Okay, good afternoon, everyone. I'm Mark Murphy, Head of Software Research for J.P.Morgan. Great pleasure to be here today with Henry Schuck next to me, who is CEO and founder of ZoomInfo, as well as Graham O'Brien on the far end, who is interim CFO. First of all, I just want to say thank you for taking the time to come across town and be with us here today and to welcome you.
Of course. Thanks for having us, Mark.
Maybe you could begin with just a very brief intro of yourselves and ZoomInfo for the benefit of anyone out there who's not familiar.
Sure. My name is Henry Schuck. I'm the founder and CEO of ZoomInfo. ZoomInfo is a software and data platform that helps sales and marketers identify and then engage with their next best customers. We start with a data asset of 100 million companies, 500 million business professionals, and a billion signals that we leverage AI on top of to identify when companies are in market for our customers' products and services, and then make it really easy for them to connect and engage with them. Our customers are sales, marketing, revenue operations professionals.
Hey, my name is Graham O'Brien, interim CFO.
Excellent. Let's start off by just talking about what just happened, which was a pretty healthy Q1. You had $10 million revenue upside. Something has felt a little better a couple of quarters in a row. You had improved retention as well, important metric. It was a little more noticeable from a revenue standpoint than from a billing standpoint. Could you walk us through maybe what you felt you were seeing during Q1? As part of that, what parts of the business are stabilizing and maybe surprising you to the upside?
Yeah, I can take that. I think the Q1 result we thought was really strong, in period. We really view the business via an up- market versus down- market split. Our up- market business, which is now 71% of our total revenue, this is the revenue that we get from companies with 100 or greater employees. That business is accelerating. It was up to 3% growth year- over- year compared to 2% year- over- year growth in Q4. We see a path towards acceleration there. Our guidance assumes that we get to mid-single- digit growth in that up- market business in 2025. Down- market, where we are effectively qualifying business at a higher rate than we did in the past, that business was down 10% in Q1. That was also in line with our expectations, a slightly faster decline than we saw in Q4.
When we think about the billings and the bookings performance in Q1, this is what we expected. Q1 is a very kind of down- market weighted quarter for us. A lot of our up- market opportunity comes at the end of Q2 and Q4. As we effectively disqualified more high risk new business in Q1 of this year, think about like $2 million a month that we would have sold in Q1 last year that we are effectively turning away now, we expected some step down in billings growth in this more down- market quarter. We would expect that to recover in bigger up- market quarters starting in Q2.
I just think thematically what we set out to do, which you touched on, Mark, is we never wanted to be in a position where we set expectations at a level that we're not going to be really confident we're going to be able to meet and exceed. We don't want to surprise our investors. Graham's done a really great job of managing expectations, setting guidance at a level that we're really comfortable we're going to be able to meet and exceed. I think we want our shareholders to never be surprised by an outcome in a financial period.
Yeah, he has done a great job of that. You changed the ticker symbol to GTM. As we were just discussing off stage, I think I still need to remember that and adapt to it. It seemed like it was signifying something. You mentioned a commitment to build the core software platform for go-to-market. You talked about aspirations of trying to gain more traction beyond just these SDRs or sales development reps and to be more ingrained with account managers, account executives, or more kind of like the front line sellers. I think externally, when something like this happens, it's always difficult for us to kind of parse through it. What is a rebranding? What is a repackaging versus what is going on? What might be something deeper? Could you walk us through the significance of the GTM and the product suite that came with it?
Sure. Just so everyone knows, GTM stands for go-to-market. We went public in 2020 as really the best B2B company in contact data that existed in the world. Over the last two years, we've been ultra focused from an innovation and engineering perspective on building more solutions that drive workflow and alignment throughout all of the functions of go-to-market, sales, marketing, account management, customer success. Last year, we released our Copilot product, which really expanded the aperture of seats that we sell into. Instead of selling in primarily to top of the funnel sales development reps, we started expanding beyond them into account managers, customer success managers, more account executives, particularly full cycle account executives.
We released a product this week called GTM Studio that is designed to bring revenue leadership, RevOps, Sales Ops together in one platform that brings first party data together, marries that to third party data, and then lets sales leadership then orchestrate and automate their front line execution within Copilot. We have re-architected the platform and the business to be focused on much more than just the place you go to find somebody's mobile phone number or email address, and much more around building workflows out for the entire go-to-market organization. We want the opportunity to have broader conversations with the go-to-market teams to bring those solutions to them, which we think are today far ahead of what the competition is providing and are solving really painful parts of the go-to-market process.
Okay. If we look back, Henry, on what's been happening, we call it the software recession. It is something that started in the second half of 2022. Every quarter, we compile the sequential leading indicators of growth across our coverage, things like ARR and cRPO and all that. It actually still continues to mildly degrade year- over- year. We also track the headcount growth of our software companies, and it remains very sluggish. Where do you think we are in the kind of bottoming out process for ZoomInfo's own growth rate? It does feel like we may be a little trophy there and starting to see some improvement. How are you reading the tea leaves on the pace at which the whole world is going to invest in RevTech this year?
I would have thought of the bottom for us around Q2 of last year, Q2 and Q3, where our net retention bottomed at 85% and then has improved to 87%, improved again, still rounded to 87%, but improved again in the quarter. I think that that is probably the most obvious indicator of coming out of the trough. We expect to continue to improve net retention throughout the year in our business. We're going to do that by moving the business up market. Today, about 71% of our business now is up- market. The up- market business retains at a higher rate, grows at a higher rate, has a much higher lifetime value, and is meaningfully more profitable in our business. We're going to continue to push the business up market. We have reallocated resources throughout our go-to-market organization to do that.
It's also where we have the best product market fit from our customers. I think I believe we're largely through the trough for ZoomInfo. The other piece is the Copilot product serves much more than just top of the funnel SDRs. It's expanded us to account executives and account managers, like I had mentioned. Actually, what we're seeing is that account managers and account executives, customer success managers who were not our customers before, came into the Copilot product. Now they have usage levels that are the same as our top of the funnel SDRs who we've spent 20 years building product and data for. We feel really good about our opportunity to expand seat licenses beyond our core use cases and beyond who currently has access to ZoomInfo.
Even as companies might pull back on account executives and account managers, we continue to, or SDRs, we continue to have expansion opportunity within those accounts. It is also worth mentioning a large portion of our business is our data services, data as a service business and growing. It is the fastest growing segment of our business. That business is not seat driven. They make a consumption commitment at the beginning of the year, and then they basically draw down on that consumption throughout the year. It is the fastest growing part of our business. It is all up- market. It is high net retention. And it is an area of the business that we continue to invest in and believe will continue to be a meaningful driver of growth for us in the future. You want to add anything, Graham?
No, just a reiteration that I think that the software recession that you mentioned, we did experience downsell there for a year or two in that software vertical. I think with Henry's point about essentially diversified selling and pricing and packaging now, that we are hopefully less exposed to just seat tailwinds and headwinds in the future.
Understood. Okay. So again, I think we heard what you said the other day about the success in Q2. We heard how you kind of characterized the macro in terms of the assumptions that you had embedded into the guidance. Is there anything you've seen, I think especially since April 2nd, when the headlines around the trade war became so incredibly volatile and they're changing so quickly? I think the possibility we consider is a just more volatile environment. Could it make some customers or prospects kind of hunker down rather than invest into go-to-market activities? I don't know what the answer is, yes or no on that. If the answer is no, where would you be monitoring for the downtick?
We didn't see any meaningful change in customer behavior. I will tell you, obviously, uncertainty is the worst emotion to sell into, particularly prolonged uncertainty. We obviously want an environment where there's macroeconomic certainty one way or the other, by the way. It doesn't need to be positive. It could be negative if I know it's just like.
We need to know what it is.
We just need to know what it is so we can make decisions. Where you would see it and where we're monitoring it is when an opportunity gets created, what is the conversion rate from opportunity to closed won business? Because I think that's where you would see things actually start stalling out, where people are actually making a decision to spend or not. We are keeping our eye on the conversion rates from opportunity to closed won business. You could go a step up from there too and just take a look at what is a demo, what are your demo to opportunity rates too? Like, hey, you had a really great demonstration of the product with the customer, but that's not converting into an opportunity at the same rate as it has historically because they're just not in a position to commit.
Most of the time, you're going to see changes in the opportunity to closed- won conversion rates.
Okay. So not really seeing much change, but those are the two main aspects you'd be monitoring for in the data?
Yeah.
Okay. Again, on the topic of headcount and your exposure that you have to the software vertical directly, I think what has been so unusual about it, it's not that normal to see a lot of layoffs in software. There was a crescendoing of that. Again, when we got into that software recession, the optimization cycle, late 2022, was continuing into 2023, there was a lot of this happening. We think the layoffs probably peaked about two years ago, probably about this time in 2023, or maybe I don't know if I should say one to two years ago. I think what we're struggling with is now you see companies that are very healthy. They're growing double digits, and they're coming in, and they're doing layoffs. Intuit did it, CrowdStrike, Workday, Meta, Microsoft announced it yesterday that they're doing a 3% layoff.
We can't tell when the headcount drops if the go-to-market piece of that headcount is shrinking. How do you explain kind of what's lingering in the, why is it lingering, and why do we have healthy company layoffs right now?
I think that there are probably a number of companies out there who meaningfully overhired in the ZIRP period and haven't fully cleaned out a lot of that. I'm seeing less and less of this happen inside of go-to-market, and I've seen more of the layoffs affect outside of go-to-market. Certainly, there are efficiencies that companies are gaining using AI and content marketing and the marketing department in general and in engineering. That gives you an opportunity to reduce heads and be getting more out of the people that you have by leveraging AI.
I think when it comes to ZoomInfo, I think our big opportunity today continues to be expanding outside of what our core seat use cases are, expanding more into our data as a service business, which is not seat- dependent, and then going after an account manager and account executive base, which is 3x the size of the top- of- the- funnel SDR base that we would be selling into. There continues to be a big opportunity on both sides of that. I think within all of those companies that you mentioned and what we see across our customer base is that there is an appetite to figure out how to bring AI into go-to-market. They brought it into customer service and customer support, largely because all you need in customer support and customer service is a first party data asset. You need your knowledge base.
You need the past tickets that you've opened and closed, some communications with customers, and then boom, you can build a really great AI bot that answers customers' questions largely better than a human can. When you go into go-to-market land and you say, "Okay, I want to do the same thing. I just want to use my first party data to build go-to-market AI agents." In 18 years of doing this, I've yet to meet a customer who's told me, "Yeah, the data in my CRM system is really high quality. It's got my total addressable market, all the people I sell to. We can definitely leverage the quality of that data asset to do things." You can't. You are not seeing it anywhere, right?
You're not seeing a whole bunch of people deploying go-to-market AI agents within their organizations the same way you're seeing it in customer support or customer service. What we're really bullish about is when we brought together Go-to-Market Studio and released it, it brings first party data, your CRM data, which is necessary. It's just not sufficient. Together with third party and second party data, it perfects that data, gives you a whole view of your total addressable market. From there, you can start building your AI agents on top of that. You can start building AI agents that do research, that do prioritization of accounts, that do first outreach AI content. The necessary component of that is that I need perfected foundational data that doesn't live just inside of my first party systems.
We see a really big opportunity as companies start looking around the departments that are leveraging AI, and they get over to go-to-market and say, "Well, what's happening over here?" Executives have to go deliver on that. The first thing they're going to have to do is marry first party and third party data together. We're the de facto solution for that, particularly in the up market.
Do you think you could say as a consequence of that need to, if this is highlighting the need to have both first party and third party data, is the software layoff situation manageable then? Is it within your tolerances right now? It feels like it is, but I just want to have clarity on it. If Meta comes out or Microsoft comes out and we see that they're cutting heads, do you think we can be sort of confident right now it's probably not hitting their ZoomInfo licenses and that you have these other, you have other ways to kind of expand within those accounts?
Yeah, we definitely have other ways to expand in those accounts. I would also just say our guidance philosophy took into consideration a broad range of potential outcomes. We continue to feel very good about where we've set expectations.
The software vertical, and I want to come back and go into the R&D investment and what you're doing on the Copilot side in a couple of minutes. When we look at, Henry, the exposure, the ARR coming from, or maybe Graham could take this, from software, it was 40% not too long ago from software, not from all of tech, just from the software vertical, right? It's down to 31% coming from the software industry. Let me ask you first off, where do you think that that's going to settle out?
I'd say I think we've reached the floor from a mix percentage at 31%. We've had four sequential quarters or four quarters in a row now of sequential retention improvement in the software vertical. As we've talked about earlier, this is where we saw kind of the greatest decline from one of our biggest growth drivers in 2020 and 2021 to kind of the greatest contribution to our downsell in 2022 and 2023. I think that 30%-31% mix is likely the floor and that it would probably settle out somewhere in the mid-30s.
I'm sorry, I didn't hear the last part of it. What did you say about?
As we get software back to being a growth contributor, we also have all these other verticals that are growing as well. I think that it's possible that software has a little bit of upside relative to those earlier on and that we get software settling somewhere in the mid-30s as a mix of the business.
Okay, that's good news. What about when you think about the other industries that are, I think of healthcare, we think of manufacturing, you mentioned a range of them on a typical earnings call where you've done business, where I would say they're catching up with the data intensiveness of the software industry longer term. Do you agree that that's something, are they going to catch all the way up there? Or do you think there's something structurally where they're going to be lower consumers of this kind of data and this kind of workflow?
Look, I think that certainly, obviously, if the software vertical is 30% of our business, 70% of our business is other non-software. The vast majority of our business is non-software. You are seeing companies like insurance companies like an Aflac or a Hartford. You are seeing retail companies like Walmart. You are seeing companies like Cintas who are leveraging data and technology to better equip their sales forces. These are companies that have really large sales forces and they, to date, have not been fully leaned in on leveraging technology and data to do that.
We think that will be a continuing opportunity for us where we're going to be introduced into these sort of new companies and these new industries where maybe today they're actually like a $50,000 a year customer of ours in some small segment, but there's an opportunity for them to be multi-million dollar customers of ours. You see that all across the Fortune 2000. I think that's where the big opportunity is for us going forward.
Okay. There's a lot of opportunity, but they might hang around 70% of the mix, it sounds like.
Yeah.
Okay.
It's going to be the software. I anticipate that the software vertical will start growing again for us too. It will grow in line with.
Yeah, I see. Okay. I want to talk about the R&D investment that you're making because I think it's a subtlety somewhere in here that it tends to get a little glossed over where your R&D budget is the biggest in the peer group, right? It's around the, of course, it's going to be around somewhere around $150 million-$160 million. We think this year it's a pretty big investment. Any insight into how you allocate that if we think across Sales OS, Marketing OS, what you're doing in Talent, what you're doing in Operations? I think the important part of it being, what can you do with this scale of R&D budget that your competitors cannot?
Yeah, I think I would think about this in two ways. The first one is there's obviously a data asset component here, right? We're spending a lot on making sure that the data asset is of the highest quality, that our customers have access to the right data on companies, the right data on the professionals who work at those companies, and then the right data on signals that are informing when you should be reaching out to those companies. We have obviously built a software layer on top of that, a software and workflow layer on top of that that allow them to take that data, take that signal, and then build it into their own workflow. Finally, over the last two years, we've built AI at the foundational level here.
First, at the data layer that allows us to cleanse and maintain and tag that data in a more robust, more accurate way. Then we've built AI throughout the application layer that allows our customers to prioritize their accounts, do pre-call research, interact with their data in a way that they've never been able to do before. I think when you look at the competitive set in our space, it's really hard to see anybody anywhere close to building the innovative solutions that we're building today. Most of the competitive set is going to miss the data foundation layer, which is necessary for anything you're trying to do with AI in the future. Even on the software layer, I don't think I've seen anybody in the competitive set do anything remarkable or interesting as it relates to leveraging AI inside of their go-to-market motions.
Copilot stands out amongst the competitive set in its ability to understand data from your CRM system, understand who you are as a customer, and then deliver to you a prioritized set of accounts that consider what your ideal customer looks like, what they were doing before they became a customer, and then delivers to you the next best customers to engage with, cleanses your CRM data in the process. Go-to-Market Studio, which we just launched, the ability to bring first and third party data together to build really unique audiences and then get frontline teams to execute and act on it. I feel like from an innovation perspective and from a product perspective, it's really hard to see another competitor that's anywhere close to us here.
Okay. How much of that R&D budget is going into the ZoomInfo Copilot? Or if I broaden it out, how much of it is going into AI versus non-AI?
Like AI driven, like just when you say AI, Mark, are you meaning just like the AI costs or AI solutions?
I mean, so presumably you're building AI models and workflows. You've got to build the Copilot product itself. We know it's calling on LLMs in the backend, but then you've got some cost of just running the, if we thought of it, for instance, from there's training or developing the model, but then also running the model, right? How much of it, so if there's $150 million or $160 million in this R&D budget, just in rough terms, how much of it do you think is going into AI?
I would differentiate between kind of the AI costs or the consumption costs, the call on the AI models, those are going to show up in our cost of service and not in our R&D. On the R&D investment, the way I would think about this is like the 11%-12%-13% of revenue that we're talking about. This reflects an aggressive investment in the intensive development of software. I think we're seeing the returning, the release of Copilot last year, the introduction of Go-to-Market Studio this year. To the extent we continue to develop products like that, you'd still see R&D in that range as a percentage of revenue.
Yeah. Okay. Part of the reason that I ask is we went in, you had over 100 open job listings in the website. It's across engineering and sales and data science, but there were a lot of mentions of looking for people that had skill sets in generative AI, natural language processing. I mean, I would assume based upon that, that you're putting a pretty serious investment into the AI side, right?
I mean, just from a product direction and roadmap perspective, there's very little we're building that's not generative AI first.
Yeah. Okay. Let's go into, let me ask you before I do that, where do you see the product limitations when if you think across the competitive set, both of the data layer and then up above the data layer, and you think across Apollo and Clearbit and Gong and Outreach, where do you think those products have a bit of a limitation?
First, there are things that we do not do or we are not going to do. We are not doing sales automation. An Outreach or a Gong or a Salesloft, they are going to do sales engagement and sales automation. We are not interested in being in that business. We are interested in being great partners across all of those vendors and having them in our ecosystem. We think that is important. A lot of our customers obviously use those solutions. When you think about like a Clari, we are not in forecasting. When you think about the down market, low-cost, low-quality providers, poor quality data, trying to do 50 different things poorly instead of being focused on doing one thing really well.
What I've seen so far is that the companies that try to do a lot of things and do them kind of 70% of the way are just, you stop overthinking that you're going to get something pretty good and you're going to be able to solve all your problems. You might be a customer for a year and then you're turning off the best-in-class providers across the ecosystem. I've seen that happen much more than some sort of all-in-one shop capturing all of the market share. From a differentiation perspective, I don't see anybody in our competitive set providing best-in-class, high-quality data that can drive really efficient, effective go-to-market motions.
I don't see them leveraging AI to do the things that sales reps and marketing people have to do every day, which is prioritize a set of accounts, identify the best people in those accounts to engage with, write the copy that my sales rep is going to use to engage with that account, constantly gather feedback on how those engagements are going and feed that through so that you can remind a sales rep to follow up or to use this message. I don't see them trying to get into true workflow for the top of the funnel or for account executives and account managers.
Okay. Since AI is such a big part of this and we're down to the last few minutes, I do want to make sure we spend a couple of minutes specifically on ZoomInfo Copilot, which launched middle of last year. There are areas we have seen already where AI takes off very quickly. The developers writing code, GitHub Copilot, it happened very quickly. I think a lot of what's happening on a contact center, right, where you've got inbounds from customers, you said yourself, I think that it answers those questions very, very well. There are other areas where it's not taking off that quickly. When you think about some of the Copilots out there, or if it's like a complicated workflow, like a bespoke workflow inside a company, it can be harder. The companies can worry about security and compliance.
What do you think is going to make, what's going to make go-to-market a process where AI resonates and it doesn't kind of get stuck in some of that molasses?
Look, I think first the way that we're going to market here, we already have 55%+ of the Fortune 1000 are customers of ZoomInfo. We've been through data privacy. We've been through data security. We have the trust of senior executives there. That makes it a lot easier for us to go in and sell Copilot and AI-driven solutions into those companies. Q1 was our best enterprise quarter for Copilot. We're getting even better at being able to be up-market with an AI solution. We've invested a lot from a privacy perspective and from a data security and information security perspective at ZoomInfo to make sure that we're cemented in the up-market where that really matters. We'll continue to do that.
I think from a go-to-market perspective, the thing that is unique across any of those competitors, Mark, is that if you are married to the data in the CRM, you cannot build great AI solutions. You just can't do it. Nobody will solve that riddle. You have to have third-party data that tells you, let's say I have an earnings call and I say on the earnings call, "Hey, we're pulling out of Latin America. We're no longer going to be operating there. We're going to pull out all of our salespeople." If I have a solution that sells to the Latin American team and I'm wasting all my time calling on the Latin American people at ZoomInfo.
You're wasting your time.
I'm wasting my time. That's a signal that does not and will not live inside of CRM. It's not a CRM-related data point that's going to exist there. Maybe I'm on this recording. We're going to get this recording after. We're going to process it and put it into Copilot. I don't remember everything that I said, but if I said on one here that I was going to reduce investment in engineering and instead I was going to deploy a whole bunch of AI solutions to do that, a staffing and recruiting company that staffs engineering people should not call anybody at ZoomInfo anymore. That's a data point that's not going to naturally live or transcribe inside of my CRM system. Those are just like two examples of thousands of data points.
You're talking about intent signals. Basically intent signals.
Intent signals.
In easy on.
Signals and beyond intent, but signals that do not have a natural place to live inside of the CRM system. As long as you do not have that, your AI is not going to work very well. I really believe that the work that we are doing to build that ecosystem, to gather all of that data, to use it to prioritize who you engage with and what you say when you engage with them, that will be a differentiator. That is a differentiator in go-to-market AI. That is why we are seeing our customers really lean into Copilot. That is why we are seeing them really leverage those AI features inside of Copilot. We see that as a place to continue to invest in to re-accelerate growth at ZoomInfo.
That's a great and compelling.