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

So thanks for joining us. This is Day 2 of the Wells Fargo TMT Summit here in sunny Southern California. I'm Michael Turrin, software analyst here. We have Cameron Hyzer, CFO of ZoomInfo, and with us for next session. Cameron, thanks for joining, making some time.

Thank you very much for having us.

Excellent. We've been making a lot of conversations around ZoomInfo, and I wanted to start off by kind of just level setting for those who are less familiar. It's been a number of years since the company went public. But maybe you can level set what the company is, the products offered, the user personas that have been most prevalent and then we'll get into some of the finer details.

Yes. So we provide a platform to sales teams and marketing teams. We think of that as go-to-market that really helps them be more effective and efficient. And we really do that through providing high-quality data and insights about the companies that they're selling to and the people that work at those companies and then signals that can help them determine when is the right time and how should they frame their outreach or conversations with those companies. On top of that data set, we've then added on additional tools that can help them automate their processes. We have a conversation intelligence tool that helps them gather data from the conversations that they're having as well as really kind of provide workflow and underlying capabilities to help automate more of that process and, in many cases, centralize some of their motions and centralize that whether they want to create a better foundational data layer to drive in the AI strategy or to drive more automation around how they're running those motions.

You were in -- at somewhat of an ideal environment when sales was forced to go remote because of how important the data you're enabling and the ability to keep teams productive in a time where I think everyone was scrambling to figure out what to do there. And we get the question that I think is mischaracterized often around, did you capture more than your share of the market during that time? If I look at it, it looks like a very significant horizontal market opportunity. But maybe you can respond to the question on how much of the market did you capture, and when you look at the addressable market, how much greenfield there still is to be had for ZoomInfo.

Yes. So when I look at that, we obviously track a number of companies that are B2B companies selling to other businesses. And in our system, we'll identify by name over 700,000 businesses that are selling to other businesses. And so I think there's a huge opportunity out there to go out and help many of those businesses that even despite the pandemic and having to go remote, still have not really modernized their go-to-market infrastructure. At this point, we have over 35,000 customers, but that's still a fairly small sliver of all of the companies that are selling to businesses out there. And frankly, even with our largest customers, there's still a significant amount of opportunity to help them continue to sophisticate their data infrastructure, help them continue to drive a better go-to-market motion. So even within our larger customers, there continues to be a great opportunity to expand with them as they continue to find areas where they can drive incremental efficiency and effectiveness of their sales teams.

Okay. The past year, you've seen a number of different headwinds or permutations play through within just the expansion rate and the growth rates of the company. Maybe you can just level set what those are and we can kind of spend some time unpacking what could happen, permutations that could drive improvement going forward.

Yes. When I think about the algorithm for growth within ZoomInfo, I really break it down into 3 components. One is churn that we see from customers, and it's natural that customers will close down or, for one reason or another, stop using ZoomInfo. Then there's the net upsell within those customers. Obviously, there's an upsell component to that. There's also, more recently, a more significant downsell component to that. And then there are new customers that we're bringing on. So historically, we've seen gross retention, kind of the inverse of churn, in that 90% range. We've actually seen that continue to hold in reasonably well. In the tougher macro environment, it will be a little below 90% this year, but holding reasonably well. What we've seen is that the net upsell has really contracted significantly. And I think a big part of that is in the period of time where we, yes -- and frankly, I'm not sure that it's so much COVID. I think it's more that there was a ton of free money in the economy, whether that's venture funding or PE funding or government support from, call it, the end of 2020 to the beginning of 2022. That certainly provided a lot of people with the opportunity to lean into their sales motions. And frankly, there are a lot of companies that had expectations of growth that were bigger than what actually happened. And so that overbuying that we experienced in 2021 at the beginning of 2022, I think, is something that we're working through right now. Certainly, you have, a, there was overbuying and then b, you've seen probably a net decrease in overall sales headcount, particularly in our customer base that's more concentrated in kind of technology right now, those being our early adopters versus more of the physical economy that we continue to expand with. And so I think we really need to work through this cycle of renewals. I think of kind of peak negativity being, call it, February or March of 2023. And so we need to get to where we fully lapped that peak negativity level in order to really get to a better foundation on which we can then grow with more of our customers. And so yes, I think that will provide the opportunity for that net upsell number to increase. This year, I think where we're expecting a net retention number to be below 90%. That net upsell is going to be very close to 0. But as we're able to attenuate that anchor of downsell within the customer base, obviously, we can hopefully move that net upsell number back up to where we've seen, and historically it's been in the 15% to 25% range in terms of net upsell. Even if I go back kind of pre-2020, '18 and '19, we saw net retention that was in that single digits above 100%. I think getting back to that level will obviously create a very good base where we can continue to then drive new sales as well. New sales in the most recent time frame has also not been as significantly affected the net upsell. So where gross retention has remained reasonably good, which I view as a definite positive. Customers are still using the system, their just appetite or demand for that use is smaller than it used to be, given the environment. And there's still a number of new customers that haven't necessarily leaned into that digitization or sophistication of their go-to-market motion. And that market is really big, particularly outside of our core technology verticals historically, that creates an algorithm where 100-plus percent net retention plus strong new sales gets us back into a teens maybe even low-20s growth rate in a more normalized environment.

Okay. That's very helpful. So on the seats and the expansion in the renewal commentary, you mentioned February, March is kind of peak negativity that you're lapping. Are there things you're seeing in renewal conversations currently that suggest that things are mostly stabilizing from a seat perspective? Or is there anything you can say around how far you are into the renewal cycle or how far you will be in that February, March time frame where you can start to think about we're turning the page on some of that and creating a good baseline at the very least.

Yes. So certainly, I think we've consistently talked about getting through that renewal cycle. And even now the people that are renewing, they're renewing against a contract level that is kind of more optimistic than peak negativity. So I don't think I'd say that we see stabilization in that yet. But as we get further into the first quarter, hopefully, that will be the case. Certainly, when we look at our customer base, based on revenue, we'll have transacted with 9% of our revenue between September of 2022 and March of 2024. So while we do have some longer-term contracts, obviously, the vast majority of customers will have transacted in this time frame where negativity has been greater. And therefore, ideally, we'll be able to build off the base with those customers going forward.

The other thing you mentioned was new customer activity has been, I think, relatively healthy in terms of what you characterized it. I'm wondering if you still feel like in some way, you had to put more emphasis on the expansion piece of those renewal conversations to make sure those go right in versus how you would typically invest or focus go-to-market. Or can you do both?

And we very much do both. Our go-to-market teams are set up so that it's a completely separate team for new. So new customers, they go to a specific account executive. Obviously, there's a lot of real-time routing and enrichment that we're doing around the customers that are coming in to get them to the right account executive. But then once they become a customer, they get handed off to our customer success team and customer support, and then they also get an account management person that's wholly focused on making sure that they get value out of the platform and then to help them with their journey of sophistication because certainly, most of our customers, they come in, in a relatively basic package, they get basic functionality. And then as they start to get more comfortable with that, they're able to move on to more workflow-driven capabilities, more automation capabilities and ultimately get more value out of the platform as well. So those teams are separate and as a result of that, there's obviously an investment trade-off of where we're putting dollars, but there's not necessarily a tension trade-off on a person-by-person basis.

Okay. You mentioned 700,000 potential customers. We've also spent time and maybe as part of the response, you can provide any recent disclosure that you've given on just the vertical segmentation, the composition of your customers. But I'm wondering how actively you're pursuing diversification or thinking about the composition of that 700,000 relative to what your existing customer base looks like in the hopes that maybe future cycles, you can hit a point where there's just more mix kind of playing against one another, assuming it's not a broad-based downturn.

Yes, totally. So currently, in terms of revenue or ACV, our software as an industry comprises less than 35% of our kind of total revenue, 34% or so. Obviously, that's bigger than what you'd think of as the B2B economy or the overall potential addressable market. And I think that is somewhat based on history. DiscoverOrg, before we acquired ZoomInfo, was really focused on profiling the IT organizations within kind of mid- to large companies and doing that with super high quality. We took all that technology that we had developed to kind of drive quality within the data and mixed that with the technology that ZoomInfo had developed to really drive quantity, breadth of the different companies that they were focused on. And so by bringing those 2 together, we really exploded the addressable market that we're able to go after and have seen an increase in the contribution from non-software companies over time. And so that is something that we continue to really focus on. At this point, obviously, 66% of $1.2 billion means that the non-software part of our business is over $800 million of revenue today. And when we look at our new business, so those companies that are coming on, it's more than 80% of the new business revenue that we bring on comes from non-software industries. And I think that there's -- that opportunity with non-software industries is really great, but it's not going to just explode all of a sudden because for a lot of those companies, there's a fair amount of inertia. If you were, I don't know, a company that frames art for offices, right, you're selling to businesses, you might have founded that company in 1953. Like, that's a 70-year-old company. They had to be doing something right in terms of finding new customers and continuing to drive that business. So they aren't necessarily saying, "Oh, well, how do I use data to like drive a better go-to-market engine?" But at some point, the founder of that company might turn the business over to his daughter who's been working a lot and she wants to think about how things could be run better. They bring in a new salesperson that maybe worked with ZoomInfo before, has greater plans, or they want to move into, I don't know, furniture sales instead of just art sales. Like those instances of change within those companies really help to help them think about overcoming that inertia of we've always done it this way to there's a new and better and interesting way to do things. And those are the companies that we're finding all the time, and that's frankly why the new business motion continues to do pretty well. And while new business overall will be a little down this year versus where we were last year, like software has come down significantly, and the rest of those industries have actually grown to largely offset that softness that we see in the kind of software sector right now.

That's great. Some of the common themes that we've heard throughout this conference have been things like value-based selling, consolidation, different shifts in terms of the way companies are selling or presenting the value of their software than might have been the case a few years ago. Are there elements of ZoomInfo's business model you would bring into that? And then I'll ask a second part, just in case you say not as much on the first part, it's just AI is a major point of focus. We've seen another player in the front office space acquire a smaller company in sort of a data-focused opportunity set, right? And I think the view is just fresh data is very important in a lot of different instances and can turbocharge whatever companies intend to do with go-to-market. So I'll give you a couple of parts to potentially answer the question with, but in terms of sources of optimism and things that you're tweaking in the go-to-market so if the macro shifts or just in general, you're in a sort of a better selling position, what would you highlight?

Yes. Certainly, for our go-to-market engine, we have been more focused on being more customer-centric. Part of this is more value-based selling versus transactional selling. That's the journey we've been on for a little while, but feel that there's a lot of opportunity for improvement there. And as we create a better partnership, relationship with our customers, we feel that as we move into a more stable or potentially growing macro environment in the future, that will pay dividends in terms of being able to grow back with those customers and frankly, just really making sure that they're getting the value that's really inherent within the platform overall. Certainly, with our largest customers, I think we're seeing good traction around that. We're seeing really strong demand for some of our more automation-focused care features as well as we think of as Data-as-a-Service or OperationsOS that is really allowing those larger customers to centralize parts of their go-to-market motion with a revenue operations team pull-in signals or data and kind of feed that out to their sales teams in a more structured way. And that more structured way ultimately makes sure that signals don't fall through the cracks, so that they're getting the most value out of the potential signals that they're, in all cases, using the best motion against a particular signal. And I think a lot of that then ends up playing into AI, where people are really thinking about their data strategy and how they are building that data foundation and having the highest quality and broadest kind of data capabilities are helping those much larger companies really drive an AI strategy. And so that is I think where we do see some traction, and frankly, where we continue to lean into providing really high-quality data and insights to customers. I think it's interesting that you really can't find the level of quality and breadth anywhere. So while there's a whole bunch of, call them, very small kind of other companies out there, they don't have the kind of tens of thousands of attributes about companies. They don't have the real quality that we continue to test and drive around the people that work at those companies and the buying committees and org charts around those companies. And frankly, I think the signals is where we see more and more kind of value for customers. And those signals are things that you're only going to find at ZoomInfo.

Yes. Before I flip over to some of the metrics and most recent earnings results and some other things, I want to just go back to what you're touching on here because this is a question I get often, and I think it's important. Like I think a lot of this conversation is important to level set not just what's happening in the macro but where ZoomInfo's value resides, so investors can make their own calculations around a normalized environment or what the future might hold. So we get questions around the moat, the difficulties of replicating what ZoomInfo has built, I think inherently because, in many ways, it's a new market relative to other software companies that software investors are used to evaluating. So when you think about the moat, the big points of differentiation that make what ZoomInfo has built hard for a competitor to replicate, what would you highlight?

I think, first and foremost, most of the data ingestion that we do is from proprietary sources. Those are community addition, contributory network as well as from our customers. And many of the different data points that we're able to derive from that, whether that's, at some level, obviously, contact information is important, but it also drives our IP to company graph, which shows -- which ends up giving us a lot of insight into different companies. So I think that the proprietary nature of a lot of the inputs of the data is a big part of it, and it's probably the majority of the evidence points that we're driving. But then the long history of data that we've built as well as the machine learning engine that we've put together to really drive quality around that. So we're bringing in millions, if not billions, of kind of evidence points into a data engine that's comparing those against each other. So we're triangulating to really understand like what are the things that should be published and should be acted on versus what are the things that are noise in the multitude of data that's out there. And so obviously, we've had more than a decade of really driving and developing and continuing to enhance that machine learning engine to drive quality. And then on top of that, frankly, we spend a lot of money not just on machine learning and how that works, but also the research team that we've developed, bigger than most of our competitors like whole companies, and that research team is constantly sampling the data in different data points to create ground truth for the machine learning engine, which, frankly, is the most important thing to driving quality. So when you sample the data points, you figure out which ones are right and which ones are wrong. You feed that back to the data scientists and the machine-learning engine so that we can scale that investment across the entire universe of companies and people at those companies that we're profiling in order to really drive the highest quality that's out there. And so I think for us, none of this is static. We want to continue to invest and drive a bigger and bigger moat of that data and the value that we're able to provide to customers with that.

Yes. That's great. And nice job, Cameron, in spending all this time without getting into metrics and staying at a higher level.

I want some metrics, too.

So we'll get to those. So summing up the puts and takes of the various things that are happening in and around ZoomInfo, maybe you can also provide some context around Q3, the highlights, the positive points, the points of consideration that you're making in terms of guidance for Q4 and just help level set where we are currently.

Yes. So I think that we do continue to see positivity out there, particularly when you look at our largest clients, the traction that we see with Data-as-a-Service and OperationsOS. We also see traction in the MarketingOS. And so I think that those are the exciting parts of the business that we're continuing to lean into and we continue to drive. It's still a tough world out there, though. And I think particularly when we look at working through some of the overbuying that we had talked about before that we will see or we expect to see net retention for the year below 90%. And obviously, we're not 100% there yet. But our expectation is that the net upsell for this year will be impacted by a significant amount of downsell. And frankly, the environment has pushed a little less upsell than we've seen in the past. So I think as we look through the year, we've set our expectations appropriately when we're looking at where we expect to end the year. And ideally, as we get through Q1, we'll be able to build off of a more stable foundation with many of those customers that have laid people off or significantly look to change their margin structure. And ideally, we'll be looking to grow as we go forward.

Okay. On margin, you're certainly not in that camp, right? You have an incredibly efficient core business. So you haven't had to make meaningful considerations around margin trade-offs to the degree that some others have.

Yes. Certainly, that is I think the goal of most businesses should be to generate profits for their shareholders. And it's certainly something that we focused on. And frankly, we leverage everything that we can, including our own system to drive really strong efficiency in the company. Obviously, the efficiency of the system largely translates into the sales and marketing leverage that we get out of our team. But frankly, we pushed that throughout the company in order to drive efficient business overall and translate that into strong cash flow as well within the company.

Any change that you've made in the considerations over the past year as far as considering just leaning further into margin and kind of weighting this out versus continuing to add capacity. It sounds like because net new is healthy, that would be a willing trade-off you'd make. And just how do you make sure that you're carefully considering the right balance, if the world starts to turn in a more favorable way that you're not caught off guard by that?

Yes. So certainly, we have continued to build capacity, and that is a core tenet that we do believe that the environment will stabilize and eventually improve. That's kind of the nature of cycles. I just don't know when exactly it's going to happen. So we have focused on continuing to build capacity from a sales perspective. We're also very much focused on R&D capabilities, whether that's implementing additional AI capabilities, continuing to deepen the moat with respect to data or leaning in with respect to some of the operations and kind of enterprise-level functionality that we offer. So those are key things that we're really focused on. Honestly, part of being efficient as a business is maintaining a certain level of nimbleness where we are constantly having the discussion with our executive team about where things are going, how we see top line and where are the places that are appropriate to lean into that can drive improvements and making sure that we're prioritizing those in the right way.

How does buyback fit in the discussion for you in terms of capital allocation? Your stock seems to be undervalued here currently. It seems like investors are, in some ways, waiting for a turn that inevitably seems like it will happen based on some of the characteristics that we've laid out. So what is the discussion that you're having and what would cause you to kind of tilt more towards buyback versus the more balanced approach that you've used?

Yes. So naturally, or obviously, we did approve a $500 million buyback in August. And we are very focused on being aggressive about that at the levels that we're trading at right now. We feel that, that is the best place where we can use that cash to return money to shareholders and ultimately drive shareholder value, given that we are trading below what we would view the intrinsic value of the stock to be. Certainly, our goal over time is to drive free cash flow per share. That's where kind of the primary metric for our performance-based shares and so forth is. And so at these levels, that is something that we think we can really impact. At this point, we are buying back -- we are using more cash to buy back shares than we're generating in a particular quarter. So I view that as being appropriately aggressive given where the stock is. And naturally, being opportunistic about that means that the stock starts to get closer to what we view as intrinsic value, then we think about what are the other opportunities for that. Realistically, in my mind, the primary opportunities for capital allocation are returning money to shareholders, which is what we're doing in an aggressive way, potentially thinking about our debt structure in some way, although, frankly, I would say that we're probably underleveraged where we are, so there's not a lot of need there or potentially M&A. Yes, I think when we look at the opportunity set and what we're delivering to customers, we don't feel that there are big holes that we need to fill through M&A. And yes, frankly, the opportunities that are out there aren't that attractive, particularly relative to being able to buy the industry leader at whatever, 11 or 12x cash flow. Like it's hard to find other things that are more attractive than that. So from an M&A perspective, the bar is really, really high.

That was a good endorsement. I hope that one picks up. We just have a couple of minutes left. So I'm going to ask a couple of forward-thinking questions. The first is just around where we are currently and things you're thinking about in terms of 2024 strategic priorities for the company. I think it's been fairly consistent in management teams characterizing the macro is what you've said that it's similar. It's not creating reasons for rose-colored glasses, but companies are accepting and making some tweaks. So is there anything there in the sort of 2024?

I mean for 2024, we're going to continue to really focus on delivering value to the enterprise. Part of that is continuing to invest into and shift the sales motion around the enterprise. So we've already started verticalizing some of the sales teams on account management side, focus even more on that as we move forward. Certainly, one of the things that we haven't discussed yet, but part of focusing on the enterprise is freeing up resources to move folks to really focus more on the enterprise, and that's focusing on our self-service or PLG motion. So we'll roll out. We've already started testing some of the ZI white capabilities and self-service capabilities, and we'll roll those out more aggressively in 2024 as well. And I think, the third leg of that is really from a product perspective, continuing to develop more of that functionality that's focused on the enterprise, whether that's within the OperationsOS to support automation AI capabilities or within the admin capabilities or MarketingOS to really drive more value for those larger enterprise customers.

Okay. Good answer. The last one, and then you're off the hook, is thinking longer term. Like step away from the macro a little bit and just think about the normalized opportunities, sort of the long-term view on why investors should prove interest in ZoomInfo and look beyond some of these things towards the bigger picture, probably a similar thing to what you're articulating to employees and what keeps motivation internally. So I'd love to kind of close on that note.

Yes. I think we are and always will continue to be really focused on delivering significant value to our customers. I think that, that is the underpinning for building a great company. By delivering value to our customers, we expect to keep the kind of gross retention in a very solid range given our mix of customers. That will enable us to kind of get past this time frame when the net upsell is not as strong as we'd like it to be. If you think about getting that net upsell back into teens range, that gets you into a net retention level that's single digits above 100%. And there's just such a massive opportunity out there in terms of new potential customers that driving a company that has great cash flow and margins that can continue to drive growth at scale in the teens range or maybe even low 20s. That's a great business overall, and that's what we're really focused on executing against an efficient and a really strong way.

That's a fantastic thing to close on, Cameron. Thanks to you.

Absolutely. Thank you very much.

So let's get back out in the sunlight. Thanks.