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

Thanks for joining us. Great to have another session. Graham, thanks for being here with us.

You've been at ZoomInfo for a while, but it's like now in the CFO kind of function. Like from your perspective, so what are your priorities here?

Yes. Thanks, Raimo. In the interim CFO role, I'm really focused on stabilization. So that means showing up not having surprises in our results, starting to together several quarters of consistent results and starting to really focus on rebuilding credibility. Internally, I'm focused on being an operational partner to our sales and product teams and making sure that they're, from a resource perspective, from a forecasting perspective, supported to go and continue the positive operating momentum that we had in Q2 and Q3.

And then I mean, it's -- the issues we had the last few years, like -- I mean, it wasn't just ZoomInfo. It's like the whole industry. Like maybe talk a little bit about -- like if you wanted to talk about ZoomInfo a little bit, but it doesn't need like, how do we get here? Like what -- from your observations, like what happened?

Yes. I think we went from a world in 2020 and 2021, where in many verticals, there was a growth at all cost kind of approach to performance. And I think that changed pretty quickly in late 2021 heading into 2022, where a lot of those companies that had large sales teams are expecting to double, triple the sales efforts. We're putting a lot of investment behind growth. We're asked overnight or decided pretty quickly to reduce that -- the investment behind that growth, reposition kind of their -- the trajectory to get to profitability faster, which made sense. But I think that certainly across a spectrum of industries, that was a pretty fractious moment. And we went from a really growth-focused role to one that was more profitability and potentially now we're getting back to a more efficient growth focus.

Yes. And then if you think about it, like you as a management team like -- and I felt kind of sorry for Cameron as well because like how do you guide when there's so many kind of changes going on in the industry, nothing really ZoomInfo, it's like more of the industry. Like if you think about like from you as a management team, like what are the surprises or the learnings that you had like over the last couple of years?

Yes, it was tough. I think the ultimate one is focus on delighting the customer, right? And that's what leads to better retention outcomes. We're pretty excited that we've seen retention stabilized now for three quarters in a row. We're focused on getting that point back to a place where it can improve. But if we're focused on delivering value to customers, helping them articulate the value that they're getting from ZoomInfo, then really everything else kind of falls into place.

Is that -- in a way, like your answer sounds like you focus on what you can focus yourself on and then the market is the market. But I mean, how do you guys think about like we basically had like the overinvestment in like 2020, '21. I mean now we're thinking talking about 2025. It's like 4 years later. Do you think there is like at some point or do you see like early signs that there's some point that people realize, okay, well, we've done the optimization. And initially, it was like people had preboard seats, but then they didn't kind of hire the sales guy, then they kind of sales force got reduced, they got used again. But now kind of how do you feel talking to customers in terms of like where we are in that kind of optimization of sales again?

Yes. I think our general feeling is things aren't getting worse.

Yes, well, let's just kind of [indiscernible].

I don't think we've actually seen things get better yet. I know there's probably some level of narrative on sentiment and outlook out there, and that would be great if there was a potential macro tailwind. But kind of going back to the -- we're really focused on controlling what we can control, improving our execution X kind of the macro opportunity out there. So what that looks like is we've had sequential improvement in our enterprise retention. We got mid-market retention back to a place of stabilization in Q2, sequential improvement in Q3. Mid-market where we saw a lot of that rightsizing or downsell pressure over the last 2 years. That went from a segment that has well over 100% retention to a segment that dropped well below 100% retention. So we're excited to see the early signs of improvement there again. And in that segment, there was a lot of software tech companies where we did downsell with them, we kept the logo, we went through one or two downsell cycles with the hope and intent of getting back to a place where we can grow those customers again, and we're focused on getting back to that spot.

Yes. Okay. And I mean, the last area that seems to kind of cause trouble is like the low end, low end. Can you speak to like what's going on there?

Yes. So in kind of the longer tail of potentially this economic cycle, we've seen that our SMB customer base has become more challenged. Retention and growth there has gotten a little bit worse in 2024 relative to year-to-date in 2023. So we're focused on two things there. One is making sure that the business that we're putting into our SMB segment that we're selling on the front end of new sales that we're getting them in at the right price point, that we're qualifying them, that we're getting cash upfront. In fact, we're disqualifying some level of business where we're not able to get cash upfront. That creates a near-term headwind, but we'll lap that in 2025. And our mid- and longer-term focus is taking our SMB business, essentially moving our upmarket business to be a greater mix of our total business. So enterprise is 41% of our business. We have a path to increasing that. We're focused on increasing that mix. Mid-market is 28%. We'd like to see that get back up closer to 30%. And then SMB is 31% right now. I expect that to go below 30% as part of this initiative. And then we get to a future where we've got 2/3 plus of the business either growing or on a path back to growth. And then we have a smaller mix in SMB that is now a healthier version of SMB.

Yes. And then can you talk a little bit -- you talked a little bit about how you stabilize the attrition, et cetera. Like can you talk a little bit about some of the action you took? Because like you could also argue it's like, well, look, they went down and at some point, they don't go down anymore. So you kind of -- but what was the action that you took to kind of -- and I'm asking this like efficiency gains are more like running the organization better is kind of also like a good thing for being a better company going forward?

Yes. It goes back to focusing on delighting the customer and customer value. So we wanted to make sure that for everything that we could control, there's just fewer seats or a really rough economic cycle that outside of that, we were controlling the outcomes where we could. So that means really understanding the health and the value of our customers if there's lapses and utilization or pockets of engagement that we wanted to address going in and really understanding why. So what in the products could be better, what parts of the product are actually driving the type of conversion engagement and usage that we want to see and then investing behind that. And part of that was the development of cellphones in 2023 and the release of it in Q2 of this year.

Yes. Okay. And then the -- just last question, I want to finish it out. You partly answered it, but like how do you -- if you think about the market at the moment, like on our side, like -- sorry, on our side, we saw like Salesforce kind of talking a little bit better last quarter. I don't know how much material these changes really were. Then we saw like Trump winning the election, so the SMB sentiment is kind of picking up. Is that something that you follow as well? And has that kind of translated into something? Or is it just way too early?

Yes. I think it's similar to what I said earlier, like we feel pretty good that things have stopped getting worse, and that was largely that down sell pressure that we've experienced in the software vertical, Some of that lingers with our SMB customers and will potentially linger into the first half of 2025. We're cognizant that like there is potential for things to get better in 2025, but we're going to be really prudent about taking any kind of credit for that and the expectations that we go out and set. So really, it's continue to execute upmarket make sure that we're managing FNB to a healthier place longer term. And then if we get any kind of additional tailwind from macro, that's just upside.

And then how much lead time do you get or maybe what are you looking at? And how much lead time do you get from that if things are getting better in terms of like what are you -- do you look at the top of the funnel? Or like what are the things that you as a CFO can do or kind of to get yourself more comfortable?

Yes. I think it's three things. One is top of funnel from a new business perspective. And then you start to look at actual conversion, down to opportunity and wins and pricing around that. And then in the customer base, like again, we -- we're really focused on that stabilized retention. You got to get the stabilization before you get back to growth. We've gone to that stabilization point. So to get back to growth, it's, one, are we truly past the downsell pressure? Do we have a more stable basis at which to kind of go and grow with our customers to migrate them onto Copilot? And really what does that kind of upsell and migration opportunity and pipeline look like? Those are kind of our leading indicators that we look at.

And then on that note, a little bit, like as an organization, you obviously haven't been standing still from a product development perspective. So there's a lot -- like what you can offer is a lot broader and what it works like 2, 3, 4 years ago. Can you talk a little bit about some of the initiatives there and how are they kind of feeding into that now?

Yes. Copilot is the really big one that we're very proud of that we launched at the end of May this year, and we really started to focus behind building ZoomInfo Copilot in the second half of 2023. Not only we think it's a great product, it's getting great traction, but it really helped our product and sales and G&A teams [ coalesce ] behind a singular focus in '23.

Maybe just -- because like Copilot gets kind of like everyone thinks like -- and look, Salesforce is doing like, oh, we're Agentforce and Copilots are our own generation. Maybe talk a little bit about what Copilot does compared to like because everyone thinks about the Microsoft Copilot?

Sure. Yes. Copilot is kind of our AI supercharged version of ZoomInfo. So if you think about kind of the processor to Copilot, our sales offering. That was a best-in-class third-party data asset that we're able to marry into first-party data. There's an application on top of that, you could customize filter campaigns. It would help with certainly outreaching prospecting lead to better productivity and better efficiency. What we're able to do with Copilot is, if in the past, is kind of everyone gets a similar version of ZoomInfo and then you're able to filter and customize it some, this is much more of everyone gets their own version of ZoomInfo. So it's much more bespoke to each individual customer. Once they migrate on to Copilot, Copilot is able to really start to understand who is this customer, what is their ideal customer profile, what is their total addressable market and then start to take their first-party customer data, blend it together with our third-party data, bring in signals from earning transcripts, employee moves, podcast, marry all that to data to really start to surface. These are the 10 or the 100 best opportunities for you to go prospect again. These are 10 or 100 best next actions for your current book of business, and that's very specific to each individual company rather than what was less of a bespoke experience before.

And then how do you achieve that? Like in terms of like do you have like an LLM model for everyone? Or like how does it -- how do you with Copilot?

Yes. It's a pretty scientific process. We rely on several different LLMs for different use cases and at different cost levels. And then we've basically just been testing and optimizing through the product development phase. This is -- there's still a pretty aggressive road map out there for Copilot. So while we're really excited about the adoption and our ability to sell it so far, we really are excited about the product road map and migrating most, if not all, of our customer base do a Copilot experience over the next 3 years.

And then how does it work from a customer perspective? Do I kind of -- do you need to sign up for it and pay more? Do you automatically upgrade them, but they need more data like there's work that needs to be done, like how do we have to think about it?

Yes, certainly from a current customer perspective, there's a few vectors to it. One is an off-cycle upsell. So your current customer maybe your renewal -- sorry, your contracts up for expiration in 2025, but you're interested in Copilot, we demo it for you. You want it now. We're able to actually, let's say, you have 1,000 currency seats, we're able to go, carve out some portion of that for 100, 50 seats, let you trial Copilot, understand kind of the incremental value there and then move that whole team over upon migration. We generally get double-digit price increase per seat when we're migrating the customer base. But as we kind of progress in time, we have a lot more opportunity to move that customer base over whether it's on what I mentioned is kind of the off-cycle or kind of the more natural time when a renewal occurs.

And then when you say double-digit price increase, when they do it, is that just for those per seat per those customers that are moving? Or is it because like 10% of the base are moving, and that's kind of where you look at a double digit from.

It's basically of the customers that have already moved to Copilot.

Yes, yes. And then how do you see the -- like -- because it's so exciting, is that like 100% -- if people are in, it's 100%? Or do you still see like 50% of the seats get it in and 50% not and then they kind of do...

Yes. Like I think when it's a national migration, usually, most of it's going to move. I think that there's a time dynamic here that's pretty exciting, right? When we launched Copilot the end of May, if you're renewing in June, it might not be the best time to introduce that to a renewal cycle. So there's some dynamic here where we can get started -- we started to get ahead of December, January, February renewals in Q3. So that opportunity and that readiness for our existing customers to move to Copilot that essentially, TAM within our existing customer base is going to increase and certainly get way bigger as we get into 2025.

And then how should we think about like -- obviously, like look, it's not that you are the only one that discovered GenAI. How -- what's the -- how are you fitting with your Copilot into what the rest of the industry is doing? Like is now everyone is selling Copilot or you relatively unique? Or is like the breadth of what you do with Copilot more than the other guys? How do you compare yourself there?

Yes. I think GenAI and specifically some of the use cases for it really emphasizes and highlights the importance of data quality. And if you're doing kind of anything outside of support or inbound use cases, having really high quality and fresh third-party data is really important to have any kind of intelligent GenAI for complex account management and outbound prospecting in these cases. We view that there's going to be a go-to-market AI platform, and that is the space and we are the leader in that space.

Yes, yes. I mean, what's the -- what are you seeing in the industry overall? -- Like a lot of your competitors were like private and smaller, how is behavior there? Because like maybe I'll start with the open question there, yes.

Yes. I think that we don't have that many direct public comps. And I think that the -- going back to the first question, maybe the second question, like there was a lot of growth demand in that time. And then specifically in the software vertical where I think a lot of those competitors or kind of adjacent companies sold to, they saw that demand slow down. So what we're really focused on is sure we saw a deterioration in growth. We wanted to make sure that our margins stayed in a solid place. And that as we think about the future that we have a few different levers to continue to grow levered free cash flow per share and continue to provide value to shareholders.

I mean is there like -- I mean, what's the investment needed from your perspective as well in terms of GenAI kind of infrastructure, GPU capacity, et cetera, is that kind of like a gating factor at some point?

For us specifically?

Yes, like if you run Copilot or is that something where you can kind of view, you can secure more capacity? and so you can compete better against some of the smaller guys?

The investments we've made behind Copilot are basically in our run rate. We had a step up there in the back half of 2023. Some of that is in R&D investments. Some of that is the cost of service processing infrastructure consumption. We're pretty scientific about use case, testing, moving around and finding the right price for the right use case. Costs have come down to some extent. But we've baked that into our cost level, our resource level right now. We continue to believe that we are resourced to return to growth and that there's not like another step-up in investment needed to get there.

Yes, yes. And like -- I mean, what's the impact on gross margins, like if you have a Copilot customer versus a normal customer?

It's not significant yet. One of the interesting things there is that to the extent that we do have consumption or variable expenses for Copilot usage, like we want to drive that usage, right? Like usage is going to increase revenue and then there's a small increase to cost of service that comes along with it.

Okay. Yes. So you wouldn't -- so is it an idea to have the customer participate more? Or is like that price -- the fixed price that you have for that it's going to cover it? Or is there at some point like a wake-up moment? Usage [indiscernible].

I think it's an interesting longer-term question that we're thinking about. But right now, I think the kind of fixed with various policy not being really restrictive around consumption and trying to find ways to drive usage is what we're focused on.

Yes. And then you mentioned AI. Obviously, requires a good data set, and you were kind of one of the best data assets in town. And we have like Salesforce doing a lot more stuff, et cetera, in there. How do you think about data asset and kind of letting it -- leveraging in more as you go into like a broader AI world and other people want to kind of work with you -- more work with you?

Yes. Again, I think generative AI really highlighted the value of data accuracy. We've been able to build this beta asset via our contributory network of scale. We're in many cases data originators. And I think really understanding the data landscape having some of the best minds in the space that work for ZoomInfo and be able to go into a lot of these larger customers that want to understand data origination, they want to understand privacy and regulatory issues. they want to understand security in AI, and we're -- we have the sophistication level to do that.

Yes. Okay. Changing gear a little bit. Like if you think about like obviously, growth has slowed down a little bit, but your -- you still were very kind of cash flow generative profitable company. How do you think about that balance now? And how do you see yourself there?

Yes. I think that, that balance will continue to optimize and we've talked about levered free cash flow per share. We had 37% margins in Q3. We've guided to 35%. I think there's more timing there than trajectory. I want to reiterate the seasonality in 2025 will be different than 2024, both from a revenue and margin perspective. So as we've said before, we recognize revenue ratably on a daily basis with no leap year in 2025, Q1 of 2025, we'll have 2 fewer days than Q4. So fewer revenue days, our typical resets with payroll taxes and retirement benefits, means that we're going to expect several points lower margin in Q1 2025, several points higher in the back half of 2025, relative to the 36% to 37% AOI margin that we view as our kind of annual baseline right now.

Yes, yes. And then the -- if you think about if time should get better, like how do you think about that think about rebuilding capacity, et cetera, and to kind of drive the future growth because you don't want to kind of save yourself to death ever. Like how do you kind of go about that?

Yes. I think we're resourced to get back to growth into the -- when we get -- when we get back to growth on that schedule, I don't think there's a lot of resourcing that needs to go back into the business from either in R&D or sales and marketing perspective, we're really focused on optimizing the balance of it. So what that means is ramping and hiring and refocusing our sales resources into the enterprise into mid-market, making sure that we're really prescriptive and efficient in SMB and that we're bringing -- we have the right amount of resources there aimed at customer acquisition that we're bringing in customers at the right price point, at right packaging, all of this aimed at better retention outcomes, better customer value because that's improving -- taking a stable net retention, which again is a good story and finding a way to get improvement there is the most important step back to growth.

And where are we on sales productivity at the moment because that's another thing where people don't think like if the productivity is not like we kind of put totally you want to, there's a lot of buffer initially there to kind of start growing with that rather than just having to hire people again. Where are you on that productivity kind of curve?

Yes. I think we're -- we went through a period where we were kind of reorienting and restructuring our sales to be more segment focused and there is kind of a ramp from there. So if you think about high velocity, SMB sale where your sales cycles are like less than a month and then you take some of those resources and you either find replacements or you move them up market, like that kind of sales cycle, the approach there leads to some gap productivity. We think we've done that already. So right now, I think like -- we feel like we're set up well. We've got Copilot internally. So we've got a lot of productivity potential there. We've got efficiency certainly from our adoption of Copilot interesting enough. When you look at our kind of the greatest gains from using Copilot internally, it's been in our account management team. And when we look at that internally, we see a lot of opportunity in our customer base across teams that we haven't historically penetrated.

Yes. Okay. And last thing, if you think about growth as well, can you talk a little bit about international?

Sure. I think international also has gone through a bit of a tougher macro over the last few years. I think what you've seen is that potentially the outlook domestically is a little bit better. We're still really focused on being the best when it comes to international data. We have international sales presence. We feel like we've made strides there during this kind of tougher period. And when we talk about getting back to growth, that's a domestic statement, that's also an international statement.

Yes, yes. Okay. But the -- like if you think the initial focus will be like because your domestic sounds like it's [ further]. So it's probably more a domestic focus than international focus.

Yes. And like I said, I think we are -- I think we can do both, honestly. I think we have -- I think we've -- during this 2-year tough period, we've been able to like really behind the scenes set ourselves up to be ready for -- want to be able to execute about around what we can control. And then when -- if and when kind of the opportunity the macro really starts to improve instead of just stabilize that both in the U.S. and internationally that we're well positioned.

Yes. Okay. And then last question for me -- sorry, last couple of questions. Like how do you think capital -- I mean you're very cash generative. How do you think capital structure from here?

Yes. We've -- we bought back 17% of the company since we initiated our repurchasing. We were aggressive in Q3 as well. We'll continue to be opportunistic buying back shares as long as we see a gap between what we view as the intrinsic value of shares of ZoomInfo versus the market price. We actually have used more cash than we generated in 2024 doing so. So our cash balance has come down. We'll continue to be cognizant of our leverage ratios, which I think have gone up some, but we're comfortable with. And then we'll just continue to balance the portion that we want to allocate towards share repurchases versus any M&A opportunities versus longer term, whether we want to start paying down any debt.

And then you mentioned M&A, like as one way. Obviously, there has been a lot of disruption in the market, which basically means there's just potentially some very interesting technology assets out there that kind of might have suffered. How do you think about M&A from here?

Yes. I think we are always surveying the landscape, whether it's things that we find to just going to be like plug-ins or carve-outs that can help our current offerings, whether there's more strategic opportunities there. Like we're always out there having those discussions and surveying the landscape. I do think with our success releasing and driving adoption of Copilot, we want to make sure that we're prioritizing that internally, but we're always going to be out there and always be considering that.

Yes. I mean like if you look at where you are in the market, is there like a big adjacency possible? Or is it just actually it does feel more like tuck-ins?

Yes. I think tuck-ins are especially when we're really happy about the product we have internally and there's little gaps that we're able to fill, the tuck-ins are something that we'll probably lean in on focusing on. And then on the greater adjacencies, I think that as we kind of seek stability, like it's our due diligence to make sure that we're out there and surveying it, at the same time, we feel good about our prospects without necessarily doing something there.

And is it more like -- if you think about it, is it more like a data -- like there's certain data assets versus like software assets like...

Core spectrum. So it's -- it could be kind of more application heavy software, there's interesting data assets out there, it's kind of AI technologies that kind of fit well within Copilot framework. So we're paying attention to all of them.

Yes, yes. Good. Okay. Actually, I really enjoyed our conversation. Thanks for joining us here. Thank you.

Thank you.