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

Good morning. Thank you for joining us. My name is Brent Bracelin. I'm cohead of the tech research here at Piper. We have the next fireside chat here with ZoomInfo. Graham O'Brien is the Interim CFO. Given this, it might be the first time you've met with the investor audience here. Maybe if you could just start out with the background. How long you have been with ZoomInfo, and we'll start from there.

Thanks, Brent. So I've been in ZoomInfo for over 7 years at this point. Came over via an acquisition, actually from ranking from DiscoverOrg. At that point, I switched from corporate accounting and over to the FP&A side, and then I've been leading our FP&A team here for the past 6 or 7 years. Prior to that, I was at [indiscernible] doing corporate accounting and I'm a [ CPA ].

Great. So maybe we'll start the discussion around the business. Obviously, you've built a pretty impressive business, over $1 billion in revenue, generating over 30% operating margins and free cash flow margins. I think the challenge here that people are trying to grasp with is the business is now contracting. And so maybe level set, what are the top 3 factors that have kind of created this headwind for the business as you think about a business that we're expecting to decline this year?

Yes. First and foremost, it's been contraction and downsell pressure in our tech and software heavy mid-market segments. So that has been a trend now for 2-plus years. And that cohort of customers was our biggest driver of growth in 2019, 2020, 2021. Once we had inflation and other kind of headwinds there, that went from largest driver of growth to effectively what has been the biggest challenge from a growth perspective. So that segment in Q2, actually stabilized from a retention perspective for the first time since Q4 of 2021. And if you look at -- I think we'll potentially talk about this later, but for our vertical perspective, software and tech was 40% of our total ACV at its peak. And then ending last year, it was down to 33%. So we've had significant downsell pressure there. And what we did right around 2022 instead of going out trying to upsell to some of these customers who are good customers, but instead of having 200 sales reps -- 250 sales reps, they now had 100 or they had 50 and they were focused on getting to profitability. We went out, we kept the logo. We showed up as good partners, but we also rightsized some of those contracts. And if you look at Q2 retention, we're starting to see the early signs that we may have reached a stabilization point there.

So 2 years of some headwinds within one of the biggest verticals for you. How do you know that it stabilizes here, right? You have one quarter, one quarter doesn't quite make a trend yet, but is the composition of that 33% of business changing when you look at like the size of the software tech companies you're serving today versus, say, 2 years ago?

Not significantly. It is more similar composition, different point in a cycle. And for sure, we are not going to look at one quarter of stabilization and take credit for that going forward. We want to make sure that we are seeing continued stabilization and then at some point, an inflection back to reacceleration. Beyond that, we asked about kind of the 3 drivers, right? So that is the big one. Then if we look further down, we're looking at SMB and I'd break that into 2 pieces to get to the 3. The first is the write-off issue with SMBs that we experienced starting in 2023 and certainly in Q2 of this year. And that is mostly a change in how we contract and get payment upfront. We've addressed that in Q2. The other side of that is the mechanism where we address that to make sure that we are getting cash upfront before provisioning means that we're running all of our new business through a new -- essentially a risk model that effectively disqualified some portion of new sales where we are not -- we cannot get cash upfront. What that means longer term is better quality of revenue, better health of customers, but that creates a near-term headwind for several quarters of effectively disqualifying sales that would have likely written off, and that's a headwind to growth in 2024.

And as we double click into just that bad debt expense, it was $5 million a year. We're looking at $32 million in just the first half. What's the delta there? Are those customers that weren't paying their bills? Walk us through like the that lift from $5 million to $32 million in the first half and what were the type of customers?

Yes. It's certainly a big jump up. If you look back in our whole history, the way we have sold from late 20-teens through earlier this year or last year didn't change. 99% of our revenue was on a sign a DocuSign, agree to terms and we will send you an invoice. We'll collect on that invoice, the rate of nonpayment or the risk -- or I guess, the risk of nonpayment or the rate of write-offs was fairly consistent over a large period of time, in that we would write off 1%, 2%, 3% of that amount. What happened is the profile of the customer, specifically in SMB, didn't really change. But the fact that we weren't getting cash upfront, we started to see that the -- that risk of nonpayment or write-off rate started to step up in late -- basically second half of 2023. At that time, we went out, we actually doubled our reserve rate to say, okay, we're seeing a higher risk of write-offs, start accruing more and more reserves. Stabilized and then the cohort that effectively entered a certain point of the aging schedule in the end of Q2 at a higher rate, and we had to reserve against that in the quarter. So the profile didn't change, the ability to pay is what did change. And we see some of that as a cyclical outcome of where we are in this economic cycle.

What portion of the business you talking about 1/3 of the business now being tech related, how much of the business is SMB related?

Yes. So enterprise is 40%, SMB is about 1/3 and mid-market is just below 30%.

Helpful. So maybe we'll go by vertical. Obviously, you talked about the business on the tech software side contracting. What are the customer mix verticals where you're seeing actually increases or stabilization?

Yes. So we talked about the contraction of the software verticals. What that means is that while we were doing that, while we were proactively going out and being a good partner and taking some downsell, we want to make sure that we are also focusing on other verticals. So that financial services, real estate, transportation, logistics, manufacturing, we saw solid double-digit growth year-over-year in those other verticals in 2023, and we continue to see solid growth across the non-software vertical. So we've done the work to invest and specialize and those customers do get a lot of value out of our offering, so that when software does come back and we do get to an inflection point that we have a lot of growth vectors.

I think about a traditional software company, particularly a start-up they're tied directly to sales rep growth. And oftentimes, a direct calling effort, you're obviously powering those efforts. How different is the financial services world or the insurance world or the manufacturing world? Is it a longer sales cycle to convince them, hey, there's a better way to leverage the database, leverage CRM, leverage the contact information, how to sell?

Yes. It depends, I'd say, like on the -- these are generally more mature verticals, right? And one of the biggest unlocks is just having reps that can speak the language of that vertical. Like there's a bit of more evangelizing that need to go on like the importance of data quality and efficiency in sales reps or I guess some of the more traditional sales outreach industries. What's great about that, that was like there is a massive TAM still out there across these industries where it is a bit more traditional. And with Copilot, specifically, we're starting to go from what people consider somewhat of a maybe SDR AE solution to expanding the funnel of opportunity to like this is a great tool for AEs, for account managers, and we really start to go build that opportunity to go to wall to wall with our current customers, but also for these customers and verticals that we haven't penetrated as much yet.

Maybe before we dive into the next discussion here on competition. Go-to-market, I know historically, it wasn't organized around verticals. It feels like maybe you're moving towards maybe a little more domain expertise. Where are we at in that process?

So -- yes, historically, specifically on our new sales side, it was a bit one-size-fits-all and the best reps got the best leads, there was not much specialization. The big step we took in 2024 was segmentation first. So that means that we have dedicated sales teams that are selling to enterprise prospects, to mid-market prospects, to the higher end of SMB. And that motion, while effectively created some disruption and friction earlier this year, later last year. What that leads to is effectively bigger deals down the road. We know those are going to be longer sales cycles for some of those upmarket customers. But we've changed the assignment and the incentives for our reps to make sure that we are investing in those sales cycles and getting higher quality customers at higher price points. The verticalization, that's something where I think we're testing it some, and we found good places where we have what I mentioned earlier the kind of the reps who can learn to speak the language, and then that would probably be the next step down that path.

Okay. So segmentation has been a big focus this year. So let's talk about competition. I mean we get the question a lot, obviously, when businesses start to get challenged, it's not just macro, like people are trying to find other reasons. And Apollo has come up quite a bit as a competitor is getting very aggressive on price. So walk us through who do you see in that competitive landscape? Is it vary by segment? And then address the question we get all the time on Apollo?

Yes, love to. We'll start the top enterprise. We don't see really any direct competition up there. We do see some opportunities, specifically with our DaaS and operations offerings to go displace kind of incumbents like D&B, but that is -- that's the landscape in enterprise and mid-market. Again, really, we don't -- the only competition we really see is more of the AVM side, so a $0.06 demand base, but -- no one doing what we're doing with Copilot right now. And then in SMB, there's a long history of low-end competitors in the lower end of SMB. And that's something that's been there forever. Our focus is efficiently capturing that lower end of SMB. So we segment within those segments, right? We want to make sure that for those bigger SMB customers, there's a large swath of like really high-quality SMB customers that we can grow with that we are still using the sales-led motion, that we're landing those customers and resources behind those. And then the further down we get where we really do start to see some of that competition across a few of those lower-quality, lower-priced competitors that we're being: one, prescriptive where we make sure that we're getting cash up front; two, running some of those through a PLG motion to make sure that we're efficiently capturing them. And then we also see like as competition ebbs and flows, we've had 2 or 3 quarters of our best win back logo performance ever. So we are seeing at the low end, some customers that go for the lower-priced alternative, but then come back 3 months, 6 months later.

Have you -- obviously, it's a full-feature product from a platform standpoint. There really isn't tiered functionality. Have you ever considered tiering the functionality at the low end with maybe a light version, the ZoomInfo Lite? Or is the goal like, hey, we're winning the back the business, we feel comfortable. We don't have to have multiple product SKUs to address that part of the market?

Yes. And we do have a ZoomInfo Lite offering out there. And we're always effectively balancing what the functionality should be and what price point it should be that we're comfortable that we're getting still being competitive there. And then with AI, with Copilot, like there's still ongoing development of where we want to draw the line from effectively contact lookup offering to a more fully featured solution or offering. And we're really prescriptive to that, and we're always doing it with kind of resource efficiency margin in mind.

Almost in the 15-minute mark without talking about AI, but we've got to talk about AI. Copilot, new product, obviously, 18 million ACV, 1,000 new logos. Maybe walk us through the mix as you think about that business. How much of that is new customers like coming onboarding via the Copilot offering versus, let's say, existing customers that are migrating?

Yes, I'd love to -- we're really excited about Copilot. We released it in late May. So as of the end of Q2, it wasn't even out in the market that long. The $18 million was ahead of our internal plan. And what's great about that is like, one, the version of Copilot that's out there that we released in Q2 is the worst version of Copilot that we'll ever have. Like we've already released 100-plus more features. We have a really exciting road map throughout the rest of this year and into 2025. As it relates to the actual mix of the $18 million, it's basically 3 vectors. One is net new customers. So customer acquisition in June into July, about 90% of our new sales motion was moving on to Copilot at purchase. The other 2 motions are, one is the upsell motion outside of renewal or expiring events. So that's where we have an existing customer, maybe they don't -- their contract don't expire until later this year or next year. We go in, we show them a Copilot. They want it now. We do an off-cycle upsell and migrate them on to it. And then there's a migration at expiration or renewal. So those are for customers that are expiring, they're on a legacy sales offering, and we move them over at that time. So we have a mix of that in the $18 million in the first 5 weeks of release.

Okay. Great. It sounds like off to a really good here. Let's talk about pricing. There's different philosophies around how you price for AI and monetize AI and obviously, Microsoft. In some cases, is embedding the functionality. And in other cases, they're going to charge for it as an add-on. I know ZoomInfo in the past has replatformed, lots of acquisitions, lifted price as you replatformed. It sounds like Copilot is going to be more of like a replatforming where you have an uplift on -- Copilot as an embedded part of the whole entire platform. Walk us through how you're thinking about monetization? Will there be add-ons? Or is it kind of more of a replatform price lift functionality for all?

Sure. Yes, and you alluded to it, we've run 2 similar migration motions in the past. One was following -- I guess, both following acquisitions of RainKing and then ZoomInfo, and that's a strong muscle for us. We got a lot of uplifts through those motions, and we're really confident in our ability to do it again. We view this in that length, and this is like a 3-year migration plan to get our core functionality of all on to Copilot over that period. When we think about uplift, we're thinking about it on a per seat pricing basis. And in Q2, in that $18 million, we got solid double-digit uplift per seat across those migrations.

Obviously, AI is a double-edged sword. In some cases, it improves productivity and potentially reduce the number of seat yourself. So how do you think about that equation of like, okay, we're adding a ton of value but also there might be fewer seats we sell?

Yes. We -- everyone we hear that some. We don't see it yet. But I kind of alluded to earlier with Copilot, we see a massive expansion opportunity.

to new cohorts. To new cohorts outside of the sales.

Yes, yes. So just from just across the -- further across the full sales funnel, right? So like we've got -- even within SDR and AE use cases, there's still plenty of seat opportunity. But this really unlocks that account manager, CSM, our account AI functionality in there. The traditional tech stack of an AM or a CSM, there's no real substitute for this. And we have a huge opportunity to go out there, specifically to customers right now where we do sell to more of a prospecting function, introduce this to those massive account manager teams and start to show them like how much value this can provide, one, from a saving some time and efficiency. But what's really cool about it is it unlocks a lot of incremental top line opportunity in pipeline that is very unique in kind of -- right? AI can help us in a system, make things more efficient. We can actually add productivity to the top line through Copilot.

So you're pushing back on this notion that it's going to reduce the network seats because you see just a greater footprint opportunity beyond the sales footprint. And early evidence would suggest that's the case?

Yes. Like I said, I don't think we're seeing any seat reduction due to AI yet. What I'm excited about is that there's regardless of that, a ton of white space in the seats within our current customers, where we -- effectively show that value with Copilot?

Great. Let's pivot a little bit to DaaS, and maybe just size the DaaS business today, the opportunity and maybe transitioning from a seat-based license model to DaaS, what does that kind of spend look like for larger customers?

Yes. So DaaS, which is part of our larger operations, business is greater than 10% of our total revenue, very heavy to upmarket enterprise. And largely, this is based off of a data tube and some level of enrichment and cleans. So it's still a subscription, but we're often selling to more of a rev ops admin technical buyer. And it's -- like we said, it's not seat based. We saw this operations business grow 23% year-over-year in Q2, and it's really, really great foot in the door to kind of go in, be data partners with some of these really big enterprise customers and then start to become AI partners with them as well.

For a customer that was spending $1 on ZoomInfo before, if they migrate to DaaS, would they spend $1.20, you think? Will they spend $1.50? Is it different? I mean is that the right way to think about it? Or it's a different...

I think this like -- if you're using our sales and now our Copilot offerings, like we will sell those complementary options. So...

That's even an upsell on top of...

Yes. It's a come in, we'll actually do your data partner with you, help you on data projects. Refresh and enrich that data for your AI projects. And we've proven that we're already successful in doing this internally. We can go in and show them that they don't need to spend millions and -- tens of millions of dollars on their data and AI initiatives, and we can be that partner for them via our DaaS and operations and eventually our enterprise AI offering.

Two more questions here for me, and I'll open up the audience for questions there. Let's talk on go-to-market, right? There's been a lot of changes. You brought in some of the leadership. Walk us through the evolution of lot more products to sell. What's the biggest change that you've made? It sounds like segmentation, but that you also need to still do on the go-to-market side?

Yes, you're right. Segmentation is the biggest one in the new business side. We've been running a best-in-class, I'd say, new business engine for years and to kind of prescriptively slowed that down in certain places to do the right thing and segments was a big change. The other part of that is using this new business risk model, getting cash upfront, which also for a period of time, slows down or add friction to that sales cycle. We're doing the right things on the new business side to make sure that we are optimized to land business and to move up market, even if we are going to that phase and actually we're kind of near the end of that phase where we did -- starting to lap that sales cycle investment. And then on the retention side, I think 2 or 3 years ago, we really started going out and kind of reshaping our account manager org to bring in and to develop people for that upmarket use case. And that -- the general theme of our go-to-market has been to move up market, and that will continue to be as we talked about those mix of segments earlier. We want to make sure that we're shifting those further into mid-market and enterprise over the next several years.

Yes. Then my last question here for you. As you think about -- two parts, that's what we do. We ask multipart questions. Part one, what do you think investors, you had a lot of conversations with investors here over the last couple of days. What do you think investors don't appreciate maybe about ZoomInfo that based on the line of questioning and maybe my line of questioning, what's underappreciated? And then two, what are you most excited about for next year?

Yes. I think that the growth deceleration, I think, kind of clouds, a lot of the positivity we saw in Q2, and we've gone -- we've struggled a bit over the past few quarters with meeting expectations. And that totally warrants kind of a skeptical view. So I want to make sure that we are rebuilding that investor credibility and trust over the next few quarters, so that -- what we believe the intrinsic value of the company starts to show through in the stock price. And then for most excited is Copilot, like this is something where we've bought, we've developed a suite of products over the last 5, 6, 7 years that we think is a really strong offering. But to coalesce around one thing as a team across go-to-market, R&D, finance leadership and really build this and release it. It's the best product we've ever built. And the road map that we have into 2025 is really exciting.

Awesome. Well, Graham, thank you so much for coming. I really appreciate your insights and coming and joining us in Nashville here. Thank you.