Title

Presentation

ZoomInfo Technologies Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.24.

Operator: Good day and thank you for standing by. Welcome to the ZoomInfo Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sisitsky, Investor Relations. Please go ahead.

Jerry Sisitsky: Thank you, Amy. Welcome everyone to ZoomInfo’s financial results conference call for the third quarter 2023. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; Cameron Hyzer, our CFO; and James Roth, our Chief Revenue Officer. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws, expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate and believe and expressions, which reflect something other than historical facts are intended to identify forward-looking statements.

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Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement in the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I’ll turn the call over to Henry.

Henry Schuck: Great. Thank you, Jerry, and welcome, everyone. While the operating environment remains challenging, we delivered results that exceeded our Q3 guidance. Revenue for the quarter was $314 million and adjusted operating income was $126 million, a margin of 40%. During the quarter, we repurchased approximately 9 million shares of ZoomInfo stock for $160 million, representing an average purchase price of $18 per share. We are uniquely positioned to capitalize on a tremendous long-term market opportunity, which gives us confidence that buying ZoomInfo stock at these levels will drive a meaningful economic return for our shareholders. Since early last year, we have highlighted the challenges of this operating environment, which include fewer up-sells, more seat down-sells and elevated churn levels.

As a platform that helps customers grow and one that serves some early cycle industries, we have seen net revenue retention and our overall growth rates come down, as customers have had to rebalance growth and profitability. This is a market phenomenon impacting companies across the spectrum of front office applications and not unique to ZoomInfo. When the cycle ends and we are in a more normalized operating environment, companies will be looking to drive growth and we will continue to be uniquely positioned to help them do just that. In this operating environment, we are committed to controlling the controllable and delivering industry-leading levels of profitability, while we invest in our customer success and improve the Company for the long-term.

To that end, we are doubling down on product excellence and customer success, investing in improved ease-of-use and driving quicker time to value for our customers. These investments have driven a 20% increase in product engagement since the beginning of the year. Customers are using more of the platform more often. We are doing this while prioritizing investments in AI, data-as-a-service, and marketing OS, and building our industry-leading data coverage and accuracy across the globe. We’ve rolled out new pricing and packaging at the low-end of the market, enabling us to capture more of the market efficiently, while simultaneously growing our contributors. And we announced a number of leadership changes that have flattened the organization and given me the opportunity to get closer to our customers and how we win them, serve them and grow them.

As part of the leadership changes, James Roth, our Senior Vice President of Sales, leading our enterprise customer base, has been promoted to Chief Revenue Officer. Chris Hays, our Chief Operating Officer, transitioned into the new role of EVP of International Expansion, and Dave Justice transitioned into the new role of Chief Growth Officer. I am excited that James is here with us on the call today and wanted to give him the opportunity to share a few words. James?

James Roth: Thanks, Henry. I’m glad to be here today. I joined the team in early 2022 because I’m passionate about the product, the vision, and the culture that Henry has built. We have the power to drive massive improvements in how businesses go-to-market with our best-in-class data, AI-powered customer insights and automated workflows. I was a ZoomInfo customer for 10 years prior to joining the leadership team and I have a deep understanding of what our customers want and need from the platform. Since joining, I’ve gotten to see the value that we are delivering to many of the largest and most sophisticated enterprises in the world. I’ve been in the room at Workday, Google, Amazon, Verizon, and so many others as we partnered with their revenue teams to build the foundation of data and insight that drive the future of go-to-market.

I’ve been proud to offer that same foundation of go-to-market technology that drives revenue, growth at the world’s best companies to companies down market across the globe. Over the past two years, I’ve helped recruit a large portion of our sales leadership, and I am excited about the team we put together and the traction that we are seeing in the enterprise. I intend to build off that success, in particular, with our $1 million and $5 million plus accounts, while we look for efficiencies in our go-to-market motion through e-commerce and product led growth.

Henry Schuck: Great. Thanks, James. This quarter, we closed transactions with a number of best-in-class enterprises, including Verizon, Walmart, Paramount CBS, Sage Hospitality, Steam Logistics, CDW, Tenet Health, The Washington Post, FranklinCovey, Lands’ End and Magellan Health. In Q3, we signed more than 200 deals with more than a $100,000 in ACV, including multiple seven-figure deals and a $15 million TCV deal. Some of the largest and most sophisticated companies in the world are going all-in on our data, insights and automation, integrating us directly into the way they go to market. While the software vertical and roughly half of the business services vertical has been impacted, we have seen strong growth in other verticals.

In financial services, Wells Fargo further expanded their relationship with us with a seven-figure subscription to our intent and company data cubes. Today, the organization leverages our firmographic data for enhanced segmentation and prioritization and they use our intent data to identify and pursue additional relationship opportunities as well as to predict potential churn. By plugging ZoomInfo data directly into their go-to-market motion, they’re able to deliver more targeted services to their customers and support the retention of high-priority accounts. In telecommunications, a large global provider of mobility, network services and 5G signed a five-year, nearly eight-figure engagement with ZoomInfo, which is now the key data and insights source for their go-to-market teams, ensuring for years to come that they will have the highest quality data as they go to market.

Another mid-market telecommunications firm who had left for a competitor 10 months earlier, boomeranged back and expanded with a multiyear, multi seven-figure engagement that encompasses the full array of our platform offering including SalesOS, MarketingOS, OperationsOS and DaaS, consolidating out multiple providers in the process. From a product perspective, we continue to focus on delivering customer success with easy-to-use features that drive quick time to value. These investments are paying dividends in the form of improved customer satisfaction and higher engagement. NPS rose 7 points year-over-year with growth every quarter. Our recent AI enhancements to Chorus have increased NPS for that product by 22 points year-over-year and overall product engagement has increased by more than 20% this year.

We also continue to receive market recognition. Snowflake named ZoomInfo an enrichment data category leader in their 2023 modern marketing data stack report. ZoomInfo obtained an AWS competency relative to our expertise in digital customer experience. And we also stand in the top 0.01% of companies with the most number one rankings being awarded 101 number one rankings in G2’s Fall Reports. We’re leveraging new AI technologies and partners to create customer-facing insights and drive data collection and validation at scale. On the customer-facing side, we are now extracting strengths, weaknesses, opportunities, threats and other insights from earnings calls and public filings which, when paired with our highly accurate data, scoops, intent and other insights provides sellers with the key insights they need to engage and account and close a deal.

LOMs are also integrated into our existing profilers and data validation pipeline, helping us understand the validity of a human name, title and educational data listed on a profile and driving further improvements in our industry-leading accuracy, which sits at an all-time high coming out of Q3. We have also seen incredibly — we’ve also been incredibly focused on our international data offering, and following recent significant investments there, our customers now have access to over 200 million business contacts in markets outside of North America. In the last two years, we have grown the number of global companies in our data platform by more than 6x, while tripling the number of global contacts and the number of global mobile phone numbers available to our customers.

In Continental Europe, specifically, we’ve expanded our mobile numbers by 13x, while growing mobiles in the UK by 6x. With this expanded coverage, global sales teams can count on ZoomInfo when targeting international markets while knowing that our commitment to ethical data collection and compliance remains front and center. As we continue to move up market, the pace of innovation accelerates, and we’ve been closely partnering with our customers to push the envelope on what modern go-to-market looks like. Cutting-edge go-to-market teams are no longer working in traditional sales systems such as the CRM. They deploy data analysts and data science teams to take a holistic look at their customers and market and then they use AI to drive sales planning, account prioritization model, next best actions and more.

AI is only as good as the data powering it. So in the third quarter, we launched our integration with the Google Analytics Hub to help these data science teams unlock the value of ZoomInfo insights and models directly within Google’s Cloud data warehouse BigQuery. This reduces the time and resources needed to execute AI initiatives and more quickly make business decisions. In addition to accessing data in modern cloud systems, enterprises must understand a single 360-degree view of their customers to effectively go to market. Our new integration with Reltio, a data management solution, provides ZoomInfo’s B2B reference data directly within the master data management capabilities of Reltio, making ZoomInfo more integrated and actionable in the enterprise.

Together, we are also launching a joint go-to-market solution for master data management. Our new partnership with The Trade Desk expands our customers’ ability to reach more premium publishers, enhance campaign fulfillment and opens display advertising opportunities around the world. This partnership supports the next generation of features for MarketingOS with international audiences and the ability to support new ad set types within our DSP. As a result, September was our highest monthly ad spend on record for MarketingOS. Down market, we’ve been investing in self-service e-commerce capabilities to ensure that companies of any size have the ability to access ZoomInfo data no matter their budget. We’ve built more robust trials, the ability to purchase a single SalesOS seat, improved pathways and paywalls for in-app upgrades and a streamlined technology-driven onboarding motion for our self-service users.

Overall, we remain focused on improving our platform and delivering results for our customers. By investing to drive a simplified user experience, easier ways to transact with us, and building upon our data quality advantage, we are controlling the controllable. We’re confident that when the economic environment improves, these investments that we’re making today will position us for long-term growth and success. Before I turn the call over to Cameron, I want to acknowledge our team members in Israel. We have more than 400 employees in Israel with offices in Ra’anana and Tel Aviv, many of whom have been called up to active duty or a member of their family has been called up to serve. We stand with them during this incredibly difficult time, and our number one priority is to make sure that they and their families are safe.

With that, I’ll turn the call over to Cameron.

Cameron Hyzer: Thank you, Henry. In Q3, we delivered revenue of $314 million, up 9% year-over-year and up 0.6% sequentially as adjusted for days of revenue recognition. We continue to believe that current momentum in the business is best measured by the sequential growth of annualized revenue, and we do not anticipate material improvements in the macroeconomic environment that could provide a tailwind to activity in the near term. Adjusted operating income was $126 million, a margin of 40%. GAAP net income was $30 million and GAAP EPS was $0.08 per share. Non-GAAP EPS was $0.26 per share. We continue to experience pressure with respect to renewals, see customers renewing at lower rates despite improving utilization and engagement.

Customers are upselling less and downselling more than we saw in the first part of the year. Additionally, our smallest customers continue to be challenged in their ability to pay, which drove another quarter of elevated write-offs. We continue to expect that this cycle of renewals will be challenging through at least the first quarter of 2024, impacting revenue growth through the first half of next year. Our greater than $100,000 ACV customer cohort declined modestly in the quarter as we saw continued pressure from mid-market technology companies reducing spend to levels below $100,000 while non-software customers over $100,000 continue to grow. We now have 1,869 customers with more than $100,000 in ACV. Our $1 million-plus customer cohort continued to grow year-over-year.

And as Henry indicated, we signed multiple seven-figure deals and a $15 million TCV deal in the quarter. Our largest customers continue to expand with functionality, seats and data as we are increasingly integrating directly into their go-to-market motions. Advanced functionality contributed approximately a third of our overall ACV and continues to grow and provide incremental value to our customers. Within advanced functionality, we are seeing the highest levels of growth from MarketingOS, enrichment in DaaS offerings and automation capabilities. Our efficient and high-margin operating model with low capital requirements and upfront billing continues to drive substantial cash flow generation. Operating cash flow in Q3 was $81 million, which included approximately $18 million of interest payments.

Unlevered free cash flow for the quarter was $95 million, representing 75% of adjusted operating income. As Q3 is typically a lower conversion quarter, we continue to expect annual unlevered free cash flow conversion in the ‘90s as a percentage of adjusted operating income. We ended the third quarter with $568 million in cash, cash equivalents and short-term investments. At the end of Q3, we carried approximately $1.25 billion in gross debt, all of which has fixed or hedged interest rates. We believe that the current environment provides us an opportunity to reduce our share count in a meaningful way, thereby giving remaining shareholders more ownership of the substantial compounding free cash flow growth that we are aiming for in the future.

We have also adjusted our stock-based compensation strategy to include performance-based units that are only issued if growth targets for free cash flow per share are achieved. During the third quarter, we repurchased 8.8 million shares of ZoomInfo stock at an average purchase price of $18.19 per share. Through September 30th, we have deployed a total of $247 million of the $600 million share repurchase authorizations and have retired 12.7 million shares, representing over 3% of the total diluted shares outstanding. Given our strong free cash flow generation and healthy balance sheet, we expect to continue to opportunistically repurchase shares. Our net leverage ratio is 1.3 times trailing 12 months adjusted EBITDA and 1.2 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements, down from 1.9 times and 1.6 times, respectively, as of September 30, 2022.

With respect to liabilities and future performance obligations, unearned revenue at the end of Q3 was $403 million, and remaining performance obligations, or RPO, were $1.1 billion, of which $795 million are expected to be delivered in the next 12 months. With that, let me turn to guidance. For Q4, we expect revenue in the range of $309 million to $312 million, adjusted operating income in the range of $122 million to $124 million, and non-GAAP net income in the range of $0.24 to $0.25 per share. For the full year 2023, we now expect revenue in the range of $1.232 billion to $1.235 billion and adjusted income — adjusted operating income in the range of $494 million to $496 million. We expect non-GAAP net income in the range of $0.99 to $1 per share based on 412 million weighted average diluted shares outstanding.

We expect unlevered free cash flow in the range of $445 million to $455 million. Our adjusted full year guidance implies 12% revenue growth at the midpoint and an adjusted operating margin of 40%. With that, let me turn it over to the operator to open the call for questions.

Operator: [Operator Instructions] Our first question comes from Mark Murphy with JPMorgan.

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Mark Murphy: Henry, I believe you mentioned a $15 million TCV deal that closed in Q3. And at such a rarity in this environment, I’m wondering if you could possibly shed a little light, first of all, on the contract duration, so we can try to annualize it. And also, just what vertical is it that’s moving forward with that scale of a commitment in this environment? And then, I have a quick follow-up.

Henry Schuck: I’m happy to take that. But since James is here with me, I’m going to have him talk to that.

James Roth: Yes. So, it was a three-year agreement with a large software company. So the annualized revenue is about $5.3 million, it is actually $15.9 million total contract value. And what’s interesting about the deal itself is that it confirms the centralization of data strategy, they’ve consumed multiple contact cubes, company cubes, firmographic information and really just going all in with ZoomInfo as the foundational data provider. And that’s where we landed it. We ended up growing it and locking it in for a three-year $5.3 million deal.

Mark Murphy: As a follow-up, Cameron, I don’t believe ZoomInfo’s revenue has ever declined sequentially into Q4. I’m wondering if we — maybe we should sense some conservatism in that forecast, or should we figure that you experienced kind of a sufficient downsells toward the end of Q3, such that it would reduce the kind of top line trend there and that potentially you do end up kind of just with a modest downtick for it.

Cameron Hyzer: So the environment does continue to be challenging, and we are expecting net retention for the year to be below 90%. As a result, in Q4, which is our highest period for renewals, that net retention below 100% creates a headwind that’s amplified by the higher concentration of renewals. So, as we’ve discussed, we believe that this renewal cycle, at least through the first quarter of 2024 will be challenging. I think if we look beyond that and you look at our renewal cycles, 90% of our ACV will have transacted between September 2022 and March 2024. So, we’re really focused on getting through this cycle. And while there is some tail of longer-term agreements after that, we’ll work through most of the space by the end of the first quarter.

Operator: Our next question comes from Tyler Radke with Citi.

Tyler Radke: Just curious what you’ve seen so far in the month of October. And specifically within the software and business services vertical, it sounded like that largely performed in line with your expectations, but just any updated thoughts if you’re seeing any green shoots emerging or if things are getting better or worse? Thank you.

Henry Schuck: October looks a lot like September and Q3 looked. So we haven’t seen any improvement in the environment. I think overall in the business, we continue to have more success outside of the software and business services verticals. And so, we’re seeing that in October as well, but nothing different than what we saw in Q3.

Operator: Our next question comes from Brad Zelnick with Deutsche Bank.

Brad Zelnick: Henry, it’s clear you’re leaning in on AI and hearing the enhancements in Chorus driving your NPS score 22 points higher is really impressive. But in a world where Microsoft has Sales Copilot, Salesforce has SalesGPT, how do you ensure ZoomInfo is front and center as the interface sales professionals continue to use for the greatest insights and productivity and helping them hit their number.

Henry Schuck: I think this all comes down to the data and insights that we provide. And it’s one thing to be able to provide insights on data that exists in your CRM or data or insights that exist on the public web, but the vast amount of proprietary non-publicly available data and insights that we collect and are able to use AI and LLMs against, that’s what we’ll — that’s what is making our product even more relevant for sales users. And without that proprietary data, without the information that sellers need to actually engage with their customers and know when to engage with their customers, any AI you put on top of just generic data doesn’t spit out relevant insights for a sales rep. And so, we’re really confident that the underlying foundation of data and insights that we have at ZoomInfo, which is proprietary and not available publicly is what will drive that pane of glass for sales reps.

Brad Zelnick: Maybe just for you, Cameron, with RPO and CRPO down sequentially amidst everything that’s going on, how much of that might be duration or anything else maybe to call out? And what needs to happen to see bookings stabilize?

Cameron Hyzer: Yes. So, as we mentioned, we do focus on sequential growth in annualized revenue as the primary metric to assessing period activity and momentum that was down at 0.6% in Q3. So, it is reflective of the challenges that we’re seeing from the environment. Other metrics can be influenced by other factors, including changes in the mix of contract lengths and billing terms and write-off assumptions. Probably the biggest one of those that showed some volatility was write-off assumptions, which have increased during the course of this year and specifically impact RPO in a negative way.

Operator: Our next question comes from Michael Turrin with Wells Fargo.

Michael Turrin: Cameron, I appreciate some of the color you’re making on retention rates and the impacts that you’re seeing. Is that comment you made around the challenges you’re seeing potentially lingering until the first half of next year, is that mostly a function of getting through this heavier renewal period? And is it similar to what you’re assuming for as to what you’d expect for the first half from a retention or a sequential growth perspective, if that holds? And maybe just for Henry, as a complement to that question, are there certain processes you’re able to put in place to help with those renewal conversations as you’re having more of those and have had more time to build response, or maybe anything you’re doing on the go-to-market side just as you work through the renewal period at the end of the year. Thanks.

Cameron Hyzer: So I think I’ll kick off there. And thanks for your question. Again, I think we’ve talked about with a number of people in the past that our view is that peak negativity, particularly with respect to layoffs and many other factors kind of occurred in the Q1 [2003] period. And therefore, we do think we need to get through the renewals with our customers. And as I mentioned before, between September 2022 and March 2024, we’ll have transacted with approximately 90% of our ACV. And I think we really need to get through that period of having renewed or sold ACV with those customers ahead of time. The assumptions really are very focused on renewals. New business continues to be relatively strong. Obviously, the environment impacts that as well.

But the sales efficiency of our new business team and the demand that we see continue to be good out there, and we continue to bring on new customers to support that. So, we’re really focused much more on mitigating and getting through this renewal cycle that we’re in right now.

Henry Schuck: I think, the big things we’re doing from a process perspective, Michael, on renewals is, number one, we’re getting at them sooner. And so, we’ve built a robust set of health scores for our customers that take into consideration product engagement, product usage, provisioning of user licenses, integrations and usage of specific products and functionality. And so, we have a much clearer view of the health of an account, and we’re engaging with them. Our account managers and our CSMs are engaging with them based on those health scores. And so, we’ve been proactively reaching out to those clients who come up for renewal in Q4 and Q1 throughout the back half of this year. And then, I talked about this a bit on the last call, but we have a really broad product portfolio.

And so, we have opportunities within the customer base if one product got down sold or a customer had a big layoff and so they have less licenses that they need for SalesOS, we’re able to bring them into Chorus or OperationsOS or other parts of the product portfolio. And so, we’ve been leveraging that in renewal conversations as well.

Operator: Our next question comes from Brent Bracelin with Piper Sandler.

Brent Bracelin: Maybe we’ll start with Cameron, one quick follow-up for Henry. Cameron, you’re obviously talking about challenges here in Q4, guiding to a sequential decline in Q4, talking about continuation of challenges into the first half. Should we also think about small sequential declines into Q1, Q2 before you see a reacceleration? And then, one quick follow-up for Henry.

Cameron Hyzer: Yes. So, we’re not guiding to 2024 at this time. And frankly, I think for all software companies, it’s probably less visibility further out than there has been historically. We do continue to expect that this more challenging renewal environment will persist through at least Q1 of 2022 (sic) [2024] and will impact sequential revenue growth through the first half. Once we’re through this cohort of renewals, there is the opportunity to drive higher growth rates, but it remains a challenging operating environment. We certainly don’t want to get ahead of ourselves as to when exactly that reacceleration might occur.

Brent Bracelin: And then, Henry, for you, obviously, clearly, a challenging environment, you’re still finding ways to close large deals. My question is on the boomerang deal. Surprised to hear a customer switched 10 months later, they’re coming back. Can you just give color around what drove kind of the boomerang deal back to ZoomInfo and how should we think about that going forward? Thanks.

Cameron Hyzer: Brent, really quickly, I just wanted to clarify, I meant Q1 of ‘24 there in that response. I think I misspoke.

Henry Schuck: Yes. Thanks, Cameron. Brent, I think — when I started this business 17 years ago, I started it with the premise that high-quality data made a major difference in the way companies go to market. And there have been cheap alternatives to what we offer for the last 17 years. And if you’re not doing your diligence and you’re not an incredibly sophisticated buyer, you can make a switch and then you realize almost instantly that high-quality data does, in fact, make a difference in your go-to-market motion. And that’s what we saw here. We saw a customer who switched to a low-priced offering and then immediately came back and meaningfully increased their spend with ZoomInfo and did it across the platforms. We’ve always competed in a way that said, when you have high-quality data, whether you’re an account executive, an account manager, a sales development rep, marketing operations professional, CMO or CRO, that information makes a meaningful difference in the way that you acquire, find and grow your customer.

And customers see that. And so, there are a lot of boomerang customers that we find who go try something new and then immediately come back. And in this case, not only did they come back, but they meaningfully increased their spend with us.

Operator: Our next question comes from Koji Ikeda with Bank of America.

Koji Ikeda: Maybe a question for Cameron here. You mentioned from September to March of 2024, you’d gone through about 90% of your ACV leaving 10% that still needs to be renewed. But the way I understand the comment was that of that 10%, some of them have already down sold in the second quarter of this year. So maybe could you help us describe the composition of that remaining 10% of ACV post March of next year.

Cameron Hyzer: Yes. So, to be super clear, those are — about 90% are customers that we’ve transacted with from September of ‘22, and we began to see real significant headwinds from the macroeconomic environment through March of 2024. So, those are longer-term contracts that transacted sometime before September ‘22, and therefore, we’re likely in a more constructive environment when they initially entered into that contract. So, that remaining 10%, those do tend to be larger customers, but there is some risk for those customers that they would perceive a worse environment than when they transacted either in 2021 or the beginning of 2022 as they come up for renewal later in ‘24 or potentially even later than that.

Koji Ikeda: I wanted to ask a question, a follow-up here on the $100,000-plus ACV customers. As we look at that metric, this is the third straight quarter of sequential decline here. And if we continue to kind of pull forward at similar pace, it would actually imply a year-over-year decline in the fourth quarter. So maybe you could help us decompose this metric a little bit? And ex technology, did this metric grow? I mean that would be super helpful to understand.

Cameron Hyzer: Yes. I think, in every quarter this year, ex technology, and honestly, if you just strip out mid-market software — so these are kind of largely venture-backed software companies. If you strip out that, this metric has grown every quarter this year quarter-on-quarter and obviously would continue to show growth as a result.

Operator: Our next question comes from Alex Zukin with Wolfe Research.

Alex Zukin: I guess on the same vein, I wanted to ask about NRR. Henry, you mentioned it was sub-90%. Are we — does this feel like a bottom and now we’re kind of taking that rate over a larger cohort here into Q4? Or is this something that gets to the mid-80s or the low-80s in Q4 and Q1? And then just on the margins, just can you remind us, given I think that there was a slight tick down in the guide on operating margins. Like what’s the — it sounds like the first half will be continually challenged from a revenue growth perspective. Are you going to grow OpEx by more than or less than revenue growth during this period?

Cameron Hyzer: So with respect to net retention, it continues to be a tough world out there. I think when we set up the guidance, we do assume that it continues to have an impact and a negative impact on net retention. And then with respect to margins, our goal right now is to maintain margins in that 40% level on an annual basis. I think historically, if you look at seasonality of margins, we do tend to have somewhat lower margins in Q1 and Q2 just based on the way that revenue recognition sets up and typical merit cycles and so forth. So realistically, I think we’re aiming to keep the annual margin at that 40% level, but I think you should — we should continue to think about seasonality and how the historical seasonality of margins has played out.

Alex Zukin: Got it. And then just a clarifying follow-up. Just — I know we’re not guiding to next year at this point given the lack of visibility. But again, if you just take the second half of days adjusted sales revenue growth or sales outstanding, is that the right way that we should at least start to conceptualize the first half for next year, just so we can kind of all get our models in the zone.

Cameron Hyzer: Yes. So I think we’ve consistently said that we continue to see challenges with respect to the environment, and we’ll see challenges through at least Q1 of 2024. So, in my mind, the range of sequential growth that we’ve seen in 2023 is a good starting point for that time period. Certainly, we think that there’s the opportunity to accelerate after that, but I don’t want us to get ahead of ourselves as to when that acceleration will occur just based on the uncertainty in the market.

Operator: Our next question comes from Elizabeth Porter with Morgan Stanley.

Unidentified Analyst: You have Brian Bressner [ph] on for Elizabeth Porter. Thanks for taking the questions. On sales efficiency, you mentioned in Q2 that trends ticked down slightly in June after showing signs of stabilization in Q1. Any update maybe on how this particular metric performed in the quarter? And what steps you can take to kind of help this into a better demand environment going forward?

Cameron Hyzer: Yes, sure. So, the environment does continue to get more challenging. And that particularly impacts sales efficiency, more so existing customer sales efficiency than anything else. So, that efficiency with our existing customers does continue to be challenged and is more challenging in Q3 relative to Q2. New sales efficiency continues to hold in there reasonably well. I think, as we’ve — as we’ve talked about before, we do see a much higher concentration of our new sales with companies outside of the technology space, which has helped us basically go after customers that are more — where there’s more demand right now.

Unidentified Analyst: Maybe just a quick follow-up. You made a few recent changes at the leadership level. Can you just — any quick comments on any changes or impacts we should expect from these going forward?

Henry Schuck: Yes. Look, I think — and I talked about it in the call, I think the big opportunity for me and for the business is a flattening of the organization that gets me closer to our customer base, closer to revenue and customer success and customer support. I, over the last 60 days, have met with over 200 of our account executives and account managers and roundtables across the Company. I’m constantly meeting with our customers. And I don’t anticipate any meaningful changes that come from these leadership changes.

Operator: Our next question comes from Kash Rangan with Goldman Sachs.

Kash Rangan: So how seriously is the Company taking the attrition rates, which seem to have spiked, especially among as you characterize the mid-market business? Some of it is not controllable if somebody is going out of business or just adding fewer salespeople or letting go of salespeople completely understand. But when you isolate those instances out, what are you learning from the engagement with the product itself that you can make it a stickier proposition that is really part of a complete loop that it’s impossible to get unhinged from the data source that you guys have built up? Because it seems to me that the attrition should be contained better than what you’re experiencing. But I’m curious to get your thoughts on how you plan to fix this.

Henry Schuck: I think that’s right. I think we’ve been thinking about — we think about this in a number of ways. And if I think about it departmentally, if I start with product and engineering, we’ve been working really hard to simplify the user experience in our platform and make sure that our customers are not just using ZoomInfo as a lookup tool, but actually plugging it in through our workflow solution to an ongoing workflow. What we’ve seen this year is the NPS scores are up every quarter. In course, our NPS score was up 20-plus points on our core SalesOS platform. It’s up 7 points year-over-year and product engagement is also up meaningfully. And so, we’re focused on making the product easier to use and then also plugging that product into an ongoing sales or marketing person’s workflow.

We think, obviously, those two things drive a meaningful amount of stickiness in the customer base. On the customer success in onboarding and implementation side, we made a number of changes in June in the way that we onboard and implement and deploy our customers to ensure that our customers are seeing quicker time to value. And those are netting out really positively for us, the numbers of customers who are using the product and using the product quicker post implementation have significantly increased. And so we feel really good about that as well. And we’ve materially grown our customer success team to make sure that we’re giving our customers — sharing with our customers best practices, solving support issues for them in a timely manner, and we’ll continue to invest across all three of those areas.

Kash Rangan: Got it. And also given the divergence between the retention of large customers versus the middle of the curve, how are you planning to win those customers back. And granted that you had that one big boomerang, the other customers in the bill of the bell curve that have defected, what’s the company’s plan, if any, to bring them back.

Cameron Hyzer: I think it’s worth noting here that the churn rate has actually not significantly improved. It’s a little worse than it was, say, in 2022 or 2021. But the big driver of the net retention change is much more that we’re seeing reduced upsell and more downsells. So, I’d say that the biggest difference is not that we’re losing these customers, it’s that they’re spending less with us. A bunch of that has to do with lower seats. Some of it has to do with tighter budgeting. But realistically, I think for the vast majority of cases, it’s not a loss of a customer. It’s a reduction in the spend with those customers that’s changing the net retention.

Operator: Our next question comes from D.J. Hynes with Canaccord Genuity.

D.J. Hynes: Henry, I feel like you’ve talked a bit more about data-as-a-service or enrichment of late and the potentially favorable economics that accrue there. My question is how recurring those DaaS agreements generally are. I mean, is it a situation where customers spend a lot on the effort upfront and then less in maintenance in subsequent years? Or is there an ongoing commitment to enrichment that makes those revenue streams more linear or recurring in nature? Like how does that typically work?

Henry Schuck: Those are recurring subscriptions to our data and our data to live alongside their CRM data, their Snowflake or Databricks data. Obviously, one of the key parts of our offering centers around the fact that this data is constantly changing. There’s no company that looks the same on December 31st as it did on January 1st. And over 30-plus percent of people are changing jobs or getting promoted or getting into new roles, we’re tracking all of these changes at scale. And not to mention, there’s the influx of new companies being started and incorporated that we’re staying on top of. So these — we’re feeding those changes in a real-time way into our customers’ systems of record, whether those are marketing systems, enterprise data warehouses or CRM.

And so those are ongoing contracts for us. One of the things that’s worth mentioning here is when you hear about me talking about this, it is largely about us being super excited about the AI opportunity that we’re seeing and what our customers are saying to us and they’re showing up at our doorstep saying, the C level wants us to drive generative AI in our outbound prospecting motion. They want us to be using AI and LLMs in the way that we contact and prospect and communicate with our customers, but the data that we have in the systems are just not robust enough. They’re just not accurate enough for us to actually take advantage of that. So when we show up and we talk about data-as-a-service, we have the opportunity to come and really drive their AI motion.

And we’ve had the conversations all across the enterprise. We have them in the mid-market. And in the SMB, we’re able to drive a lot of that workflow directly from our platform. And so we think the AI opportunity and the focus on AI really gives our data-as-a-service offering the spotlight.

Operator: Our next question comes from Joshua Reilly with Needham.

Joshua Reilly: Nice job executing here in a tough environment. You mentioned the expanded international coverage. How are you prioritizing the expansion of the Company and contact database internationally? Are you going by a geography or some other way of expanding that? And then what inning are you in, in terms of getting the international database where you want it to be to kind of properly monetize it?

Henry Schuck: Yes. Great question. Thank you. We are going where our customers go. And so we have a tremendous amount of telemetry built into our platform. And so we’re able to see how our customers are searching across our platform, what they’re looking for and what countries, what size companies. And then, we’re doing a number of user surveys to understand when we do have the information, what else would they like to see. And so, when you see the growth in contact information, mobile phone numbers, whatever that is, it’s being driven specifically from where we see our customers searching and where we see our customers telling us they want a deeper, more robust coverage and actionability. And so, we’ve done that country by country, region by region.

I would tell you, we’re probably — we are obviously monetizing this solution. We think the solution that we have internationally is far and away a better solution than anything competitively, even solutions that are native in Europe or internationally. So, we feel really strongly about that. We think there’s still a great opportunity to enhance the data asset. So I would tell you we’re somewhere like the seventh inning stretch.

Joshua Reilly: Got it. And then with the stock price, obviously, depressed here in the near term, and you bought back 8.8 million shares. How should we think about leaning further into the stock repurchase over the next several quarters given you still have a fairly healthy amount in the current authorization?

Cameron Hyzer: Yes. So, our plan is to continue to opportunistically repurchase stock based on where it’s trading relative to what we perceive as the long-term value. So yes, I think at these levels, we’ll continue to lean in. We do have a fair amount left on the authorizations that we currently have, but we’ve continued to buy stock in October, and we’ll continue to do that going forward.

Operator: Our next question comes from Taylor McGinnis with UBS.

Taylor McGinnis: So last quarter, I know part of the hit was customers who had renewed lower in the past still renewing lower. So now that we’re in the fourth quarter and coming up on lapping some of the bigger layoff activity, just curious for those who did lay off at this time last year, can you comment on how those conversations are progressing? So, are you still seeing them take down seats further? Is that trending better than expected? Would love just any thoughts there?

Cameron Hyzer: Overall, it continues to be a tough environment. We do continue to see customers that renewed at lower levels last year, continuing to have pressure with respect to their purchases this year. So, I’m not convinced that most of the way through October that we’ve seen kind of customers that made really big layoffs last year. So, it’s a little hard to compare for those customers that are — didn’t really get through their cycle of negativity until February or March, where exactly they’re coming out given that those layoffs in many cases happened later in their cycle or particularly for customers that had multiple rounds of layoffs. I don’t know that we’re kind of lapping the easiest comps yet.

Operator: Our next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow: Two quick ones. Cameron, you talked last quarter already about those headwinds that we have till Q1 next year. Compared to your comments last quarter and this quarter, how has your sense changed? Is it about the same, or you expected Q2 slightly better, slightly worse? Where did you come out there? That’s the first question. And second question for James and Henry. If you think about a downturn, usually, everyone is about cost cutting. And then you suffer and you see it now, at the later stages of a downturn, people usually start thinking about, oh, I did my cross-cutting I think about sales and sales growth, again, are we at those conversations at least at the early level yet or not there yet?

Cameron Hyzer: In terms of kind of where we were compared to last quarter, I think we expected the environment to get worse than it has gotten worse. I don’t think we see any trends currently that the operating environment is getting better. And in some instances, I think it’s largely a customer by customer at this point or kind of segment by segment that there are some things that, frankly, I think people are more worried than they were at the end of last quarter.

Henry Schuck: I think the other thing I would add there, Raimo, is if you’re in the boardrooms of private equity or venture capital-backed businesses today, there is not a push for the companies to grow faster. There is a push still for those companies to cut costs and get to — pull profitability forward or to increase profitability. So I don’t think we’ve turned that corner where investors and board members are pushing their private companies to get back to growth. I think they’re still in a — either maintain the cost you’ve cut or continue to cut costs mentality.

Operator: Our next question comes from Brian Peterson with Raymond James.

Unidentified Analyst: This is Johnathan McCary [ph] on for Brian. So I think you mentioned non-software growing at the low-20s clip last quarter. Is that still kind of the right ballpark? And then for that non-software piece of the business, how would you categorize the NRR of that category versus the broader figure?

Cameron Hyzer: So I think as mentioned, the operating environment continues to be challenging and as expected, it was worse than we saw in Q2. That weakness is not just confined to software. Non-software growth did decline. It’s below 20% this year — or this quarter, year-over-year. We do continue to see demand in those non-software industries, particularly on the new business side. And certainly, the retention in non-software is well above what the overall average is, but we continue to see kind of challenges there.

Operator: And our next question comes from Rishi Jaluria with RBC Capital Markets.

Rishi Jaluria: Henry, you talked a little bit about in your prepared remarks, your efforts with both PLG as well as leaning a little bit more on self-service e-commerce capabilities. Can you expand a little bit on what you’re doing there? What kind of a road map will look like? And how early traction or customer reception has been from these initiatives?

Henry Schuck: Yes. I think what we’ve been focused on this year has been really to build the infrastructure and be out in market testing self-service and e-commerce capabilities with our downmarket customer base. And we’ve seen really good traction that our ability to sell in a self-service e-commerce way down market has grown quarter-over-quarter, every quarter this year. And so, we feel really strongly about that as we go into 2024. Today, we’re focusing that offering on the lowest end of the market where we can drive efficiencies by taking a sales rep out of the motion. And then, we’ve built and we’ll continue to build technology onboarding. And so customers can also onboard in a self-service way. We’ve noticed that we’ve been able to meaningfully drive up usage and adoption of our platform with our technology and self-serve onboarding, and we think we can continue to make impacts there.

I’ll tell you, we’re in early innings, but we have a lot of confidence about that product and its ability to drive efficiencies and growth in the down market.

Operator: Our next question comes from Terry Tillman with Truist Securities.

Unidentified Analyst: This is Bobby De [ph] on for Terry. I’m curious, across the different OS solutions, SalesOS, MarketingOS, et cetera, are you all seeing any of the segments more resilient than others related to existing customer activity or new customer wins? Thank you.

Cameron Hyzer: Certainly, as we mentioned before, within the advanced functionality, which is really encompassing functionality outside of the SalesOS and the add-ons to SalesOS, MarketingOS has done really well, and it’s growing. Obviously, that was a newer product in 2022, but is a place where we continue to see growth. We also see, as Henry has mentioned, a lot of growth in our DaaS and enrichment capabilities as well as automation capabilities, which those land either primarily in the OperationsOS or a lot of the automation capabilities, whether that’s Workflows or Engage, et cetera, are part of SalesOS. So I think it’s parts of those OSs that we’re really seeing more interest from customers. And I think as Henry mentioned, part of that is driven by people looking at their data strategies as may be driven through AI or preparation for AI. And part of that is them thinking about the efficiency of their teams and looking to automate where they can.

Operator: Our next question comes from Jack McShane with Stifel.

Unidentified Analyst: This is Jack McShane on for Parker Lane’s team at Stifel. I’d be curious to ask James what are some of your top priorities and changes you’re looking to make in the go-to-market of ZoomInfo. And where do you see the biggest opportunities as you step in the new role?

James Roth: Yes. Thanks, Jack. So in terms of the biggest opportunities we see this DaaS led motion that we’re seeing in the seven-figure upmarket cohort, we’re seeing a lot of success in. The ability to take that into the lower end of the enterprise and into mid-market as well is a big opportunity. Overall, it’s just the customer centricity, Henry spoke to it as did Cameron, getting the value to our customers. What we see, there was an earlier question on the DaaS being a onetime or recurring. When folks ingest that data, they buy more of it in every single example that we see. And so, leaning into that as a motion, making sure that that customer success motion, ingesting it into their data lakes, showing them how to activate it, those are all top priorities.

Because when folks use the full breadth of our platform, we see continued success and continued growth with what they’re doing. So, those are just a handful. I think over the last 18 months, we’ve built out a world-class enterprise team, and we’re seeing the success there. And continuing to do that is what I get extremely excited about across the overall organization.

Operator: I’m showing no further questions at this time. I would like to turn the call over to Henry for closing remarks.

Henry Schuck: Thank you everybody for joining us. We really appreciate it.

Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.