Welcome to the Arctic.
Good afternoon. My name is Elizabeth Porter. I'm an analyst on the U.S. Software Equity Research team, and I'm really excited to have with us, to wrap up our TMT conference, ZoomInfo CEO Henry Schuck and interim CFO Graham O'Brien. We will have some audience Q&A at the end, and for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures, and with that, Henry, Graham, thank you so much for being with us.
Thanks for having us.
Great. So last week you guys reported Q4 earnings. You had a nice beat to Q4 revenue, upside to guidance. We do still have a little ways to go before that for the revenue guidance to kind of get back to where you would like the company to be. But Q4 was certainly a step in the right direction. And I'd love if you could highlight your view of the health of the company and the business in Q4 and the type of the macro environment that we're operating in today.
Sure. Why don't I start and then hand it to Graham. I think what we saw in Q4 was a continued stabilization and then improvement in our business, largely from foundational changes we made in the way that we go to market that began in Q2. And then secondly, from the innovation that we've been building with Copilot, which brings AI to go-to-market teams. And then maybe the third leg of that has been our continued performance in our OperationsOS and our SaaS segments of the business that grew 27% year over year, the fastest growing segment of our business.
But I think what you see now in our business is the things that we were focused on from an execution perspective that really began at the end of Q1 of 2024, started coming to fruition in Q4, and setting the foundation that we can start building on top of.
Yeah, you know, in Q2 of last year, we made a lot of operating changes with a long-term view in mind. I think we viewed Q3 as a quarter of stabilization, and then Q4 as potentially the first inflection point back along an accelerating trajectory. We're really excited about the up-market business trajectory. It's 70% of our revenue coming out of Q4 and our ability to continue the longer-term transition of our down-market business to be in a smaller and healthier version of down-market.
Those are some new metrics that you gave on Q4, kind of the splitting out of the enterprise and mid-market at 70%, SMB down-market about 30%. You guys have made a lot of changes. One, just better product-market fit up-market has allowed you to really double down on that opportunity. Also, you're looking to mitigate risk in the SMB down-market piece as well. Could you just walk us through how the company has really fundamentally changed over the last year or so, both from a go-to-market and a product standpoint to capitalize on those two segments?
Yeah, I think from a go-to-market perspective, one of the big changes that we did this year was we resegmented the way that we get net new logos. And so where historically we had one sort of pod of sales reps who were sent leads that came in from an inbound or SDR-led motion, we now segmented that set of new business account executives to enterprise, mid-market, and SMB representatives. And so what we're seeing from that, as soon as we made that change, what we saw was that the percentage of up-market business that we were closing on the new business side started significantly ticking up. And so when you think about what that does for the long term of the business, it's creating a better and better book of business for us to renew in future periods.
And so instead of SMB and down-market being the vast majority of the new business that we're bringing in, it's ticked down materially so that we're bringing in much more up-market business. Those up-market customers, they grow more, they retain at higher rates. We have incredibly strong products for them. And so over time, we're building a better and better customer base, a healthier customer base. Then in the down-market, the big change we made in April was we layered in what we called a risk score, where we looked at the companies coming in through the inbound funnel, and if they pass a certain threshold of risk, risk to pay, risk to pay us, we required them to pay us upfront.
What that did was, one, it created a headwind in our business, about a $2 million a month headwind in our business because we were disqualifying low-end opportunities that we didn't think would either pay or grow meaningfully with us. But what it also did was it made it so that we were bringing on a much healthier SMB customer base. While we're not counting on any improvements from that, we do believe or are optimistic that when we come up to renewing those cohorts of the business, that they are going to perform meaningfully better than our historical cohorts.
On the product side, one of the big changes has been Copilot. Copilot isn't just an add-on, but rather a full new platform that customers are getting access to. What are some of the highlights of what Copilot enables for customers that just wasn't fundamentally available on the traditional platform?
Yeah, so one just metric that's worth mentioning as it relates to Copilot usage is we never historically sold our product to account managers. That's a new persona that we thought we'd have an opportunity to sell into with Copilot. We now have thousands of account managers using Copilot. And one of the things that we see from those account managers is that their usage rate is at the same levels as our SDR users. Our SDR users are the users that we've targeted for the last two decades. And so to see account manager usage at those same levels in Copilot gives us a lot of conviction, one, around the product that we built, and second, around our ability to continue to drive persona expansion and seats within our customer base and within new customers.
So, a couple of the things that you're getting out of the box with Copilot that you wouldn't have had historically in legacy ZoomInfo SalesOS. I think the first thing is legacy ZoomInfo was very much a pull platform. You would go in, you would search for the companies that you were looking for, you would look up their intent, you would look up if they visited your websites, you would look up their news, and then you'd go on with your day. Anything you wanted to do, you'd have to come into the platform and pull that information out. And sometimes it lived in three or four or five different screens. Today, Copilot is very much a push platform. We connect with your CRM. We understand which accounts you're selling to. We understand your territory. We understand your total addressable market.
Copilot, as an AI agent, understands your business as well and knows who you sell to and knows what your value propositions are. It reads your website and case studies, so it knows how to talk in your company's language. And then it starts delivering for you the companies that are most likely to be in market for your products and services. It understands that by looking at the opportunities that you closed over the last six months and then looking at the signals that those companies were exhibiting three months before they became opportunities, then looking for those lookalikes and presenting those to you. And so now every morning, every account manager, every account executive, every SDR is getting a ranked list of the prospects that they should be engaging with based on a number of signals. For example, hey, they just hired a new CTO.
Hey, their VP of infrastructure visited your website and your pricing page. They just had an earnings call where they talked about needing your products and services. They just had to put a job posting on their website that said they're working on a new project or initiative that your product can help with. And so all of these thousands and thousands and thousands of signals that we're looking at from account to account, we're now pulling together, matching to your company, and then pushing in front of your account executives and account managers in real time. You didn't have that before. The second thing is, in order to be able to do that, the first thing we do is we build what we call internally a go-to-market data lake for our customers. We take their CRM data, their first-party data, their call data, their email data, their calendar data.
We marry that to ZoomInfo's data asset. We automatically cleanse, enrich, and append that data because the data inside of your CRM is neither accurate nor complete. And then we give you a go-to-market data lake that you can start asking questions on top of that feeds Copilot. And so what we're seeing is account managers come into the platform and ask questions before they go to a meeting. Hey, I'm going to a meeting with the CEO of this company. What do I need to know about the account? And now we have the context from your first-party data married to the context from your third-party data to answer those questions in a real-time dynamic way.
I think the thing that we're hearing from our customers, and it's certainly true across our own company, is that we're interacting far less with the CRM than we are with ZoomInfo Copilot today because it's all in one place. It's accurate. It has third-party context married to first-party context, and it's a much easier interface to get answers to questions about the accounts you're going to or that you're going to have meetings with. I would, historically, if I had a meeting with a number of customers, I would reach out to an account manager and I'd say, hey, I'm meeting with this company today. What do I need to know? And they'd probably clear the rest of the next two days to write me the world's greatest account brief that tells me what I need to know for that account.
Today, I just skip that altogether and I go straight to Copilot and I just say, I'm going to have a meeting with this client today. What do I need to know? And I get up-to-the-minute, very accurate information for that account. You can imagine the efficiency saving across thousands of meetings that take place every day.
Yeah. And so going beyond just SDRs, moving to these account executives, how big of an opportunity is that as you're addressing a larger persona beyond the traditional SDR base? And is there any sort of difference in the go-to-market strategy to address that new persona? And if so, how are you looking to invest behind that?
So we see the account executive account manager universe as three times as large as the SDR universe. And the traditional or the motion that we're using today to expand personas across those accounts is that we're running POCs and trials within our customers where we give them access to Copilot for a month or two months or three months. We collect ROI from those trials that's universally incredibly positive. And then we expand the POC and sell the migration.
Great. And clearly, we've seen a lot of success with Copilot. It's now up to $150 million ACV in Q4. That's up from just $18 million in Q2. So how much is this a shift from existing customer spend to ZoomInfo from the traditional platform versus new logos that are new to ZoomInfo? And then maybe for Graham, how should we think about just the timeline of shifting customers over? And from a financial perspective, how does this start to flow through the model?
Let me make one point, and then I'll answer that question. When I think about what ZoomInfo's durable competitive advantage is, it's a lot of, it's not one thing. It's a lot of different things. It's the breadth and depth of our data, the accuracy of our data, the constant updates to that data, the vast library of signals we bring to bear on companies and accounts, the identity graph that we've built that lets you identify companies and buying personas that visit your website, intent data that's unique and proprietary to us that lets you know when a company is in market for your product and services, our compliance and regulatory posture up-market. All of these come together to create that competitive advantage and that durable competitive advantage.
But one of the issues that the businesses had historically was to actually get the value out of all of those different pieces was very, very hard in the legacy platform. You had to go to a whole bunch of different pages. A little bit of it lived here. A little bit of it lived there. And what we're really excited about is Copilot does this incredible job of giving you one single pane that really highlights all of those things that are our competitive durable advantage. And it lets customers see that all in one place, pushed to them in real time. And so their experience with ZoomInfo is very different in Copilot than their experience in our legacy sales platform. The way customers get to Copilot is first, today, over 90% of our new business sales are on the Copilot SKU.
And so, new to the franchise is coming on Copilot. You can upsell, and you can off-cycle upsell into Copilot. And so, that's a customer who's already in the account base who doesn't have Copilot, doesn't have a renewal event, where we go in, generate demand, and then sell them Copilot, and then at renewal. And at renewal, it can be like a pure upsell. It could be I was on a call the other day with a customer that had 200 sales reps, went down to 100 sales reps, wanted to also cut their spend 50%. But with Copilot, we were able to keep the spend close to flat, even though it was 100 less seats. And then there's pure renewal upside, where we just sell and upsell at renewal time.
Today, when we migrate customers to the Copilot platform, we see a strong double-digit uplift in per seat pricing when we make that move, and so those are the three ways that customers come on to Copilot.
Yeah, and I just add a little bit to that. So the $150 million of Copilot ACV as of last week, think of that as a run rate on the Copilot SKU. The majority of that still has come from new customer acquisition. That's mostly a timing dynamic. We'd expect that to shift over time to be more derived from the existing base. Copilot is already contributing to retention improvement. We mentioned the double-digit uplift there. But when we built Copilot, and frankly, everything we're doing, even up-market and down-market, is being done with a focus on customer value and retention outcomes. So we're seeing early signs of better utilization, better frequency of usage, higher customer satisfaction with Copilot customers. Traditionally, those have led to better retention outcomes.
We're not taking credit for that in expectations at this point, but it was all built with the expectation of delivering customer value and prioritizing retention.
I want to get back to the point on, as customers upgrade, you have this on average double-digit increase in ACV. We are still sometimes working through the period of getting past those renewals with people who are lowering their head count. I think the concern going forward is, as sales become more efficient, do you maybe need less heads? So I guess there's kind of two questions. First, one, are you seeing any sort of changes in seat demand as it relates to customers that may be buying Copilot versus not buying Copilot? Or anecdotally, what you may be hearing in the industry as it relates to lower seat count volumes from AI efficiency? And then second, in the event that we do have lower seats, but with higher Copilot spend, do we think of this as a net negative, neutral, net positive?
Yeah, look, I haven't seen anybody today in our customer base who's come and said, you know, I've just driven so much efficiency in my go-to-market motion that I just don't need these 20% of my sales reps anymore. I think that's a possibility in the future. I don't think we're seeing it today, and my sense is, where you see that, it's much more likely that I reinvest that to grow faster than I cut it to drive profitability. I think historically, you've seen increased productivity be reinvested back into growth than to just drop into the bottom line, and so I would expect that to happen more than heads getting cut. I think the opportunity with the monetization opportunity around Copilot, but today, I think one of the biggest opportunities is this persona expansion.
Where historically the seats that we could get our hands on were top-of-the-funnel prospecting seats, today, we're seeing account managers, customer success managers, sales leaders become Copilot users and Copilot customers. That's a much larger base of account seats to go after that we feel like would offset any sort of efficiency head loss.
I want to switch gears for a moment to go back to the data as a service, where you've seen a lot of good growth there. A lot of that is larger customers. There's demand for data, particularly as they may build their own AI solutions. Can you just unpack the increase in demand? Is that from existing customers engaging with ZoomInfo in new ways versus new customers? How do we think about the durability and growth that you're seeing in DaaS?
It's existing customers. It tends to be, or it is, basically all up-market. Not basically. It's all up-market, particularly like the high end of up-market. Those are customers who are engaging with us in a different way, where historically they are seat-based customers, and now they have a need for more centralized data. We're plugging into their Chief Data Officers, their Chief Information Officers, their heads of BI, their heads of data science, and they're leveraging our data to master data in their CRM systems, their marketing automation systems, their Snowflake and Databricks platforms. There are two things that are driving the improvement there. One is we're executing better. Historically, we didn't have a great motion around this.
We've hired a number of data solutions consultants and built a team that is singularly focused on making sure that when we sell DaaS, DaaS gets plugged into a critical workflow at the company. Since we've done that, we've seen retention rates consistently tick up and tick up and tick up. And so we feel really good about how our execution is driving impact there, and then the second thing is that we're seeing companies come to us and say, hey, we just built an AI agent for support. It was super successful, but it just leveraged our first-party data. We put our knowledge base data in, our support tickets data in. That's all we needed, and it created a great AI agent for us to answer support tickets and close out customer issues, but now we want to do this on the go-to-market side.
On the go-to-market side, the data that we have to leverage is the data in our CRM system. That data is incomplete. It's inaccurate. It's not usable for the AI agent. When we plug that data into an AI agent, we get no good outcomes. Not to mention, the data that lives in my CRM system doesn't include any of that signal data that I need. So you can imagine a situation where I tell a seller, hey, here are the things you need to know about this account, and it's only based on my first-party data, but yesterday, they announced a 400-person layoff, or they had a great quarter, or they have a new CTO, or they visited my pricing page, or they researched my competitor on competitor websites. If I don't have any of that context, it's not a very good AI agent for go-to-market.
And so we see customers coming to us and saying, hey, we want to build a great AI agent for our go-to-market teams. We just don't have the data to be able to do that. We want you to be the data layer that we can build on top of.
Great. And so yes, you have this really strong foundational layer of data, but you've also been expanding into new use cases and functionality, particularly as it relates to the engagement layer in areas like we would see with Gong or Salesforce, I mean, SalesLoft. So how do you see the overall market consolidation? And is AI a forcing function to drive a faster pace of consolidation? And how do you see the market playing out? Is this a winner take most?
Yeah, look, first, we are much more focused today on Copilot and our Operations OS business than we are trying to be everything to everybody across the go-to-market tech stack. I think one of the things that we learned is that people want best-in-class point solutions. And so they're not going to negotiate on getting a best-in-class solution. They'd rather these things be just well-integrated. And so we've spent a lot of time over the last year better integrating to our ecosystem, better integrating into SalesLoft. We had an announcement last month that we're now natively integrated back and forth, natively integrating with Gong and integrating deeper with Outreach and Clary and the rest of that ecosystem. We think it's really important to be well-integrated there. And then secondly, we think all of those platforms benefit from having our data integrated.
If we have a customer who uses Gong for conversational intelligence and uses us for Copilot, great. We want those systems to talk to each other. We think we have a really unique offering as it relates to AI for go-to-market, and we're happy to be an ecosystem partner and a good partner across the ecosystem.
Another question we've been getting a lot more recently is around OpenAI and their demo of a sales agent. So we'd love to just get your view on the demo of the OpenAI agent and how ZoomInfo is competitively differentiated. How should we think about those up-market clients, particularly some of the more sophisticated ones, leveraging ZoomInfo versus OpenAI, particularly that high end?
I think first, the publicly available data universe is a tiny percentage of the data that we offer our clients. And so if you wanted to try to build a sales enrichment application on top of just publicly available data, you would have 5% of the data asset that ZoomInfo has. And of course, part of our motion is also indexing the public web and making that available to our clients in our product, but it's, again, a tiny percentage of the overall data asset that we provide our clients. And so I think it has meaningful limits when you're just using publicly available web data. And then I think secondly, and maybe most importantly, one of the most important things that our customers value from us, particularly in the up-market, is our privacy and regulatory and security posture as it relates to collecting data, particularly people data.
And they don't want to run afoul of the GDPR or the PIPEDA in Canada or 16 different states in the United States have data privacy laws. And we spend a lot of time and energy making sure that the way that we collect data, the way that we notify professionals that we've collected their data, that that is all well above board from a data collection perspective. And large enterprises rely on us to give them the data that they need in a privacy and compliance-first way that I don't think you'd feel very safe getting from DeepSeek or just an LLM that's gathering data from the public web.
Great, and I want to switch to a little bit over to the financial side. In Q4, your NRR improved two points sequentially to 87. And it was the first quarter that we saw the NRR improvement for a couple of quarters now. So what were the key drivers behind the improvement? What's the outlook for how this trend is embedded in kind of the future quarters? And where do we ultimately get back to?
Yeah, that's a great question. Well, I'd say the key drivers were less downsell and also having upsell opportunity via Copilot operations. When I think about the opportunity going forward, I think about it in an up-market and down-market split. I think longer term, we're focused on getting our up-market business at or above 100% retention and stabilizing down-market in out years. I want to note that up-market has higher margins too. So the faster we can get retention net positive up there and move the mix of the business towards more up-market, we should see margin improvement as well.
Okay. And the other side to the retention has been kind of the new business side. And I think investors have been a little bit overly focused on the retention side of the business. So can you just speak to a little bit more of what you're seeing on the new business trends?
Yeah, we reoriented our new business team in 2024 to be up-market and segment-focused. In Q4, that up-market new business ACV number was up in the high 40s% year-over-year growth. So we're getting traction from that investment up-market. And then down-market, we started, as Henry talked about earlier, we started disqualifying higher-risk new business that we would have previously sold prior to Q2 of 2024. That's a headwind to new business until we lap that in Q2 of this year and Q3 of this year. But we're already starting to see some of the benefit in the form of higher quality revenue, better cash collections, lower write-offs. So I feel really confident in our ability to continue to grow new business and shift our mix of new business up-market in 2025 and beyond.
I'm going to ask another question and then open up to the audience if there's any. More recently, we've been starting to really focus investors on free cash flow per share, and so.
Just across your coverage universe?
No, no, no. Just on you guys.
Oh, I was like, oh, that's interesting.
No, no, no, no.
Because we're the only ones talking about that in your coverage.
No, no, no, no. But I think you guys do have some great cash flow generation and pointing to people and setting the floor for the dollar free cash flow per share as an example of just how you guys are highlighting the metric more. So I wanted to ask just about the free cash flow generation business. And are the free cash flow margins more dependent on the expansion and operating, or is this really just more of the opportunity to drive higher revenue starting to flow through that free cash flow margin?
Yeah, there's a few levers to do that. And I think we're focused on all of them. I think that we believe we're resourced for growth. I think we're really focused on getting back to a world where we're posting durable sequential growth and growing top line. We also feel like we have an opportunity to expand margins while we do that as we exit this year and certainly into next year. We guided to 36% from an operating margin perspective. I would kind of characterize that as a stable position. There's some more seasonality this year. We guided to 33% in Q1. I'd expect maybe a point of sequential improvement in Q2 and then certainly in the higher 30s and improving exiting the year. And then buying back shares. We were really aggressive in 2024. We bought back more than we generated from a cash perspective.
When we talked about initial guidance this year, we did not put a buyback assumption into that weighted average shares outstanding share count. That was purely a modeling consideration. We expect to continue to be opportunistic buying back shares.
Great. Are there any questions in the audience? So there has certainly been some noise in the financial statements just related to the accounting adjustment that you had in terms of the write-down. And I wanted to ask if there's any sort of metrics or given just the noise that you would highlight in financials that might be missed just given some of the more recent quarters.
I think that our cash flow margins held in pretty well. If you think about the Q2 change in estimates, accounting charge, those were largely non-cash. But as related to those, we started making those operational changes with the new business risk model, with accelerating our shift up-market, both by accelerating that market growth and forcing our down-market business to be a smaller and healthier version of itself. And that showed up sooner than we expected, I'd say, in Q4 from a cash collection perspective and quality of revenue, lower write-offs.
Great. Awesome. With one minute left, what are some of the three things that we should be looking forward to in 2025?
I think the continued next shift up-market. Everything we're doing internally for product and go-to-Market perspective is focused on customer value and retention outcomes, and I'd say that we have the opportunity to continue to grow up-market and take that 70% of the business and put it on the path to 75% over the next couple of years and even approaching 80% four or five years out. I think we'll have a big product launch in May that will really drive up-market momentum, particularly in our OperationsOS product that we're all really excited on and focused on, so that would be another place to pay attention.
Awesome. Great. Well, thank you so much for joining us today.