ZoomInfo Technologies Inc. (NASDAQ:ZI) Q4 2023 Earnings Call Transcript
ZoomInfo Technologies Inc. (NASDAQ:ZI) Q4 2023 Earnings Call Transcript February 12, 2024
ZoomInfo Technologies Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.25. ZoomInfo Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the ZoomInfo Fourth Quarter and Full-Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sisitsky, Investor Relations. Please go ahead.
Jerry Sisitsky: Thank you, Amy. Welcome everyone to ZoomInfo’s financial results conference call for the fourth quarter and full-year 2023. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; Cameron Hyzer, our CFO. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws, expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate and believe and expressions, which reflect something other than historical facts are intended to identify forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement in the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I’ll turn the call over to Henry.
Henry Schuck: Thank you, Jerry, and welcome everyone. We ended the year on a more positive note with revenue, profitability, and cash flow that exceeded our guidance. Revenue for the fourth quarter was $316 million and adjusted operating income was $126 million, a margin of 40%. Both ahead of the guidance we provided. For the full-year we delivered $1.24 billion in revenue, generating nearly $500 million in adjusted operating income and converting 93% of that into unlevered free cash flow. During the quarter, we purchased approximately 10 million shares of ZoomInfo stock for $153 million. We're confident that these repurchases will drive a meaningful economic return for our shareholders and we will continue to aggressively repurchase shares as we take advantage of disconnects between our share price and the intrinsic value of our growing, profitable, and cashflow-generative business.
That being said, since early 2022, we have been managing through the challenges of a weaker macro environment, which has particularly impacted the software industry, our largest vertical. Overall, software has contracted while all other industries are growing. New business has performed well while NRR has declined as the pullback in the software vertical has disproportionately impacted our existing customer base, resulting in fewer upsells and more seat downsells. However, our demand and sales velocity for new business was our best ever. We closed the most new logos on record in Q4. Our in-month create and close win rate for December was the highest we've ever had in a single month, and our median sales cycle shortened significantly year-over-year.
Last year, I said that we would make key investments in data accuracy and data coverage by growing our contributory networks and doubling down on the AI and machine learning we use to keep data fresh and accurate. Today, 9 out of 10 times a customer looks for a contact, we deliver a match. That's up from 7 out of 10 times at the start of 2023. Those investments resulted in a 23% year-over-year increase in our net promoter score, while NPS attributed to our data asset disproportionately increased by more than 50%. Our significant investment in data quality and breadth didn't just improve customer sentiment. Q3 and Q4 ‘23 were both our biggest win back quarters on record with more than 550 customers, who left us returning to our platform. Sales teams are loud advocates for having the best tools to hit their quotas and when management makes a decision to buy cheap they are ultimately forced to buy twice.
Those 550 customers who left for the promise of just good enough data realized that winning just one incremental deal per rep using ZoomInfo is worth far more than any potential cost savings from a low quality, low cost provider. Another example is a marketing demand generation business that tried out a cheaper competitor hoping to save money. This is a company whose entire business model is built on driving appointments, demand, and sales for technology companies. Data inputs are critical to their success. They were so dissatisfied that they came back to us just months after leaving to perform a head-to-head test of data quality. Ultimately, they told us that “the difference was night and day, and the data quality, platform integrations, and direct dials from this provider couldn't even compare to ours”.
While the price was cheaper elsewhere, the actual cost of leaving ZoomInfo was extraordinarily high as the customer missed out on the countless opportunities that their sales reps could have had. A publicly traded multinational MSP and provider of technology solutions turned off ZoomInfo for a cheaper alternative. As they started preparing for the new year, they realized that they needed to fundamentally change their go-to-market strategy, and they conducted an extensive RFP process to find the right solution. They came back to ZoomInfo, because we were able to help them with all of their key initiatives for go-to-market success, ramping new account executives, increasing sales efficiency, driving sales and marketing alignment, and actually leveraging AI.
A high-growth industrial diagnostics company switched from ZoomInfo as the economic environment got more challenging. Within months, their frustrations around data quality, integrations, workflows, and sales efficiency boiled over so much that their sales leadership insisted on a change and made the easy decision to return to us. They bought cheap, then they bought twice. From accurate mobile phone coverage to firmographic and location data to seamless integrations with CRM and workflows, when your go-to-market efforts necessitate demand generation at scale doing it with a low cost, low quality provider creates an immense amount of waste. Many of the largest and most sophisticated companies in the world are going all in on our data, insights, and automation.
And in Q4, we added the most new enterprise customers since 2022. Four out of the five largest market capitalization companies in the world use ZoomInfo and we currently have more than 60% of the Fortune 100 as customers. Uber, Altis, FIS, Brown & Brown, Capital 1, and Amazon are all existing enterprise customers, who expanded with six-figure plus growth in the quarter. We continue to have meaningful white space within this customer set. We also closed transactions with a diverse group of companies large and small and across all verticals, including Kraft Heinz, Johnson Controls, First Financial Bank, Peachtree Hotel Group, Open AI, SoulCycle, Nurse Registry, Equitable Advisors, and Apple. We are not sure when we will see the economic environment flip from a headwind to a tailwind, but we continue to build the organization to optimize for the massive long-term opportunity, while maintaining industry-leading levels of profitability today.
But what we are sure of is this, every company that fails to invest in the highest quality go-to-market intelligence will crush its own ability to win. If you're a sales or marketing professional, the ability to successfully and predictably hit your number month in and month out is rife with roadblocks and systemic flaws. Territories are poorly mapped, targeting is weak, CRM data is incomplete and inaccurate, sellers waste inordinate amounts of time researching, marketing campaigns go out to random companies at random time and money is spent in horribly inefficient ways. This type of sales and marketing pain is universal. Step out onto any sales floor without access to go-to-market intelligence, and you'll hear a familiar chorus. I don't have the right contacts at this account.
I keep calling disconnected numbers. This company isn't even in my territory anymore. It got acquired. The new CEO at this company used our competitor. There are only 100 targetable companies in Los Angeles. That can't be right. Marketing didn't hit their pipeline contribution this quarter. Or worse, you'll just hear nothing and wonder why is the sales floor so quiet? A lack of key signals and insights, married to incomplete, stale, or outright inaccurate data on customers and prospects, throws sand into the gears of every go-to-market function. It starts with quiet sales floors and leads to missed numbers, low morale, lost deals, career slumps, and your best reps walking out the door. We are the biggest and most impactful innovator focused on solving this problem for go-to-market professionals.
And now we are introducing the next biggest innovation for them, our generative AI powered copilot that turns every seller into your best seller. Copilot enables customers to bring together their internal customer data with ZoomInfo's best-in-class data and applies advanced generative AI to shift through the noise and identify insights sellers actually want. The best sellers focus their energy on the companies that are most likely to close. They do their research, craft high-quality personalized engagement, and stay on top of their deals to remove risks and move to close. We have built advanced AI into our Copilot to replicate these best-in-class activities. Copilot identifies ideal fit accounts by examining a customer's history of closed one versus closed lost deals and then running AI against our proprietary data set to identify the characteristics of ideal fit accounts.
That includes basics like industry and company size, in addition to tens of thousands of additional sophisticated attributes that we collect like tech stack fit, department budgets, and executive presence. It then scans our proprietary buying signals to identify the accounts most likely in market to purchase. Lastly, it will identify the next best action sellers should take by pinpointing the right buyer, exactly when to reach out to them, what channel to engage on, and exactly what the contextual message should be. For example, Copilot might tell them to email the main decision maker or to start a display ad campaign against the buying committee. It then uses our generative AI emailer to create a hyper-personalized message incorporating all of the context we have about an account, contacts, their history, and pain points.
We have expanded our data set to power this level of precision and personalization. Copilot starts with our highly proprietary data asset, including billions of unique intent data points, opportunity scoops, executive promotions and job changes, website visits, and then pulls insights from earnings called transcripts, websites, product portfolios, and press releases to identify prospects pain points, value propositions, and potential opportunities. That's layered on top of our existing intent and opportunity scoop data for personalization. Copilot is currently deployed across hundreds of customers and tens of thousands of users and will be generally available in the middle of the year. We anticipate packaging Copilot with our other recently innovative AI features, including our AI account fit and in-market scores, creating a migration and monetization opportunity for every customer in seat to our new AI-enabled platform.
Copilot deepens our already proven track record of innovating on the way revenue teams go to market. In our second annual customer survey, we polled 7,000 users in more than 80 countries across a variety of sales, marketing, and operations positions to find out how they drove growth using ZoomInfo. Overall, our customers report a 52% increase in win rate, a 46% improvement in marketing pipeline, a 32% increase in revenue, 72% growth in quota attainment. They are 64% more productive. They see a 35% reduction in customer acquisition costs, and CSM saw a 34-point increase in net retention rates. Every business wants to make their go-to-market motions more efficient, and our customers make it abundantly clear that ZoomInfo does just that for them.
Copilot will enhance our already strong new customer motion and provide us with another tool to drive expansion and fight down sell on the customer base. Finally, I want to take a moment and talk about the incredible team we've built at ZoomInfo. I'm continually impressed by the level of commitment, competence, relentlessness, and resilience exhibited by every person here. We are entrepreneurs, who are motivated to innovate and reaccelerate growth, both at ZoomInfo and for our customers. 2023 was certainly a tougher year than we anticipated. As a platform that drives efficient revenue growth, we thought ZoomInfo would be well-insulated from the many layoffs and the changing growth trajectory of our technology customers. While our new customer growth remained strong throughout the year, renewals were impacted by seat-down cells triggered by layoffs and fewer upsells as technology customers pause expansion or experimented with lower quality alternatives.
As Cameron will detail, around half of our ACV is coming from verticals that were the most impacted in 2023, and yet we still delivered a year of growth, profitability, and free cash flow. We continue to control the controllable while building for the long-term. We're executing with efficiency, innovating, and delivering tremendous ROI to our customers. We are growing while others in our space are shrinking, and we're driving a leading level of profitability and free cash flow while continuing to return cash to shareholders. We have the team, the platform, and the market opportunity that gives us confidence in our ability to win long-term. With that, I'll turn the call over to Cameron.
Cameron Hyzer: Thanks, Henry. In Q4, we delivered revenue of $316 million, up 5% year-over-year. Annualized revenue based on 92-days in Q4 was $1.255 billion, up 0.8% sequentially. We were pleased to have delivered better-than-expected revenue with improving sequential annualized revenue growth relative to Q3. Adjusted operating income was $126 million, better than guidance and represented a margin of 40%. GAAP net loss was $5 million and GAAP EPS was a loss of $0.01 per share. Non-GAAP EPS was $0.26 per share. For the full-year, revenue was $1.24 billion, up 13% compared to 2022. Adjusted operating income was $499 million, margin of 40% and unlevered free cash flow was $463 million. We were again GAAP profitable for the year with net income of $107 million and GAAP EPS of $0.27 per share.
Non-GAAP EPS was $1.01 per share. We are initiating guidance for 2024 with revenue growth of 2% to 3% as an implied operating -- adjusted operating margin of just over 39%. For 2024, we expect to deliver $455 million of unlevered free cash flow at the midpoint of guidance. While the operating environment has curtailed growth currently, we continue to believe that there is an extremely large opportunity to transform the way businesses go to market, which gives us confidence in our ability to accelerate revenue growth over the long-term. Given uncertainty in the economic environment and the subscription nature of our business, we have not incorporated these potential tailwinds into guidance for 2024. When we do realize higher levels of potential growth, we would expect to realize additional operating leverage in the business and drive higher margins in the future.
Net revenue retention was 87% for the year, with mid-market companies, particularly those in software and technology space, being most unchallenged. The outsized down sells from customers most impacted by the economic environment exceeded the net upsell that we generated from other customers in 2023, creating a drag on net retention. In the near-term, we expect to maintain customer churn at levels we experienced over the last few years. We anticipate additional down-sell pressure in Q1 as we are still lapping a peak of negativity from last year and working through the long tail of multi-annual contracts that were most recently transacted in a very different operating environment. Our expectation is that as we move through the year we will see opportunities to stabilize net retention and begin to return to structurally higher levels.
Our guidance prudently assumes that for 2024, net revenue retention does not meaningfully get better, and at the low end of the range of guidance, it assumes that retention declines for the full-year. We now have 1,820 customers with more than $100,000 in ACV. While that metric declined by 49 in the quarter, it belies our success expanding with larger customers, as average revenue for this cohort has increased. Our investments have helped drive the enterprise portion of our business to record highs, while mid-market customers have fallen out of this cohort. Enterprise ACV overall now represents just under 40% of the overall business, up approximately 10 points over the last three years. We also continue to see success with advanced functionality, which contributes roughly a third of our overall ACV, with particular strength from Operations OS, which now contributes more than 10% of our ACV.
From an industry perspective, our software and technology customers were particularly challenged in 2023. Software, our largest vertical, now represents less than 33% of our ACV and was down on an absolute basis year-over-year as layoffs drove down sells among customers. ACV from non-technology industries increased as a percentage of overall ACV, as we continue to see growth and opportunities for greater penetration. This part of our business grew approximately 15% in Q4 relative to last year. Write-offs continue to impact us in Q4 as many of our smallest customers remain to challenge in their ability to pay. In addition to the increase in bad debt associated with write-offs, we've experienced a similarly sized impact to revenue. Our expectation is that the impact from write-offs will attenuate over time as our mix of revenue continues to shift to enterprise customers and we roll out more product-led functionality for smaller customers, which is paid at checkout.
Operating cash flow in Q4 was $129 million, which included approximately $6 million of interest payments. In December we completed another repricing of our term loan at par, where we reduced the interest rate by 60 basis points from SOFR plus 285 to SOFR plus 225. This will result in annual interest payment savings of approximately $3.5 million. Unlevered free cash flow for the quarter was $126 million, representing 100% of adjusted operating income. We ended the year with $529 million in cash, cash equivalents and short-term investments, and we carried approximately $1.24 billion in gross debt, all of which has fixed or hedged interest rates. During the fourth quarter, we repurchased approximately 10 million shares of ZoomInfo stock at an average price of $15.43 per share.
In 2023, we repurchased $400 million in ZoomInfo stock, retiring all 22.6 million shares repurchased, representing over 5% of the total fully diluted shares outstanding. Our net leverage ratio is 1.4 times trailing 12-months adjusted EBITDA and 1.3 times trailing 12-months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of Q4 was $442 million and the remaining performance obligations or RPO were $1.15 billion. Of which $856 million are expected to be delivered in the next 12-months. With that, let me turn to guidance for Q1. We expect revenue in the range of $307 million to $310 million, adjusted operating income in the range of $115 million to $117 million and non-GAP net income in the range of $0.23 to $0.24 per share.
For the full-year 2024 we expect revenue in the range of $1.26 billion to $1.28 billion and adjusted operating income in the range of $492 million to $502 million. We expect non-GAAP net income in the range of $0.99 to $1.01 per share, based on 399 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $445 million to $465 million. Our full-year guidance implies 2% to 3% revenue growth and an adjusted operating margin just over 39%. For the year, we would expect CapEx in the range of 4% to 5% of revenue as we anticipate an additional $25 million to $35 million in capital expenditures relative to 2023 driven by facilities build-outs where we have outgrown certain offices with expiring leases. We continue to expect free cash flow conversion in the low-90s as a percentage of adjusted operating income.
Our non-GAAP tax rate for 2024 is expected to be 15%. With that, let me turn it over to the operator to open the call for questions.
Operator: [Operator Instructions] And our first question comes from the line of Mark Murphy with J.P. Morgan. Your line is open.
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