Everyone, my name is Brian Peterson. I'm on the application software team here at Raymond James. Very happy to have ZoomInfo back with us this year. Jerry, Graham, good to see you guys. So this is a fireside chat, pretty open format. So if you guys have questions, just raise your hand. Happy to make this pretty interactive. But Graham, just maybe kick things off. I know you guys had a really strong fourth quarter report. Maybe highlight a couple of things that you would like to show from the fourth quarter.
Yeah, thanks for having us. We're pretty excited about the Q4 results. We had positive leading indicators of growth across a lot of our metrics. We view this as kind of a re-acceleration period. In Q2, we started introducing a lot of new practices with the long-term growth of the business in mind. Q3 was kind of a quarter of stabilization, and I think Q4 was more of an inflection. So we saw net revenue retention improve sequentially for the first time since Q1 of 2022. So we went from three quarters stable at 85%. We improved two points sequentially to 87%. Great sign. We still have a lot of work there to get that back up into the 90s. But that was a really good sign. We had sequential revenue growth of 1.8% in Q4, added significantly to our 100K logo cohort, grew our million dollar cohort.
So really focused on upmarket performance. And I think we had some good outcomes there in Q4.
So we'll hit on upmarket, but I want to kind of start off higher level on AI. And in an AI world, talk about the importance of ZoomInfo and what investments you were making there to kind of enable GenAI use cases for your customers.
Yeah, it starts with ZoomInfo Copilot. And we're really focused on not only selling that to new customers, but our migration pattern. We had $150 million on ZoomInfo Copilot product as of the earnings date last week. We released it in May of last year, so that's only nine months out in the market. And we're really excited about the opportunity there going forward. The other kind of AI lens to view this through is our Operations product. So ZoomInfo Operations grew 27% year over year in Q4. That was a five-point acceleration from the 22% we had in Q3. And Operations is our data access service we enrich, route, cleanse. We kind of show up as a data partner. It's very much an upmarket product. And AI has really surfaced a need for best-in-class third-party data. And we're addressing that need with our Operations offering.
And how do you think about those products in terms of kind of a higher level, like net new and the investments and the interest in the pipeline versus the existing base? And what is their interest in those products specifically?
Yeah, I think we've got great opportunity in both. Right now, the majority of the ZoomInfo's ACV is coming from new-to-the-franchise customers. You'd expect that dynamic to shift as we kind of progress through a full year of migration opportunity and renewal cycle, so it's kind of more a product of time, but we're getting great customer acquisition traction there, and then with our operations business, there's still a lot of opportunity out there to introduce operations to either full-on net new logos or existing ZoomInfo logos that aren't currently using it, but I'd say that in general, we're really focused on the customer retention opportunities here across both products, but we'll continue to focus on getting customer acquisition in the door.
Maybe talk about the value that a customer would get on Copilot versus non-Copilot. Then if we were to think about kind of the uplift in terms of the customer economics, what does that look like?
Sure. First and foremost, as these reps, Copilot users are more productive than the alternative. So think about 10 hours per week saved using Copilot. Now, that means you could either work 10 hours fewer or just be more productive at the prior work rate. So we've got more productive reps. We've got generation or identification of more pipeline, better closure rates. So all those metrics lead to better utilization for us from a product perspective. Better utilization, higher frequency of usage, basically just happier customers traditionally have led to better retention outcomes. We haven't seen that yet because we haven't gotten to a meaningful cohort on Copilot that is at a renewal point yet. We'll start to see that experience in the back half of next year. We're not taking credit for that yet in any kind of our financial expectations, but we're excited about the opportunity there.
And then from a kind of economics of pricing, within our existing customer base, when they migrate onto Copilot, what we've seen there is a double-digit uplift per seat. And some of that's off-cycle demand where they say, "We need Copilot. We want it now." We were able to get a good amount of pricing there. Other times, it's at a renewal situation.
And so I want to kind of highlight, maybe separate a little bit like upmarket versus downmarket. But as we think about kind of that upmarket kind of net new opportunity or your differentiation, what are you seeing there? And I know in terms of the value that you're providing to customers, what are people using? What's the competitive market like? What do you see in upmarket?
Yeah, so last quarter, this is the first time we've really kind of simplified our disclosure around this and just how we view the business of upmarket versus downmarket. So upmarket is what has traditionally been our mid-market and enterprise segments. We're just coupling that in as our upmarket business at 70% of our revenue base exiting 2024. And then downmarket is our SMB customer base, customers with 99 or fewer employees. And that's 30% of our business exiting 2024. We shifted upmarket in 2024. We went from around 65% upmarket to 70%. And that's really where we view our growth opportunity is in that customer population. Upmarket grew 2% in 2024. Downmarket was down 9%. We have more resource to go drive growth upmarket. That's where we kind of view that durable revenue growth opportunity as being. We talked about mid-single-digit growth in the upmarket business in 2025.
That's what's in the guidance. Then downmarket, we're expecting potentially lower growth. We did see signs of stabilization there in the back half of 2024. Our approach to this is we're not going to rely on downmarket revenue growth in our financial expectations. We want to give ourselves the flexibility to take resources out of downmarket and give ourselves the opportunity to go capture upside relative to that upmarket growth expectation.
And how do you think of, if you're looking at upmarket 70% of the business, how do you think about that balance of net new versus what you're seeing with existing customers on the NRR side?
Yeah, if we think about it in a retention lens, as we shift more and more of the business to be in upmarket, our goal is to get upmarket retention to 100% plus. And then you could think about the new business contribution in 12%-15% of annualized revenue range. I think that's kind of the healthiest view of the business. Now, that would translate to mid-single-digit, maybe even a little bit higher growth. And like I said, we're kind of focused on getting to some of the upside in that upmarket business. But first step is improve retention.
How do you think about the same sort of factor on the downmarket business? How would that look?
Yeah, I think our assumption in the guide is that downmarket gets worse or at least declines at a greater rate than the 9% that we saw last year. So that's largely an assumption that retention gets a little bit worse and that we basically take that opportunity from a new customer acquisition perspective to bring customers in an efficient manner. So what that means is the higher end of downmarket, there's good LTV from those customers. We want a sales rep in those sales cycles. And we think we have great long-term return opportunities with those customers.
But as we're kind of testing and further rolling out our digital PLG motion, we're really focused on efficiency from a customer acquisition perspective at the lower end of downmarket and continuing to reinforce our Contributory Data Network, bringing in customers at the right price point so that we have better retention outcomes a year or two out.
And what are you seeing from a competitive perspective? I know pricing is always a topic with investors, but how would you see the competitive dynamics both upmarket? And then does that look a little bit different downmarket?
Yeah, I'd say it hasn't changed much in the past year. At the lower end of downmarket, there generally are several competitors that we see there that are lower quality, lower price. The customers down there are usually more price sensitive. So again, we're focused on competing down there, getting those customers. But it's more from an efficiency and data perspective and less from a, this is going to be a driver of revenue growth for us. And then as we start to move to the higher end of downmarket or the lower end of upmarket, the customer generally is much more focused on quality of data and product. And we see very little competition there. In the upmarket, we'll see some ABM marketing competition. We'll see some company data competition at the highest end of upmarket.
But for us, competition usually is not isolated, but centered down at the lower end of downmarket.
What about winbacks? I know it's come up a little bit over the course of 2024. Anything upmarket that you can highlight in terms of people that may have left and have come back to you guys?
Yeah, Winbacks continue at a strong elevated level. So the way we view this is if customers do leave for a competitor, if we track them coming back to us, it's a good kind of indicator that we're still where we want to be in the competitive landscape. In the second half of 2023, we saw Winbacks step up significantly to kind of record levels. You could think about that basically as persisting at those levels, both from a logo and dollar perspective through 2024. So it hasn't dropped off. It's just continuing at these elevated levels.
What would you call out in terms of trends by vertical? I know software is exposure, business services, but anything that you've seen in terms of those markets specifically? And how are you ramping in maybe some other end markets?
Yeah, good question. I'll start with software. Software was 39% of our business in 2022, 2021, and growing. It was effectively the most impaired vertical for us for about two years. A lot of our customers went through kind of a right-sizing or a change in profitability. What we were able to do is generally do our best to keep those customers as customers. But we did go through a couple of years of downsell pressure. So software went from, again, 39% of the business to about 31% exiting 2024. We did see sequential improvement in software retention over the last three quarters. So that was a great sign that we've potentially kind of reached the uptick in the curve again. And we're excited about the opportunities for growth in that vertical.
While that was happening over those two or three years, we found greater success selling into kind of some of the more traditional verticals: manufacturing, finance, transportation, and logistics, business services, and those have been growth verticals for us, so we kind of view the next few years as potentially gone through the worst with the software vertical. We're at a place now where we feel like we're resourced to grow with that vertical again, and we continue to have growth opportunities in the non-software verticals as well.
Why do you think that kind of the non-software biz verticals are still behind the curve in thinking about that modern data-driven go-to-market? And will AI or could it change that?
Yeah, I think the way it is, it is a little bit further behind just on the sophistication scale from go-to-market technology. So I view that as a pretty big opportunity that there's a lot of more traditional verticals out there where we're just starting to get penetrated. One of the things we did internally was if you think about our new business account executive or our new business teams, like two or three years ago, not only were they not verticalized, they weren't segmented. So last year, we took the step of segmenting our new business team so that we had teams that were focused on the higher end of upmarket or the higher end of downmarket and then changed the rules of engagement, compensation structure so that we were incentivizing, taking the time to land a larger customer at the right price with the right expansion opportunity.
We're not totally verticalized either, but we did start to take teams or folks that had greater success selling into specific verticals, speaking their language, and start to really point them further into those verticals. I still think there's a lot of white space there for us to go get.
Are you seeing the benefit of those changes now? I'd love to understand maybe what you think that could do to overall sales rep productivity and the go-to-market. When should we see the impact of that?
I think we're just starting to see it. I think we saw the early signs of it in Q4. So if you think about 2023 and certainly the first half of 2024, we were doing a lot of reallocation or optimizing of this go-to-market motion. We were also building products that we really believe in during that time, and in Q4, I think the way I view this is sales efficiency, so is our new business efficiency getting worse or better? Is our renewal and upsell efficiency getting worse or better? And I think we started to see the signs that new business efficiency was going to take a step up in Q4, and that's what you would expect from after, call it, six quarters of doing the work behind the scenes, making the investments to set us up for better long-term value.
Is that what drove, in your opinion, kind of that step up in large customers that we saw in the fourth quarter? Maybe you can speak to what you saw that kind of drove the strength of market in the fourth quarter.
Yeah, we added 58 logos to our 100K cohort in Q4. We were back up to growth year over year for the first time in some time. Q4 is a significantly more weighted to upmarket business. So it is, at least in 2024, a better setup there. Q1 in 2025 will not be as opportune a setup from an upmarket perspective. It's more downmarket. But I look at that increase from a few different views. One is the actual new customer acquisition. So our upmarket new business ACV grew in the high 40s year over year. That's an output of dedicating those reps to specific segments, being okay with a little bit of a longer sales cycle for a better outcome. And then it really was having product like Copilot, like Operations to upsell and expand customers who were spending less than 100K to spending more than 100K.
Then getting through kind of the tail end of the software pressure, which meant that we had fewer logos that were spending above 100K that we needed to right-size at a lower spend level.
And if you think about software specifically in there, do you feel like we're through the worst of kind of that downsell headcount reduction? Or is that something that kind of persists? Or what do you think in terms of kind of just isolating the software dynamic?
Yeah, I feel like we're through the worst of it. I don't know if we're at a place of reacceleration of growth. But I think we've gotten to a point where we shouldn't have much significant downsell pressure. I think we've got the products and the relationships to go and capture growth opportunity. But I wouldn't say that we're 100% sure that we're back up on a reacceleration slope.
One more from me. I'll open it up to the audience. But just thinking about the balance of growth versus profitability, where do we stand today? And how do you think that should look going forward?
Sure. Good question. So we guided to negative 1.6% revenue growth and 36% margins. There's some seasonality in the margins. So we guided to 33% for Q1. So we'd expect high 30s in the back half of the year. I think we've got an opportunity to improve margins while also optimizing our ability to get back to meaningful, durable growth. The way I view this is the first step here is to get back to being a Rule of 40 company. And then if you think about kind of the growth algorithm or the opportunity two to four years out, as we continue to focus upmarket and we take the upmarket business for being 70% of our revenue to 75% over the next couple of years to potentially 80% over four to five years, now you've got 80% upmarket, potentially growing double digits at that point.
And you've got downmarket 20%, potentially maybe zero or stable around there. You've got a high single-digit grower at that point that is also more profitable because our upmarket business is where we have better profitability opportunities. So getting into the high 30s, low 40s margins in that scenario is, I think, the right way to think about the trajectory.
Anything from the audience? All right, I'll keep you in some hard-hitting ones. But as we think about the growth profile, how do you think about the recovery in 2025? And is there a good durable growth rate you think to pin on? Or are we too early to call that right now?
Yeah, we've said it a few times before. I think we are resourced for growth. I think we've spent the past two years building the products that are going to drive that growth, focusing on customer outcomes, and we were down 2% last year. We've guided to negative 1.6%. We grew sequentially in Q4, so I think we need to continue to give ourselves the right baseline to grow off of, but we continue to be resourced for growth. I think we've got to get to a spot where we are growing sequentially for several quarters in a row, and I think that comes with stable, if not improving, margins.
And you mentioned the outcomes orientation for customers. Maybe talk about the ROI pitch and what you're able to deliver for some of your upmarket customers.
Sure. Yeah, we're really focused on being able to articulate ROI. I think we've always been very confident in the ROI and the value that our solutions provide for our customers. But it's not always super explicit. So being able to show with something, for example, like Copilot, that using Copilot relative to our old legacy offering or even a competitor, you surfaced X more pipeline and you closed at Y better rate, which led to Z better revenue, and you pay us A, so you have an ROI of whatever X. Being able to be really crisp about that, and we're nine months into Copilot, so we're just getting to the point where we're almost able to do that more out of the box, whether it's ahead of a sale during a trial motion or six months into a contract.
And maybe just I know we're working on Copilot, but what about GenAI use cases internally for you? Are there things that you can do from the margin side? And have you seen any productivity benefits from just employing GenAI internally?
Yeah, we're hyper-focused on that. So we're going to be ahead of the curve on leveraging GenAI internally. One thing is we use Copilot internally for a lot of our resources within sales, but even across other teams. But I look at this internally, if we just kind of ignore the go-to-market application, we've got great use cases in R&D from developer productivity. We're testing and applying some of that now. And there's pretty cool early returns on that. There's a lot in finance too, honestly. You think about accounts receivable and collections efficiency, how to prioritize that, using AI to effectively automate, whether it's processes or actually prioritize or surface what is the next best receivable to go afterwards. And we're well into that study as well.
So the cash flow generation is really strong. Maybe help us understand how are you thinking about capital allocation priorities over the next year or two.
Yeah, we bought back more than we generated last year. So we continue to be very aggressive on the buyback front. We ended the year with $150 million of cash on the balance sheet. I view that as kind of a target ending cash balance every quarter, $100-$150 million. So with the guide of $430 million of unlevered free cash flow, we expect cash interest in the $45 million-ish range. And then we've got a few financing commitments. But that leaves $300-$350 million of cash available for allocation. And we'll continue to revisit the best use of that cash. But I expect it to continue to be buying back shares.
And we'll wrap out. I'm sorry, go ahead.
I'm new to the company, so excuse my question here. But why would I use your Copilot versus Microsoft? Are you cheaper? Are you better integrated? Why use you or why use Microsoft? Everyone's coming up with Copilot. Companies aren't coming up with everyone. So they have to pick one. So why you?
Yeah, that's a great question. Yeah, there's certainly a lot of agents, Copilots, assistants, different things out in the market. There's a few reasons to choose us. One is we have the data layer. And I think what AI use cases have really surfaced and is helping a lot with our Copilot success and our Operations success is your automation or your ability of agents to automate tasks really depends on the data that you're feeding. So we have the best in class third-party proprietary data. So that's reason number one. Outside of that, it kind of depends on what your use case is. A lot of the agents or AI use cases right now are support or inbound, or we talked about developer productivity. But what we've really built is a sophisticated, intelligent outbound motion. And that's a much more complex problem to solve.
So think about if you're a support rep or you have support inbounds coming in, you already know who that's coming from. It's an existing customer. You have all the first-party data you need to know about them. And that agent can process and address in a pretty efficient manner. Same thing with inbound. So if someone comes in, they're not a customer, but they fill out a form and they want to talk to a rep or they want to buy something immediately, again, you're getting most of the information there. And that's a pretty good use case for an agent. When you're doing outbound or even when you're doing account management from existing customers and you need to bring in signals and information from outside of your first-party data sources, that's what we've built Copilot to do.
Maybe just take a step back. The sources of your data advantage, and this maybe isn't always clear to everyone, but you guys have better data. How do you get that? What is the value proposition? How do you source it?
Yeah, it's a variety of ways. One of them is our contributory data network. But what we've really built is that there's a lot of sources of data out there. We do a really good job of connecting those originating certain sets of data. And then there's a lot of, think about it as data science or ranking or prioritization work that goes into cleansing and effectively doing QA on that data before it gets into the customer.
Maybe just to wrap up, thinking about 2025 strategic priorities, what should we be paying attention to from your perspective?
Yeah, we're focused on the customer. And I think driving retention improvement, everything we do needs to be focused on the customer continuing to get the value from the product and making sure that we are articulating that ROI to the customer.
Great. Graham, thanks for the time.
Appreciate it, everyone.