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

All right. Hey, everybody. My name is Koji Ikeda. I'm one of the SMID Cap software analysts here at Bank of America. I'm super thrilled to have the CFO of ZoomInfo, Cameron Hyzer, with us today. Thank you so much for joining us.

Thanks for having me.

Of course, super appreciate it, as always. So just real quick, high-level background. I know a lot of people know ZoomInfo, but for those on the webcast and those in the room that are unfamiliar with it. Maybe just a quick minute or 2 of what is ZoomInfo, what's the opportunity? Who is Cameron Hyzer?

Yes. So I'm the CFO at ZoomInfo. I've been here for getting closer to 6 years. And ZoomInfo provides a platform for salespeople to help them sell more effectively and more efficiently. We do that by delivering high-quality data to them about the companies that they're selling to, the people that work at those companies and signals about those companies that might indicate that they're in the market for any particular service. And so we're really excited about the value we've been able to deliver to people historically with that. And we are rolling out right now our Copilot that effectively brings all of those things together so that people can understand who are the companies that they should be reaching out to. What's the buying committee within that company? And what's the context under which they should be reaching out to those companies. Maybe you're a benefits administrator brokerage or benefits brokerage firm, you want to know when people just hired a new CHRO or a VP of Benefits. You want to be able to reach out to that person, congratulate them on the job, talk to them about maybe where they worked before and how you can deliver value to those companies. Those are things that Copilot product [ would ] walk in every morning and you see here's the thing that you should do today and why you should do it and how that will help you move something forward.

What is the pain point that you guys are trying to solve now specifically when customers are coming to you? I imagine over the past several years, especially with generative AI coming into the marketplace, things have changed. Maybe they haven't. I mean when they're coming to you what are they talking about? What they're saying? ZoomInfo help me with this. What is that specifically?

Yes. So I think the pain point that we're really trying to solve is that a lot of companies haven't necessarily changed their sales motions historically. So if you're a freight forwarder in New Jersey, you probably wanted to know all the businesses around you that we're shipping things. Frankly, you probably had a motion that you set up in 1972 when you founded the company to go out and find those businesses, maybe you joined the country club to meet CEOs or you sponsor the town fair in order to meet folks or if you go to conferences. Whatever it is. Realistically, our belief and what we've proven with a lot of our customers is that by having high-quality data and third-party data about all the things that you don't see or can't see or your salespeople aren't in the weeds of everything. By having that high-quality data, you can run those motions much better. You can get signals on people that might be in market or, frankly, more automated signals across a broader universe on the things you already use. You're an accounting firm that specializes in helping people do valuations on intangible assets when they sell their company. You probably want to reach out to people before they send out an announcement that they're going to sell their company. You want to introduce yourself. You want to be in front of them. There are plenty of signals on this company has grown. This company has just taken investment. This company is 4 years into their private equity firm like you should reach out to them. All of those things are really important to driving the best motion that you can in order to -- sales at the end of the day is often a hand-to-hand combat sport and providing better tools to those salespeople to drive better motions and more efficient motions is something that we've gotten really good at.

ZoomInfo is one of the most real-time [ seers ] of front office demand with your customer enablement platform for sure. I believe that. And so maybe the question here is about the demand environment. How are you categorizing the demand environment today versus the beginning of the year versus a year ago? How different does it feel? Does it feel like it's getting better, worse, stable?

Yes. I think it's been a tough go for front office folks, particularly people who are really helping salespeople do a better job. I think when you think about who we're selling to, we're selling the sales teams that are looking to invest into growth. I think that's been higher beta to the economy than other things. So when salespeople are excited about their opportunities for growth, they invested a lot more through 2021, et cetera. When they've been less excited about it, they tend to pull back a little. So I think it's been a tough environment. We, in particular, because I think we're still earlier in our overall penetration in the market, had a relatively high concentration software companies as customers. I think if I roll back a couple of years, software was over 40% of our business. Realistically, those companies have gone through a bit of a reckoning in terms of their operating models and really look to pull back on costs. So that's been tough. I think if we think about where we are right now, we're seeing that mid-market where a lot of the software companies has started to stabilize in terms of net retention. Enterprise is looking better. It's starting to improve over the last couple of quarters in terms of net retention. And I think where we see now versus maybe the end of last year, that's a little tougher as the small business, in particular, has gotten tougher. I think they're people -- there's more uncertainty about growth within those small businesses than there had been. And that's an area where we've seen net retention tick in -- tick down, particularly at the end of Q1.

I wanted to dig into that SMB commentary and thinking about the first quarter results and guidance, right? You did lower the full year guidance by about $50 million. And a lot of the questions that I got from investors both print was why $50 million? What happened there? It sounds like it was...

Definitely, it was not $50 million.

What did you specifically see that changed? And those pressures that you saw, are they still there? Are they abating? Does it feel better from that standpoint?

Yes. So certainly, again, we've kind of seen our business, if you think about enterprise, which is a little less than 40% of our business start to improve a little. You see mid-market stabilize at some level, that's kind of high 20s, mid-20s of our business and small business, where that's 1/3 of our business degrade. I think the issue with small businesses that had been relatively consistent over the past, call it, 18 months. And so the movement for small business by itself was relatively significant. I think we wanted to make sure that we were in a view where we're taking that weakness into account as we think about the rest of the year. But the upper end of the market continues to do pretty well. I think we see a lot of customers that are really positive about their investments in ZoomInfo and what they're getting out of it. And certainly, that's something we want to continue to capitalize on with those larger customers, in particular.

And when we look at the full year guidance, it does assume things kind of get a little bit better in the second half, maybe slightly on the days adjusted revenue perspective. But what are you seeing out there that's maybe giving you the confidence in the second half of the guidance [ for this year ]?

Yes. So I think it gets better from a sequential growth in each quarter perspective. It doesn't get better in terms of what our assumptions are around net retention. So -- yes, that improvement in sequential growth is more a reflection of Q2 and Q3, in particular, have lower expiring periods within them, which means there's less opportunity for people to either cancel or downsell, allows the upsell and new business that we're seeing shine through a little bit more and obviously add to the ARR in a way that we didn't necessarily see in Q4 and Q1, which are our biggest expiring quarters. So to some extent, that's a natural impact of just the expiring more so than it is that we're assuming that the actual renewal rates or retention levels for different customers change in a significant way.

Got it. Got it. Let's talk about those renewal cycles a little bit. You have called out in the past some sort of chunk of ACV that still needs to renew. What does that chunk of AR -- or ACV that needs to be renewed? What does that look like today? How is those renewals going? How are you feeling about those?

Yes. So certainly, we have majority of our revenue, it's a little over half of our revenue is actually on annual cycles. So those are renewing every year. And then we have a number of customers that had signed up for on a cycle that's either a 2-year or a 3-year cycle. At this point, if I start at September of 2022, which is, I think when we start to see real pressure and kind of litany of layoffs and other things after that, we've transacted with roughly 90% of our customer base between September of 2022 and March of 2024. So there's obviously 10% of our customer base that are on long-term contracts that last transacted with us before September of '22. Those will roll off over the coming quarters. It's not like there's a big chunk in any particular spot. But those will roll off. I think getting through March of '24 was very important for us, though, because many of those longer-term contracts that are still to come are with really big companies that haven't necessarily built in a lot of growth into their contracts or they are generally more stable. I think while there are some smaller companies in there, the kind of biggest and most risky companies have transacted with us since that period. And we've seen a number of obviously down sells for them, but obviously, we are focused on being a spot where we've reset those to healthier levels that ideally, we can go forward with better renewals going forward.

Got it. Thank you for that account. I wanted to ask you a question about TRAs. I am not a TRA expert.

What does TRA stands for? That's the important question for you.

Something receivable something.

Yes, it's a tax receivable agreement. That's very good.

So I get the question and I have a hard time answering clearly. Please walk us through the TRA, what is it? What does it need [indiscernible]?

Yes. So the TRA is a tax receivable agreement. It basically came about because before we went public, we were a partnership. There are a lot of tax advantages to being a partnership. When you go public, obviously, public company investors don't want to invest in a partnership, they want to invest in a corporation. When investors convert from being a partnership to a corporation, there are actually tax advantages that the company gets out of that. So you'll see that we have a $2.8 billion TRA. That's $2.8 billion that we would potentially pay out over the next 14 or 15 years. We also have a $3.8 billion deferred tax assets. So those are the benefits from a tax perspective that we expect to get. So there's a $1 billion benefit to the company that will obviously realize over time related to the TRA and the deferred tax assets. And those payments that we make on the TRA are completely aligned with the taxes that we would have paid and that the deferred tax assets kind of signify. And so in basically all cases, although with one exception, in all cases, we're just going to pay out that TRA, right, when we realize the benefits from the deferred tax assets. The only time when the TRA would potentially be paid ahead of any of the realization of those deferred tax assets is under change of control at a point you discount back the kind of potential future payments and whoever the acquirer would then get the full value of those deferred tax assets down the road. So they're getting value, obviously, but you need to pay for it upfront just because the shape of taxes can change over time. And so I think for a lot of software investors or for a lot of folks in general, like it's not the thing that you see all the time. But there are plenty of companies out there that are obviously companies that have TRAs. Ours is very similar to those, and we account for it very similarly. All of the GAAP and non-GAAP metrics that we have are essentially the same as all those other companies that have TRAs out there.

Got it. No, thank you for that. I appreciate that. I wanted to switch the conversation to boomerang customers and the customers that have come back to ZoomInfo. I thought that the commentary that customers are coming back was very interesting because I think one of the debates on ZoomInfo was competition, potential attrition of ZoomInfo going to either competitor -- lower-priced competitors, different types of competitors out there. But here, they are coming back. And so talk to me a little bit about the pace of boomerang customers, what are they telling you? Why are they coming back? Is this a trend that could continue to happen over the next several quarters?

Yes. So we've always had low price competition, I think from the very beginning, and you can point to the merry-go-round of different competitors that have been out there those competitors are offering a much lower quality offering than ZoomInfo. And oftentimes just focused on contact data, that contact data is less accurate, but also isn't wrapped with all the company data and signal data that we're able to provide as well. But even if you're just using ZoomInfo as a contact data lookup tool or something, having the sort of quality that we have, if you're a salesperson or you're used to going into ZoomInfo and finding an e-mail address, and that actually being correct and also finding a phone number and that actually being correct and finding the positions and the kind of recency of data as being as much as you're fine, you can go out, you can find a low-end, low-quality competitor that will be less expensive. But once you start using it and the e-mails are not as -- you don't find them as often. The phone numbers might be just the main phone number for the company and not the direct line for whoever you're trying to reach. The person may have moved jobs or moved to different companies. Once you start seeing that a lot more often, it is frustrating. It slows you down. And frankly, it means that if you were using ZoomInfo to get to deals before, you're getting to less of those. And frankly, the cost of our solution is way less than the cost of that particular person. And so when that person is frustrated and not performing as well and everything else, that's when customers come back. They get feedback from their salespeople that they're wasting their time with bad data that they're going down dark alleyways. That's frankly frustrating and causing kind of contention on the sales floor, like those are all really bad things that people are coming back for. And so we've always had boomerang customers that has accelerated of late. I think a big part of that is in tough times. People are more likely to go look for something that's less -- just less. It's less quality but also a lower price. And what I think they realize is that they miss having high quality. They miss something being really good. I think it is interesting. Most of our boomerang customers come at the low end of the market or the low end of mid-market. That almost never happens at the enterprise because, frankly, the enterprise does real tests. They actually really test the data. They want something to be really strong. They also care about how well it's integrated into their systems. They care about privacy and where things are ethically sourced for them. So yes, we very rarely lose and there's very little competition in the enterprise because they are testing the data and they're doing it before they switch to something else. You're a really small company. Sometimes they're willing to take that flyer and they figure out that they were wrong.

Is there any data you could share on those Boomerang customers in terms of duration of time away, like maybe last year, we saw them away for a year and now they're coming back faster. Is there anything you could share on that?

Yes. I mean we only count them when they come back within a year. So realistically, like I don't think that, that duration is changing a lot. Sometimes it's 2 months. Like super frustrated. Sometimes it's 6 months, sometimes it's closer to a year. The problem with 2 months is like you have to show up and you probably paid -- you probably agreed to pay for something else for a year. So our salespeople and a lot of people have a kind of point of view that if you choose badly, you pay twice. So I'd say that 2 months is definitely on the short end, but being in the 6-month, 9-month time frame, it was pretty normal.

Okay. Okay. I wanted to touch a little bit about data and privacy. I mean always a big topic for you guys. I remember at Investor Day, I think it was 2 years ago, we had a -- got to see a whole section on how you guys are in the forefront of data privacy. And we definitely appreciated that. Is there any sort of update you can give on how you're thinking about data privacy has anything changed? What has changed in the data privacy world? Is there any sort of upcoming regulations or things that we should be thinking about?

Yes. So we're still super focused on data privacy. We continue to roll out tools for our larger customers so that they can manage how the data that they're getting interacts with their systems. Again, particularly for multinational companies that are operating in different jurisdictions in Europe, you have GDPR in California, you have CCPA and whatever, Brazil you have something else, like having tools to manage those in specific ways is really helpful for those customers, and they want to make sure that they're subscribing to the regulations where appropriate. Certainly, from a landscape perspective, like we've always operated at the far end of being compliant with every rule that's out there. I think most people would point to GDPR as being one of the more restrictive areas. We certainly go above and beyond what GDPR would require in terms of privacy. So there's been no changes in terms of things that have gotten close to all of the processes and policies that we have in place in terms of notification and doing it more than once. I think the things that have changed are -- in the U.S., there's probably more local -- state and local regulations than there have been in the past. I think there's an ongoing conversation at the federal level or will there ever be a federal privacy law like I don't know if that's any closer than it was before, but it's certainly gone through iterations. I think while there are more regulations, again, it doesn't really impact us because we're here and like there's one here, one here, one here. I do think that a lot of them are starting to coalesce around a certain template. I think if you ask our privacy people like the Washington template, that's probably the template that ends up getting used in a lot of places, which frankly, it's good for us. Although having more complexity in privacy is actually probably good for us. Everyone coalescing around the Washington template that actually excludes a lot of business, a lot of business to business as being not something that they care about or not something that they feel is sensitive data is certainly logical, but it means that everyone is going to have a little bit easier time complying with it versus super complexity, which when you're the big -- when you're the big player in the space, you're able to deal with that complexity, which certainly happens internationally more than it does [ in us ].

Yes. Yes. I wanted to ask a question about sales capacity and how you're thinking about growth, return to growth, balancing growth and profitability. So specifically on sales capacity, what does the capacity look like today? How are you thinking about managing head count over the next 12 to 24 months? And what are some of the triggers that you're looking for, either externally or internally within the business to know now it's time to step on the gas even?

Yes. So we're certainly focused on continuing to grow sales capacity. Sales capacity has 2 angles to it. One is just the number of people you have and how tenured those people are. That's been a natural kind of tailwind for us in terms of that tenured just because us, like a lot of other companies have seen attrition go down. And therefore, we have folks that have been with us a little longer. Obviously, the other part to that is that there's efficiency around the people themselves. So one of the things that our sales team is super excited about is that they get to use Copilot. They feel that they're getting a lot of value out of that, both from the new business side as well as from the account management side. So we're going to continue to obviously invest in that sales capacity. My view is that overall head count in the company, we'll probably grow that similarly to where we see revenue growth, maybe a little bit lower than that in order to continue to drive good cash flow margins. I think we all believe that the hallmark of a good company is driving cash flow for our shareholders. So we're going to continue to focus on that. But really focus on where are the places that we should be investing in order to drive growth. Some of that, particularly this year, is really growing the team that's rolling out and then supporting Copilot and then the other part of sales capacity. We're going to continue to look for other areas in the business where there's the potential for efficiencies in order to maintain margins in the 40s neighborhood, plus or minus.

Were there any changes to sales compensation plans this year to either push one way or another land versus expand geographies, products? And anything to call out from that front?

Not significantly. I'd say the place where we are focusing from a sales perspective, whether it's compensation or structure or whatever else is starting to push more for more into the enterprise. And so we've done a number of things where we are segmenting the sales force a little bit more based on kind of industry and capability, particularly in the enterprise, segmenting the new sales team in terms of focusing more on enterprise and mid-market customers as opposed to just small business customers. So those are the things that we're focused on. And around the edges, there might be spiffs or other things to kind of help with that as a plan, but there's not an overall change in the compensation structure.

Got it. Got it. What about from a geographic perspective? Is there any push into certain geographies, whether it's within the U.S. specifically, more international? And how do we think about the geographic push?

Yes. And I think we -- certainly, we opened an office 3 or 4 years ago in London. That's certainly an area that we want to continue to see grow, although, frankly, I think the macroeconomic conditions in Europe have been worse than the U.S. over the past few years, maybe that's starting to turn around a little. So we'll continue to focus there. Otherwise, in the U.S. and Canada, we have a very efficient sales motion that doesn't necessarily require people to be on the ground everywhere. So I think we're going to focus on hiring where it's most efficient, where we're getting the best kind of return for people and kind of really helping to drive value for our customers no matter where they are. Yes.

How should we be thinking about partnerships, specifically with the different technology vendors out there? Thinking about Salesforce, HubSpot, I mean, you listed Databricks, TrustRadius, Trade Desk. Others is partners of you guys. And so how to think about these relationships as potential accelerators of growth for you?

Yes. So those are very different in terms of the partnership. Some of those you take like G2 as an example, where we've developed the platform, the Copilot platform to really be able to ingest signals from a lot of different places. We have the widest and kind of best set of signals out there, but there are signals that other people are going to be able to provide. G2 is a great example. They can provide comparisons of your product versus someone else's product. That's a great intent signal that either someone's researching a competitor, researching the space in general. So we're going to bring those in, and there are a lot of partnerships like those something like Databricks or Snowflake is very different, where we can basically latch on to the commit that you have to GCP or Snowflake or Databricks or whatever else. They like us because we can help drive more usage because we're very relevant to a lot of the things that are doing. And so getting in as part of that commit, obviously, helps us get more stickier with our customers. So I think we're always looking for where are those partnerships that we can avail ourselves to really drive more value for the customer overall and help us with the model.

Yes. Yes. Maybe last question for you here, Cam. Thank you so much for doing this. Cash flow. Cash flow is an important part and the ability to generate cash flow is an important part of the ZoomInfo...

Every business, but yes.

Of your story, of course. So how do you think about managing cash flow? Is there any sort of seasonality that we should be aware of onetime effects or anything to call out with the 2024 cash flow? Just so we're not caught by surprise.

Yes. I mean there is always some seasonality. If you think about Q4 and Q1 being heavy expiration periods for us. That also means that, that also tends to be when we bill a lot of our customers, and therefore, we collect cash on those in the -- up in the following quarters. So Q3 tends to be a little bit lower in terms of collections that we'd have. Certainly -- so I think you can look back at seasonality and kind of see the shape of where we see cash flow throughout the year. And then certainly, there are some areas where there are onetime things that will impact cash flow this year. We obviously have the settlement to settle all the privacy suits, which is a great thing, but we need to pay for that. There is some -- there are some things that we're working on from a [ real estate ] perspective too that could have a short-term cash flow impact in Q2 or Q3. So those are outside of my normal operating levered free cash flow, but are things that we're obviously focused on making sure we're managing through.

Got it. We're out of time. Cam, thank you so much for joining us. Appreciate it.

Yes, absolutely. Thanks for having us.

Have fun. Thank you so much.

Thank you.