Release Date: August 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ZoomInfo Technologies Inc (ZI, Financial) saw its best new business quarter in both the mid-market and enterprise segments ever, with significant growth in $100,000 and $1 million ACV customer cohorts.
- The company launched and monetized ZoomInfo Copilot, an AI-powered offering, which has already generated more than $18 million in ACV across over 1,000 logos.
- ZoomInfo Technologies Inc (ZI) reported strong operational performance with net revenue retention stabilizing for the first time since Q4 2021.
- The company's operations and Data-as-a-Service offerings grew 23% year-over-year, demonstrating strong 117% net retention rate.
- ZoomInfo Technologies Inc (ZI) has made significant operational changes to reduce future write-offs, including requiring prepayment from riskier SMB customers.
Negative Points
- ZoomInfo Technologies Inc (ZI) took a $33 million charge in Q2 due to higher-than-expected write-offs related to prior period sales, particularly with SMBs.
- The company revised its full-year guidance downward due to the charge and increased conservatism around future financial performance.
- Despite operational improvements, the company is not assuming any positive trends will continue in the back half of the year, reflecting a cautious outlook.
- ZoomInfo Technologies Inc (ZI) experienced increased write-offs in June, particularly from SMB customers, impacting its financial results.
- The company is facing challenges with nonpayment from SMB customers, leading to increased bad debt expenses and other related costs.
Q & A Highlights
Q: After Q2, the EBITDA, we should largely be through the renewal risk, which has pressured the business for a while now. So I'm just hoping to get a better understanding of the decline for the back half of the year. Or are you assuming a second round of downsells or has new business outlook changed materially? So if we could just get some color on kind of where the incremental pressure is coming from and the assumption on NRR in the back half of the year, that would be great.
A: Sure. Thanks, Elizabeth. I think there are a variety of factors that go into the guidance as we think about it. And certainly, we've elevated our assumptions with respect to continued write-off potential in the thought that the operational improvements that we've implemented probably won't really take hold until the end of this year or more so at the beginning of next year. Additionally, the operating environment under which we're operating continues to be pretty fluid. So we've inserted incremental conservatism with respect to the guidance. And I think that if you look out in the world as we see it, there's a lot of uncertainty, both for companies, but also for the people making decisions in terms of the growth of those companies.
Q: I'm curious if the volume of newly announced layoffs in the technology industry since June and July might have surprised you at all because Henry, I think you just said that you're not assuming that any of these improvements that you did see in Q2 are going to continue in the second half. So we had these announcements from UIPath and Intuit and OpenText Salesforce and Intel and others since then. And so I'm just curious if something is causing you to sense a second wave of layoffs that might be affecting go-to-market head count in the last say, five to eight weeks a little more than you might have expected? And I have a quick follow-up.
A: I think the thing to remember about our business is two things. One, there is a meaningful portion of our business that's not seat-based, that is usage based. We talked about the Data-as-a-Service and Operations OS business, which now makes up 13% of our ACV, that's not a seat or usage-based business. It's also growing 23% year-over-year. And then, on the seat-based part of our business, we are not fully penetrated across really any of our enterprise or mid-market customers. And so we don't need the incremental seat from a hiring perspective to add to for us to grow within our customer base. The other thing that I would add there is, one of the places where we're bullish about Copilot, is that it's expanding our use case beyond just top of the funnel prospecting, to the full funnel. And so we're now seeing open opportunities where we're bringing in sets of users that were otherwise or in the past pre-Copilot were not customers of ours or we're not users of ours. And so we have a lot of opportunity, both from a usage-based perspective and from a seat-based perspective to grow despite the despite layoffs in tech or shrinking go-to-market team?
Q: Henry, it's no doubt a tough environment and ZoomInfo has outsized exposure to some of the tougher segments of the market. But as we think about an environment versus execution versus product market fit, how much of what we're seeing in the numbers, do you feel is within your control? And maybe just a quick one for Cameron. Cam, can you comment on the pricing trends that you saw in the quarter?
A: I think that's actually the frustrating part about this quarter is that there's an incredible amount of operational improvement that we're seeing in the business. The 100,000 cohort growth, the first time we've seen that since Q4 of 2022. Stabilization and net retention rates, the first time we've seen that since Q4 of '21. Stabilization in our software vertical net retention rates. Our enterprise business grew 9% year-over-year. Operations OS and our DaaS business grew 23% year-over-year with 117% net retention. Copilot sold solidly above our expectations in the customer base. And we're monetizing AI now throughout our customers. When we're monetizing that, we're also seeing that happen 75% of the time in mid-market and enterprise customers, and we continue to innovate there as well. And so there's this tremendous amount of operational momentum and operational execution happening in the business, where I actually believe our product market fit is getting stronger. Our sales motion is getting better in the upmarket. We're monetizing Copilot in the base, and you're seeing that operational performance come through in the business. Now at the same time, the write-offs escalated, we have to increase that estimate and we have to take this accounting charge this quarter to put that all behind us, to move forward with a clean slate and to take away this volatility from our business.
Q: If you think about the ability to collect from clients, like how does this current environment kind of compare to what you've seen before? Because like we had in the COVID 2020, where it was half 2022, this seems to be either you changed how you kind of in 2023 or it's getting worse? Can you just compare and contrast like how this kind of feels compared to the time before, because it is somewhat surprising given that you've been in tough markets before.
A: It's Henry. Look, I think there are two things that happened or one big thing. We did see these rates elevate against from the 2020 and 2021 rates. We saw this trend escalate and elevate in the 2022 and 2023 cohorts. They're writing off more, obviously, more than what our historical rates were. That's why we've increased the estimates this year, and we've taken this accounting charge, we've accounted for those collectibility issues. The other thing that I would tell you is the way that you solve this moving forward is what we did with these upfront prepayments. One a risky or small SMB customer comes through, they can achieve a lot of value from ZoomInfo, but we require upfront prepayment from them now and going forward. That's a fundamental change in the way that we operate. And so we're going to significantly make a dent in the collectibility of our future contracts by doing that.
Q: Just to stick on the idea of the new business risk model, Henry. Are the parameters there simply about the size of the customer that you're talking about? Or is it also based on a number of seats or products they're adopting from you guys at the onset?
A: Yes, the new business risk model takes into account a number of firmographic related data points and then a model that looks back at the collectibility of other accounts that look like those accounts. But you can think about it as size, industry, number of salespeople and then a compare against look-a-likes who paid or didn't pay us in the past. We're using a number of key data points to assess the risk of the clients who come through, size is obviously one
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
