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

I'm DJ Hynes. I'm the senior software analyst here at Canaccord. This is the 44th year Canaccord is at this conference. We couldn't do it without companies like ZoomInfo, being here without the investor clients. So thank you all for being here. We have CEO, Henry Schuck; CFO, Michael O'Brien. We're going to do this as a fireside chat. If at any point, there are questions in the audience, don't be bashful. Raise your hand. I'll work them into the conversation. I have stuff that should get us through a half hour. So we'll start with me, and then please don't be shy.

Henry, I'm going to skip over the business intro part of the conversation. We have a full room here. I assume most folks are familiar with the business at this point. Let's just talk a little bit about kind of Q2, what's top of mind for you coming out of the quarter and kind of how that sets you up for the back half of the year in terms of business fundamentals?

Sure. So the quarter was a tale of kind of 2 worlds. On one side, we finished the quarter at the end of June. I'll let Graham talk a little bit about the write-offs and how they affected the quarter and also the go-forward guidance. But we finished the quarter, we were very happy with our operational results. We had our best net new ARR quarter in the last year. We increased the customer cohort -- the 100,000 customer cohort for the first time since Q4 of '22. We had our best enterprise and mid-market quarter ever. That's been a strategic goal of ours to move upmarket. We introduced Copilot, our new AI platform, and we sold and monetized it into our base and with our new business customers. It was solidly above expectations. We stabilized net retention in the business for the first time since Q4 of '21. We stabilized software net retention for the first time since Q4 of '21. So we walked away operationally, really happy with the quarter that we put together. And then at the end of June, we saw a level of write-offs related to contracts we had signed in past periods escalate. And we knew at that moment that, that was going to cloud all of this operational improvement that we saw in the business that we were pretty proud of. And Graham can talk a little bit about what that write-off did in the quarter and what it does going forward?

Sure. So in 2023, we saw the risk of nonpayment, specifically in our SMB, customer cohorts started to increase. At that time, we increased our reserve rates and contra revenue and bad debt to account for that. And then we saw it actually start to stabilize in Q1 and into Q2. In June, the receivable cohort that began to progress through actually got a higher risk of nonpayment than we had previously estimated. What you do there is you need to reserve for that higher risk on payment, and we applied that increased estimate to all the other cohorts that were progressing through the aging at that time. That's what led to the revenue and bad debt charges you saw in our results in Q2.

And we rolled out a risk model for our SMB clients where we risk rated everybody who came through the funnel. And then we required the riskier customers to pay us upfront and before they gained access to ZoomInfo. And look, I think that our -- what we -- our problem here was that we extended credit historically to customers who weren't creditworthy. And the change that we made in April requires those customers to pay us upfront before they get access to ZoomInfo. We put $11 million to that motion in the quarter. That's up 10x from any other prior period, and we continue to drive that motion through the business, which effectively turns away lower-quality customers and that requires any customer with -- any risky customer to pay us upfront.

Yes. So if I hear the message right there, it was like Q2, we took our lumps for maybe past sins, right? We've put better risk and controls in place now that in theory shouldn't be an issue going forward. And then in terms of risk of potential future write-ups with what's in the installed base, how would you characterize any issues or possible concerns there going forward?

Yes. I think so. First, there's no write-off issue outside of SMB. Mid-market and enterprise are totally fine. And then even in SMB, it's the lower end of the SMB. What our guidance anticipates for the back half of the year is that the escalated level of write-offs continues through the back half of the year, so we accounted for that. And the operational change we made in the quarter, where in April, we started acquiring these upfront payments, we're not going to see the benefit of that really until Q4 of this year and Q1 of next year as those contracts, the period of time when those contracts would have gotten written off are not going to be written off any more.

Yes, understood. Let's talk about mid-market and enterprise, which I think there were a lot of really good data points in the quarter. And maybe you could juxtapose what you're seeing kind of new business versus cross-sell and then tech versus non-tech?

Sure. New business in the beginning of the year, we broke out a separate team to be focused on enterprise and upmarket business. And then in the quarter, new business had its high watermark for business sold to mid-market and enterprise clients. We also had our largest new business deal in history. It was a $1.4 million annual deal over 3 years. So we felt really good about the progress and the momentum we've made from a new business perspective in mid-market and enterprise. And the mix of mid-market and enterprise compared to SMB business was the best, I think, we've ever seen as well. In the customer base, we're selling Copilot and monetizing it in the customer base. 75% of the customers who bought Copilot were in the mid-market and enterprise. To me, that's a sign and it's a real validation of the product. Mid-market and enterprise customers scrutinize the products the most. And so the fact that 75% of our Copilot upsells came from that universe and the customer base is great. Our operations OS product, which is designed to give customers access to a broad set of our data inside of Snowflake, Databricks, CRM Systems and help them cleanse and append and enrich that data for a bunch of downstream workflows like territory planning, business segmentation, prospect scoring. That business grew 23% year-over-year. It's primarily up market. It's primarily in the enterprise and the higher end of the mid-market. And so that area of the business, we feel good about. And our enterprise business grew 9% year-over-year. Mid-market is where there's been a large tech concentration. And our technology customers who are historically our fastest-growing customers over the last 2 years have gotten much more pressured than outside of tech. The pressure continues there, but like Graham mentioned, this was the first quarter since Q4 of '21, where we actually saw stabilization across software businesses, net retention stabilization. And then the SMB, the lower ends of the SMB, we continue to -- those continue to be a more challenged segment of our customer base.

Yes. Yes. Makes sense. You guys are a very data-driven company. You talked about stabilization in software net revenue retention. What are the other metrics you track that might inform your view on kind of where we are in this pressure of down sell? And do you feel like we're nearing a trough?

Yes. Let me start and if Graham has anything to add. Look, we look at -- fundamentally, we're looking at health of the customer as it relates to their usage and utilization of ZoomInfo. And we're tracking that usage and utilization across the customer base and then have a number of programs from a product perspective to drive usage into the customer base. We all -- we have seen that level of usage, both stabilize and improve over the year. And with Copilot, we actually see a meaningful uplift in usage of ZoomInfo when you compare Copilot users versus non-Copilot users and usage directly correlates to retention rates or has historically directly correlated to retention rates. And so we feel good about improvements in usage, improvements in utilization. We're tracking that very closely to understand the health of the customer base. And then we're seeing higher levels of usage from copilot users that as we continue to migrate a larger and larger portion of the base on to Copilot, should be a tailwind to our net retention numbers going forward. Do you add anything?

Yes, usage and engagement as the leading indicators to retention, and we were happy to see retention stabilize sequentially in Q2.

Yes, good. Let's spend some time on copilot. We've alluded to it several times, but maybe haven't explicitly talked about what the product does for folks who may not have seen it yet or be familiar with that. So talk a little bit about kind of the fundamental problem you're solving and then how ZoomInfo is uniquely positioned to leverage copilot. I mean copilots become a term that we're hearing often now. But how you guys are differentiated from the copilots that we might get from a CRM vendor, for instance?

Yes. So in go-to-market land, the #1 thing every go-to-market organization is trying to drive for their teams is, can I get you in front of the right accounts at the right time? If I'm going to allocate my resources, obviously, I want to allocate them to the companies that are going to make a buying decision about my product within the next, call it, 3 to 6 months. That's the Holy Grail for every go-to-market organization. And that is what we're building and what we've released with Copilot. Number one, we look through your CRM system. We understand what accounts you're winning, what accounts you're losing, what accounts are you -- are in your ideal customer profile. We take those. We then look at ZoomInfo for signal that was related to those accounts. So when those accounts became opportunities, was something happening from a signal perspective that we can look backwards to and then apply to the future. And so maybe your accounts became opportunities always within 60 days of a new CFO arriving. Maybe they became opportunities when we saw you -- when we saw those customers increasing research on your brand or the solution that you use or your competitors within the 60 days prior to them becoming an opportunity. Maybe they all had great earnings calls right before if they are a public company. And so we're looking at this tremendous amount of signal that we've created. We're looking at the accounts that were opportunities, and then we're taking signals that associated to when they became opportunities and telling you the next set of accounts that look just like those accounts. Then we're layering in our people data, our company data, and then we're building out what your communication plan should be with that account. So with one click, we're creating the messaging. That messaging is being -- is leveraging all the information about your account that ZoomInfo has. So it knows what company you are, who you sell to. We've read all of your case studies, all of your press releases, all of your earnings calls if you're public. We've ingested podcasts your CEO or CFO has done, and we're taking all of that information to on-the-fly, write you a very compelling message that you would use to reach out to your buyer, write you a compelling call script if you're an account executive that you can use to engage with the potential buyers. So we're finding your best accounts. We're ranking them by signal that indicates their end market, and then we're using AI to draft the messaging that you should be using to engage with that.

Yes, yes. Doing all the homework that a sales guy needs.

Yes. So ideally getting you in front of exactly the right accounts at the right time.

Yes. Let's talk about how it impacts the economics of the business. Maybe you could hit a little bit on kind of realized price uplift. And then as part of that, my sense is you're starting with the customers that have the highest propensity to buy, right, who are going to get the most value from it. So in theory, your realized price uplift, but those customers are probably more than maybe as you go deeper into the base. So here's on realized price uplift and then like durability or how you're thinking about that longer term?

Yes. So first, on the price uplift, we are monetizing Copilot in the base, and we're getting a solid double-digit upgrade per seat when we're doing that monetization. We anticipate that over the next 3 years, we're going to migrate our entire customer base onto the Copilot AI-enabled version of ZoomInfo. We are phasing our way into that and starting with customers, like we first started with customers who had a CRM connected and used Chorus, our conversation intelligence tool because if you're using conversation intelligence of any kind, we're getting tremendous insights from all of the calls that you're having. Then we've expanded that now to customers who use Gong as a conversation intelligence tool. We'll expand that to customers who you Zoom Video and Teams as a conversation intelligence solution. So while the phasing right now is designed to get the customers who have all of this today, as we expand the product functionality into these other areas from a conversation intelligence perspective, from a sales automation perspective, that next cohort isn't going to have less value than the first cohort because the functionality is catching up in that way. And so we anticipate moving the whole customer base. We anticipate continuing to get double-digit uplift when they move to Copilot. And as we're releasing new features and functionality, we're expanding the phasing and making sure that the customers who come on are going to get real value out of this.

Yes. One more product question. Talk a little bit about the Data as a Service business, how that's been performing, kind of how it differentiates from your core offering? And then are there opportunities for Copilot in Data as a Service in other parts of the organization -- or the product that you've built for the different personas inside the organization?

Yes. So Data as a Service is our solution that helps customers cleanse, enrich and append the data that they have on their prospects and their customers that can live in a number of areas. It can live in a data lake like Snowflake or Databricks or Google Cloud, it could live in their CRM systems, it can live in their marketing automation systems. Wherever it lives, what's been interesting about go-to-market organizations over the last decade is, they put all this data inside their CRM, all this data about customers or prospects inside of their data lakes and then they started building applications and workflow on top of that data. If you go out and talk to any of your friends who use the CRM system and you ask them, how do you think about the data inside of your CRM, 100% of them will tell you the data is bad in my CRM. I can't use it for anything. And so we skipped over this infrastructural element that's required if you're building applications on top of data that requires that the data be cleansed, that the data be complete, that the data be usable for that workflow and whatever you're doing with the data downstream. And so that's always been an opportunity for us. I think one thing that's happening today or 2 things that are happening today in go to market: number one, every go-to-market organization is being pressured to drive efficiency within their go-to-market motion. The days of growth at all costs are long behind us, and there is an initiative inside of every go-to-market organization to drive efficiencies in the way that they acquire new customers or grow their existing customers. To do that, a lot of these customers are figuring out centralized data management that brings all of their customer data together, tries to rank them, make better resource allocation decisions, segment the customer base better, create a better territory assignment plan. And so as they're driving productivity, they're doing it through a centralized data management motion where we come in and help make sure that the data that they're making the decisions off of is accurate and complete and enriched. And then there are AI projects where the C-suite is saying, "Hey, listen, we want to see AI being delivered through our go-to-market organizations, and we want you to go. We want you to go do that, build a virtual SDR or drive more efficiencies using AI." Well, to do that, again, the input of data is critical to the output of any sort of productivity-enhancing AI. And so we're seeing more customers show up and say, "We're running these initiatives, and we need Cleanse and Accurate Data to do that."

Yes. Yes. Makes sense. I want to end with a few on the numbers. But before we go there, I'm going to ask just like a culture question of ZoomInfo like what's employee morale like? It's been a couple challenging years, not for ZoomInfo.

ZoomInfo too.

ZoomInfo has been challenged, but it's been -- software has been broadly challenging right? So some of the headwinds, if you guys are facing, are not unique. What are you seeing in terms of employee turnover? What are you doing to keep morale high? Like how does it feel internally?

Yes. So first, I'll tell you morale at ZoomInfo is very good right now. And despite our quarter, I think because of the operational improvements that are happening in the business, there's a lot of buying-in into the future of the company. And had those operational improvements not been there, I'd probably be telling you something very different. But my ability to go in front of the company and say, "Listen, when you look at what we delivered this quarter, these things that I said last quarter were most important to deliver from an operational perspective." We hit on all of these things. We saw -- we launched Copilot. We sold it in the base. We increased the $100,000 cohort. We increased the $1 million cohort. We had our highest net new ARR quarter. In the last 4 quarters, we finally stabilized net retention. You can see all of that, and I've been really transparent with the team about that. While also, it's going to be a cloudy quarter because this write-off issue is not only -- it's complex, Wall Street doesn't like complex, and it hides that. But the team's morale around what we're building, the improvements we're making in the future or move-up market, they're all bought into that at ZoomInfo and I've been extra transparent about what are the challenges in the business and how are we addressing those challenges and what is our progress against those challenges. So I feel like morale is objectively good at ZoomInfo today.

Yes. You mentioned employee buy-in. Maybe that's a good segue to talk about personal buy-in. You also made some comments on the Q2 call that you were going to be actively buying stock. I don't know if there's anything you want to say to that or...

Sure. I bought $13 million of ZoomInfo on Wednesday. I have an open window until the middle of September to continue buying. And look, a big chunk of my net worth is tied up in the success of ZoomInfo or is connected to the success of ZoomInfo. So -- and I'm committed to delivering growth at the company. And while I recognize it's difficult to see those operational improvements, I can see them. The team is bonding behind them, and I'm confident that you'll see them in the financial results soon.

Yes. Maybe on the numbers, and I don't know if this is you, Henry, or Graham, but you guided for Q4 days adjusted sequential growth that was flat to slightly negative. And I felt like it was somewhat intentionally flagged or called out for investors as a potentially a proxy for thinking about '25. What was the message you were trying to get across there?

Sure. I mean if you look back at the last several quarters, you see roughly flat growth. And we developed the guidance to accomplish or start accomplishing our goal of rebuilding investor trust. We wanted to set guidance that we felt comfortable that we could meet and exceed, and we were cognizant of 2025 when we did that.

Yes, yes. So setting reasonable expectations that you guys feel like we won't have to revisit in the future?

Yes, that's right.

Yes. Henry, maybe we can just finish with some parting thoughts, like what do you want investors leaving this room here today to be thinking in terms of the setup of the business going forward?

Yes. Look, I think we took an approach from a guidance perspective that included myself, the finance team, the go-to-market organization to make sure that we set guidance in a way that we can meet and exceed going forward. We have a lot of confidence in the operational improvements that we're seeing in the business. That's giving us a lot of confidence in the forward opportunity in the company. We think Copilot is a real opportunity to migrate the entire customer base and get real uplift as we do that. We're very clearly ahead of anybody in our space from an innovation perspective with Copilot. And the copilot that we monetized in June was the worst version of copilot we're ever going to sell with the worst enabled sales team that's going to sell it. And so since then, we've released hundreds of additional features. We continue to enable our sales team. We think that that's a foundation that we can build on and that it's not anomalistic, and we have a lot of confidence in the future of the business.

Yes. That's a great spot to leave it. It's nice to see you buying more stock. It speaks to your confidence in the business. And Graham, congrats to you on the new CFO role. Looking forward to working with you, and thank you guys for being here.

Do you want to take questions?

Were the questions in the room? I'm sorry.

Any additional comments on your relative impending position on how that's [Technical Difficulty].

Sure. Maybe I'll just repeat it for the webcast. The question was around relative competitive positioning and any changes that they're seeing in the market?

Yes. So largely, our competitive set lives in the lowest end of the SMB. If you go upmarket to the upper end of mid-market and the enterprise, we see next-to-no competition there. There are some legacy vendors from a firmographic perspective that you might see weigh in the upmarket. But in the low end of the SMB, there are a number of competitive players who are price competitive, but not quality competitive. And so what we're seeing is some customers in that low end of SMB will go to a low-end competitor. But over the last several quarters, we've had our best win back quarters in history. Last quarter was our best one on record, where customers who left us came back to us. And so I think we'll see a lot more of that, and that will be a trend that continues. And ultimately, between copilot and on much higher quality data and analytics that we provide, we are distanced from those competitors as they sophisticate further upmarket.

Anything else? Awesome. Well, it's a great spot to leave it. Henry, thank you very much.

Thank you, DJ. Thank you, everybody.