ZoomInfo Technologies Inc. (GTM) Earnings Call Transcript
August 31, 2022
Earnings Call Speaker Segments
Welcome, everybody. I'm Brad Zelnick with the Deutsche Bank software team. Delighted to be here in sunny Las Vegas, Nevada at this year's 2022 Tech Conference. And for this session, joined by ZoomInfo CFO, Cameron Hyzer. Cameron, welcome.
Yes. Thanks for having me. It's great to be here.
For sure. Thank you. Format of today's session will be a fireside chat. Going to go through a number of questions with Cameron. We'll try to keep my eye on my inbox. If there's anything that you have, you'd like me to work into the conversation, I'll do my best. But with that, Cameron, welcome, and let's dive right into it.
So my first question, maybe just to get some of the post Q2 out of the way. The market response coming out of Q2 has been very positive. And from our conversations, it seems that investors have been surprised by the resiliency of your business and the ability to continue landing new customers even in a more challenging environment. What's your message to investors on why ZoomInfo continues to resonate with customers even in difficult times?
Sure. I think there are a couple of key factors. One is the ZoomInfo platform is a really obvious ROI for our customers, and it's really fast time to value. So between both of those things, when people are thinking about, okay, what can I do to improve the efficiency of my business? Yes, ZoomInfo is a really obvious choice. Something that people not only are continuing to invest in, but also stepping up their investment over time. I think it is somewhat telling that if you listen to a bunch of other earnings calls or whatever else, a lot of people are talking about improving their margins or being more careful about costs. But the one place that they're not cutting back is feet on the street sales. It's one of the main things that focused on. So aside from its great ROI and quick time to value. It's also a really strategic place that [indiscernible] best and everyone wants to sell more.
Yes. No, that's intuitive. I think at the same time, we're finding that, unfortunately, nobody is completely immune, right? So while strong momentum continued in Q2, you did see longer sales cycles and some larger and international deals. We're now 2 months into Q3. Can you update us on what if anything has changed in terms of the demand trends that you're seeing into -- and through the end of August?
Yes. I think as we have gone through Q3, we have seen a number of those deals that extended in Q2 close. But we still see some sales cycles that are longer than they would have necessarily been in Q1. I very much view the world as it's not just the state of the macroeconomic environment, but it's actually the rate of change. So I think that the rate of change from November to May was pretty dramatic, right? Everyone went from -- things are going great, to oh, no, like the sky is falling. I think that people are getting more used to the current macroeconomic environment. It may not be necessarily like we may still be in a recession or whatever. But I think people are getting to that point where they can make decisions, they can invest in things, they know the state of play. And therefore, hopefully, there's a stabilization [indiscernible].
So to your point about getting better, getting worse, rate of change, would you characterize it as kind of leveling off from trends that you've seen?
I think that the rate of change is starting to stabilize would be good. Yes, I think we still see somewhat extended sales cycle to correct.
Got it. Okay. Makes sense. And Cameron, you've mentioned that your efficient selling motion and rapid time to value are key differentiators. I remember even during the time of the IPO, learning about your sales process, I've been a student of various go-to-markets across the industry and to appreciate how different a data-intensive it really is. But maybe for those less familiar, can you talk a little bit about the model and what you guys do that's different that enables the rapid time to value and the selling motion that you have?
Yes. Well, and certainly, we're really focused on efficiency around our go-to-market. A big part of that is really leveraging our platform. We're big believers, and I think a great proof point that high-quality data and insights drive better outcomes. And around that, we wrap a lot of automation and technology as well as we try to be really thoughtful about how we bring in new people. We train them up quickly. We give them the right set of tools to drive value. And so I think all of that together is a big part of how we are continuing to maintain and drive an efficient selling motion. And the sales guys don't always like to hear it, but it's also a really easy thing to sell. Giving people high-quality data and insights they haven't been able to have before, kind of an obvious value for customers.
Makes sense. And as we think about your land-and-expand motion, can you talk about what a typical customer adoption journey looks like? And what penetration looks like for your most evolved customers?
Yes. So a typical journey is we start out with a relatively transactional deal and a small part of the company. It's often a single team, people who have either used ZoomInfo before or kind of get referred through a friend or whatever else. And then over time, we continue to expand with those customers. Historically, that expansion has largely been adding reach within the enterprise. So getting different teams and more seats or integrating more data in with the systems that they're using to go to market. The interesting thing is over the past couple of years, we've started to see much more functionality that we've developed or acquired and been able to upsell that as well. So the momentum around that expansion is going in multiple dimensions, which is really exciting. And that functionality dimension is one where we've seen a lot of traction and a lot of excitement from our customers.
The powerful additions that you've made, and we hear about it in customers that we speak to. You also talked about -- at the beginning of your response, you talked about somebody -- telling somebody about ZoomInfo. And I have to imagine salespeople are always moving from one firm to another. And I got -- I don't know if you have any stats or a data company, but to get a sense of how often they bring their tools, they bring ZoomInfo with them and if that lowers the cost of sale.
Yes. I mean it certainly helps. Anecdotally, I hear about it all the time. I have friends that like our salespeople, they've gone from one company to another and the first thing they say naturally, they come to me and they say, like, what's the best discount I can get on ZoomInfo? But yes, I think it's one of the first things that come in. It was actually interesting. My sister runs a really small company in San Diego. She was hiring her first salesperson and she called me up and she said, it's crazy. He said he won't join unless I get ZoomInfo for him. I'm like, yes, that's -- and it really does drive day-to-day performance for a lot of people. So I do think that, that certainly helps. For some period of time, I can't remember this like the stats was a while ago, we looked at it. It was a meaningful percentage, like over 1/3 of deals or people who are coming from other places and bringing ZoomInfo with them.
Well, by the way, I thought the CFO is the last person you want to ask for a discount.
Some people don't think about it that way.
They try anyway.
Yes.
Maybe, Cameron, if we can move into MarketingOS, your account-based marketing solution, which I think is relatively new and a compelling addition to the platform. Can you just touch on the value add here for existing SalesOS customers and what the early adoption has looked like so far?
Yes. And MarketingOS has been really exciting, and I think we're getting great feedback from those early customers. Obviously, we rolled it out earlier this year. I think there are a couple of things. One, historically, we've built a lot of what are traditionally marketing-centric technologies, whether that's building an audience or even inbound insights on like who's visiting your website. All of those things were built for salespeople, and we just needed to reskin them effectively for our marketing use case. And it creates this really interesting opportunity for us to really bring marketing and sales together into the same system. Historically, that hasn't been the place, there's been a little contention there. But having some place where marketers are running campaigns, focusing on accounts and integrally like handing that off to sales is really exciting. And honestly, it works the other way. We've rolled out new features recently. We call it Aircover, where if you're selling to whatever, Coca-Cola, and you have a buying committee and you say, "Okay, I'm having a meeting with senior people at Coca-Cola. I want to start running ads. I want to create a campaign against that particular audience." That's something you can click in SalesOS, send it over to MarketingOS and actually drive that Aircover campaign or whatever you're doing. So I think that integration between sales and marketing is really exciting. It's something that can help drive more alignment and more efficiency in terms of how people are spending their marketing dollars and focusing their sales teams.
Very cool. Maybe if we could pivot to TalentOS, one of the other solutions. And can you maybe just explain for us the advantages that it has over existing and perhaps more established recruiting products in the market like LinkedIn, for example?
Yes. The interesting thing about TalentOS relative to SalesOS is salespeople really haven't had a place historically where they can go and find buying committees and whatever else and historically hasn't been -- like LinkedIn hasn't been set up as well for sales teams as it is for recruiters. In the TalentOS sales cycle, you actually have people who -- when they're doing passive recruiting or they're looking for passive candidates, they already use something. They generally already use LinkedIn, which is actually helpful. It's like really easy to go and say, okay, you use LinkedIn, right? What's your response rate from InMails because that's the only way that you can get to people through LinkedIn. Yes, that response rate is low. It's probably below 10% overall. And again, you're looking for people who aren't in the market looking for jobs. They're not monitoring their LinkedIn all the time for InMails. So the value proposition is really, okay, you're going out, you're finding these people, we can increase your response rates because you can give them phone calls. You can reach out to them on e-mail as opposed to just InMails, you can get to people in other ways, and we can help you automate those things. So one of the -- one of our head sales guys, he -- one of the most -- one of the best recruiters I've ever met reached out to me. She worked for Travis Kalanick's new CloudKitchen or whatever it's called. And he said -- and Henry turned around and said, "Why is she one of the best recruiters?" And he's like, "Well, she sent me an InMail, and then she followed up with an e-mail and then she sent a text, all within 5 days. And it's like I've never seen someone actually do that." And Henry is like somewhat dump on, and he's like, "That's exactly what we do and we automate that for everyone." So that ability to go multichannel is really the value proposition that were additive to LinkedIn. And then we have additional capabilities where you get automation capabilities. You can look at -- you can really integrate more industrialization than just going into LinkedIn and kind of clicking filters.
Is it tougher for you guys to sell? Just simply, it's a different audience and maybe a different buying pattern than you're more used to?
It is a different audience, but I think we've had a lot of success selling it really because people get the ROI. They understand that if I have access to more people and I can filter or kind of automate the interaction with those, there's an easy ROI there. And I think interestingly, where they already get ROI out of LinkedIn, they can easily see how there's -- how they can spend a little bit more on TalentOS and actually increase those capabilities that they have.
Cool. Maybe turning to a different topic, Cameron. I think many would look at ZoomInfo on its core data asset is sort of the crown jewel or crown jewels. Can you talk about how the company is investing in that core data asset, in particular, to ensure that you're staying ahead of competitors in generating high-quality sales leads and Intent data for customers?
Yes. So I think one of our biggest investment areas continues to be expanding the data set, continuing to improve quality. I think one of the interesting things is when we think about competitors, there's really no one out there that offers the same breadth and depth of data that we do. And then certainly, no one that has the same level of quality. So across all of those dimensions, you can't kind of look at smaller companies that maybe only offer Intent. I'd submit that our Intent data is generally better than someone who just has Intent. But then they don't have contacts that they can push in. They don't have the capabilities around technographics or firmographics on company data. So we're focusing on continuing to improve quality across the board and we have a big team of data scientists and researchers that are really focused on continuing to do that. I think, in many cases, just the data science team and research team are bigger than like the entire companies of many of those companies that are focused on one thing or another. And then continuing to just put distance between us and anyone else that's out there on all of the dimensions that we have.
Makes sense. Cameron, you have many different types of competitors given the broad platform and different solutions that you have. And I think at least some that I've seen that don't have a data strategy, a data asset like you do have instead embraced the strategy to go and partner with any other data provider, except maybe yourselves, I don't know how that works. But to be data agnostic in a way where instead of cultivating or acquiring a data asset, they're partnering with multiple ones. Why is ZoomInfo's strategy, the one that wins?
I mean, first off, there are a lot of kind of point solution data providers out there that I don't think any of them are as high quality in the points where they operate as we are, which is ultimately why ZoomInfo has gotten to a level of scale that none of those other competitors are even close to. So -- and I think in a world where we firmly believe, and I think our customers believe that high-quality data and insights drives better outcomes. Kind of garbage in, garbage out as a problem for a lot of things. So I think that, a, that is the kind of primary differentiator that you're going to go out and partner with something else. You're not going to have the same capabilities, you're going to have a "garbage in, garbage out" problem. That being said, we're really focused on ensuring that our customers are successful. So we do integrate in with a number of other software point solutions. And we'll continue to make sure that if someone really likes the fact that there's an orange screen on something and we only have blue screens, like we'll integrate in with that. The differentiation is going to be that it's just so much easier in a single code base and a single screen to integrate way better with our own products. So whether that's Engage or Chorus or our Chat solution, all of those things are much better integrated. You have all the functionality without swiveling between ZoomInfo and importing something in or setting up a workflow in one system and then having to go somewhere else to find the data to do that. So the integration capabilities are just always going to be much, much better in the single system, in a single code base, we're going to be able to do things that none of the other competitors will even be able to touch.
The comprehensive platform approach that you have and the advantage that you have with that core data asset at least seems to show in your financials. So maybe if we pivot...
That is the -- that's the scoreboard.
That's the ultimate goal. Exactly. So maybe just switching over to the financials. Can you remind us exactly what your revenue guidance embeds in terms of customer behavior and new deal activity, even if maybe qualitatively relative to the trends that you saw in late June and into July. And I know we touched on this a little bit, but if you can frame it as it relates to your guide that would be great.
So when we think about our guidance when we're framing our guidance, we consider a wide range of potential outcomes. And we set our guidance really at the low end of that range where we're comfortable that we'll be able to meet and exceed that over time. Sometimes I like to point out that we went public at the beginning of the COVID pandemic. So my imagination of a kind of wide range of potential outcomes is pretty broad. So certainly, when we look at our guidance levels certainly implies that the world gets worse and not better in the short term.
Got it. And just as we think about the different solutions that you offer and macro sensitivity, I don't know that you've really explicitly told us like exactly how big some of the different solutions are. But like as we think about TalentOS, could that be an area that would see more of a headwind if hiring slows down in general? And maybe similarly, on MarketingOS, how correlated is demand for MarketingOS with overall level of customers' marketing spend?
Yes. I mean, I think, certainly, the importance for TalentOS, while overall hiring levels may matter a little, you're really talking about passive recruiting. So it's looking for those people that are hard to find. And in the world where we are today, there's a war for talent out there, particularly on those people that are hard to find. And I don't see that kind of moving in the same direction as just like we're going to reduce our investment a little. People are still going to have a bunch of turnover. They're still going to need high-quality engineers. They're going to need salespeople, they're going to need executives. All of those things are a little less volatile than just overall hiring trends. So I think TalentOS does have some sensitivity to hiring, but it's more focused on that passive recruiting market, which is a little bit more -- people are always going to need high-quality people. With respect to MarketingOS, I think the real value there is being able to target your marketing in a way that you're going to have a better outcome. So if I tell you that -- if you're selling, I don't know, security software and instead of going out and like buying ads in the Super Bowl or putting your name on whatever, the Golden State Warriors Stadium is, if I tell you, okay, you should create an ad campaign where you can really target VPs and directors of security at companies that are over 1,000 people and continuing to grow. That ad campaign is going to be a much higher ROI kind of capability for you. So if you're scrutinizing your ad spend, your marketing spend and looking for what are the things that are going to make the biggest difference, we are focusing on something that is much more surgical and targeted. So I feel like there's actually the potential that we can kind of help drive better efficiency for marketers. And there's so much white space, but I think it's still a really exciting opportunity.
White space actually takes me to the next question. You've talked in the past about having very low market penetration in this growing product portfolio and increasing value proposition. Why shouldn't current growth rates be sustainable over the next couple of years?
Yes. I mean we're certainly focused on sustaining elevated growth rates for a really long time, continuing to take the operating leverage that we naturally generate in the business and reinvest that back into sales and marketing capacity and R&D innovation to drive sustainable long-term growth. Yes, I do think -- some people call it a rule or a law of large numbers. I'm not sure if it's a scientific law. But realistically, there are very few companies that have gone from $1 billion in revenue and continuing to grow at that 50% or whatever it was before then. So I think as we're growing off a larger and larger base, there will be some moderation in those growth rates. But our expectation is certainly that on an absolute basis, we're going to grow more and more every year than we have historically.
Helpful. And that makes sense. And as part of that, how should we think about advanced functionality as a growth driver just versus core product? And what's a reasonable goal for where advanced functionality can get to in terms of ACV mix in the next 12, 24 months from what I think is about 29% today that you like to disclose?
Yes. So it's a little over -- it's a little under 30% now, around 20% at the end of June, 29% at the end of June. And I think it's a really exciting opportunity for us because we already have relationships with those customers. They already trust us in terms of the capabilities we bring, and we're able to deliver outcomes that they've never really had before through better integration and kind of really taking the high-quality data and insights that we have and making the time to value around those even faster for our customers through that integration. I'd like to think about it more in the long term. And if I think about average customer that has 25 to 50 seats, that might be a $50,000 deal if they just have company and contact data, the kind of core asset. If they were to take all of the functionality around SalesOS with Engage and Chorus and Intent, new Workflows, yes that would be over $100,000 deal. So just within SalesOS, you can see that those customers could get to 50% of their ACV in terms of advanced functionality over time. And if you add on MarketingOS, that could be another 6-figure deal. If you add on OperationsOS, that can be another 6-figure deal. So you're talking about customers that could be going from $50,000 and kind of, call it, base functionality to having all of the advanced functionality to be over $300,000, that would imply that our long-term goal should be that the advanced functionality should be 80%, 85% of the overall mix. And so that acceleration and that dimension of adding functionality in order to drive more and more of that expand ocean is really exciting and really puts us to a place where we can have much bigger clients and continue to drive additional growth over time.
It's a really helpful way to frame it. Maybe just turning to margins, Cameron. You've committed to holding adjusted operating margins above 37%. How should we think about leverage in the model going forward and the relationship between growth and margins?
Yes. So I certainly view the world that as we're growing off a bigger and bigger base, there will be natural operating leverage. We'll harvest most of that in order to continue to drive sustainable growth over time. But certainly, as the growth moderates as we're getting bigger, I do see the margins will drift upwards over time. Right now, we're around 40% in terms of margins and I expect that, that will drift up as growth moderates when we're gone.
Cool. And as I think about ZoomInfo, it's an amazing story of M&A and corporate development that is unique, and it's a muscle that's extremely well developed, especially for a company your size. How long do you think it takes for the bid-ask spread to narrow in the private market today for us to start seeing a wave of consolidation of smaller venture-backed companies? And to what degree should we expect ZoomInfo to be a consolidator?
We'll continue to be opportunistic in terms of how we think about M&A and where we're going. Realistically, we have a very high bar in terms of what we think is a good acquisition target. Part of being good at M&A is integrating quickly and kind of driving value and knowing exactly what you're getting. But part of it is also just being disciplined and not just acquiring something to acquire it, you need to acquire something that for us, needs to drive value for our customers. It needs to either make our data better or get better with data. It needs to be something that we feel really comfortable that we'll be easily to sell and push into our customer base and then they'll get value out of it. And all of that translates into it being accretive in the kind of short to medium term. With respect to the bid-ask spreads, like my personal opinion is that there are a lot of companies that have raised venture capital over time that they've -- are going to require more capital at some point in the future. Yes, the closer they are to the point where they're going to require more capital, the more realistic they're going to be about their value. I think companies that raised money at the beginning of 2022 or the end of 2021, they probably have a fair amount of runway and yes, I wouldn't expect that those companies would be looking to particularly sell in a down round as long as they kind of can paint a rosier picture than what they're currently seeing. But I think as you get further and further along in the kind of current environment, more and more people are going to realize that if you're growing 50% and losing money, you're not worth 10x revenue anymore. It's just not possible. So once you have to raise money or you start thinking about that, I think that's where you see a bigger, bigger tipping point in terms of that bid-ask spread.
Got it. And maybe just related to your capacity to do deals. Net leverage is now down to, I think, about 2x EBITDA, and you're generating very healthy free cash flow. What's the appropriate amount of leverage to think about for the business over the next several years?
I mean certainly, we could be more levered than we currently are. I kind of view this within the construct of equity investors as well as debt investors. We're aiming to be an investment-grade company in the next few years. That means that while we could take on somewhat more leverage, we're not going to lever up in a significant way. So I think our continued growth, which is really driving a lot of that deleveraging really just creates incremental capacity and flexibility for us going forward. Ultimately, I'm going to optimize the capital structure and where there are opportunities to invest more in the business, either through M&A or whatever else, the first place that we're going to go is to capitalize on some of that capacity with respect to leverage. And so yes, I think we're just building more and more of that capacity over time as we continue to grow.
Cool. I think we've got about 5 minutes left. I don't know if anybody's got any questions in the room. I've got a couple more otherwise. Okay. And maybe I don't see -- actually, we do have a hand up. Hang on one second. I think we're going to pass you a mic. One sec.
You referenced at the top of the conversation that the environment was relatively consistent from what you've seen. It does feel like a little bit on margin. We're hearing software companies talk about, we're going to be a bit more careful about our spend and selectively decide where we continue to grow and not grow, which includes sales. I'm just curious if you found while the data component still is relatively immune from that or there's any sort of, I don't know, I guess, potential for that to creep into what you saw.
Yes. I mean I've used in the past the words insulated, but not necessarily immune. And I think that, that's very true of where we sit. Realistically, I think within our business, there's so much white space out there in terms of companies that haven't started to invest in digitizing and modernizing their go-to-market motions. Or haven't started to take on additional levels of functionality that, that's going to be the main driver of growth in that long-term secular trend. I do think is less impacted than am I investing a little bit more or a little bit less to drive growth. I think the other thing for us that also goes back to the white space is that much of our growth has come from a variety of industries, whether that's manufacturing or financial services, pharmaceuticals and health care, transportation and logistics, that's where we've seen a lot of that secular growth kind of drive elevated growth over the last couple of years. All of those sectors are growing much faster than the early adopters and software businesses or whatever else. So that white space, I think, is -- continues to drive a number of new customers coming in as well as those customers expanding over time, which is obviously a healthy diversification for us in terms of what we see going forward.
Cool. With that, I'm going to end with the magic question. What do you want to leave us with? What haven't we asked you that you'd want to impress upon folks?
That's a good question. Obviously, we're really focused on continuing to drive sustainable growth over the long term. I think sometimes some people ask me, what is the most misunderstood thing about ZoomInfo?
Sure.
And I would say that a lot of investors, they kind of have their pattern matching kind of think about what they're doing. And they often ask the question like, are you a data company or are you a software company? I actually feel like that's the wrong question to some extent because ultimately, the data makes the software better and the software makes the data better. So actually combining the two in a real thoughtful way that drives more value for the customers, which is what we're really focused on doing, actually makes us better than either of those independently. And so I would actually say that trying to categorize this one place or another, I get that, that's how a lot of investments kind of work. I actually feel like we're better for the fact that we have both, and we're combining them in a way to really drive value for the ultimate customer.
Squares very well with the Deutsche Bank software teams. Data mode thesis, which is why we're big fans of ZoomInfo. And with that, Cameron, always good to see you. Thank you so much for attending this year's conference.
Yes. Thank you very much for having us. Thank you all.
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