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

All right. Let's get the ZoomInfo session going. Thank you so much, Henry and Cameron. Good to see you guys. Cameron, I think it's your first time at Goldman Sachs Communacopia + Tech, maybe.

Yes.

Okay. So welcome.

Thank you.

Henry, you were here last year.

Yes.

And thanks, everybody, for attending this session. It's -- I think we're almost halfway mark for the conference. It's been a fantastic start. We had about 200-plus companies register. So thank you for registering to attend. About 2,600-plus total registrants that is investors and companies, et cetera. So one of the bigger conferences we've hosted. So Henry, you were here last year, and I asked you this question, it was a different market back then a different market today. But nonetheless, an entrepreneur like you, that has this idea for this company, you have a certain vision and that vision does not really change just because of the economic cycle or maybe there are some adjustments you've made to that vision. How do you wish to -- wish for ZoomInfo to be seen in the next 4 to 5 years? What are your goals and aspirations for the company?

Yes. Look, I think at the fundamental level, we want to run a really efficient, durable company. And so I want to continue doing that. I feel good about that vision and our desire to continue to operate with best-in-class margins and get back to best-in-class growth rates. I think -- when I think about what it is from a product perspective and now how our customers get value out of ZoomInfo, that is largely the same, and that is around modernizing how companies go to market. It is amazing if you go to kind of any company and you take a look at how they acquire customers, how they grow their customers, the mechanisms and systems and data that come together to do that. That whole motion, big, small, software, non-software is fundamentally broken. It's not tied together in an incredible way. They're disparate systems, disparate data. It's not run in an incredibly efficient way either. And if you look at any sort of company oftentimes your sales and your marketing spend is the biggest line item on your income statement. And I think we have an opportunity to really change the way companies go to market, not just by telling them who but also telling them when and how we need to engage with them. And really the power of AI comes into our ability to tell them when they should be engaging, what channel they should be engaging through, how often they should be engaging, with whom they should be engaging. And so that fundamental change of how companies go to market to really drive efficiency and effectiveness for that, that vision hasn't changed.

Got it. Got it. Okay. So with respect to the core data platform versus the other pillars you've got an HR product, you've got -- which is basically talent, then you got engaged marketing, et cetera. How do you see these pillars? So given that we've gone through this economic downturn, it's understandable that the other non-data pillars probably are less of a priority for our customers. How do you see these categories coming back in the event we do have a normal economy?

Yes. So I think -- look, I think today, outside of the core SalesOS, there's MarketingOS, there's OperationsOS and then there is TalentOS. I think you just kind of take a look at the market, TalentOS last year, it was in '21, it was an incredibly tight labor market, and companies needed multiple different ways to engage with talent and bring them on board. This year, we thought that was a little bit different. And so when we think about the universe, we're thinking about SalesOS, MarketingOS, our OperationsOS and data as a service. We really think that when you bring sales and marketing people together and you align them, then you unlock a tremendous amount of value. Marketers don't get credit for anything unless somebody from sales does something with something that gets generated to marketing. And so the ability to tie those people together to say, "Hey, marketing is going to go out. They're going to do advertising and demand generation and webinars and everything else to this universe of people and still has visibility into that is aligned to that can drive the next action based on what marketing is doing." We think is really a fundamental change. And MarketingOS and SalesOS coming together, we're really investing behind. And then the data as a service and OperationsOS platform, one of the big changes that we're seeing today is for the last 2 decades on this stage and with customers and in a number of different places, we've been talking -- I've been talking about the fact that the data inside of your CRM system is missing an infrastructural element of data accuracy, data quality, data enrichment. That CRM is this open database where anybody can put data in. It doesn't matter how complete it is. It doesn't matter where it came from. You could go to a webinar, sign up -- get sign-ups at an event, a sales rep can put that data in and it's not complete and it's not accurate and it changes. All of this data is constantly changing. People are getting promoted, they're leaving their companies, companies are growing and shrinking and doing M&A. And none of that is being organically reflected in your CRM, your first-party data, your system of record. And so the data in those systems is really inaccurate. But where a spotlight is being put on this today, is that the C-suite is coming down into sales and marketing and saying, "Hey, I want to do something with generative AI, show me what you're doing with generative AI from a go-to-market perspective. I think we should be using it for outreach. I think we should be using it to engage with our customers. Show me how you're using it." And what are the sales or marketing executives do, they go look at their first-party data, their CRM system that has all of this kind of randomly assorted data and they go, "well, I can't really leverage this for what you want because the output won't be accurate." We'll be talking to enterprise customers the way we should be talking to SMBs. We'll be talking to a health care company the way we should be talking to a software company and will be a mess. And so all of a sudden, we're seeing companies come to us and say, "Oh, yes, we really do need to clean the data in our first-party systems in order to leverage generative AI in the downstream activities." And that's our DAS product that does that.

The what?

The data as a service product. The OperationsOS product.

Got it. Got it. Excellent. Excellent. One for you, Cameron. As you look at the scale of the business longer term, the company had been running very profitably even while growing very rapidly. So in this -- coming out of this, if there is something called a recovery, how should we look at the growth versus the margin trade-off for the company if you do find opportunities to reaccelerate the top line?

Yes. So we are still very focused on driving a very efficient business, maintaining margins for this year, we expect those to be around 40% on an adjusted operating business just on an operating basis. Going forward, we very much expect that we will be able to continue to drive operating leverage in the business. And I don't think we're ever going to drive massively higher margins. But certainly, margin improvement through operating leverage would be our goal. And I think when we decouple that a little, whenever I think about margins, I think about sales and marketing and the sales and marketing efficiency that we can drive. And certainly, in the current economic environment, it's been tougher to make sales, and therefore, sales and marketing efficiency has come down. But as we hopefully see stabilization in buyer behavior and the economic environment out in the future, an improvement in that sales and marketing efficiency will enable us to reaccelerate growth, but also realize some of the natural operating leverage that we'd be able to drive. And certainly, on the non-sales and marketing side, whether that's cost of service or R&D or G&A, we do feel that there is some natural operating leverage where we're going to continue to really invest into R&D, but probably realize some of the operating leverage in the other parts. So we actually expect that as the environment normalizes, we will be able to get back to better growth levels and probably deliver a little bit of operating leverage with that.

So you're anticipating a recovery in overall -- it has to happen, right, so.

Yes. I mean, that's how cycles work. I don't know when it's going to happen or how long we're going to be in a depressed state. But at some point, yes, there will be a normalization in buying behavior that will help us.

And it makes sense to bifurcate this in our business, too. In non-software, our non-software business, which is 65% of our business, so think of it like $800 million of revenue is growing north of 20% year-over-year. Our software business, 35% is actually, this year has shrunk, where historically, is growing 40% year-over-year, north of 40% year-over-year. And so as this cycle normalizes and even as software just stabilizes, we have a lot of confidence and conviction that we're going to get back to those same levels of -- maybe not the same levels of growth in '21, but best-in-class levels of growth for the business. I think what we see happening in software is like the software businesses were going down the road at 90 miles an hour and then someone pulled a hand break. And so you have these companies who, I have an example that I recently talked about, they had 40 salespeople, they're growing 40%, 50% year-over-year.

This is a real company? It's a real company?

Real company. They had received almost $500 million in outside funding, 40 salespeople growing 40%, 50% a year. So they have visibility to 100 salespeople. They bought 100 licenses. They turned the corner on '22 and their investors, "Oh, this was a business that was burning money." The investors showed up and they said, "Hey, look, we know that you're growing 40%, 50% a year, but what we really want is for you to grow 10% a year, and we want you to be at 40% EBITDA margins because that's the way we're going to get back to our valuation from '21." And we want you to do that in a quarter. And so all of a sudden, this company that had this aspiration to be 100 licenses, is actually taking their sales team of 75 down to 20, and you're seeing a similar story over and over inside of the software cohort, particularly in that mid-market tech space. And so we're trying to -- we're managing through that the best way that we can.

So Cameron, a question for you. When do you reach the comparable quarter of when this attrition starts to really bottom out for you. I think you mentioned something like Q1 of '24 on your earnings conference call, but is it really as simplistic as the software industry went through a bunch of layoffs in Q1? So you're going to wait to Q1 of next year?

Yes. And certainly, we're seeing that the renewal cycle that we're currently in, we're kind of entering the second phase of that. We started to see some pressure at the end of Q2 last year. And we're seeing that those renewals, particularly in those kind of higher-growth tech companies, where we realized some level of pressure last year are actually renewing at worst rates this year. So we do feel we need to get through the cycle of renewals and kind of, in my mind, lap peak negativity. So I think when we talk to a lot of our customers, peak negativity probably occurred in the February or March time frame of 2023. And so getting through the cycle of renewals to lap those. I think the core assumption there is that there's not another peak of negativity that we're going to see. But I think most of the signs that you look at right now would say...

February of '24.

February '24 would be when we lap that. And then have a more solid base to build with those customers going forward.

Yes. And the key here is if software companies outside of ZoomInfo want to grow and accelerate their top line, they're going to have to use more licenses. So it's stunning that, that segment of the business, which was the fastest growing is shrinking, but it cannot stay that way. If it does, then I'll be out of a job if you think about the top line.

You see these like panic-driven decisions. You don't know what to do. And so they're just cutting whatever they can figure out. And then eventually, they're going to get to a place like you're saying, Kash, where they go, "I need to grow." And growth becomes important to the business again versus just cutting, which is what a lot of the software companies are fundamentally focused on today. And when they get to that point, we're the most obvious investment to make.

Yes. Yes. That's what I've been telling clients that I don't know when it's going to turn, but the most leveraged company to this potential turn in the software industry is you guys. And I know that it's very different, 0% rates in 2021 is -- was crazy, free cost of capital. But let's say, rates stabilize at where they are. I think Henry, you and I were talking about 5% or maybe another conversation, 5% return on cash is actually pretty damn good, right? But when you look at 2024 as being potentially stable, let's say, rates are where they are, maybe they come down just a little bit, how does the buyer behavior change that? Because what we've been through the last 18 months is absolutely unusual. Rates going up as much as they did, 525 basis points. That's not happened many times. So let's say we stabilize. Are we overreacting, looking backwards and not entertaining a view of the world, which is a bit more stable? And in that stable view of the world, how do your customers set budgets and how do they prioritize you guys in hiring? How quickly can things be better next year?

I mean, first to get like a feel for what a stable environment looks like. I look back to pre-pandemic 2020, 2019, 2018, 2017. And this was -- and then I think about the fundamentals of the business then, still high margin, still high growth and much higher net retention rates than what you're seeing today. I think 100% net retention, north of 100% of net retention throughout those years. And so I take that kind of stable environment and I go, okay, that's how I think about the future. And when I think about the future with high net -- much improved net retention rates growth back to best-in-class rates. Because the universe hasn't changed dramatically from 2019 to -- or the go-to-market universe hasn't changed dramatically from 2019 to 2023. Those same problems that existed for businesses in 2019 still exist today. You're not seeing like all of a sudden, everybody has like a robot doing all of their outreach or all their go-to-market efforts or the systems are just perfectly tied together or they're really driving an efficient motion. That hasn't changed. And so those problems are out there, the market is still there for us to go get. And so we feel really good about our ability to go back in there and get back to that.

Great. And with respect to the go-to-market, I know you mentioned on the call that you're still not happy with sales efficiencies and where they need to be. Regardless of the cycle, are there some structural changes that you're contemplating to improve sales productivity? So I don't think that your sales force is all about empowering sales people to go sell better that you found some opportunities to improve efficiencies. What have you covered there?

I think the biggest thing is we've spent this year investing behind a PLG motion, a product-led growth motion. There's 700,000-plus businesses that can be customers of ZoomInfo. And we're not going to be able to touch every single one of them with one of our account executives. And so we've been building out our capability to drive a product-led motion. We also have a website that's in the top kind of 2,000 visited websites, traffic websites in the world. And so we can monetize that traffic better if we have the foundation of product-led growth. And so we've invested in our ability to take payment over the -- over our platform simply to upgrade users, simply to connect all of that to our back end, from a billing and revenue perspective. And we feel really good about our ability to really put that into place in 2024 and see upside. It's out there today, and we're seeing really great early indicators of that being a really successful motion. Obviously, a PLG motion with no salespeople is even more efficient than our current motion that we feel really proud of today. And then on the other end of that spectrum, we continue to invest in our enterprise sales motion where we think the biggest opportunity in our business lives is with our enterprise customers where we're very lightly penetrated and see a big opportunity to sell all of those platforms in. And you can see like in our $1 million cohort year-over-year, that cohort grew 40% year-over-year. And so that motion is getting momentum, and we feel like we can continue to invest there and see outsized returns.

How much is software in the $1 million cohort, is it?

It's actually a decent size of that cohort. And the reason is, if you think about like a large software company, IBM or Oracle, Salesforce, Adobe, any of these sort of large companies, they weren't like that 40-person company growing to 100, now back down to the 20. They kind of weather these cycles pretty well. And so those companies in the enterprise, they continue to grow with us. And in the enterprise cohort, they continue to be a meaningful portion of our million-dollar cohort customers. But you also see textile rental firms in that cohort, you see media firms in that cohort. You see transportation and logistics, financial services in that cohort. And so that $1 million cohort is very diverse, but it probably looks more like the core business where kind of 35% to 40% of software.

Got it. Okay. That's a useful data point, definitely. Shifting to -- I said -- actually, I said I will not use the terms, shifting gears, drilling, double-click, cliched hackney in terms of we just promise that we're going to use natural language, English. So forget that I said and drilling into whatever. Let's talk about generative AI. Let's talk about generative AI. There is a school of thought, and I'm sure that it has little validity that somebody can start a data as a service company, build an element that can go scour the web and look at LinkedIn, put -- create a database of professionals and start a competing business. What are your thoughts on people said the same thing about Intuit tax or I can create an LLM that can do your taxes. It's just as simple as that.

I think the big thing here is that the parts of our platform that are put together from scouring the web, they're value additive, but they're not the core pieces of value that we provide our customers. And so your ability to go gather a bunch of company information from the web and put it into an LLM, we've been doing that, and we've been powering that with AI for the last decade. There's a huge AI engine that underlies all of ZoomInfo where data from a number of sources comes in and the AI makes sense of it, makes sense of what to publish and what not to publish. We've been investing in those -- in that capability for years. Now does that drive the major value of the ZoomInfo platform? No. Of course, it doesn't. It's just sort of surrounding the core value, which is our ability not only to tell you which companies, who at those companies to engage with and how to engage with them, but also when a company is in market for your products and services. And all of that additional -- all of that additional sort of core data is all driven by proprietary data that we gather through contributory networks, our community addition where panels and people share data with us that we make sense of and then publish. We have the most robust IP to company graph, which powers our ability to tell you when a company is on your website before they fill out a form. And then marrying that to workflow is super important. I don't just want to know who all the 100 million companies that get sell to are and all the 300 million people who work at those companies that I could potentially reach out to. I want to know which ones of those 100 million companies are in market right now for my products and services, which ones are visiting my website, who are the exact people at those companies I should be engaging with, how should I be engaging with them. Is it e-mail? Is it phone? Is it Facebook ad or display ad? Is it a marketing automation campaign to invite them to a webinar? And tying all of that together with the workflow layer. That's what companies really want, you're not going to get that from LLM.

Yes. That's fairly compelling. Yes. Where do you stand with some of the new marketing automation companies that have sprung up around. I know that you've done a pretty good job sizing up who's good and who's not in buying these assets. It looks like there's a never-ending supply of marketing automation, okay? So anything that you look at and say that could be a very interesting company.

Well, first, we integrate with dozens of different systems, including all of the marketing automation players. I think the way that we think about what we do relative to what a marketing automation provider does is marketing automation gives you an incredible amount of signals on your first-party data. And so if somebody clicks an e-mail you send or fills out a form on your website or you already know who they are, you've cookie them or whatever, you can get a lot of insight and signal from that. And so -- but all of that signal lives on the 4 corners of your website. We believe there's this whole other universe or there is, this whole other universe as signals that you should be collecting to let you know when to engage with companies who haven't clicked an e-mail you sent, haven't been to your website and filled out a form. These are companies who are researching new products and solutions on the web. These are companies that have just hired a new executive who makes purchasing decisions around yours. These are companies that just hired one of your super users or your former customers into their business. And how do you build a workflow around all of that universe of signal. Because marketing automation has done a nice job of letting you build workflow around the signals you receive on your website. But the minute you step away from your website, all that signal has been dark to marketers and salespeople. And we're really shining a light on that and then letting you build workflow across that. And so I think marketing automation is going to -- will obviously continue to have a place as a universe to get signals from your first-party assets, but everything else is where we continue to be focused on.

Got it. Got it. Got it. Do you -- what do you think of the copilots? We're going to have more copilots than Intuit.

Absolutely. I think copilots are super compelling. We're building our own at ZoomInfo, copilots for account executives and account managers and STRs, which will give you the -- which are out there scouring the data inside of ZoomInfo, scouring the data inside of your CRM and showing up to you and saying, "Hey, here are...

The usability of the system.

The usability of the system. Yes. In gen AI, I think of it in 2 ways: one, usability of the system, huge advantages when you leverage generative AI from a UX and UI perspective. And then on the other side, I think of it as proprietary data really makes these models successful. And so for us, we already have places in the platform that would have taken you 37 clicks to initiate. But with gen AI, we've brought down to 4 clicks.

And how are these products being priced? And when are they going to be available?

Yes. So great question. Today, these are just going out to our customers and we're getting a feel for where are they adding the most amount of value. And then ultimately, we'll have different pricing SKUs for an AI-enabled version of the platform.

What are you going to call it?

Actually, we have been undecided. It will be AI something.

Yes. Yes. Are you going to use CoPilot or?

We like the CoPilot for it. Yes.

Some people have come up with other ideas to call these things. But -- so do you think the market has an appetite to pay more for generative AI products? So every software company has been -- including Microsoft is priced. They're CoPilot is $30 per user per month. I think ServiceNow is talking about Pro Plus being a 60-plus percent premium. Where do you stand? Some of the companies like Workday have not been really committed. Their view is that it's -- a lot of it is going to be available in the platform. And if there's a brand-new product, we'll charge for that, but it's going to be a part of the platform. And so it's a useful retention tool, maybe upselling. How are you thinking about generative AI? Do you really think it can be priced at a separate SKU? And will customers be able to justify the budgets for something like this?

Yes. Look, I think to the point we were just making there are places where generative AI is going to drive usability of the thing you already built. And so we have this platform. It's designed to help sales reps get in front of -- sales and marketing reps getting it right customers at the right time. It's very oftentimes much more laborious to do that without generative AI than it is with generative AI. Are we going to like charge you to make the experience easier for you? No, we're not going to charge you for that. But if there's a new capability that we're able to launch the -- or the new functionality and new feature that we're able to launch because of generative AI, that would be -- we would think of that in a different SKU. But to let you do what you fundamentally came to ZoomInfo to do in a more simple way, that doesn't make sense to charge for.

Got it. Cameron, one for you. When you look at the growth algorithm for a software company, at least the way I look at it, retention and upsell, downsell and new sub ads, right? Where are we in the process of bottoming out with all these 3 variables? Are they bottoming out simultaneously? Or is 1 ahead of the other? How do you map this recovery?

I mean, the way I think about it is certainly in the current environment, we are facing a retention headwind that we hadn't faced in the past. A lot of that is working out some of the overbuying that occurred historically and frankly, shifting from a 0 interest rate with tons of free money coming from venture companies and whatever else do, a world where money is not free and people need to think more about what they're buying. So that's the biggest headwind right now. It is resulting in somewhat lower gross retention or somewhat higher churn. But the bigger issue is really the kind of net upsell has really come down. And at this point, might be close to flat. And so that's where I think we need to get through this renewal cycle as we were talking about before, kind of -- and once we start peaking -- once we start lapping that peak negativity point, give us the opportunity to grow. On the new sales side, while it is a harder environment to sell things than it had been historically. The efficiency of our team, while down a little, isn't down significantly. And I feel like there's such a big opportunity out there that we're continuing to build our capacity so that we're able to take advantage of that, particularly as the environment stabilizes a little bit more and we'll be able to continue to drive growth there.

So giving that we're going through this downturn, how are customers dealing with choices that may be tactically cheaper than ZoomInfo? And what are you doing to counter that switch away from the gold standard, which is you guys?

Yes. Look, I think, #1, People appreciate that ZoomInfo's data quality is second to none and that, that data quality drives better outcomes for their business. I think the work that we've done in the last year to pull a full platform together that brings together the marketing team that brings together conversation intelligence and sales automation and data as a service. That is our -- that -- we're going to lean on that to bring our customers to keep our customers with us. And once we get them using that workflow and tying all of those systems together, that's where it becomes incredibly sticky because it's not just data and company information and contact information, it's plugged into a workflow, it's signals, it's bringing in signals from your conversation intelligence and your sales automation. We think that from a practicality perspective, from a value perspective, that drives a tremendous amount of value for our customers.

Got it. I want to do a publisher check and see if anybody has any question. If you just have a question, just raise your hand. Yes, go ahead. There's a question up front here. Thank you.

So you recently announced a large buyback and you have historically been using capital for M&A. How do you think about using capital today for buyback versus M&A?

I think the best company to buy right now is ZoomInfo. So we're going to use our capital to buy the best M&A we can do, which is our own company. And so today, we announced a $100 million buyback, then we announced an additional $500 million. We feel really good about continuing to deploy that and we're going to be really good capital allocators at ZoomInfo.

Any other question? I hope that at some point, those 3 variables that drive your growth, what would be the leading indicator of, let's say, environment starting to improve? Where would you see the improvement? Would it be in retention or upsell or new adds?

Yes. And we very much focused on the sales efficiency around those things. But I do feel like the biggest indicator is going to be in that net upsell. That's obviously where we're feeling the most...

Existing customers, buying more seats or upgrading the indicator?

Yes. Well, net upsell also means existing customers not looking to downgrade as well. So I think between the downgrade pressure that we're seeing in the lack of upsell, not complete lack, but obviously less than it had been in the past. I think that's the area that we're really focusing on. And ultimately, when the sales efficiency around that starts to improve, that's a good signal.

Got it. A final question for you. As you talk to your customers, what is their take on calendar '24 budgets? At this point, nobody knows what it is. But how are they leaning towards? Are they saying, I'm going to grow my budgets or going to keep it flat because I don't know why?

Yes. Look, I think it's a mixed bag, but there's a lot of optimism baked into 2024 when I talk to our customers.

Why is that?

This feels like a year where they rebuild -- every customer I talk to, feels like this is a year that they're rebuilding the way that they think about how they go to market, how they acquire new customers. And it feels to be like for all of them, they're getting into a place where 2024 is a lift off point for them where this year, they're rebuilding, but next year, they're going to be -- they'll have to finish their rebuilding.

Yes. Isn't amazing the most positive thing was absolutely towards the end as we reach the -- so we could start this conversation all over again. I would drill into like Part 2 of ZoomInfo and for why Henry fields like '24 could be a good year. And I hope you're right because we've gone through this 18- to 20-month correction cycle. And our Chief Economist, like I said, he has been calling for a peak in rates and that our house is calling for a path in the second half of '24. It seems unthinkable. But he's been dead right so far. And so the status we've seen a decision-making, hopefully, it comes to a point where things start to open up a little bit, and we can get back to running a growth business because it's more fun running a growth company than...

Buying back stock, a higher growth and buying back stock. How boring is that.

Let's go growth.

It's a great company to buy.

I know.

You agree?

Right now. Yes. But let's go growth. Yes. Thank you so much, Henry.

Thank you, Kash.

Thanks.