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

Hello, everyone. Thanks so much for attending the event in this session. My name is Taylor McGinnis, I'm on the software team here at UBS. And with us, we have ZoomInfo's Cameron Hyzer, who is the CFO. Cameron, thanks for taking the time.

Yes. Thanks for having us.

And just to let you guys know, there's QR codes in front of you. So if you have a question, just scan the QR code, type it in and we can get to them at the end.

Okay. So let's dive in. Cameron, I think a good place to start would be, I think a lot of the investor debate is how much of like the growth decel that we've seen is cyclical, right, versus evidence of maybe hurdles down the line, right? So I know you've been getting a lot of questions on increased Chorus competition. Where can sales intelligence rebound to? So I guess what are you seeing? Like what are the underlying drivers that you're seeing in the business that would tell you, "Hey, a lot of this is just cyclical," and when things normalize, there's going to be a better path going forward.

Yes. So I think particularly with respect to how our customers are doing, we tend to break out churn and gross retention from the net upsell and so what we've seen is that churn and gross retention have held in reasonably well. Churn is up a little bit from where it had been in 2021, but I think that's natural just given the environment that we're in. In terms of the decel, which has largely been generated from net retention coming down significantly, we see that most of that is the result of a much smaller net upsell. And so our customers are staying with us. They're continuing to use the platform, but particularly where they have fewer salespeople or really focused on reducing costs. That's the area where we see that reduction. Realistically, our expectations for net retention this year is that it will be below 90%. And when we go and talk to a bunch of other sales tech vendors out there, many of them have seen net retention reductions of greater than 30%, which frankly, we're going to do better than that. So I do think that, that does point to -- because our customers are continuing to use the platform just at lower levels for fewer numbers of employees, and the fact that many of the other vendors in our space. Obviously, many of them are private, but they've seen even worse kind of net retention shifts than we have makes us feel fairly confident that it is largely macroeconomic. And I think ultimately, we've figured out that our hindsight would tell us that we're probably higher beta to the economy than maybe we would have expected in hindsight, looking at -- we're really helping people solve for growth and solve for continuing to grow their companies. When that growth goes away, that tends to be one of the places that they invest less in. Hopefully, that means that we're also a higher beta, the other way when -- eventually when the economy stabilizes or improves.

Yes. And to touch on the software tech exposure versus the non-software tech exposure. Could you comment, I guess, what you're seeing in terms of the demand impact in those different verticals? And then I don't know if there's a way or even just to give a high-level qualitative commentary. But in terms of the difference that you're seeing in NRR with that more challenged cohort versus some of your other ones, just so as we can kind of picture 4Q, bigger software bookings quarter, right? But as we get into next year in terms of how we think about the tailwinds from some of these other industries, it might just help provide a little bit more visibility there.

Yes. So certainly, historically, software actually had a higher net retention level than other industries. And part of that was that they were customers for longer. And certainly, the kind of longer we have customers, they tend to have higher net retention than earlier cohorts, but also because there was a growth area and people were continuing to drive more and more acceleration into that. What we've seen over the last couple of years is that software has gone from being meaningfully higher in terms of net retention so meaningfully lower. So the rest of the industries, while they have been impacted, net retention is down a little. It's kind of inverted where the net retention from other industries has held in better than what we've seen from software. And I think a big part of that when we talk to customers and talk to folks is a lot of companies are seeing less growth and therefore, leaning into it more, but software, in particular, is going through a dynamic where most companies are rethinking their operating model and no longer thinking that growth at all costs is a long-term strategy for running their company. So they're really focusing on improving their margins and a big part of improving margins, particularly when growth has slowed for a lot of those companies is cutting costs. And therefore, that's where we're seeing the bulk of the down sell in our customers is taking out costs that they perhaps had overpurchased previously or had higher expectations in terms of seat growth. And so I think resetting our particularly software and high-growth customer base back to a level where there's a better foundation that we can grow those customers going forward. That's really what we're focused on. And yes, I think I've talked about this before, but my view is the peak negativity with respect to particularly software companies, but layoffs in sales seats and other things was probably in the February or March time frame of 2023. So really, we want to get to the point where we're lapping that peak negativity, all the renewals that we're renewing now, obviously, were previously signed before that. Work out some of that excess capacity that those folks have so then we can get to that better foundation for growth going forward.

Yes. And on that point, I think we've seen a little bit of an uptick in layoffs, particularly in software and tech of the late. So I guess when you look at your customer base, I would love to hear what you're seeing. I know you talked about, like you just said, thinking that you're going to get through that peak negativity at the end of 2Q. If some of the activity that we're seeing today, is there any risk to that in terms of the renewal cycle there?

Yes. I mean it certainly the magnitude of layoffs while they are continuing are much more managed than what you had seen kind of at the end of last year and the beginning of 2023. Certainly, our expectation is that the world gets a little tougher as we continue to go through the year. So I think we've baked in some of that into our expectations generally. But certainly, ultimately, I do believe that people will get back to positioning more for growth in the future. I just don't know exactly when that's going to be.

Yes. Well, let's maybe then focus on some of like the longer-term growth drivers. So you guys have recently made a big shift on the sales side, right? So moving Chris to focus more on international and there were some other changes as well, too. So could you just maybe comment on like why those changes were made, one? And then what that means in terms of your guys' priorities, focus areas and how we should think about that in terms of the model?

Yes. So the real focus of the organizational changes that we've made has been to flatten the organization. And Henry really wanted to get closer to the customer to make sure that, that feedback loop of how we are managing customer expectations, how we're driving value for the customer and what we're doing to continue to drive that value is something that he's a little bit more in the weeds on. So that was really the focus of the organizational change that we executed again since the beginning of the fourth quarter. And realistically, I think we've recognized that we want to continue to be much more customer-centric in terms of the value that we're delivering to those customers as we move forward as opposed to I think if you look back at 2021, we were much more sales-centric, showing up and selling the next thing in every conversation that we had versus if you look at the motions that we're running today and how the sales folks are operating. It's much more about having a conversation about where we can drive the most value for the customer. And that doesn't always have to show up as an incremental sale. It can show up as an improved renewal or ultimately just better satisfaction for those customers. So then as we move forward, we can continue to build upon that relationship and grow with those customers as they grow in the future.

Yes. And on the international opportunity in particular, because I know that's always been a smaller portion up for revenue for you guys. So it's a little bit different because there's GDPR. There's a little bit more stricter data privacy rules. So is that at all a hurdle? And I guess how are you guys addressing that? And then two, is there any like changes that need to be made to like further penetrate the international market? Or is it just a function of building out maybe a bigger sales force there?

Yes. So particularly with respect to Europe, we've gotten to a point where we are the most privacy-centric vendor that you're going to find and really tuned all of our offerings to be at a level that's above the requirements for GDPR. So I think we feel really good about the data that we're providing. What we've done this year is continue to expand the reach of that data. So that at this point, I think you won't find another vendor out there that has more actionable data with respect to European companies, and the people that work at those companies, whether that's e-mail addresses or cell phone numbers. And so we put a lot of effort into really driving that actionability of the data and the quality, in order to really be the best thing that anyone can find out there. So at the end of the day, Europe is actually more challenged from an economic perspective than what we've seen in the U.S. so far. So that has hampered the growth a little, but we actually see growth in Europe continuing to be in line with what we see in the U.S. despite an even tougher macro environment. So that's a place where as things ultimately improve, that will ultimately lean into as well.

Right. So that's really helpful, and then going back to some of the sales changes. When you made the leadership changes, is there any anticipated or like more organizational changes. I know you guys have been making a bigger push into the enterprise. You've talked about verticalizing the sales force. I guess, how big of an overhaul is that? And how should we think about that in the context of margins and things like that.

Yes. So certainly, a big push of what we have been doing is focusing more on the enterprise and starting to roll out those vertical teams. That will be something that we continue to do and really focus on driving some of the areas where we have seen more success. So for instance, the $1 million-plus cohort continues to grow really nicely and those are customers that are more sophisticated. They're layering in more advanced tools and taking more data to ultimately drive kind of a centralized motion as opposed to a single sales person. Sometimes that's focused on improved automation, sometimes it's improved action against specific signals. A lot of times, it's based on an investment in the data foundation on which they can build AI tools. So those are areas that we're continuing to lean into and continuing to push the sales team in that direction where it's more of a consultative sale, it's more focused on integrating DAS and OperationsOS tools versus just selling incremental seats in order to drive that value for the customer.

Yes. And when we think about what that means for the trajectory of margins is, as you move more and more upmarket, is there incremental costs that you're going to have to incur upfront? And maybe there's some offsets within the organization. So maybe you could talk a little bit about like those levers because ZoomInfo, you're 40% margin, you're already very efficient. So I guess, how do we think about the puts and takes of that?

Yes. When I look at those enterprise clients and realistically, the LTV-to-CAC for those clients is actually higher than what we'd see at smaller clients. So ultimately, at least from a kind of sales perspective, we should actually get leverage out of that move. Certainly, there are some upfront costs just in terms of shifting people to a longer sales cycle versus the quick sales cycles we've had in the past. But we've managed through a bunch of that and ultimately really driven the team to be more focused on those already. So we don't anticipate that there will be some short-term kind of hit to margins as a result of that focus. And then as we move forward, what we've really developed is we're testing kind of PLG capabilities where at the low end of the market, we can sell folks in a self-service way, and those will roll out more as we kind of get through the end of the year and into next year so that we can continue to shift resources or the cost around those resources up market. Get a more efficient kind of PLG-driven motion for the smallest customers. And then continue to focus some of our sales resources and support resources at those larger customers that ultimately can be more profitable over time.

Got it. That's helpful. And then as we think about what that means for cash flow, can you maybe comment a little bit about how to think about some of the near-term cash flow trend? So I know you point people a lot to looking at the EBIT-to-free cash flow ratio. And I think that's been hovering around the low 90s. So as we look into next year, specifically, is it fair to assume that like similar ratio could hold? Or maybe you can talk through the potential like headwinds or tailwinds to free cash flow as we look going forward?

Yes. So when you think about the conversion of free cash flow realistically, obviously, a lot of it just has to do with profitability, and that's where you get to that comparison to EBIT. Certainly, there is a dynamic where the faster we grow, the more kind of upfront payments we're going to get, and that's relative to the revenue that we're generating. So that balance sheet kind of tailwind to free cash flow is correlated to growth. So at the growth levels that we're at today, I think seeing something in the low 90s on an annual basis is a reasonable expectation. At some point, when we see a reacceleration of growth based on the economy stabilizing a little, I'd actually expect that we could see an improvement of that ratio or conversion rate to get more into the mid-90s or even higher over time.

That's helpful. And then maybe turning a little bit. So shifting gears to the HubSpot Clearbit acquisition. I'd love to get your thoughts on the competitive landscape. What that means for the space? It seems like to some degree, HubSpot acquiring that company validates the opportunity that you guys are going after. But maybe you can give the audience a little bit more information on how you guys differentiate and what that means going forward for this industry?

Yes. So obviously, we have a number of competitors just because the offering that we have is very broad and services a lot of folks. Clearbit plays at the very low end of the spectrum. And frankly, we don't even see them that often. From a competitive perspective, the mentions of competitors or even our win rates at that low end of the market have been pretty stable or even improved over the course of the year. What we have seen is that there are some competitors that are getting a little bit more traction, largely at the expense of others. Clearbit is like so far down at the end, that it doesn't even necessarily show up from that perspective. I think what many of our customers are doing, particularly if you get outside of that kind of single seat market or at the low end of the market, is they're really looking for depth of capabilities and breadth of capabilities. So where -- whether it's company attributes or contact data or intent data or other signals, that's really where we're going to shine, a, because the accuracy levels are so much higher; and b, because the breadth and capability set is so much broader that we're able to drive a much higher kind of ROI for our customers and a better experience overall. So I think that's the real differentiation. And at the end of the day, that's a big part of why most of our customers are going to be mid-market and enterprise customers, whereas all of those smaller competitors compete much more at the low end of the market. The other thing that continues to be a moat and something that we really focus on a lot is the privacy aspects of the data that we're providing. So we are very focused, as I mentioned before, and making sure that every company that we -- or every kind of data point that we're providing gets the same level of privacy scrutiny as they would, if they were in Europe and under GDPR. And that's something that no other company does in terms of notifying their -- all of the folks that are in there, making sure that we have an easy and kind of straightforward opt-out capability within the platform and providing tools to our customers so they can turn the dials on where they want to run with privacy. So the interesting thing about Clearbit, just to bring it back to the answer is most of their data is on a limited set, hundreds of attributes for company information, but a small part of their data is contact information. And there's kind of at the spectrum of privacy, it will be interesting what HubSpot does just given that they're historically touted to be -- touted themselves to be at one end of the spectrum. And Clearbit is clearly way on the other end of the spectrum, in terms of how they deal with privacy and what they're doing with data.

Yes. And I wanted to dive into what you were talking about earlier with all the different data points that you guys have and intent and things like that. So one of the things that HubSpot alluded to is that there's a generative AI play here, right? Like it's going to give them more insights out of activity outside of just HubSpot that can help with personalization. So just curious as generative AI is getting talked about more and more and more every day, when you speak with your customers, are you starting to get pulled in to those conversations? Or you starting to hear companies come to you and say, "Hey, data enrichment and that part of the story is an important." Like first step into getting deeper into some of the model work and things like that.

Yes, absolutely. And that's why our largest customers. So the $1 million plus cohort of customers continues to grow really well and why they're ingesting more and more data in a centralized way, whether that's taking data as a service or the OperationsOS to drive more of their motions. A lot of that is building a data foundation where they can take literally tens of thousands of company attributes and the people that are within those companies, the movements around those people, the intent data. All of those signals into a real engine that can ultimately drive a productivity increase and effectiveness increase for their sales folks. So that is a big part of a lot of our kind of larger customer conversations that we have with folks to get them that value.

Got it. And then maybe going back to the top line. But when we think about next year, I know you made the comment that, "Okay, we're going to get through a lot of the tougher renewals by the end of 2Q." And then maybe you could potentially start to see like quarter-over-quarter growth start to trend up from there. So one question that like we often get from investors is if NRR ends up staying flat, let's say, then that would require a lot of new business activity on top of that for you guys to grow next year. So when you think about the growth algorithm there, it might just be as simple as once you get through a lot of the tougher renewals, then you could start to see retention drift back up again. But maybe you could just talk through the puts and takes there and how you think about those different levers next year?

Yes, absolutely. So I think of the growth algorithm largely is there's a churn aspect of that. And given the composition of our customer base, I think a good churn level is around the 90% -- or the 10% level, which gets you through that 90% gross retention. And even in today's environment, gross retention has kind of continued in that. It's a little lower than 90%. But given the economic environment, it feels like a good spot. So gross retention held in pretty well, a little below 90%. The net upsell is the next piece of that. And certainly, we've been working through with our customers a fair amount of working through the weeds of like overbuying that's happened in the past and, frankly, layoffs that they've gone through. So historically, we've seen that net upsell in the teens to 25% range. If you look at '21, it was pretty close to 25%. Last year, it was more in the kind of teens, 14% range. Even if you get back into the 2018 and 2019, you saw similar levels of net upsell in that kind of teens level. So I think that once we've worked through the kind of overbuying that we've seen with a lot of customers, kind of taking away that boat anchor of down sells will actually naturally help that net upsell number and ultimately get net retention back into -- our goal would be to get net retention back into the single digits above 100% or that range over time. And then the new business side of that equation continues to work fairly well. There's been a little bit of pressure on the efficiency around that, but it's down a little from where it was last year, despite even tougher economic environment. So when you put all those together, the real shift when we see the macroeconomic kind of situation either stabilize or maybe improve in my mind, is more around that net upsell and getting net retention back into the, call it, single digits above 100% versus anything else.

That's really helpful. Now I'll turn over to some of the questions from the audience, there's two here. So the first one is that given the nature of your business and presumably the ability of ZoomInfo to use its own tools most effectively, can you provide any commentary around ZoomInfo's sales force productivity relative to similar B2B SaaS companies.

Yes. So I think our sales force productivity and sales efficiency continues to be one of the best that you're going to find out there. If you look at the new business part of the equation, it continues to do really well. I think of it as like in the -- it's a 1-point something x where the ACV that we're bringing on is well in excess of the cost -- fully loaded cost of everything that we put into it. On the existing customer side, it actually continues to do pretty well, but obviously is impacted by the down sells that are out there. So I view this as we're still on a -- we're still in the, I don't know, top decile or maybe even better than that in terms of what the comparative sales efficiency would be. Obviously, I think everyone in B2B SaaS is a little challenged in terms of top line right now versus where they had been previously. So I think all of the efficiency levels have come down at some level, but it would be hard-pressed for me to name very many that are spending whatever 28% of their revenue on sales and marketing, and still growing whatever last quarter, it was 9%.

That makes sense. And then the second question is, can you talk about the growth in different cohorts how is million-dollar cohort growth trending?

So the $1 million cohort is well in excess of the 9% that we did last cohort in last quarter and continues to do really well. I think a big part of that is that the net retention is meaningfully higher than the overall business. And obviously, that cohort includes software companies and telecommunications companies and transportation logistics companies and financial services companies. So it is a mix, but that larger cohort, frankly, is more stable in terms of companies and therefore, there's a little bit less downsell pressure. But even the larger deal that we did in Q3 that the top 5 client is a software company like they've laid a bunch of people off over the last year or 2. And as a result, the renewal that we did with them was not okay, we're just going to grow more seats. It was actually a reduction in the level of seats, and then they took on additional functionality in terms of DaaS and OperationsOS so they can centralize more of their motions, drive more of that kind of signal into a centralized place and then use their routing technologies to kind of create actions off the back of that. So the overall upsell was actually a good upsell, but off of fewer seats with more DaaS and OperationsOS to really drive that.

Yes. And I know that you've talked about, and this is a good segue into some of the add-ons because I know you've talked about that OperationsOS and DaaS, and some of those areas are actually still growing pretty fast despite a lot of the macro headwinds. So can you talk about what are the underlying demand trends behind those products that despite everything that we're seeing, they're still holding up pretty well?

I think the common thread for a lot of those is, a, more sophisticated clients that have the capability and resources to invest into those things. And obviously, there's a big swath of our customer base that are smaller customers and don't have the same set of capabilities. But also that they're focused on automation. They're focused on AI and they're focused on centralizing more of their emotions as opposed to just giving a salesperson a tool and saying, "Go have at it." They're looking for ways where they can leverage the best of their potential motions and really driving that across the entire sales team. And so that common thread where it happens, it tends to be larger customers, tends to be folks that really want to focus on data and really want to focus on where they can drive efficiency and effectiveness of their team in a really scalable way.

Perfect. Well, I think that's all we have time for. Out of time. Thank you, everyone, for joining in the audience, and thanks so much, Cameron, for the time. I appreciate it.

Thanks for having me. Thanks a lot.