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

My name is Hamza Fodderwala. I'm a U.S. Software Analyst at Morgan Stanley. And with me, I have the pleasure of hosting Cameron Hyzer, Chief Financial Officer of ZoomInfo. As mentioned, I'm filling in for my colleague, Elizabeth Porter, who's currently on parental leave. So hopefully, I can do her justice. We'll see. But Cameron, thank you so much for joining us. And before I begin, I should mention a brief programming note for important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. With that, we'll kick it off.

So Cameron, maybe for investors who may be newer to ZoomInfo story, could you provide maybe just a brief overview of the company for the products and the core value proposition?

Sure. And thanks for having me. So ZoomInfo, we provide a platform to sales and marketing teams. We think about that as the go-to-market teams for companies that really helps them operate more effectively and efficiently and digitize their go-to-market motions. We do that with a database of really high-quality information about the companies that B2B teams are selling to, the people that work at those companies and signals that help those teams determine when is the best time to reach out to someone or how to frame their conversation. And then on top of that, we overlay a number of automation tools to help those teams effectively use those signals, automate their motions and drive a better, more effective and more efficient go-to-market motion.

Got it. Got it. You talked a little bit about the platform. So I think a big investor debate has been sort of the TAM of ZoomInfo. Is it a digital Rolodex, or is it more than that? Can you talk a little bit about how you're expanding to really become that sales automation platform that you spoke about?

Yes, totally. So when you think about our largest customers, they really are using ZoomInfo to really power their whole go-to-market motion. That means bringing in signals using our workflow tools to then automate different motions, whether that's reaching out to a customer, sending them, advertising or e-mail campaigns or other things and really helping to drive making the salesperson's job easier every day where they can be more effective and efficient to drive more and more value for their company. And so that is the kind of end value. I think there's a spectrum of sophistication among our customers. There are some customers, particularly when they start out, they're using the system more to look up contact information or find out more about their target companies. But then as they continue to mature with us, using more and more of those capabilities to drive a much more sophisticated go-to-market motion is where we see many of our customers going and at this point, over 80% of our customers use some level of advanced functionality that we offer. So we do have people moving along that journey as they continue to mature.

Yes. And speaking of that platform earlier [Audio Gap] we'll involve what the customer purchased and do you think that's repeatable across your customer base?

Yes, it's entirely repeatable. I think that customer at this point is a top 5 customer, not necessarily 1 of our largest, but -- or 1 of our largest but not the largest. And that's a software company that's continued to grow. It's obviously a pretty large company. They actually have reduced seats with us over the past year or so as they've reduced the size of their sales team. So coming into the quarter, that could have very well been a downsell with that customer but they're also looking to invest more into their centralized data infrastructure and really help with the automation of different motions, help with that data foundation as they start to build more AI capabilities. And so the kind of upsell portion of that deal was really driven on them taking more data in a kind of API capability in order to really drive that back end operations level and to continue to sophisticate their go-to-market motion.

Got it. So maybe digging a little bit more into the platform expansion. So you've invested heavily in expanding outside of the core data provider capability into these advanced functionality workflows. Can you talk a little bit about these different types of use cases? What has been the penetration within your customer base? And maybe 1 or 2 use cases that you're seeing a lot of traction in particular?

Yes. So the areas where we're seeing the most traction tend to be in our operations OS, which is really the ability to manipulate and route data within the infrastructure of the company as well as automation capabilities. And so part of that is the marketing OS as well, which is a relatively new product, helps people automate their marketing motions at the end of the day. It's really an account-based marketing tool that allows people to target specific accounts and then drive marketing or social or other motions off of that. And so I think that's where we're really seeing the most traction is in those automation capabilities, whether it's operations OS or engage or our workflows or marketing OS at the end of the day.

Got it. So you're obviously expanding the solution set. At the same time, there has been a bit of a slowdown in the business over the last 18 months, along with a lot of other software companies. Can you speak to that a little bit? And why you see growth sort of stabilizing going forward?

Sure. So yes, I think a fair amount of our business is with the early adopters of our platform, which were really more in software and technology companies. If you go back to the DiscoverOrg days, we actually focused almost exclusively on profiling the IT departments within large and midsized companies. So it's natural that most of our customers are software. When we acquired ZoomInfo, we actually really expanded the addressable market that we could go after because we brought in quantity technology to kind of merge that with the quality technology that we'd developed at DiscoverOrg. And really we're able to go after all sorts of other industries, whether that's retail or transportation logistics, telecommunications, financial services, et cetera. So that doesn't kind of change the fact though that like most of our business is historically technology businesses and coming into this year, around 40% of our customers by revenue were still in software. Software has been a really tough kind of place to be over the last year to 18 months. A number of companies have seen their growth trajectories, changed pretty significantly. And obviously, when we're selling into the sales teams at those companies, that change in trajectory impacts what they want to buy and how they want to grow. In addition to that, there's been significant pressure on how they think about their margins as a business. So particularly in mid-market software, if you were losing 20% to 50% of your revenue, your investors were pushing you to get to something closer to breakeven. That's a big shift in terms of operating model for a lot of our customers. So we've been working with our customers to kind of work out some of the over buying that occurred when if you go back to 2021 and 2022, there was a lot of free money in the system. Working out that overbuying resetting to a level where we think that there's a really good foundation to grow with those companies as they start to reaccelerate their growth is what we're really focused on. And at this point, I kind of think of peak negativity as being in the February to March time frame of 2023. So we have a number of subscriptions that we need to lap that peak negativity and get through this time frame of potential downsells or tougher renewals so that we can then ideally have that opportunity to grow with those companies again.

Speaking of that, I think in Q3, you talked about how your 90% through the renewal of some of these cohorts that have been subject to that downsell pressure, yes, by the end of Q1. So as you sit here today, what is your sort of comfortability around sort of growth stabilizing beyond Q1 next year?

Yes. So certainly, again, that concept of lapping peak negativity and even with our long-term contracts being through 90% of our revenue, having transacted with us between September '22 and March '24 makes us feel really good that, again, we want to be able to kind of reset that foundation. Obviously, we're not all the way through that yet. But as we get through that and we reset that foundation, it does give us that opportunity to remove some of the downsell pressure that we've seen over the last 3 or 4 quarters and start to rebuild with those customers as they start growing again.

And just to clarify, the customers who may be cutting back, is it just a function of seats? Is it functionality? And what are you doing to sort of offset perhaps those seat expansion headwinds.

Yes. So it is majority seats. Obviously, when people are cutting back seats, they're also looking at other parts of their contract and oftentimes pulling in some of the additional functionality that they have. Realistically, our focus right now is to really partner with those customers, make sure that they're getting all of the value out of the platform that they can and resetting the relationship in a way where we're not just showing up to kind of sell the next thing, but really focused on making sure that those customers are driving value for their own organizations so that as they start to look into the future and think about their growth prospects, that they can really lean on the system to leverage that going forward.

Yes. Shifting gears a bit. One of the things that really stands out, particularly someone who might be in new to the story is the really high operating margins, you have over 40% operating margins for ZoomInfo, which is a lot higher than companies at your scale and your growth profile. What about ZoomInfo's sort of business model enables this?

Yes. So it's been something that we've obviously focused on for the entire history of the company. A big part of it is that we're leveraging our own system to drive a more efficient and effective go-to-market motion. We've done that from the very beginning. I find it interesting that realistically, most software companies, they're spending sometimes the majority of their operating expense, although usually the plurality of their operating expense on sales and marketing. So that's a big line item for any software company. If you're able to drive a really effective and efficient go-to-market motion, that can help support the operating margins of the overall company. And obviously, just culturally, we are really focused on making sure that, that focus on continuing to be 1% better every day to make sure that we're getting the maximum leverage out of the operating expenses that we're deploying pervades to other parts of the company and not just sales and marketing, but it really starts with sales and marketing and using our own system to drive that leverage.

I mean any time you have very high operating margins, I imagine that introduces a lot of competition. So what is it about ZoomInfo that differentiates itself from, let's say, a software company like Salesforce, right, which is kind of in that sales automation space or how spot or what have you?

Yes. I mean I think that what we really focus on is a really high quality data asset that we -- that our customers can leverage to really get the most value out of their folks. Realistically, I think that there are a lot of companies out there that are pure software companies. And I think that those -- that software has that opportunity to deliver a lot of value. But when you're talking about really making the world a better place for salespeople having information about the companies that they're selling to, the signals around those companies in terms of when you should be interacting with them or how you should frame your message and the people that work at those companies really helps to drive a ton of leverage and that becomes an interesting value proposition. And frankly, it's hard to get to really high-quality data and really high-quality insights, and that's where we focused all of our efforts and where we really differentiate versus other software vendors that are out there.

Got it. Speaking of data, generative AI, obviously, has been a big theme this year and going into next year as well. How is ZoomInfo leveraging all this rich data that they have to offer applications to their customers that could help them be even more productive.

Yes. So AI is obviously a really exciting opportunity for us, particularly when you think about some of the capabilities that we've already added on in terms of meeting summaries and follow-up e-mails that you can kind of generate out of the system. And we'll continue to drive more and more leveraging of the insights and signals that we're generating in order to help our kind of customers and AI is a key component to that. But I actually think that, that's maybe the smaller opportunity relative to many of our largest customers really focusing on their data infrastructure in order to leverage AI in bigger ways. And so that's where we see a number of our $1 million-plus customers and other large customers really starting to take on more data as a service and operations OS so that they can help drive overall AI motion within their companies.

Got it. One question, then I'll open up to the audience for any questions as well. You talked a little bit about how software and sort of the tech protocol, I think it represents 35% of your business now, I think down from 40% previously. What other verticals are you seeing more demand in? And do you think that mix goes down over time?

Yes. So it's really any other businesses that are selling to other businesses, financial services, business services, transportation and logistics, telecommunications, health care and pharmaceuticals, retail, manufacturing, all of those are continuing to do really well for us in terms of other verticals outside of the technology space. And so I do think that in the long term, I'd expect the contribution from a particular vertical to get closer and closer to that vertical's contribution to overall, call it, B2B GEP.

Okay. Any questions from the audience? We have 1 here. We just wait for the mic, sorry.

I'm curious if you're able to monetize AI on specific SKUs or does it just improve the platform overall? Or just maybe talk about AI and how it expands the amount you can charge to the customer.

Yes. So certainly, some of our SKUs, where it's the kind of more advanced SKU or higher-level SKU that incorporates AI, that allows us to get more and more folks up into those SKUs to drive better monetization and a big part of it is just driving a better customer experience, which will obviously increase our retention as we go forward. So those are the kind of primary areas that we're seeing today, but certainly, the pull from customers investing in AI and needing high-quality information to kind of feed those engines is another area where we're really excited about the future with respect to AI and how being really the only platform that has those high-quality data and insights to help drive them is really important.

Any other questions?

Maybe on the AI topic. I mean, clearly, a company with 40% operating margins, you're already very profitable. But in what ways are you leveraging AI internally to make yourself even more efficient?

Yes. So certainly, there are copilot areas where we're leveraging AI and things like R&D to help drive more efficiency out of the team and help further widen that moat of capabilities that we're able to offer customers. Historically, we've always leveraged AI and machine learning in a really big way to drive quality at scale across the entire database, and we'll continue to invest in that. There are more and more opportunities. And then certainly, within the sales and marketing team, we are often piloting the first kind of AI capabilities that we're going to put into the system with our team to help drive more and more efficiency from a sales and marketing perspective as well.

Yes. I think you also called out some sales efficiency hurdles from increased time spent by reps on renewals. Can you talk a little bit about what steps the company has taken to improve that? And what you're seeing in terms of sales productivity trends going forward?

Yes. So from a sales efficiency perspective, on the new side, it's actually been reasonably stable. Obviously, it's a harder world out there. So you see that come in a little. The bigger impact to the environment has been on the -- on our existing customers. And so we've focused a lot on creating new or new renewal team just to help people get through like a base level of renewals. We focused a lot on expanding our enterprise focus with respect to our customers and in many cases, verticalizing some of the teams so that they're able to have those deeper conversations with customers as well. And certainly, we're always focused on where we can deliver more value, whether that's from a training perspective or getting people's integration setup or in a better way. And so those things also help to drive retention, particularly as we move forward with those customers.

Yes. On the verticalization point, you talked about how you want to expand into other B2B verticals. Is there an evolution of the go-to-market strategy that has to take place? You talked about vertical selling? Is there going to be more of a channel component. And what does that mean for, let's say, profitability longer term?

Yes. I think it's interesting. We talk about expanding into that space, but it's roughly 2/3 of our revenue. So it's already an $800-plus million business. It's not a kind of small thing that we're looking to expand, but certainly, we're very underpenetrated in those areas. So there's a lot of opportunity to continue to grow. And certainly, verticalization is a key component of that and 1 that we focus on we'll bring on more channel partners as we continue to grow as well, which that's something that we historically have not focused on. So it's a bit of a newer motion for us. But those things are all important to continuing to drive that growth.

And today, just roughly, when you think about your existing customers, I know there's some downsell pressure in 1 of the cohorts, but think about growth going forward, how much of that is coming from expansion within the base versus net new?

Yes. So I think we've seen historically that net new does continue to drive growth, and I think that's true within the current time frame as well. And a big part of that is just how underpenetrated we are with respect to those overall markets. But I think when I think about the growth algorithm long term, we've seen gross retention hold in relatively well in this environment. So our customers continue to use these platforms, but some of them on a reduced basis just based on where they are. We've seen that net upsell contract significantly. And I think that's the area that we'd like to see that get back to expansion. A big part of that is the kind of boat anchor that we have from downsells that we're looking to work through that and get to the point where we can get back to a net upsell level. Historically, even before 2020 in '18 and '19 as examples, like net retention was in that single digits above 100% level. So love to get back to that level where we see our existing customers contributing single digits, maybe even close to double digits of kind of baseline growth. And then given that we're so underpenetrated, continuing to drive new customers to get us back up into teens level, maybe even low 20s level of growth in a more stabilized environment.

And generally, what happens to growth in net retention when a customer does buy multiple products or the broader platform vision with ZoomInfo?

Yes. Certainly, as our customers get more sophisticated, they do tend to have higher levels of net retention. So they continue to invest more. Obviously, it's more integrated into their environment, so it's harder to kind of take out. So both gross retention and net retention are improved as customers are using more and more of the functionality.

And ZoomInfo obviously, in an enviable position given very high 40% plus operating margins. When you think about growth versus margins going forward, is it going to be more margin expansion, more focus on growth and sort of stabilizing that top of the funnel going into next year?

Yes. I think that we are focused on getting that retention back into a level that we feel is healthier for the business. And therefore, think more focused on that growth. Realistically, we have a business that, like all software businesses and data businesses has a fair amount of operating leverage inherent in the model. So lower levels of growth that operating leverage becomes less apparent. And obviously, as we get growth back into back up, working through this time frame, we'll be able to realize more of that operating leverage going forward.

Got it. Maybe just last question on capital allocation. You've deployed, I think, $160 million of your $600 million buyback authorization as of Q3. Can you talk just high level about your capital allocation strategy? Is it going to be more buyback focused, more tuck-in M&A? How do you think about that going forward?

Yes. So certainly, we're here to kind of be the best capital allocators that we can. And certainly, in the current environment, we feel that we're trading at a level that's well below the intrinsic value for the stock. And therefore, we are going to continue to be aggressive about buying back stock in this environment. Realistically, we're deploying more cash to buy back stock than we're generating in a particular quarter right now at these levels. Going forward, it is dependent on kind of where the stock is trading relative to the -- to that intrinsic value level that we see in the growth of the business. And therefore, we'll continue to monitor that, decide where to go. I think we're interested in M&A, but realistically, it's not a lot of things that we think we're missing in terms of delivering value to the customers with respect to what we're doing. So it's not like we're focusing on like trying to find specific features or other things. And if I can buy back really the leader in the industry at 11 or 12x cash flow. I'd much rather do that and makes the bar really high to think about other M&A to do.

Got it. We have 30 seconds left, actually. Maybe 1 thing that you're particularly excited about for next year, obviously, it seems like there's going to be stabilization beyond Q1 based on your guidance. But 1 thing you're particularly excited about, new product or whatever going in 2024?

Yes. I think the couple of things that we're really excited about are continuing to focus on the enterprise and to really drive value with those large customers. We are rolling out a PLG kind of a self-service motion for smaller customers so that we can push more and more of our high-value resources to those customers that are really digging in with the platform and generating a ton of value and I think as we continue to move forward, things that are more automation and AI driven. So like when we think about what we call like signal to signal to action capabilities within the platform, those I think will be really exciting over the next few quarters and the year.

All right. Cameron, thank you so much for your time.

Appreciate it.

Thank you very much.