My name is Rishi Jaluri, head of Software Equity Research here at RBC. I'm delighted to have with me Graham O'Brien, who is the CFO of ZoomInfo. Graham, welcome. Thanks for being here.
Thanks, Rish.
Maybe let's just start a quick overview of ZoomInfo just for the generalists in the room, and then we can jump into some specifics.
Sure. ZoomInfo is the go-to-market platform for businesses to find, acquire, and grow their customers. We've recently released our AI-powered Copilot, ZoomInfo Copilot. And what that does is it supercharges that sales motion, consistently surfacing customer-tailored signals and intent at scale and providing those up to use cases across the go-to-market spectrum.
Great. Maybe let's think about what's happened in recent quarters. Obviously, we've seen growth continue to inflate downwards, have some pressure at the low end, but there also seems to be some green shoots and signs of maybe stabilization and positivity in certain parts of the business. Maybe can you walk us through that, and what's the path to turn around from here?
Yeah, for sure, so in Q2, we saw kind of an inflection point, certainly up market, so our mid-market and enterprise segments, and we were really optimistic about the operating momentum coming out of Q2, and we felt the same way coming out of Q3. At the same time, we're seeing some degradation in our SMB customer base, and we're accounting for that in some of our expectations and certainly the aggregate trajectory of the company or of our growth, but what we're doing from an SMB perspective is actually disqualifying some level of high-risk transactions that we were selling in the past, and so it's led to some of the write-off challenges that we saw in Q2.
So we're able to secure cash upfront through this new business risk model that we implemented in Q2 and optimized in Q3 and are effectively getting to a place where mid-market is approaching getting back to being a contributor to growth. Enterprise is growing. SMB is going to decline as a percentage of our total business. But as it does and stabilizes, it will be a smaller and healthier segment.
Maybe just can you expand a little bit on the write-down dynamic in Q2 and what that led to Q3? I think that's still pretty not well understood by the investment community.
Yeah, for sure. So in Q2, we had a change in estimates related to the risk of non-payment from our customers, mostly predominantly lower-end SMB. So what happened in Q2 is that triggered an accounting true-up. And that resulted in a $15 million revenue charge, a reduced revenue, $14 million bad debt charge that increased bad debt expense. And the thing about that is funding the balance sheet reserves to effectively account for current write-offs and potentially future write-offs. The activity or the write-off volume did continue at elevated levels in Q3, certainly in the beginning of the quarter. And that's think of it as like writing down accounts receivable, writing down on revenue, limited impact to the P&L, or at least volatility on the P&L. But we did see that trajectory start to improve or the level of write-offs that abated as we exited the quarter.
Yeah. Okay. Got it. That's helpful. And obviously seen a lot of macro pressures in the business. How do they look today? And maybe we need to think about the different pieces of the business, and each of them has their own macro impact, but where they are today versus where they were maybe two or four quarters ago, and what assumptions are you making underpinning guidance, at least for the rest of the year?
Yeah, I think the macro experience is pretty similar to where it's been over the last six to 12 months. Potentially the outlook is better. The momentum we're seeing up market with mid-market retention improving sequentially for the first time since 2021, enterprise retention back up at 100%. We feel like we are controlling and creating those outcomes, and any kind of macro tailwind would just accelerate that. At the same time, from a Q4 guidance 2025 kind of directional baseline, we are going to continue to be very conservative, and the way we're doing that is any of those positive trends that we're seeing up market, doing the right thing in SMB as well, or that's kind of a near-term headwind, we're going to discount those positive trends across the board until we have a few quarters of those translating into P&L performance.
Yep. Okay. And then the natural follow-up to that is thinking into 2025, I know you haven't put out formal guidance, but just how should we be thinking about the business and outlook heading into 2025, and what can drive a return to actual underlying growth?
Yeah, it's a continued momentum up market. So we've got enterprise growing. We've got an operations or DaaS solution that is heavy in the enterprise, a 22% growth year over year last quarter, continuing to drive that motion. We've got ZoomInfo Copilot where we're seeing lift on migration. We're seeing a great new business motion that lands very well on the high end of SMB and mid-market, and certainly in the enterprise. So we remain cautiously optimistic about returning to sequential growth in 2025. But we're going to continue to discount the operating trends and make sure that we're giving ourselves room to exceed expectations.
Okay. Got it. Maybe let's talk a little bit about Copilot. So you gave some stats on the most recent earnings call. I think it's at $60 million in ACV and up really meaningfully versus Q2. Can you talk a little bit about what's driving some of the early successes you're seeing there? And where has the traction been? Where have you been seeing the most traction specifically?
Yeah, great. Yeah, Copilot is exceeding our internal expectations. The way to think about it is we had $18 million of ACV on Copilot exiting Q2, well over $60 million exiting Q3. We get that from selling to net new customers. We get that from migrating to our existing customers off cycle. So they don't have renewal events. They can't wait. They want ZoomInfo now. We migrate them. We get lift on price. And then we do have some level of expirations that have happened or sorry, renewals that have happened in the four or five months since GA where we migrate those customers over. One of the exciting things about Copilot is that what we released at the end of May was the earliest and potentially kind of worst version of Copilot. We've already made significant progress on the roadmap.
So we're selling and offering kind of a better and better product every day. Something to think about with our existing customer base is we didn't have the ability to, for lack of a better word, pilot Copilot until really the end of Q3, beginning of Q4. So what that meant is we have an existing customer. They have 1,000 seats on our sales offering. They want to go and migrate to Copilot. It's all or nothing, the switch. Now we're able to move 10 seats or 100 seats or one team onto Copilot. They can trial it for some period of time. They can compare productivity, efficiency of that team versus kind of a control group and really kind of isolate that ROI, and that accelerates sales cycles, puts us in a really good position to monetize Copilot in the customer base.
Yep. Absolutely. Maybe let's think about the broader AI strategy right now. Where do you see the largest areas of opportunity near term, and where are you prioritizing your investments?
Yeah, two things I think about with AI right now is internally, where we can leverage AI from an R&D perspective or specifically kind of a software development perspective and just be more efficient there. Certainly, we have G&A use cases too, whether that's on the receivable, stuff like that, scoring customers. And then from a sales perspective, obviously Copilot is an AI-powered tool. But besides that, when we go out to our enterprise customers and they have a slew of AI initiatives, they are quickly seeing the value of that data layer and how important it is to actually succeeding and building AI applications on top of it. So we can come in there with Operations OS, with DAS, selling them Data Cubes, taking our best-in-class third-party data, marrying it to their first-party data and being that data partner as those AI initiatives take hold.
Yeah. Maybe alongside that, I think one question we get a lot is LLMs obviously do a great job of being trained on data, and to a certain extent, you can start using that to actually get contact information and org charts. How do you think about the potential of AI as a threat, or is this something that you feel well protected against?
Yeah, I think we are able to leverage AI internally for some of that. I don't think it creates a new competitive dynamic specifically to us. I think our contributory network really solidifies our moat against kind of more startup competitors from LLMs. But we're going beyond just the company and customer and contact database. Copilot, our operations offering, really focuses on signals, intent, surfacing those things, harvesting them from unstructured data sources. Think about like earnings scripts, podcasts, marrying that all together. So not only are you sharing company data or contact data or providing that, you're providing actual intelligence around that data and enriching it via those signals. And that's what we're really excited about.
Yep. Okay. No, that makes a lot of sense. Maybe let's touch a little bit on competition because that got brought up. Maybe let's separate into two classes. So one, you've seen some upstarts out there that have been making a lot of noise, Apollo and others. What are you seeing in terms of the competitive environment from them?
Yeah, I think we saw kind of peak competitive environment maybe was like 12 months ago. And there's always been lower cost, lower quality data providers in the SMB in our world. So what we're really focused on is, and again, we don't really see that much up market. Mid-market, we'll occasionally see kind of ABM competitors. Enterprise, occasionally we'll see a D&B or a company data provider in a sales cycle. But really in mid-market and enterprise, a lot of times it's just us in the sales cycle. In the lower end of SMB, we're just focused on prescriptively and efficiently capturing that business. So what that means is, one, new business risk model, making sure that we're actually getting cash upfront before we provision, scoring those customers, understanding the risk and their ability to pay as they come in.
Then, two, releasing and resourcing a more digital PLG motion so that we are able to provide a version of ZoomInfo, the right packaging, the right price, the right entry point for some of those less sophisticated customers, making sure that they're getting the right level of value at the front end and turning that into a potential tailwind to retention a year or two out.
Yep. Yep. Okay. And then the other kind of potential class of competitors is CRMs getting into this space, most notably HubSpot. They bought Clearbit. They're doing some stuff with Breeze Intelligence. How are you thinking about the impact of that on the business?
Yeah, great question. We haven't seen Breeze or anything like that really in any sales cycles as a competitive position. We look at that, not just Breeze, but other kind of CRM approaches. It's very much an inbound enrichment motion. And that is something that is potentially first-party data is good enough to do. What really differentiates us is third-party data asset, the outbound motion to do that, which is a much more complex motion. And then being able to marry all of that data together, create account summaries for account managers, take those net new signals every day, rise that up, surface that to an account manager, to a sales leader, tell them what their next best actions are, and then help them take those actions.
Yep. Yep. Okay. Great. Maybe let's now talk about some of the initiatives that you're driving to kind of improve the momentum of the business, starting with the focus on enterprise customers, larger customers. What are some of those initiatives you're doing both internally and externally to help just drive better execution there?
Yeah. The first thing I called out a little bit earlier was being able to pilot Copilot, making sure that our go-to-market motion is well-suited to kind of the more complex buying cycles of an enterprise customer, potentially of a mid-market customer. We also resegmented our new business motion and to some extent our account management motion earlier this year. So what that means is historically an account executive could sell 10 lower cost smaller deals or sell one larger one, and they would at times be incented or it would make more sense for them to go and spend their time on the 10 deals. We've now updated our rules of engagement internally to make sure that we are focusing the right level and type of resources at enterprise customers where sales cycles can be longer. It's a more sophisticated process.
It's more kind of relationship building in that first year than anything and making sure that we're set up for the long term to have durable growth in the enterprise and mid-market.
Yeah, and maybe sticking to some of those go-to-market changes, how do you maybe think about tweaking that without disrupting or at least minimizing disruption to the business and maybe helping drive expansions? Because that's the other piece, right? NRR you've talked about to drive NRR upwards at those large customers once you land on them.
Yeah, and I'll reiterate, we're already kind of into this, right? We've rolled out a dedicated kind of enterprise new sales team at the end of last year. So if you think about nine-month, 12-month sales cycles for some of these large enterprises, we've already done the resource investment. We've already started the clock and are excited about the opportunity to really start to ramp up the ROI there. And then from a retention perspective, some of this is doing the right long-term thing at customer acquisition. And maybe there's some timing friction there. Maybe there's some pricing, but that it pays off certainly net positive from an LTV to CAC perspective longer term.
Yep. Yep. Okay. That makes sense. And then in the past, Henry's talked a little bit about wanting to embrace more of a PLG motion with the product, and I'm sure that can really help in focusing, landing efficiently at smaller customers. Can maybe walk us through some of the changes and what momentum we've had with the PLG motion?
Yeah. So we've rolled out a PLG motion. I think we're going to continue to invest and develop it. It's still fairly early from our point of view on that motion for us, but making sure that we can provide the optimal kind of buying experience and then actual product experience. And then doing that on the front end, making sure we can also have this built out in a thoughtful way for renewal. So again, I think we've made really good progress on the customer acquisition side from PLG perspective, but we don't want to just lean too heavily into that before we've really figured out keeping those customers, giving them an opportunity to grow, setting them up for positive retention outcomes.
Yep. Yep. Got it. Got it. One of the initiatives that we've seen really over the past two years is diversifying the revenue base, not just from a customer standpoint, but vertical standpoint. Obviously, there was a lot of over-indexing to tech. Maybe can you walk us through how that motion has gone in terms of growing the non-tech verticals and what investments you need to make both in terms of data and even go-to-market to really go after some of those verticals?
Yeah. I think we've made a lot of the data investments already. And software has been, software was very heavy to our mid-market segment, has been the greatest contributor to the deceleration of growth that we've experienced over the last two years. It's largely been a downsell story. So think about software company, mid-market, 2021, 100 reps, growing 50%, 0% margins, negative 10% margins. And then overnight, half as many reps asked to have 20% margins grow 10%. We kept a lot of those logos by we wanted to be good business partners. We wanted to go through that downsell pressure, kind of waited out until they got back to a point of growth. I think we're getting back there. We had mid-market retention improve sequentially this quarter for the first time since 2021. Software retentions improved twice or for two quarters now sequentially.
But we're still at a kind of an inflection point. We haven't necessarily gotten back to growth there. So last year, we talked about non-software verticals, I think growing in the mid to high teens. And we continue to have success with finance, logistics, manufacturing. What we're doing from a go-to-market perspective is, in addition to the segmentation from earlier, we're also starting to have some specialization with verticalization. So that means that we're able to go into these verticals that are not tech and speak the language, really understand the use case for ZoomInfo for them, where maybe we're not as ready to specialize a year or two ago. So I think that is the exciting thing about those more traditional verticals, being able to go in there and really quickly get to value of ZoomInfo for you.
Are there any verticals worth calling out that you said that you've seen kind of some early signs of success in outside of tech?
Yeah. Financial services, manufacturing, logistics. There's certainly other cycles there, but I think those are places where insurance, where you can go in, and if you start to build relationships, there's effectively a marketing effect that we're trying to go out and capture.
Yep. Yep, then maybe thinking about the international side of the business, obviously very over-indexed to the U.S., plenty of opportunity internationally. Kind of a similar sort of question, right, but as you think about expanding internationally, how do you figure out which geographies you want to target and what investments do you need there, both from data and go-to-market side of the equation?
Yeah. I think we've made a lot of progress with our international data quality. That's a place where I think we really can compete and differentiate. The international macro is worse than the U.S. macro. And I think we just made a fair amount of go-to-market investment back in maybe 2020, 2021. Now we've made strides from a data perspective. So I think we're well set up to grow there and accelerate growth there. But I think that some of that is just offset by the buying environment.
Yeah. Yep. Got it. Got it. Makes sense. Then maybe I want to think about, since we were talking AI, I was thinking about the Chorus acquisition, right? That does conversational AI. Maybe can you walk us through progress that you've made with that acquisition since then and how we think about it now in a post-generative AI world?
Yeah. Chorus, we're really excited about Chorus. We continue to sell it. It's a great conversational intelligence solution. It also is incredibly important as a component to Copilot. So its ability to harvest signals from calls, put those into essentially enriched first-party data. That's where being able to monetize that in tandem with Copilot is something that we've been really excited about. And we're excited about how kind of the synergy of that and Copilot in the future.
Yep. Yep. So now I want to maybe turn to margins. So you have some investments that you're making in AI, some go-to-market changes. What steps can you take to preserve margins, or is there potential for margin pressures as a result of all of these?
Yeah. Great. The margins were 37% in Q3. We've guided to 35% for Q4. There are some timing there. I think that is more timing than trajectory from a margin perspective. But if you think about margin in that 36%-37% annualized range, I think that's kind of the right baseline. We've made the investments behind Copilot. Some of that was a reallocation, but we've done the work. We feel great about the product. We don't feel like there's an incremental step up or one-time investment that is out there in the future. So we're also cautiously optimistic about returning to growth, and we think we can do that at the current margin profile. I do think, or I want to call out, that there is some seasonality in 2025 that is different than 2024.
We're going to have one fewer day in Q1 of 2025 than we had in Q1 of 2024, and as usual, two fewer days in Q1 of 2025 relative to Q4 of 2024. So we recognize our revenue ratably by day, which creates quarter-over-quarter impacts from a revenue and margin perspective.
Yep. Yep. Okay. Got it. Got it. Maybe can you walk us through then, going forward, how should we be thinking about free cash flow per share as a KPI going forward?
Yep. We expect to deliver $1 of levered free cash flow per share in 2024 and to meaningfully grow that in 2025. We think there's a few levers to do that, but the one we're going to prioritize is growing the top line. So we're going to keep expectations about growth conservative until we're able to actually show it. But in 2025, we believe we're a resource for growth now. We believe we have the right product to go get there. We have the trends up market. We're going to discount all the positive trends in with the expectations. But we, again, cautiously optimistic about getting to growth. If we are delayed in getting to that sequential growth, then it starts to become a margin expansion discussion.
I think if that happens, then we're talking about taking 36% or 37% margins up to 39% nearer term with a path to 40%, and then also continuing to opportunistically reduce share count.
Yep. Yep. And just to clarify, when you talk about returning to sequential growth, you're saying in 2025, you expect to return back to days adjusted sequential growth, right?
Yeah, so that's what we're cautiously optimistic about.
Okay. Got it. Got it. No, that's helpful. Maybe you did mention DAS a few times, and that is kind of another product to sell and growth drivers. Maybe walk us through exactly what that product is and maybe some of the learnings you've had getting that product to market versus the core Sales OS.
Yeah, so you think about Sales OS, and now as we're shifting more into Copilot, that's an application on top of our data layer. And then with DAS, and part of our operations offering, that is more the data layer or going in. We refer to these as Data Cubes or selling them a data asset that then we refresh and update and enrich over time. It's still a subscription model. It is not seat-based, so that is different from sales and Copilot. It is, and the buyer's often different too. It's more of a, could be a strategy, administrative data or RevOps buyer. But it is going in, up, getting that data in there, being a data partner, helping them structure and maintain that data relative to their first-party data.
Yep. Got it. Then maybe sticking on the topic of data, can you walk us through how we should be thinking about the regulatory environment? Obviously, a lot of concerns around data privacy and security, and those maybe have gotten exponentially bigger in a post-AI world. Walk us through kind of your maybe competitive advantage when it comes to that and how you're navigating the regulatory environment.
Yeah. We think we're on the forefront of that. We don't think there's anyone better positioned than us from a data privacy perspective, and we view that as a competitive advantage. When we're in sales cycles that are competitive, we have the internal data privacy team. We can go out and show the buyers, their security teams, their privacy and legal teams, what compliance is and why we're compliant and why potentially other offerings wouldn't be.
Yeah. Okay. Got it. And is that something that maybe as you think about expanding internationally, there's another layer on that, or is that something that you're also already kind of prepared for?
Already prepared for, but yeah, the dynamics are different with GDPR and other legislation that's been enacted out there. So again, I think we've done the hard work. We've made the investments on this, and we view it as a competitive advantage.
Yep. Okay. Got it. Then maybe I want to turn to M&A. You've done a number of acquisitions over the years. Obviously, ZoomInfo itself was formed through that. How should we be thinking about the M&A playbook and prioritization of M&A going forward?
Yeah. We'll continue to look at the landscape out there. I think we kind of were a lot of peak M&A, call it 2021. Then if there's something that's compelling, we feel like we have the capital options to go do something. But I'd say we're in a position right now where we're so excited about what we built with Copilot, what we built with operations, with marketing, and with the gap we see between share price and intrinsic value that we're pretty comfortable with our capital allocation strategy, but we are frequently reviewing the landscape. If we find something compelling, we always feel like we have the ability to act.
Yep. Yep. No, absolutely. And then if we think about maybe opportunities at the lower end, do you see an opportunity to maybe get more traction with some of the AI-native companies out there that themselves are now getting a lot of funding, growing, hiring a lot, and have that be a potential lever to growth?
Yeah. We view that as two ways. One, I think those would be great customers of ours. And certainly with funding potentially being overweighted to that vertical, I think that potentially is a tailwind to what was a headwind with software. And then again, just making sure that we are internally leveraging AI in every way possible to drive growth and to find efficiencies in the business.
Yep. Got it. And how about the pricing environment? Have you seen any kind of changes in that in general or been able to maintain pricing? And if so, what tools have you been able to use for that?
Sure. We view pricing really from a tiered functionality perspective on the new business side, making sure that we're bringing customers in the right functionality, the right price point to affect retention outcomes. So we haven't really seen significant changes to our ASP on that front, but we have changed the mix some. So if we view Copilot as something that we can get price uplift for, we're also being thoughtful about the price entry point at the lower end of SMB. And then we're also looking at our seat penetration and making sure that what we're optimistic about is historically ZoomInfo has been viewed by a lot of the market as top of funnel prospecting, AE, SDR use case. We see a massive opportunity to go and introduce Copilot to an account management use case, a CSM use case, a sales leadership use case.
Internally, the greatest increase we've seen in Copilot value and usage has been from our account management teams, and we're really excited about that white space out there that we see.
Yep. Absolutely. And then maybe lastly, just turning back to Copilot, you talk a lot about getting existing customers to trial it. Has this been something that's been helpful from a net new perspective as in customers that had no relationship with ZoomInfo before, you're now able to land them because you have a unique product in Copilot?
Yeah, absolutely. I think there's segments of the market out there that view Copilot as kind of a traditional company and contact solution and is not. And then as we're able to market and show that this is the go-to-market AI platform, that is an eye-opening moment for them. And certainly, I think we're kind of early on that front. But the reactions we're seeing on kind of the, "I didn't know ZoomInfo did that," that's what we're really excited about, the momentum behind that trajectory.
Yep. Absolutely. Maybe in the 30 seconds we have left, just how should we be thinking about the potential to expand your partner ecosystem, maybe lead more heavily on partners on the go-to-market side?
Yeah, absolutely. We have a partnership team in our sales org that is focused on that. I think we do have a strong motion on that with a few enterprises at this point, but it's something that I think as we grow and move up market will be a bigger part of our business.
Awesome. I think we're out of time. It's a great place to jump off. Graham, thanks so much for being here. Thank you, everyone.