Q2 2023 Zeta Global Holdings Corp Earnings Call
Greetings, ladies and gentlemen, and welcome to the teachers second quarter 'twenty to 'twenty three earnings conference call.
At this time, all participants will be in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please stay strong zero.
Telephone keypad.
As a reminder, this conference is being recorded.
It is my pleasure to introduce your host Scott Smith, Senior Vice President of Investor Relations.
You may begin sir.
Thank you operator, Hello, everyone and thank you for joining us for <unk> second quarter 2023 conference call today's presentation and earnings release are available on David <unk> Investor Relations website at investors that data global Dot Com, where you will also find links to our SEC filings along with other information about <unk>.
Peter.
Joining me on the call today are David Steinberg Data's, co founder Chairman and Chief Executive Officer, and Chris Greiner, Our Chief Financial Officer.
Before we begin I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward looking statements regarding our financial outlook business plans and objectives and other future events and developments.
Statements about the market potential of our product potential competition and revenues of our products and our goals and strategies.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
These risks and uncertainties include those described in the company's earnings release, and other filings with the SEC and speak only as of today's date.
In addition, we have received subpoenas from the SEC as part of an investigation into a company we worked with prior to our IPO. The amount of business. We conducted with this company was quantitatively insignificant and we have not worked with them since 2020.
Finally, our discussions today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for our GAAP results we.
We use these non-GAAP measures and managing the business and believe they provide useful information for our investors.
Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate can be found in the earnings presentation available on our website as well as our earnings release and other filings with the SEC.
With that I will now turn the call over to David.
Thank you Scott good afternoon, everyone and thank you for joining us today.
The second quarter of 2023 marked our two year anniversary as a public company and I'm extremely proud to announce we have exceeded consensus estimates and raised our outlook.
Every quarter since we've gone public with Q2, continuing the pattern.
In the quarter, we delivered revenue of $172 million.
25% year over year, with adjusted EBITDA of $27 million up 45% year over year.
This translates into an adjusted EBITA margin of 16% up 210 basis points year over year.
We generated $21 million of cash from operating activities.
41% with free cash flow of $13 million up 110% year over year, we have generated positive free cash flow in each of the eight quarters since our IPO.
Driving this level of consistent growth and profitability is only possible if you're developing exceptional products that deliver exceptional value to your customers.
<unk> data our goal is to make marketers the heroes of their stories by helping them to acquire grow and retain customers substantially more efficiently and effectively than ever before by leveraging our data implementing our software and utilize.
The superpower of our AI.
By creating heroes, we also create advocates which is reflected in our net promoter score or NPS and our recent survey, we score greater than 90% for product quality customer support and ease of doing business.
And it's no coincidence that companies with the highest NPS also have the highest employee net promoter score or E. N. PFS. Once again zenaida ranked highly in this area, including a score for four out of five is a great place to work and over 50%.
<unk> overall increase from 2022 to 2023.
NPS and E&ps are key elements of our <unk> 2025 company leadership, Coles, and we remain well on track to exceed our targets.
Marketing is currently at a crossroads as the ability to connect with consumers and execute sophisticated marketing strategies across channels is harder now than ever.
<unk> recently commissioned a study with Forrester consulting that reveal almost half of marketers do not trust the reliability of their data due to fragmented tools and technologies.
Dressing this deficiency requires enterprises to invest in higher cost and higher complexity integrated platforms to realize the digital promise of superior consumer experiences and higher returns.
Study validated what we already know.
This data marketing platform, whereas Emt is purpose built for the digital transformation enterprises seat.
<unk> solves these challenges by unifying identity.
Telegent activation into a single platform delivering better experiences for consumers and better results for brands.
<unk> was designed on a simple powerful premise while data is abundant.
Actionable intelligence and capabilities are scarce.
The GMP takes complex disparate data and unifies it together to create a complete picture of the consumer our proprietary AI synthesizers data into the highest possible intent based score and then activates across every channel to create one to one marketing.
<unk> says at scale.
Let me give you an example.
In the second quarter, we signed a multi year $7 5 million dollar contract with one of the largest automotive service companies in North America, replacing their legacy marketing cloud.
With identity and intelligence at its core the GMP enabled their marketing team to become the hero by consolidating multiple customer views across their five different brands into a single profile we call. This a golden record.
Which has been elusive for multi brand marketers to realized quickly and consistently.
And with the activation and the same platform. The marketing team is now easily able to target with greater efficiency deliver more personalized experiences across channels and measure impact with greater precision.
All resulting in higher return on investment.
Having an AI powered marketing cloud that delivers actionable intelligence like the CMP is critical to engage with customers in today's complex and rapidly changing marketing ecosystem.
Consumers are harder to find and exposed to more marketing messages, making connecting to the right consumer more difficult than ever.
This makes <unk> data cloud, even more vital as it has grown to represent over 90% of the U S adult population.
And as we become more embedded with our customers and capture even more signals, our AI becomes even smarter, making our platform stickier and our competitive differentiation even greater.
The addition of our proprietary gender AI models further increases the utility and stickiness of busy on peak.
We see this in the automation of manual tasks driving greater efficiency. We also see this in the <unk>.
Elevation of intelligence, which is the electricity of our AI powered marketing cloud and our competitive advantage.
This is evidenced through our reported results as well as our leading indicators such as our pipeline and our Rfps, which continued to hit record highs.
A key driver to this growth has been laid a lot which has built tremendous brand awareness and business impact over the last two years.
That is why I am extremely excited to announce our third annual state of live event will be September 28 at the time Center in New York City.
This larger venue will further elevate <unk> brand through a day of insightful thought leadership and world class speakers, including writers producers directors entrepreneurs and actor Seth Rogen, and Evan Goldberg, who will speak about their journey at success across industries.
From Hollywood through house plants, and how they have achieved success through innovation passion and persistence.
Additionally, we will have Cmos for many fortune 500 companies.
In total there will be over $100 billion in annual marketing spend control by the people in the room.
The day before Zaid alive will also be filled with a series of meetings, including a discussion with our customer Advisory Board and a group investor meeting and more.
We continue to focus on the advancement of this Ada brand and could not be more pleased with the progress we've been making which has rippled through our industry recognition and our financial results.
In summary, we continue to be incredibly well positioned to capitalize on the need for enterprises to do more with less and simplify their marketing stacks.
And while we have come a long way on our journey over the last two years as a public company.
We truly believe we are just getting started.
As always I would like to sincerely. Thank our customers our partners team Jada and all of our shareholders for the ongoing support of our vision.
Now, let me turn it over to Chris to discuss our results in greater details Chris.
Thank you David and good afternoon, everyone.
I'll cover three themes highlighting another very strong set of results.
First we extended our track record eight straight beaten raise quarters and once again exceeded our top and bottomline compound annual growth rates required to achieve our <unk> 2025 plan.
As seen on slide seven in our earnings supplemental our trailing 12 month growth rates for revenue and adjusted EBITDA are pacing six points ahead of the original date of 2025 compound annual growth rate established in February 2022.
This trajectory of pacing ahead of $1 billion in revenue and $200 million and adjusted EBITDA by 2020 fine. It's certainly not captured in data's valuation today.
Second we delivered another quarter, where profit grew even faster than revenue generating 210 basis points of adjusted EBIT margin expansion.
Cash flow from operating activities of $21 million up 41% year to year and free cash flow of $13 million up 110% year to year. We're doing what we said we would do grow our universe of new buyers drive our <unk> 2025, Kpis and extract significant operating leverage.
Our expense structure.
Third we're raising guidance, we are increasing guidance for the contribution of last quarter's M&A plus flowing through and raising the organic over achievement for the full year in revenue and profit.
I'll discuss this in detail on today's call and can also be found on slide 14 in our supplemental earnings material for additional clarity.
Now, let's dive into each of these results for more detail.
Starting with our results total revenue of $172 million grew 25% year to year or 24% on an organic basis, we exceeded the midpoint of revenue guidance and consensus by $9 8 million with $1 8 million of the upside coming from our March 2023 acquisition of <unk>.
What counts.
The strength of our quarter was once again highlighted by the addition of scaled and Super scale customers at a pace that continues to be firmly ahead of our <unk> 2025 model.
We ended <unk> with 425 scaled customers up 14 from last quarter and up 14%, which translates to 52 net new scaled customers over the last year. This is a nice acceleration from the 30 added for the prior four quarter period and double the growth rate require.
For <unk> 2025.
We added new scaled customers in each month of the quarter with most new additions coming from industries, such as consumer retail travel and hospitality education and technology media.
And of the 14 scaled customers added quarter to quarter nine renew to data and five were existing customers that became scaled.
Out of the 1 million Super scale customers, we were up eight quarter to quarter to 118 and up 18% year to year.
Six out of our 10 largest industry verticals grew over 25% again this quarter.
As you've heard me say for many quarters now while data has been executing very well and growing profitably through a choppy macro backdrop, we're not immune from its challenges.
<unk> continued to see pressure in the insurance vertical as the industry works through elevated loss ratios in premium increases.
Our view is this is an industry specific dynamic and nearing the bottom of the spending cycle.
Nevertheless, as another example, illustrating the industry diversification of the portfolio how resilient the balance of the customer set has been and how our value proposition. The platform is resonating with buyers.
Total scaled customer <unk> was 392000 up 10% year to year, and the 12th straight quarter of double digit growth.
It's worth noting since announcing data 2025, six quarters ago, we have exceeded our scaled customer count growth target every quarter.
Not surprisingly with the adoption and scaling of pilots more customers entering at lower band, which is a factor driving overall ARPA growth.
We view pilots is core to our land expand extend strategy and healthy indicator as these other pipeline for future Super scale customers.
A good example of the land expand extend strategy is the progression scaled customers, making adding channels throughout their platform journey with data.
As seen on slide 10 in our supplemental earnings presentation. There is a 70% increase in channel adoption between our 100 K to 1 million scaled customers and our 1 million plus super scale customers.
This translates to a 10 times, our <unk> differential between the two cohorts a massive opportunity with the enterprises already spending hundreds of millions to billions in marketing a large percentage of which we can address.
Direct mix of 75% improved four points from 71% last quarter.
Furthermore, direct revenue growth accelerated from 10% year to year in the first quarter of 2023% to 15% from year to year and <unk> 23.
In 2023 direct mix continues to be influenced by the addition of new agency customers, who have started their journey leveraging <unk> data and measurement and started their activation on social channels like meta or Tic Tac.
As a reminder, we anticipated this and as we communicated last quarter. It is common for agency platform usage to start with integrated channels and extend and grow overtime to Zeta owned and operated channels. We have good visibility into their progression to our channels based upon our history with other agencies and how our sellers.
Are incentivized.
The advantage customers have with using the data is data and owned channels is the ability to maintain a single thread of identity throughout their omnichannel strategy. Additionally.
Additionally, by relying on <unk> data and have access to our data cloud. We also create a wedge to bridge from marketing activities to also become their enterprise intelligence layer. In fact, we've already started executing on this enterprise layer strategy by integrating with agencies to a co branded intelligence solution.
In this model data provides the tech stack data and future innovation, which powers and agency branded solution.
This model is highly scalable provides data with incremental high margin revenue and represents a contracting changed from consumption to subscription recurring revenue streams.
Very excited about this as it can transform our customer relationships, while also serving as a catalyst for future growth and recurring revenue mix.
For the remainder of 2023, we expect direct revenue mix to be in the range of 70% to 75%, which is consistent with the mix we assumed in our guidance at the beginning of the year and consistent with the expectations, we outlined last quarter for GAAP cost of revenue percentage being equal to the average of second half 2022.
<unk> or 38%.
Sales productivity metrics remained strong and because of that we do not believe we need to add as many new quota carriers as previously thought.
One of the many benefits we're seeing from our best of breed sales management system is to use predictive metrics that enable us to fail fast and higher smarter.
Along those lines in conjunction with our April annual revenue performance review cycle and this quarter's M&A related restructuring activity, we reduced redundant roles and unproductive sellers at the same time, we maintained our historical hiring teams, resulting in no net change in quota carriers quarter to quarter.
But still up 13% year over year at 130.
In addition to our pipeline growth from our demand generation engine sales development reps and quota carriers. We are also seeing strong contribution from our snowflake partnership in fact, this past quarter. We were honored to be named powered by Snowflakes go to market partner of the year.
Which brings me to the topic of accelerating profitability.
In the second quarter, we delivered our 10th straight quarter of expanding adjusted EBIT margins year to year adjusted.
EBITDA in the quarter was $27 million up 45% year to year with adjusted EBITDA margins of 15, 6% up 210 basis points year to year, it's worth noting that in the second quarter. It was the first time, we've seen adjusted EBIT margins increased over the first quarter going from 15, 3% in the first quarter.
2023 to 15, 6% in the second quarter of 2023.
Driving operating leverage as productivity in sales and marketing, which excluding stock based compensation fell 120 basis points year to year to 24, 4% as a percentage of revenue.
R&D expense to revenue excluding stock based compensation fell 70 points year to year to six 9% as we continued to benefit from our global engineering and data science workforce.
And G&A expense to revenue, excluding stock based compensation fell 60 basis points year to year to 17, 4%.
GAAP cost of revenue came in at 36, 1% down 50 basis points year year, and was up 160 basis points quarter to quarter due to the impact of agency customers, which I discussed earlier.
Importantly, we continued to see low cost of revenue within our direct channels.
On a GAAP basis, or <unk> 23, net loss was $52 million, which includes $58 million of stock based compensation.
Excluding the accelerated expensing related to our IPO stock based compensation would have been $21 million.
In the quarter, we also incurred a $2 8 million restructuring expense following the rapid integration of what counts and the broader synergies we are realizing across the business as we look to drive towards data 2025 long term model of at least 20% adjusted EBITDA margins.
With this focus on efficiency and expertise in driving M&A synergies, we are delivering strong cash generation cash flow from operating activities was $21 million up 41% year to year with free cash flow of $13 million up 110% year to year. This equates to 48% of <unk>.
Adjusted EBITDA up from 42%.
Last quarter and 33% last year.
Which brings me to my third topic, our increased third quarter and full year guidance.
For rounding purposes as outlined in the guidance table on slide 14 of our earnings supplemental materials. We are clearly delineating increases in guidance related to last quarter's M&A from increases related to the companys organic over achievement for the third quarter, we are increasing the midpoint of revenue guidance.
<unk> by $3 million to 179 million up 18% year to year out of this increase $1 5 million is attributable to the acquisition of what counts and $1 5 million as organic upside.
Excluding last year's political candidate revenue of $3 million the mid point of organic revenue growth was 19%.
In terms of adjusted EBITDA, we're guiding to a midpoint of $32 million or 17, 9% margin. This represents dollar based growth of 43% year to year 320 basis points of margin expansion, which is a 90 basis point improvement versus our previous guidance.
For the full year of 2023, we're guiding to the midpoint of revenue of $715 million up 21% year to year and $14 million more than previous guidance.
Our guidance includes $5 6 million for the acquisition of what counts and the additional $8 7 million as organic upside.
On an organic basis, our 2023 revenue guidance implies 20% growth.
And excluding last year's political candidate revenue of $7 5 million the midpoint of organic revenue growth is 22%.
In terms of adjusted EBITDA, we're guiding to a full year midpoint of $124 5 million or 17, 4% margin. This represents dollar based growth of 35% year to year and 180 points of adjusted EBIT margin expansion, which is 30 basis points better than our previous guidance.
As a reminder, during the third and fourth quarter of 2020 to Veda had a total of $7 5 million of political candidate revenue that we do not anticipate repeating in 2023.
This results in a full year 2023 organic growth headwind of 160 basis points, including a headwind to <unk> of 230 basis points or $3 million and a headwind to Q4 of 310 basis points or $4 5 million.
Slide 16 in our earnings supplemental material outlines this in detail.
Before turning to Q&A, let me quickly close with a couple of final thoughts first we continue to demonstrate the ability to execute with short term precision.
I'll also investing to maintain a trajectory to beat our long term data 2020 by model of at least $1 billion in revenue at least $200 million and adjusted EBITDA and at least $110 million in free cash flow.
And second we continued to accelerate profit and cash generation to increase leverage against our disciplined cost structure.
For 10 consecutive quarters, we've expanded adjusted EBIT margins year to year, while continuing to deliver consistent 20% plus revenue growth.
Now, let me hand, the call back to the operator for David and me to take your questions.
Operator.
Okay.
Thank you, Sir ladies and gentlemen, if you could talk to us a Christian please please oh and then one on the signed up in key pad.
A confirmation tone will indicate comes from an easing in the question queue.
You May press star two to meet the cube.
Call participants are making use of speaking prevent it may be necessary to pick up your handset before pressing just talking.
Our first question comes from Arjun Bhatia of William Blair.
Hi, This is Chris on for origin, congrats on the quarter and thanks for taking the question.
First I want to touch on.
The customer response has been so far to some of the newer AI offerings that launched just before the end of last quarter.
And if you had panther directly monetize those products are primarily a letter or customer acquisition or lower officer.
Thank you Chris we appreciate you being on.
When we rolled out the new generative AI.
Tools, which really help all of our clients to add additional horsepower to their own team, it's effectively virtual data scientists living inside of the platform that give additional capabilities in real world simplistic answers.
We rolled it out to everybody at once and I don't think we've ever rolled out a product that I personally got more people, saying they loved and we're excited about it's still early days.
We will continue to fine tune it and we will continue to make it better but as you know we've always been on the cutting edge of artificial intelligence. We started patenting machine learning all of the rhythms as much as seven to 10 years ago, and we have a meaningful patent portfolio around machine learning and artificial intelligence.
<unk> so as we made the leap to go from using AI to help our clients get to the highest level of intense based score as to whether somebody would want to purchase a product and have the not just intend to buying it but because the data is all deterministic would have the ability to know what.
The person could be approved for it to taking that to building tools that allow <unk> to make questions like what is my most valuable audience or which of my customers are buying additional products from my competitors and how do I capture that by adding those types of tools.
<unk>, we're starting to see clients getting even stickier and we think that will add to the stickiness of the platform in the years to come.
Okay.
Great. Thank you that's very helpful color and then I was I wanted to touch on was the acquisition of what counts.
Kind of where this fits in with Veda overall in terms of product and talent and then what potential you see to grow that business going forward.
So I think it's dramatically we're always looking for great teams, great data and great technology, when we look at M&A.
Never bought a company focused on the revenue growth associated with it it's just not been our Mo.
In this case, what counts is a very unique boutique email service provisioning business. It allowed us to integrate their technology into our tech stack and bring some incredible human capital into our business and obviously, we felt like it had created a little.
Bit of confusion around our first quarter, which is why we've gone so much further and breaking it out and really showing how small and acquisition. It is.
The other thing I think has really been important about our M&A strategy has been less.
Level of accelerated profitability, we have been able to drive through M&A by taking out expenses on both sides. In this case, we picked up some incredible people around sales and engineering and as we looked at cutting team members on our own team, we were able to take certain head count out here.
<unk>, which resulted in greater profitability than you would see for the revenue that this particular business brought in so great people, great Tech and additional profit acceleration all came out of this very small acquisition.
Thank you operator next question please Kristin.
Thank you very much sir.
The next question comes from Richard Baldry of Roth in EM.
Thanks, I was wondering if you could talk about the competitive win rates. You know you noted that you're still seeing record pipeline record Rfps. So wondering if that's that's moving at all.
Maybe with respect to pricing environment are you seeing people like Salesforce openly talk about 10% price increases. So do you think that impacts of win rates or is it something that you could also follow suit some sort of pricing power of your own. Thanks.
Yeah. Thanks rich.
We continue so I always sort of said as the as the pipeline grew and as data is brand sort of went from Veda, who are more recognized brand name, which is really where I feel we are today I Wouldnt say, we are a household name, but we are definitely really evolve the brand that we're seeing.
Our record RFP. So we I think three quarters in a row. We've said, we've now hit new RFP Records that is.
We're at another record RFP level at the end of Q2 going into Q3.
I always felt that gosh, if you could increase that funnel enough you would just naturally start closing a smaller percentage of the rfps.
We're not seeing that we're still closing greater than 50% of the Rfps and proposals, we're being invited to participate in which quite frankly, even surprises us at this point.
As it relates to our competitors raising price for lowering price.
I think that as we look at our business, we see an opportunity to continue to accelerate our growth and if you look at the way the business has been operating now where over the last few quarters I don't know the exact number I'm sure Chris could tell me, but over the last few quarters, we've added at least 300.
Basis points in operating margin.
We're starting to see incremental margin drop at a disproportionate rate from revenue to gross margin to operating margin, we think thats a trend thats going to continue so as we look at our win rate we are seeing opportunities to do more with customers I don't think at this point, we're sort of looking at.
Raising price so to speak but I would say, we are winning greater than 50% of the engagements.
Rfps, we get invited to and I will remind you, which I'm sure you know greater than 17 companies on average.
Invited to the average RFP, we are invited to and in 100% of the wins, we had in the second quarter will be either salesforce Oracle or Adobe.
100% of them, we'd be at least one of them and most of them. All three were invited so we feel like our technology and our people are exceptional but when you add in the proprietary data that.
Nobody else has that really fuels as the electricity to powering the platform and then you ingest the superpower of our AI you are really putting together a solution.
And our software stack that really can't be paralleled EBIT, if our competitors, we are lowering their price let alone raising their price.
Thanks, Congrats on a great quarter.
Thank you Rich next question please operator.
The next question comes from Zach Cummins are Pete Roddy Securities. Please go ahead.
Yes, Thanks, David and Chris Thanks for taking my questions and congrats again on another strong quarter I, just really wanted to ask about sales productivity with head count being flat quarter over quarter, but really having no impact on what youre seeing on the sales execution side. So can you just talk through your approach to sales productivity and what's really driving the success.
So youre seeing with with your reps.
Thanks Zack.
Two really interesting data points for you first and this is our guiding principle it will always be quality over quantity.
Second to that is we want to be guided by the data and by the productivity metrics. I think there is a really really interesting set of data points for you to illustrate the productivity, we're seeing and how that is guiding our hiring decisions. If you look back at the last 12 months, we've added 52.
<unk> scaled customers over that same 12 month period, we have added 15 quota carriers.
If you go back to the prior trailing 12 month period, we added 30 scaled customers and 35 quota carriers. So we're going from less than a one to one ratio to today, adding three and a half new scaled customers per quota carrier. That's obviously translated in back to back quarters, where sales in.
Marketing as a percentage of revenue has gone down year over year, but it's also evidential the type of productivity that we're seeing and what guides our hiring decisions I think we have a great sales management system, we have an exceptional training and learning and development team and as David mentioned, we have a product that we believe is best in market.
Understood and just one follow up question for me is really just around the feedback you've been hearing from customers. So great to see the upside here in Q2 and that flow through into your guidance for second half of this year, but David I was just curious in terms of conversations youre, having with customers is there still challenges around what budget.
They have allocated for marketing initiatives or what's kind of the overall sentiment youre hearing from customers.
We we have not seen that in fact, we just were talking to clients and everybody is looking at our platform and using our platform is certainly saying to us how do we do more with the existing budget right, but we've been taking.
So much market share as a percentage of our business right now.
You are still talking about an industry that's got a trillion.
So when we when we look at our projections at $750 million. This year, we're still just getting started.
715 don't get ahead of us.
Our 715 I apologize don't kill me that later sorry, Thank you Chris.
To reiterate 715.
The order rates.
The reality is that what we're seeing is that marketers are being smarter theyre focused on efficiency, but we're not seeing a cutting back now I do think as we go into some of the upfront cycle buying for linear TB over.
The next few months I think youre going to see people migrating away from upfront linear purchasing two keeping more dry powder on hand, and focusing more on digital which I think will be a nice tailwind for us, but as we talk to.
Clients, we have not seen a cutback.
Quite frankly, and we continue to see clients, saying, how do we spend more.
Okay.
Understood well, thanks for taking my questions and best of luck in the coming quarter.
Thanks Zack.
Thank you. The next question comes from Ryan Macdonald of Needham and company.
Alright, Thanks for taking my questions and congrats on another great quarter wanted to ask about <unk> trends with scale customers I noticed on the slide deck. Obviously, the data 2025 forecast is assuming about a 14% CAGR.
Last two quarters now around the 10% growth range, just wondering if youre seeing anything in terms of changing patterns.
In terms of expansion activity with with your customers that might be slowing that pace of expansion versus your expectations.
Hey, Ryan and thank you for the congrats on the quarter I'm glad you asked the question because I could see how that could be a path that would be followed but I think it's a different case first.
Every quarter since we announced the <unk> 2025.
Beat the model growth rate for how many scaled customers, we should be adding and I think when you think about our model of getting to at least $1 billion at least $10 million in profit you really need to think about scaled customer count and are proving conjunction so we continue to run at about twice the rate of the amount of new scale customers that.
In our model in terms of <unk>. So specific to your question. What's really interesting is that our pilot program. Our land expand extend strategy is working exactly as we would want it to so for example over the last trailing 12 months, we've added 52, new scale or scaled customers.
What's interesting about that if you look at the breakdown 32 of those fall into the revenue band of less than 500, K. So a 100 K to 500 K that is I think a very good illustration and demonstration of landing pilots and beginning to scale them.
That's an important pipeline for us because those are our future million plus super scaled customers and what we're seeing in the behavior of those scaling pilots and early stage scaling scale customers is they continue to rapidly add channels. So if you look at the average channels used per 100, K to 1 million.
It's about one 7%, whereas the average channels used by a super scale customers to eight that's a 70% difference in the number of channels and more importantly that drives the 10 X differential and the <unk> between those two quarters. So the difference between around 100, K and a little over $1 million.
So in summary, we think it's really healthy because we see the pilots a being closed and be beginning to scale and it's our future pipeline of super scaled customers.
And of course collectively between the massive overproduction of large new customers, even with the <unk> being different we're still mathematically far ahead against our 2025 plan.
I appreciate all the color there maybe just as a quick follow up on the on the <unk>, obviously, great to hear you're focused on sort of making sure you're driving sales productivity and sort of cutting underperformers, but given the commentary around record continued record levels of rfps.
Strong deal environment should we expect <unk> to.
To continue to add quota carrying reps as we get into the back half of this year and into 'twenty four.
Yes.
Pointed out because I think Chris speaks to this better than I do but to doug's fee are moving very rapidly under the water here we are.
Added 11, new reps in the quarter. We just took out 11 reps that weren't hitting the productivity levels that we would've wanted so I wouldn't be that focused on the 130 versus 132, I think what you've got to focus on is by keeping the <unk>.
Who are really doing well, while continuing to add new people, who can evolve and grow with us. The trick is not just adding people or keeping people and then we could have kept people and the number could have been much higher but our percentage of SG&A would have been higher than that so.
We feel very very good about what we've been doing inside of the sales force and if you look at the win rates.
Well ahead of where we expect it to be at this point Chris.
That's great color, David you are right Ryan over the last two years, we've added between 20 and 25% more sellers I do not anticipate that we need to add as many in the second half of this year, but we will add and what we.
We're watching very closely is what is the number of opportunities that each hunter is pursuing and what are the number of accounts that each farmer is managing in our scaled universe and making sure we keep a smart balance, but as David said continuing to be guided by quality and our sales productivity metrics.
My congrats again.
Thank you. The next question comes from Jason <unk> of Craig Hallum.
Great. Thank you guys I wanted to ask about market share trends on the activation side.
A little bit of a data AD tech stigma and AD Tech market has been a little bit more volatile. This year. So curious how you think you're shaping up on the market share side.
Yes, so I mean, I know people like to break this into two parts. It's obviously not how we think about it because we're really looking at how our data and our AI drive enterprises clients ability to create maintain and monetize customers right. So across the board, sometimes that's through CRM and sometimes that <unk>.
Activation in different methodologies.
Sure.
Our businesses that you would associate with advertising technology are growing substantially faster than the market is itself substantially faster and I know, we don't break that out separately, but.
The reason I think they are growing substantially faster is because when you take our data and you're using our artificial intelligence to build the highest quality deterministic audiences across the platform you are able to effectively eliminate 50% of what the marketing would've cost.
But for the enterprise goes into market. So you can say these people are interested these people will be credit approved. These people are not interested these people will not be credit approved do not run marketing to them right. So in an environment like.
Like we're currently in where you're.
Youre seeing marketers, who are looking at the most complex marketing ecosystem, that's ever existed in an environment, where they're under more pressure than ever to do more with less when they look at the data marketing platform our ability to seamlessly.
Create customers at a substantially lower cost than you can without our platform is driving that growth rate in that particular line of our business, which is once again substantially higher than the growth rate.
You would associate with that particular segment and let me just jump in Jason because I think it opens up an opportunity to make sure that we emphasize something that I covered in my prepared remarks around how we're evolving how buyers who have traditionally used <unk> consumption or a marketing activation or you need to kind of further bridge to add.
And changing that entire contracting and solution model and I talked about this in the prepared remarks, but an example of how we're already executing and closing on contracts is we're now creating relationships in particular with agencies. So you think about that where data is the tech stack Zeta is data.
<unk> is used in their platform Zeta is the future innovation platform and by doing that we're now creating a bridge from being their marketing activation partner to their enterprise intelligence layer why that's important to investors on why that's responsive to analysts and feedback. We've received is that allows us to go after a very different <unk>.
<unk> shipped with that customer very very different and from a margin perspective, its much higher margin scope.
And it shifts us from consumption based to where they are subscribing to the platform and all of that obviously goes on the direct channel.
Great color there guys. Thank you for that Chris one follow up for you I. Appreciate all the detail you gave on slide 14, breaking out the guide what stands out to me. There is the EBITDA guide for Q3, Youre seeing a lot more leverage in Q3 with three over 300 basis point improvement than I can remember seeing in the last few years.
Or is there anything specific to call out on why the ramp in profitability in Q3 or Q4.
It's a good call out so you are right in the second quarter, our adjusted EBITDA margins expanded year over year by 210 basis points by the way, there's a 10th straight quarter in which they've grown year over year and Youre right accelerates to over 300 basis points of adjusted EBIT margin expansion I think what's impressive about that is it's been done up to this point in the.
Of getting leverage out of our cost of revenue, which by the way I think I think that eases in the second half of the year that headwind what's been driving it is a really balanced opex cost discipline that we have within the company getting good leverage as I mentioned on sales and marketing I talked about how the number of quota carriers we've added.
Compared to number of scale customers. We've added over the last 12 months to 24 months. There is a substantial step up in sales productivity at the same time, we utilize our global capabilities across our engineers and data scientists to get scale and efficiency out of our R&D line and we firmly believe that we're going to create value for shareholders and customers.
Investing in sellers and product what's in the middle of the G&A and we're going to keep being very efficient on that front I am excited about going forward, but we have a unique headwind this year with the new agencies. We brought on in terms of gross margin I wouldn't be surprised if that headwind eases and it becomes even more leverages <unk> going forward.
We're seeing the market come to us right and as a part of that we've been disciplined about sales marketing and all of our operating expenses and as a part of that discipline and you just naturally seeing a greater incremental margin drop to the bottom line.
The other thing I want to point out here is we have beat and raised eight quarters in a row. So you can assume we had a high degree of confidence.
And our ability to deliver on that increase in operating margin or we wouldn't be putting it out there.
Thanks, gentlemen.
The next question comes from Ryan Macwilliams of Barclays.
Thanks for taking the question David how do you see the macro outlook impacting their latest results in the second half like did you see any improving signs from customers at the end of the second quarter or since then maybe anything to call out like maybe deal cycles are getting shorter.
Yes, we are definitely seeing a lot of what we saw last year around nervousness dissipating and we are seeing.
We're closing bigger deals than we've ever closed before in our corporate history.
And we're seeing bigger deals come in than we've ever seen before the other thing we're starting to see.
As we're starting to see the sales cycle is shortening a bit a lot of that is around the nervousness that I think had been going around with starting to dissipate now obviously, there was a little bit of news in the global markets today, but the truth of the matter is for US we're seeing more.
Marketers be more aggressive and looking to do more in the back half of this year than obviously, we originally expected and obviously that is showing up in our increased projections for Q3 and rippling through the entire year.
I appreciate that color and also just a follow up on that.
Are you seeing.
The emergence of generative AI put more onus on.
I'll hit the marketing or chief marketing officers to make the decision to upgrade their platform.
Okay. Now is the time. This is the killer App that is getting these large enterprises like more comfortable making the big push here.
Yeah, I mean listen.
No question. The generative AI has created a buzz that I have not seen around technology in quite some time. So this is and unlike some of the last few technologies, we saw a lot of buzz and yes, Im looking at the meta versus.
We're seeing real business tools and real business capabilities come out of this one which is not to say the meta versus <unk>, but that was I was trying to be a little tongue in cheek.
But the reality is that I think what youre seeing now is it's being discussed everywhere I don't think it's being implemented everywhere, yet and I think it's just starting.
To drive our sales cycle and as we look across the landscape.
Believe over the next year, we're going to see one of the largest replacement cycles in the history of the marketing cloud because you've got all these marketing clouds that are coming up for renewal that had been in place for 234 years coming up and when we lead with generative AI, which we.
Due when we lead with not just large language models, which quite frankly make a lot of enterprises nervous because they don't want their data to share back we're really focused on what we call small language models, which allow the algorithm to live inside of the CVP and see just their data in the say the data cloud and get really re.
Really smart on their products without ever allowing their data to leave the ecosystem that is resonating like nothing I've ever seen before so we're seeing big Big Big movement. There. It's just not closing this week I think we're going to start seeing a close over the next couple of quarters on that narrative.
Breaking here should be for next year, thanks for the color.
The next question comes from Matt Hoffman of Morgan Stanley .
Hey, guys. This is Matt on for <unk> was in the quarter.
So CDP has been an area of focus you just mentioned and I mentioned relatively newer offerings. So it'd be great to just get some color around what mix of customers are using your CDP today kind of how it's progressed.
And then just when you think about the CDP opportunities largely greenfield or are you actually seeing displacement of other vendors.
So thank you I will answer your second question first it is almost all Greenfield I mean, there are so few companies out there that have implemented the technology over the last year or two that are changing it out.
So most of what we're seeing is greenfield opportunity what I would tell you is the vast majority of our enterprise clients are using our CDP and some component of the tech stack that we have delivered to them, it's really becoming table stakes inside the data marketing platform.
And I believe we're the only <unk>.
Company that can deliver a CDP plus which brings the full integration of a data cloud and a full AI implementation that allows for seamless activation in one centralized CDP.
Got it. Thank you that's helpful. And then just as a quick follow up.
I mentioned that in the quarter, you want 100% of the Rfps, where either Salesforce Oracle or Adobe. We're also involved I'm curious like what the typical customer size looked like there if there's kind of any any indication you can give for us or if it was there if there was varied across customer size, yes.
Just want to quantify what I said and Youre very close, but what I said was in 100% of the Rfps. We beat one of those docs I don't wanted to sound like we displace them in all of them in some cases there was another legacy solution in there and they competed against US and then we won.
I can't give the exact size against those particular players I, just we don't give guidance to that and we don't get down to that micro level. What I can tell you is the deals that we're seeing today are the biggest deal opportunities we have ever seen as a company and we continue.
To be incredibly honored to get invited into these RFP processes for Fortune 500 Fortune 1000 companies that we are incredibly excited to not just be involved but to be winning on a consistent basis greater than 50% of the time again.
Competitors like we compete with.
Understood. Thank you and thank you for the clarification.
Yes, thank you very much.
Okay.
Thank you.
Churn comes from Koji Ikeda of.
Bank of America.
Yeah, Hey, guys. Thanks, Thanks, so much for taking the question and squeezing me in here a.
A couple from me just thinking about the super scaled customer cohort increasing by eight.
I think one of the best you've ever done there from a quarterly perspective.
But also the scaled customers were also up a bunch to plus 14 in the quarter. So I would think with such a nice super scaled at maybe the scale to be a bit softer which wasn't the case this quarter. So what's going on with that 100, K plus number strength does that do to customers quickly scaling into that cohort or you did.
<unk> customers signing bigger now I mean is that is that a bigger driver of that number for the scale customers.
The first one yes that is that is the short answer the medium answer is I think the best insights come from zooming out on this metric and as I mentioned earlier, we added over the last 12 months 52 scaled customers. What's interesting to US is it's also a case of the pilots so our agile intelligence solution.
Really resonating it's the hook right hook get set as a wedge and then that leads to the first second third channel of utilization of the data cloud, which then drives them to move up in revenue band side of that 52 that we've added over the last year 32, we're still in that less than 500, K indicated 500, K cohort, which is a really exciting.
<unk> pipeline and they are not far off from getting to that $1 billion plus so.
Really pleased with what we saw and I think it's even more evident when you're using zoom out.
Yes, I do think that it's a credit to our team that we are seeing bigger deals and we are closing a greater percentage of them. So you're seeing these bigger companies that scale faster and you really is usually usual nailed that code we really.
We're proud of that Super scaled number going up.
Painlessly the scale customer number going up so we're feeling like we're delivering on all metrics here as a company.
Got it got it no that's super helpful. Thanks, guys and just a follow up here and kind of a hypothetical question, but just thinking about your your 2025 targets and you're outpacing both revenue and EBITDA. It seems like but what happens if demand continues to increase you know just like let's just say it goes off the <unk>.
Uh huh.
How do we think about EBITDA margins in that scenario. If it passes if the growth needs to come at a higher investment.
Would you be willing to take down or maybe stall EBITDA margin expansion in the future to deliver growth or would you even be able to deliver the same type of margins.
Hey, Koji.
Think it's one of the biggest misnomer.
Smith numbers.
Growth does not have to be sacrificed for operating leverage and you are right I mean on slide seven we actually brought in a new site into the earnings supplemental and I think it's look we have a chip on our shoulder we put it in the script I do not believe it is fully appreciated just how firmly we're tracking ahead of plan when we establish a day to 2025.
Model back in February of 2022, and you look at where our growth rates are to date were six points ahead six faster than what the model presumed on the top line and six points faster on the bottom line.
Get really interesting exciting leverage out of our opex structure, we anticipated this year with new buyers being added like agencies that we would have a bit of a temporary headwind on cost of revenue and factored that into our guidance as that eases as we wrap on that that should be additive will talk data live and at the Investor day.
The day before it in September 27th we'll make sure everybody gets an invitation to will give some insight as to.
Where things could go I don't want to get there yet, but we're really excited about the leverage of the business and the performance of our overall data team.
And quite frankly for a number of years now we've been able to grow revenue at a substantially faster pace than our competitors and people expected us to while simultaneously consistently adding meaningfully to our operating margin.
The big question here and I, probably shouldnt, even throw this out yet is when do we when do we throw out the Veda 2030 plan, but we've got our first get get everybody, 100% comfortable with date of 2025, which quite frankly continues to dumbfound us that people at this point are not looking at this and saying this is going to have.
<unk>.
Thanks, so much for taking the questions.
Thank you ladies and gentlemen, we have reached the end of a question and answer session I will now.
Alright. Thanks.
Because it can be months.
Not 100% sure she introduced me, but I'll assume it was me.
So listen to in summary.
We continue to accelerate profit growth, while driving the business I am incredibly proud of this team and while we're growing the business. We're also seeing incremental margin dropping at a disproportionate pace.
Want to say again, we beat and raised eight quarters in a row. We at this point would not be putting out projections that we didn't have a high degree of confidence and we're ahead of our data at <unk> 2025 plan and we are incredibly excited about the Zeta alive.
Then coming on September .
September 27th and September 28.
Truly I could not be more thankful for RSA to team, our zeta constituencies, our clients and the shareholders who have supported us.
Through all of the turbulence of the current markets. Our goal is to continue to reward those who bet on us by continuing to beat raise and wise. Thank you all for your time today.
Thank you ladies and gentlemen that concludes today's event. Thank you for attending and you may now disconnect your line.
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