ZoomInfo Technologies Inc. (GTM) Earnings Call Transcript & Summary

I think we'll kick things off. I'm DJ Hynes. I'm Canaccord's Senior Software Analyst. I focus on the applications sleeve of coverage in the universe. This is the 43rd year that we've done this conference. We wouldn't be able to do it without the support of the companies that come and bring the content, investors that ask the good questions and host all the meetings for us. So thank you to everyone for being here, especially Cameron Hyzer, who is the CFO of ZoomInfo. We're going to do this as a fireside chat. I've got a bunch of questions that will probably get us more than a half hour. But if there are questions from folks in the audience, pop your hand up. We can work them into the conversation. I'll repeat them for the webcast. But grab my attention. We'll get right into it.

Sure. That's fine with me.

Cameron, what's -- I'm going to assume everyone in the room knows ZoomInfo by now.

Sure.

We'll spare you kind of the business intro. Talk about Q2, kind of what you saw in the quarter. How you feel coming out of the quarter and kind of what's top of mind as you've been talking to investors since?

Yes. So certainly, as we went through Q2, we did start to see some renewal characteristics that changed our view in the world. First and foremost, we're just starting to lap those renewals that we saw take incremental scrutiny last year, and not renew as well as we wanted to. That is -- becomes a much bigger cohort as we -- particularly as we get into September and then even bigger still in Q4. And what's happening is that we are seeing that those renewals that were painful or took more scrutiny last year, are performing worse this year than they did last year. And as a result, when we think about that dynamic moving through the remainder of the year, I think we need to prepare ourselves that this coming renewal cycle will be potentially a tough one, particularly as a big chunk of our business is still in software. So selling to software companies that have reduced their real focus on growing new business, which is the kind of most obvious use case for ZoomInfo. And we've also continued to see a fair amount of our business in small customers, and particularly in the 1- and 2-year cohort. So those customers that signed up at the end of 2020 through 2021 and beginning of 2022. Those customers are performing worse than they -- than kind of earlier first and second year cohorts. So this renewal cycle, as we get through the end of this year and into Q1, I think certainly has the potential to be tough. And then as we get through that, and in my mind peak negativity, if we want to think about that, probably occurred in Q1 of this year in 2023, call it February, March. As we get to the point where then we're lapping people that have renewed kind of post that peak negativity, we do see the opportunity to reaccelerate the growth from the levels that we are expecting through the end of the year.

Yes. I want to make sure I understand the comment around kind of the second time through a renewal cycle appropriately. So you said it's getting worse than the first time we saw. Does that mean...

Yes. For those customers that renewed less than we would have expected or would have been down last year.

Yes. So they downsold a little bit the first time around. Now they're down selling more than they did the first time on the second time?

Yes. Yes.

And this is -- we're kind of 1 quarter into this dynamic, would you say?

Yes, I mean -- yes, at the end of June, even less than 1 quarter. So not a huge in. But as we look at those customers, that cohort gets bigger and bigger as we move through Q3 and Q4. And realistically, I think one of the ways that I think about that is those are many of our more volatile customers. Those are the customers that were really quick to kind of change their buying patterns in 2022. And as we get through the year, there are more and more of those that are reevaluating their operating models. They're really looking for where they can become more profitable, particularly for software companies. And frankly, like not all of them to a sustainable operating model. If they were losing, I don't know, they had negative 10% margins in '22, and they're looking to get to breakeven in '23, that's still not what most investors are expecting. And so, particularly for those that are focusing on new business as a place where they can take out costs, that is our most obvious use case and a place where we're being deprecated, at some extent, at a number of customers. But at some point, I do believe that software will become a, at least a neutral to positive driver of growth within the economy. And so many of those customers eventually do need to start thinking about where they're going to bring on new customers and how they're going to do that. And certainly, our tool is a very obvious one to help them do that more efficiently and effectively.

Yes. Yes. I think you're right about the longer-term positioning of track and software. I mean it's kind of a no-brainer. So starting in kind of Q3 of last year to now, we've had kind of a series of cascading estimate revisions, right? It's taken a while to get the numbers to where they are today. What leaves you confident that estimates are set in the right spot now? And kind of what -- speak to the visibility level you have there?

Yes. So certainly, we believe that we're more conservative in terms of our view of the world. So if I think about -- at the beginning of this year, we had articulated our guidance and defined our guidance based on Q1 being a little bit worse than Q4 and then being relatively stable throughout the year. At this point, we're assuming that the world in effect, how it impacts us, gets worse in Q3 and Q4, even worse than what we saw at the end of June. And so I think that our goal was really to set a baseline in terms of something that we can then build off of going forward, with a relatively negative set of assumptions that a lot of things need to get worse in order for -- particularly the low end of the guidance to be met.

Yes. Okay. So you've kind of quantified this software tech-challenged segment of the business as 35-ish percent of ARR. When those customers are coming to you and having conversations around kind of renewing smaller, downselling, what are the levers you have? What are the plays you can make with them to try and preserve contract value? Are they working? Or is it just, hey, we need to get costs out of the model, so there's nothing ZoomInfo can do in those scenarios?

Yes. I mean I think that a bigger piece of many of -- particularly the software customers is that they are really focused on taking costs out of the model more than anything else. For a lot of customers, when they're coming up for renewal, we do have plays where, if they aren't utilizing all of the seats that they had contracted for or aren't using all of the data that they had contracted for, that we'll identify those well ahead of the renewal, go in and offer to swap kind of unused seats or kind of data credits for other products or services that they would get value out of, whether that's adding intent capabilities or adding on Engage or Chorus or other integrations that they could use. And I think for many customers that are in a stable spot in terms of how they're operating in that business, that historically has been a good motion for us. For customers that -- particularly if they've, I don't know, laid off 50% or more of their new sales, like headcount, and are really focusing on changing their operating model in terms of getting to a profit level, that offer often falls flat. They're not looking at kind of driving more value out of the new sales part of their business. I think a refrain that we hear from a lot of our customers, and I think a lot of software analysts that I talk to, they hear this from a lot of public companies as well, is that new business is tough right now. We're deprecating our focus on new business and focusing on retention, shifting resources to service our existing customers better. And then at some point, we'll rotate back to more of a growth-oriented model. And I think for those customers who think of us as a more solidly new business use case, it's hard to convince someone to say, yes, you should spend more for that when you're taking out most of your new business headcount and when you're really not expecting new business to drive much of your growth in the short term. So I think, particularly in software, that's the challenge that we face.

Yes. The encouraging data point, and my view that came out of the Q2 call, is the nontech piece of the business, which is 65% of the mix, I think you said was growing 20% plus?

Yes, well over 20%.

Well over 20%.

Yes.

How do you feel about the durability of growth there?

Yes. Certainly, that is an area where, particularly in pockets, we see growth that's even more robust than that. And I think that the biggest kind of piece of that is, a: many of those customers, transportation and logistics is, I think, an example that Henry used in the call, they run more stable businesses at the end of the day. They're not kind of focused on taking their margins from, I don't know, 15% to 40%, which would be an even bigger jump -- or is even less of a jump than someone going from negative 50% to 20% margins. Yes, I don't think that they feel that pressure either internally or from their investors or whatever else. And frankly, we're far less penetrated into many of those markets. Many of those brick-and-mortar industries that are still out selling to other businesses, they've developed motions over decades. If you take a freight forwarder, they may have started to develop their business in the 50s or 60s. They developed motions to go out and find companies to sell to. And they've obviously worked, because those businesses are still around and so forth. But as -- sometimes, it's a generational shift, so the owner hands the business over to his kids or they bring in new salespeople or they start to see competitors grow in different ways. Those are opportunities where we can come in and change that inertia to a point where they'll look at the system and they'll say, "Oh, I never knew something like this existed. This is really interesting for me to be able to supplement the motions that I use today." And that growth continues there. We're really lightly penetrated into those sorts of markets, and there's a huge opportunity for us to continue to grow. So I think our guidance is set to a point where we think everything is going to get a lot harder. So our guidance doesn't necessarily contemplate that, that would hang in at those levels. But I think that there's a lot of opportunity for us to continue to grow in those other brick-and-mortar type industries.

Yes. Look, I don't think the macro headwinds are unique to ZoomInfo, right? We had Outreach here presenting yesterday, and they didn't quantify, but certainly qualified that they're seeing many of the same challenges that you are, particularly in the tech vertical. How do you think about kind of benchmarking ZoomInfo versus others in the industry? What gives you confidence that this isn't a share-loss scenario?

Yes. And certainly, in our industry, and when I think you talk to other companies that are selling into front-office capabilities, and I kind of take out the system of record, CRM systems, so the HubSpots and Salesforces of the world. I don't think there's a CFO out there that says, "Oh, yes, I can just take out Salesforce. And I don't need it anymore." We do have that argument with a number of our customers. And I think we end up retaining those customers, but at different levels. But you look at other, call it, advanced technology in the sales and marketing tech stack, and I actually think we're faring better than most. And one of the most public examples would be LinkedIn. And LinkedIn basically has 2 businesses. They have their recruiting business and then they have their marketing services. Overall, they grew 5% year-over-year, and I think it's 7% on a constant currency basis. But they talked about how -- that was all driven by their recruiting part, and that the marketing services part of their business was actually down year-over-year. You look at other public companies in our space, they're also down or flat year-to-year. If you're just looking at that, you're just looking at that kind of sales and marketing tech kind of oriented space. I've heard that many of the public companies or many of the private companies are flattish if you look at it. So growing 16% year-over-year, while certainly below the standards that we set for ourselves. And I think still actually fairly robust compared to many other of the data points that you'll find for other companies in our space.

And doing so massively profitably.

Yes. Well, that is a big part of what we've always focused on, is certainly cash flow generation and profitability. And so, yes, doing it on a profitable basis and frankly, doing it at a scale that none of the other companies in our space, with the exception of LinkedIn, have. I think we're still focused on doing better, but I wouldn't say that -- if you look at the competitive set or the people that we compete with, yes, I think it's a tough world for everyone out there.

Yes. How much is price coming up in conversations? I mean, I think of you guys, look with the breadth, the accuracy, the intelligence. I mean you are a premium-priced product in the space.

Yes.

Are customers opting for good enough at a cheaper price in this environment? Like what we exactly...

No, we certainly don't. We don't see that in a material way. That's always been the case and some of the pressure that we felt at the low end of the market. And I think we continue to see that. There's this kind of merry-go-round of #2 players that have kind of come through. And it is always a, we're going to be 50% or 30% or whatever the price of ZoomInfo. And yes, it's not as good of a service, but it's good enough. I think we've -- frankly, in the low end of the market where we do see those players, we continue to see better win rates than we have historically. They're a little better, which tells us that, that dynamic is not changing in any way. We are focused on continuing to offer value to customers. And we've started to ramp up a PLG motion where perhaps, we can be even more successful at that lower end of the market, but we still don't see even middle market or large enterprises want to opt for something that is lower quality, that it doesn't have the same sort of privacy kind of capabilities or protections and it doesn't have the same kind of integration and just breadth overall. And so for those larger customers that do care about where the data came from, what sort of privacy protections do you have in place? How well can I integrate this in with my other systems and so forth? And frankly, they're scaling quality over a broader number of people. So a little bit of quality goes a long way if you're spreading it across hundreds or thousands of people, and a lot better quality just makes it a no-brainer. So at the middle market, and in particular at the enterprise, we continue to not see any of those lower-end competitors even really enter the conversation.

Yes. Okay. So I kind of think of ZoomInfo as this data foundation or backbone that you've now kind of built or acquired software pillars on top of, right? I mean, with Engage and Chorus and the like. Platform consolidation is a big theme that we're hearing in the public markets today. I think ZoomInfo will stand to benefit from that over time. But maybe just talk about why having that data and intelligence, the sales workflow, the sales recorder intelligence piece of it, kind of all in a single platform is better than going out and trying to kind of get best-of-breed point solutions from other vendors, right? I think there's a question of just, as these other companies continue to scale, like why will ZoomInfo win versus an Outreach or a Gong or whoever?

Yes. So I think most software over time tends to consolidate across multiple niche spaces. I think you've seen that in a number of other, call it, software verticals. And I think a big part of that is, a, I don't think that most people want their users to be logging into 10 or 15 different systems. You tend to lose productivity by doing that. You tend to -- that swivel chair kind of gets you -- doesn't get you as good of an outcome over time. And so I think our real view is that we want to deliver the best kind of quality experience for our users and ultimately help drive more effective and more efficient go-to-market motions. I think that they are likely -- and I think a lot of people say, I'm going to have multiple platforms. But I don't necessarily need like point solutions for every task that a salesperson or a marketing person is undertaking. And so our real goal is to ensure that as we're delivering more and more of these capabilities, that we're doing so in a way that really connects the systems so that you're able to run a single motion or a single play without having it drop between the cracks of different things. So a, we want to deliver a better experience overall across the entire go-to-market motion for customers. And then b, I think most people look at and analyze software companies, like there are a lot of software companies where the majority of their operating costs or at least the plurality of their operating costs are sales and marketing, which means if you're buying software, you're really paying for the salesperson just as much as you are for the software. And so if I can deliver a broader set of capabilities with 1 salesperson versus you getting it from 4 different sales people, not only can I give you that better experience where you're able to run your motion, you don't have as much integrations and other things between them, but I can do it at a lower cost and frankly, be more profitable as a result of it. So I think that combination of lower cost and better experience is a natural kind of place for people to end up landing, particularly as they start thinking about the -- accelerating their new business motions. I think when you're pulling back on that new business, you're not necessarily thinking about, well, how can I invest in this to make it better? You're thinking about where can I just cut things. But as we're thinking about that reacceleration, I do feel that we have that opportunity to just deliver a better experience for our customers and do so at a lower cost. And frankly, why is ZoomInfo like the right kind of place for that? The one thing that I think we have that no one else has is really high-quality data and insights in the businesses. And all of these functionality run off a baseline of insights. So if you're going to take the insights anyways, you might as well have that integrated in with the rest of your functionality in a tighter and more cohesive way.

Yes. I think that's fair. Can I ask you the AI question?

Sure.

I'm sure you've answered it 100 times before.

Yes.

How are you thinking about kind of incorporating the advancements in AI into your platform? I mean, I know there's been an element of AI from the get-go in terms of how you manage your data and kind of keep it clean. But the advancements, how do they apply to your slice of the market? How are you thinking about monetizing them?

Sure. So look, we've invested in AI, and frankly have patents going back to the early 2000s on how to leverage AI across large data sets to drive better quality and frankly, leverage the research motions that we have in order to continue to enhance a much larger database than you can just research. So AI has been a core part of everything that we've done to date in terms of generating really high-quality data and being able to provide that to our customers. The current advancements of AI with respect to large language models and -- is really an interesting addition to kind of already having high-quality data. I think there are a number of areas in the platform where we can use those large language models to effectively speed the time to value for a user. Whether that's natural language search to make our insights kind of easier to get to, to folks, whether it's summaries on transcripts that we're already generating, whether it's the ability to create e-mails within Engage. I think many of those kind of LLM-based things will probably be somewhat commoditized over time. But what they are going to allow us to do is to increase the time to value on the core data and the high-quality data that's there, which ultimately is, in our mind, going to help drive better engagement with our customers and frankly, higher retention as a result. So many of those things that we're rolling out, we're rolling into the higher-tier aspects of our platform, which obviously drives some incremental costs. But I think with respect to just incorporating LLM into our platform, it's more about improving the user experience. I actually think that, that's probably not the biggest advantage that AI will have for ZoomInfo, though. Like in reality, our incorporating those models will help improve the user experience. But ultimately, people are going to try and automate that last mile of their go-to-market motions in even a bigger way with other tools as well. And so those other tools where they automate that last mile, it's become way more obvious that they need to really create a more solid foundation of the data that they're working with. So I think you go to any C-level person and you ask them, "Is the data in your CRM like good?" And they're just going to say no. And not even like really good, just good, and they're going to say, "No. For years, we've let anyone put anything in there. There's never been any cleansing. We know that, that data kind of erodes or atrophies. Like every year, people move companies, they change positions. Companies grow. They shrink. They acquire other companies. Like we know that, that data is not good." And then you say, "Okay, you want to automate the last mile of reaching out to customers with AI? And you're going to base that on a crumbling foundation of atrophying data," like immediately shines a light on like that problem. And that's an area where we continue to see real demand from our customers to drive a better foundation of data, better insights, better quality; the, frankly, contact information and insights that are completely proprietary to ZoomInfo. Like that's an area where by investing into AI to kind of get better outcomes, it's naturally going to be a tailwind for us to provide better enrichment and foundational data capabilities for our customers.

Yes. Yes. It's like ZoomInfo is an input in many ways to AI strategies, right, that...

Yes, absolutely. And yes, I think there are a lot of people, whether it's Accenture has talked about this, like Microsoft has talked about this, that AI is not just about having a model that can like write an e-mail, but the data that goes into it is really important to getting the best outcome and, frankly, doing that in a cheaper way. A kind of smaller data set of high-quality data is going to get you a better outcome and a cheaper outcome than importing the world into an AI model.

Yes. All right. We are out of time. I didn't get through all my questions, but maybe just a parting thought for investors as we get out of here. What do you want -- what's the message you want to leave folks with?

I think the message that we're largely focused on is that we do anticipate that it will be a tough kind of few quarters as we work through this renewal cycle. But there are a lot of opportunities to reaccelerate growth post that. And I think there are a lot of exciting things in the business, whether we're looking at non-techy industries or $1 million cohorts, that we still continue to see solid growth and opportunity in.

Perfect. Cameron, thank you very much for being here. We appreciate it.

Absolutely. Thank you.