Q3 2024 ZoomInfo Technologies Inc Earnings Call

Speaker Change: Good day and thank you for standing by. Welcome to the Zoom Info third quarter 2024 financial results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone.

Speaker Change: You then hear an automated message advising your hand is raised. To withdraw your question, please press star 101 again. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Jerry Sisitsky, Vice President, Investment Relations. Please go ahead.

Jerry Sisitsky: Thanks, Victor. Welcome to ZoomInfo's financial results conference call for the third quarter 2024. With me on the call today are Henry Schuck, founder and CEO of ZoomInfo, and Graham O'Brien, our interim CFO.

Jerry Sisitsky: 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.

Jerry Sisitsky: and expressions which reflect something other than historical facts are intended to identify forward-looking statements.

Jerry Sisitsky: 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.

Jerry Sisitsky: 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.

Speaker Change: All metrics on this call are non-GAAP unless otherwise noted. Reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, let me turn the call over to Henry.

Henry Schuck: Thank you, Jerry, and welcome everyone. We continue to see stabilization and improvement in our net retention rates and believe that we're moving forward with a clean slate while delivering improved financial results.

Henry Schuck: Q2 was about implementing new initiatives to position the company for long-term success and Q3 was about executing on those initiatives on these initiatives and moving the business forward.

Henry Schuck: In Q2, we successfully deployed a new business risk model, which has successfully reduced the volatility around future write-offs.

Henry Schuck: In the third quarter, we applied this model more broadly and transacted more than 55% of our new business opportunities through upfront prepayments, up from 33% in Q2.

Henry Schuck: In doing so, we also disqualified more risky small businesses than ever before.

Henry Schuck: While this is absolutely the right thing to do for the long-term health and durability of our business, it will remain a headwind to the optics of our growth in the coming quarters.

Henry Schuck: In the quarter, ZoomInfo CoPilot performed better than expected. Our NRR stabilized at 85% for the third consecutive quarter, and we accelerated our shift upmarket by delivering strong enterprise growth and growing both our $100K and $1M plus customer cohorts sequentially.

Henry Schuck: As a result, gap revenue for the third quarter was $304 million, and adjusted operating income was $112 million, a margin of 37%, both above the high end of our previously provided guidance.

Henry Schuck: We remain committed to efficiency with a focus on growing levered free cash flow per share. To that end, unlevered free cash flow for the quarter was $111 million, up 17% year-over-year.

Henry Schuck: In Q3, we also retired 24 million shares, approximately 7% of our total shares outstanding.

Henry Schuck: Since March of last year, when we announced our first share repurchase authorization, we have retired 68 million shares, or approximately 17% of total shares outstanding.

Henry Schuck: We believe in a long-term opportunity to drive shareholder value through compounding growth and levered free cash flow per share. When you combine our strong

Henry Schuck: Cash generation with the ongoing share count reductions. We expect the company will do at least one dollar of levered free cash flow per share this year and we plan to grow that number meaningfully in 2020 in 2025 and expect to continue to grow it over the long term.

Henry Schuck: In a seasonally slower quarter for our upmarket business, we were able to deliver another strong enterprise quarter.

Henry Schuck: Our 100K Customer Cohort grew by 12, the second consecutive quarter of sequential growth, ending the quarter with 1,809 greater than $100,000 customers.

Henry Schuck: Revenue from this cohort now makes up 44% of our ACV.

Henry Schuck: We had one of our best year-over-year increases in million-dollar-plus customers.

and drove accelerating sequential ACV growth from that cohort.

Henry Schuck: and Enterprise ACV, which now represents approximately 41% of the business, grew 1% sequentially.

Henry Schuck: More customers are turning to ZoomInfo because we're driving demonstrable results with strong ROI that helps customers increase their revenue and reduce their costs.

Henry Schuck: During the quarter, we closed transactions with leading organizations of all sizes.

Henry Schuck: such as Commerce Bank, Samsung, Bamboo HR, Sonesta Hotels, Bentley, Clary, and Premise Health.

Speaker Change: At Amplitude, we consolidated a number of existing data vendors, deployed ZoomInfo Copilot across 150 sales reps,

Speaker Change: added operations for their RevOps team and continue to support their marketing and audience building and execution efforts with ZoomInfo Marketing.

Speaker Change: Recently, The Economist entered our $100,000 customer cohort through an investment and co-pilot licenses as part of a multi-year agreement designed to drive efficiency in their sales and marketing operations.

Speaker Change: Facing challenges with data accuracy, CRM decay, and process automation, they chose our AI-driven solutions to consolidate intelligence providers and streamline workflows.

Speaker Change: This strategic decision aims to double their sales opportunities, bolster ABM strategies, and gain efficient access to global business intelligence.

The End

Speaker Change: and a Fortune 50 customer successfully replaced a legacy firmographic provider with our operations and data as a service products and grew into our million dollar customer cohort. They will leverage ZoomInfo to better understand and expand their total addressable market in their SMB and mid-market segments to identify high propensity to buy accounts and to build dynamic audiences for digital activation.

Speaker Change: They will also rely on Zoom info to help create a new, more efficient outbound sales motion.

Speaker Change: In Q3, ZoomInfo Co-Pilot showed strong performance, delivering results that exceeded our expectations, especially in our mid-market and enterprise segments.

Speaker Change: The driving force behind Copilot's adoption is the measurable return on investment it offers.

Speaker Change: Our customers report 25% of their total pipeline directly attributed to opportunities identified by CoPilot.

Speaker Change: a 58% increase in prospect engagement rates, a 62% improvement in email response rates, and productivity gains of eight hours per week per user.

Speaker Change: The foundation for co-pilot success is the combination of relevant customer context with best-in-class activation for go-to-market teams.

Speaker Change: Customer context comes from the strength of our data asset, unified with the customer's business context from systems like CRM or data warehouses.

Speaker Change: We're known for our leading contact and company data, which provide actionable insights against hundreds of millions of contacts and companies.

Speaker Change: Now, our new sets of products expand into processing billions of data points daily to prioritize and personalize engagement at scale.

Speaker Change: During the quarter, our product innovation focused on increasing co-pilot opportunities and strengthening product market fit.

Speaker Change: First, we expanded our Signal ecosystem to capture additional mission-critical go-to-market insights that neither exist nor are actionable in legacy CRM.

Speaker Change: We now process over 300 million daily signals to help every member of the go-to-market team win faster.

Speaker Change: For enterprise sellers, we added buying group and executive tracking signals, including hiring trends, expanded person moves,

or updates to previously engaged contacts.

Speaker Change: For transactional and SMB sellers, we added SMB signals like business origination or lien data.

Speaker Change: For value selling, we added key unstructured data assets, like earnings transcripts, financial filings, analyst research, or podcast transcripts that deliver relevant context, pain points, and growth expectations.

Speaker Change: And for Competitive Intelligence, we added competitive intent signals, social proof and insight into customer satisfaction to increase retention, including integrations with competitive intelligence platforms like G2, TrustRadius, and TechnologyAdvice.

Speaker Change: Co-pilot in the Signal ecosystem can now be activated by a larger share of our customer base thanks to new integrations with Microsoft Teams for Enterprise, Hub Spot for downmarket customers, and Outreach, Sales Loft, and Groove for technology companies.

in addition to existing integrations with Salesforce, Gong, and Slack.

Speaker Change: Going forward, we will expand Copilot's use beyond prospecting to support key use cases for account executives and account management teams.

Speaker Change: Early results show Copilot is reactivating dormant seats and driving demand for expansion, particularly in the mid-market and enterprise segments.

Speaker Change: Examples include account executives using AI-powered account planning, customer success teams managing renewal risk through signal monitoring, and marketing teams driving sales execution through co-pilot.

Speaker Change: This comes on the heels of recently being named a leader, and this year, and this year,

Speaker Change: recently being named a leader this year in the 2024 Gartner Magic Quadrant for account-based marketing platform.

Speaker Change: We believe this is a serious nod to the speed of innovation coming from our product and engineering teams and the market demand coming from the marketing departments of our customers.

Speaker Change: The demand for Copilot shows that successful automation and AI and go-to-market strategies require high quality reliable data. Our customers have realized that running large language models on their CRM data falls short.

Speaker Change: ZoomInfo Copilot goes beyond the CRM to create a complete picture of the addressable market. Every account, every buyer, what they care about, and how to engage them most effectively.

Speaker Change: What sets Zoom Info apart is our ability to unify contextual data across the entire customer journey with a multi-channel activation layer across sales and marketing.

Speaker Change: This combination of context and activation drives successful AI and go-to-market, and we're best positioned to capitalize on this platform shift.

Speaker Change: Before turning it over to Graham, I want to acknowledge and thank the team.

Speaker Change: Across the organization, we are doing great things. From the work in finance and accounting, to the innovation we are driving in product, to the sales team and beyond. We are focused, we are aligned, and we are operating with a sense of urgency.

Speaker Change: In Q2, we took the necessary steps to ensure that we were very well set up for the future, and I am pleased that our positive operating momentum translated into strong financial performance this quarter.

Speaker Change: We continue to focus on enterprise growth, driving customer outcomes with CoPilot, and we're committed to driving long-term value creation through consistently growing levered free cash flow per share.

Speaker Change: While we are not guiding to 2025 today, I would call out that you should expect a very conservative approach to our guidance communications going forward in general, but particularly as we navigate this SMB transition.

With that, I'll turn the call over to Graham.

Graham O'Brien: Thanks, Henry. In Q3, we delivered $304 million in revenue and adjusted operating income of $112 million, both better than the top end of the guidance we provided.

Graham O'Brien: When adjusting for the charge we took in Q2 and its impact on the second quarter, as well as the additional day in Q3, sequential revenue growth for Q3 was negative 2%.

Graham O'Brien: As expected, write-offs continued at elevated levels in Q3, but showed signs of abating as we exited the quarter.

Graham O'Brien: The operational improvements we implemented are delivering results as our business risk model disqualified a record number of high-risk small business transactions in the quarter.

Graham O'Brien: As we exit Q3, that refined SMB sales motion is disqualifying more than $2 million of higher-risk new sales per month, which we anticipate will improve the quality of revenue and reduce write-offs over time, a near-term tradeoff that benefits us over the long term.

Graham O'Brien: We believe the challenges that led to the accounting charge in Q2 are behind us, and we are seeing stabilization and early signs of growth in a number of different areas of the business.

Speaker Change: As Henry indicated, net revenue retention was stable at 85% for the third consecutive quarter.

Speaker Change: We are growing the enterprise business. We added to our 100k customer cohort. We added to our million-dollar customer cohort. We drove an acceleration in ACV growth for million-dollar-plus customers, and we are seeing strong early traction with CoPilot.

Speaker Change: In short, we are controlling what we can control, and we are executing very well against our key priorities.

Speaker Change: Enterprise ACV, which now represents approximately 41% of the business, sequentially grew 1% in the quarter.

Speaker Change: With continued stabilization in mid-market and enterprise strength, approximately two-thirds of our business is on a path back to growing mid-single-digit or better.

Speaker Change: As we grow in the enterprise, turn around mid-market, and more aggressively disqualify smaller and riskier businesses from the platform, we expect SMB to become a smaller and smaller percentage of our overall business.

Speaker Change: As that happens, we have a more favorable mix of revenue, and the business is set up for more durable and higher levels of growth.

Speaker Change: Our operations business increased 22% year-over-year as we saw continued momentum helping companies with their data foundation as they look to leverage AI.

Speaker Change: Taken together with our success driving co-pilot, advanced functionality increased to 38% of the overall business in Q3, up from 35% in Q2.

Speaker Change: Co-pilots surpassed $60 million of ACV in the quarter, exceeding our expectations.

Speaker Change: In addition to the rapid innovation on the platform, we continue to successfully drive new-to-the-platform sales, off-cycle upsells, and co-pilot migrations on renewal.

Speaker Change: We continue to see meaningful uplift on accounts as we transition them into a co-pilot experience, with the majority of these migrations coming in mid-market and enterprise accounts.

Speaker Change: Utilization is up and customer satisfaction is trending higher, which we believe is a leading indicator of improving renewal trends and higher net revenue retention.

Speaker Change: In Q3, we took advantage of the dislocation in share price and retired more than twice as many shares in a quarter than ever before, repurchasing 24 million shares of ZoomInfo stock for $242 million, in part through an accelerated share repurchase program.

These repurchases reduced total shares outstanding by approximately 7%.

Speaker Change: As of the end of Q3, we have 343 million shares outstanding, with $157 million in remaining repurchase authorizations.

Speaker Change: We will continue to be enthusiastic and opportunistic buyers of the stock based on the wide gap we see between the intrinsic value of ZoomInfo and our current market value, and because it is one of the best and highest returns on our capital.

Speaker Change: Operating cash flow was $18 million in Q3, and as we indicated on our last financial results conference call, we restructured our WALPAM lease agreement early in Q3 and paid a $59 million termination fee as we continue to right-size our real estate footprint.

Speaker Change: We estimate that this will save us more than $100 million going forward.

Speaker Change: Additionally, in Q3 we funded a 30 million dollar settlement related to right of publicity lawsuits, providing avoidance of future litigation costs and liabilities.

Speaker Change: Unleveraged free cash flow for the quarter was $111 million, a margin of 36%.

Speaker Change: and relative to leveraged free cash flow, we incurred cash interest of $19 million in the quarter.

Speaker Change: We ended the quarter with $148 million in cash and cash equivalents, and we carried $1.24 billion in gross debt.

Speaker Change: The $650 million in 3.875% senior notes have a maturity date of February, 2029. And the remaining balance of $590 million in first lean term loans has a maturity date of February, 2030.

Speaker Change: Our net leverage ratio is 2.3 times trailing 12 months adjusted EBITDA, and 2.2 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements.

Speaker Change: With respect to liabilities and future performance obligations, unearned revenue at the end of Q3 was $419 million, and remaining performance obligations, or RPO, were $1.05 billion.

Speaker Change: of which $780 million are expected to be delivered in the next 12 months.

Speaker Change: While sequential growth remains the best metric to evaluate the business, we know some of you look to other metrics.

Speaker Change: For those looking at billings, the mix of our balance sheet reserves

Speaker Change: and the changes in practices that we made relative to higher risk businesses.

Speaker Change: requiring prepayment in advance, drove higher than normalized growth in billings this quarter, and I would caution you from extrapolating too much from the billings growth trajectory.

With that, let me turn to guidance for Q4.

Speaker Change: We expect GAAP revenue in the range of $296 to $299 million.

Speaker Change: adjusted operating income in the range of 103 to 105 million dollars.

Speaker Change: and non-GAAP net income in the range of 22 to 23 cents per share.

As a result, we expect for the full year 2024.

Gap revenue in the range of $1.201 to $1.204 billion.

Speaker Change: and adjusted operating income in the range of $416 to $418 million.

Speaker Change: We expect non-GAAP net income in the range of 92 to 93 cents per share based on 378 million weighted average diluted shares outstanding.

Speaker Change: We expect unlevered free cash flow in the range of $420 to $430 million, which, consistent with historical reporting, excludes the impact of the restructuring and settlement payments in the quarter.

Speaker Change: Our full year guidance implies negative 3% revenue growth and a 35% adjusted operating margin at the midpoint of our guidance range.

Speaker Change: Now I will turn it over to the operator to open the call for questions.

Speaker Change: Thank you. As a reminder to ask a question, you will need to press star 1 1 on your telephone and wait for a name to be announced to withdraw your question. Please press star 1 1 again. Please limit yourself to one question. Please stand by while we compile the Q&A roster.

One moment for our first question.

Speaker Change: Our first question comes from Alec Zukin from Wolf Research. Your line is open.

Alec Zukin: Hey guys, thanks for taking the time. I apologize for the background noise. Maybe just the first one.

Henry Schuck: Henry, can you comment on just the demand environment, what you're seeing kind of exiting the quarter into Q4, how it's changed. I noticed a couple of new customers were kind of in...

Henry Schuck: I would say sectors very adjacent to your core so that was that was kind of interesting and then maybe as a follow-up on retention you talked about gross retention getting better is that gross is that expansion as it goes and kind of how you see those trending over the course the next three quarters

Yeah, thanks Alex. I think on demand environment...

It's relatively unchanged from Q2.

Henry Schuck: We're seeing really strong demand in the upmarket, particularly in the mid-market and the enterprise segments. In mid-market, we're seeing strong demand for co-pilot in our enterprise and strategic segments.

Henry Schuck: We're seeing Copilot in the Enterprise and a lot of DAS and Operations OS in the strategic segment.

Henry Schuck: of our business. The SMB segment, particularly the lowest end of the SMB, continues to be challenged, particularly from a net retention perspective, and so that commentary is unchanged from Q2.

Speaker Change: Yeah, and I'll just add on top of that, net revenue retention was 85%.

Speaker Change: for the third quarter in a row, so reflecting stabilization there.

Thank you. One moment for our next question.

Speaker Change: And our next question comes from D.J. Hines from Canada Core Genuity. Your line is open.

Speaker Change: Hey, thanks. So Henry, you have this dollar per share in leveraged free cash flow target out there for 24. You also said that you expect to meaningfully grow that in 25. How much of that free cash flow per share growth in 25 is predicated on a recovery and revenue growth? I mean, can you get there without a bounce back in the top line?

Graham O'Brien: Yeah, this is Graham. The way I think about this is there's a few levers to drive that meaningful growth in levered free cash flow per share, and the lever that we're going to prioritize is growing the top line. We're resourced for that.

Graham O'Brien: If we aren't achieving that, then it becomes a margin expansion lever, and then continuing to retire shares, which we'll continue to consider.

Speaker Change: Okay, and then Graham, while I have you, so sequential growth normalizes minus 2 in Q3, you're guiding to minus 2 in Q4. Is that a good way to think about the early part of next year given the new conservative guidance posture, and do you expect to return to positive sequential growth at any point next year?

Speaker Change: Yeah, we're going to be very conservative in our guidance period, and we again had positive momentum exiting the quarter in Q3 from an operational perspective.

Speaker Change: But we're going to be really conservative about the end period assumptions in Q4. That's our largest expiring quarter And with that level of activity, we're going to, you know, continue to be conservative from a guidance approach

Yeah, I think that makes sense. Okay. Thank you guys.

One moment for our next question.

Speaker Change: Our next question will come from Brad Zelnick from Deutsche Bank. Your line is open. Great. Thank you so much, and thanks for all the disclosure, but I'm hoping guys you can just help

Speaker Change: clarify the SMB dynamics because Graham you say that the SMB changes are largely behind you but Henry you're also talking about a more conservative approach you know into into your guidance methodology and next year

Speaker Change: So, I guess two questions. I had thought in Q2 you cleared the deck, so to speak.

as it related to charge-offs for your smallest customer segment.

Speaker Change: and that hit revenue in Q3 and it was a bit of a cleanup. Are we still seeing, perhaps, upon renewal...

customers that are, you know, in that segment that are...

Speaker Change: not paying as expected and are there additional charge-offs that are hitting Q3 and expected forward and then related to that

as we think about the impact of the stricter

credit that you're applying and credit practices in that segment.

is that having...

Speaker Change: a more pronounced effect than you would have thought when you came out of Q2, or is what you thought consistent as you saw it perform in Q3? Thank you.

Speaker Change: I'll start. The charge in Q2 did clear the deck there. That is not something that persisted in Q3. There's no real P&L volatility or continued impact.

from the Change and Estimate in Q2.

Speaker Change: What is happening is, as we do, you know, disqualify high-risk new SMB, new sales transactions at a higher rate.

Speaker Change: it does create a growth headwind until we lap that in Q2 of next year.

Speaker Change: So, you know, the way that we're thinking about this is that that disqualification was up to two million dollars plus per month in Q3, up from a million dollars per month in Q2.

Speaker Change: And as we think about SMB, we expect SMB to decrease as a percentage of the business and actually potentially decline in ACV for a period of time until we lap the introduction of that new business risk model from last year.

Speaker Change: So, you know, our focus is on prescriptively and efficiently capturing SMB business and continue to believe that there's a high level of

Speaker Change: of quality demand in the segment that we can grow with, and then, you know, the write-offs.

Speaker Change: Again, we reserved against the P&L impact. We still have an elevated level of processing write-offs.

Speaker Change: in Q3, but we saw that level abate as we exited Q3. And as we get further away from Q2, when we implemented the new business risk model, call it six months, maybe nine months down the road, that's where we'd expect to start to see that benefit from higher quality SMB new sales and lower write-offs.

Okay, thank you

Thank you. One moment for our next question.

Speaker Change: Our next question will come from the line of Elizabeth Porter from Morgan Stanley. Your line is open.

Speaker Change: Great, thank you so much for the question. I wanted to first in on some of the cost reductions that you guys have talked about, including some of the real estate changes that you've made. Any way we should think about some of the early guide rails on operational margin improvements as we look into 2025?

Speaker Change: I know we were at 37% in Q3, the guide for Q...

Speaker Change: Q4 is 35%, you know, there is some just timing between those two quarters rather than trajectory, but, you know, we think about this in the framework of lever pre-casual per share and

Speaker Change: you know, growing that next year, and one of the ways to grow that, if not the way to grow that, is to expand margin.

Speaker Change: And then just as a follow-up, on the co-pilot side, so it's good to see that adoption there.

Speaker Change: I just want to understand, just given some of the headwinds that kind of we're seeing still across the macro, is co-pilot adoption driving up, you know, average deal sizes across most of those customers that are taking it? Or is it viewed right now as an opportunity to keep renewals flat despite some of just the broader headwinds?

Speaker Change: Today we are seeing double-digit growth on migration to copilot when we're migrating our customers. We are seeing that grow ASP

when we do those migrations.

Thank you.

Thank you. One moment for the next question.

Speaker Change: Our next question comes from Remo Lynch from Barclays. Your line is open.

Speaker Change: Hey, thanks for taking the question. This is Frank Onferamo. Following up on that last one, with another quarter in the market for CoPilot, what's been the incremental feedback from customers around that, and what's the best way to think about contributing to net retention in Q3?

We've seen really positive sentiment from our customers on CoPilot.

Our customers are telling us that 25% of their...

Speaker Change: of their pipeline is attributed to opportunities that were flagged to them through co-pilot.

Speaker Change: 58% more meetings, more engagement from the emails that are being generated through our AI emailer.

Speaker Change: and we're seeing higher engagement and utilization rates of customers on Copilot versus our legacy solutions. And so we feel really good about the product that we're building. We continue to add a tremendous amount of functionality to the product as well. And so additional integrations, additional signals that will all drive additional engagement by our customers and take away go-to-market friction upfront. And so we continue through Q4 to see really good momentum from Copilot.

Thank you. One moment for our next question.

Thank you for watching!

Thank you.

Speaker Change: Our next question will come from the line of Parker Lane from Stifel. Your line is open.

Speaker Change: Hey guys, thanks for taking the question this afternoon. Henry, look at the NRR stabilization, you see growth in the enterprise segment, maybe less of an emphasis on S&B long-term. Wondering if you could talk about any further sales changes or just the absolute number of sales resources you have as you approach year-end and start thinking about how 2025 can be best set up for the business.

Speaker Change: Yeah, I think, you know, we've been on a phased journey to continue to move resources up market into our mid-market and enterprise segments. We think we have a continued opportunity in Q4 and into 2025 to move resources from the lowest to the highest.

Speaker Change: SMB segments up into our mid-market and enterprise segments and then drive a digital, more digital self-serve in the lowest segments of our SMB business and manage that business much more efficiently with our PLG motion and free up resources.

Speaker Change: to go into our upmarket segments where we're seeing meaningful growth and success and we want to capitalize on.

Understood, thank you.

Thank you. One moment for our next question.

Speaker Change: Our next question will come from the line of Brent Brastlin from Piper Sandler. Your line is open.

Speaker Change: Yes, this is Hannah Rudolph on for Brent today. Thanks for taking my question. Just one for me. I wanted to ask about the data as a service business. It sounds like you're seeing really solid momentum with your co-pilot product. Just wondering if you're seeing equally strong momentum with the data as a service product.

Speaker Change: Yeah, we continue to see really strong momentum in our data as a service business.

Speaker Change: and that business is growing 22% year over year. We feel really good about that. The adoption is really strong in our enterprise and strategic segments, where they're leveraging that asset to build AI solutions, to cleanse.

Speaker Change: data in their CRMs, in their data warehouses, in their marketing automation systems. And we think that that's a business that will continue its momentum going into 2025.

One moment for our next question.

Speaker Change: Our next question comes from Koji Ikeda from Bank of America. Your line is open.

Koji Ikeda: Yeah, thanks guys for taking my question. I wanted to follow up on a previous question about the exit growth rate.

for 4Q and thinking about 2025.

Koji Ikeda: And so when we do look at the exit growth rate in 4Q, it's a little bit lower than it was during the prior guide. And I get the really conservative part of that. But maybe help us understand a little bit more what we could underwrite in the business momentum, maybe one, two, or three positive drivers here that could give us confidence.

Koji Ikeda: that 2025 revenue growth would not be flat to even negative next year. Thank you.

Speaker Change: Yeah, you know what, the positive drivers that we're really focused on are up market right now. So, you know, we're growing the enterprise business.

Speaker Change: and, you know, we continue to have an opportunity to re-accelerate that further.

Speaker Change: In mid-market, specifically in our software vertical, we saw retention improve sequentially for the second quarter in a row after multiple quarters of decline. That's really where we had the most down sell pressure over the last two plus years.

Speaker Change: So we're really just balancing that with, you know, being selective in the SMB and finding the right growth balance between the three segments.

Speaker Change: And while we're seeing good momentum continue in October and into November, we're going to continue to be conservative with our guidance.

Thank you.

Thank you. One moment for our next question.

Speaker Change: Our next question comes from Taylor McGinnis from UBS. Your line is open.

Speaker Change: Just to clarify, is that on existing customer renewals, or is that...

Speaker Change: new logos because I'm just curious how we should think about the growth algorithm I guess in the near term being maybe more weighted towards

Speaker Change: And then just quickly as a follow-up, in terms of the guide, was there any changes that were embedded in the 4Q guide in terms of how you're thinking about the headwind from SMB and what that might have been?

Speaker Change: Yeah, thanks for the question. The disqualification numbers, those are new business, new logo driven. So, you know, a million dollars in Q2 per month of new business ACV that we're disqualifying, and then that number's increased to two million with our updated model in Q3.

Speaker Change: And then on the guide, yeah, that disqualification is a near-term headwind to new sales.

Speaker Change: but at the same time these are high-risk customers that were, you know, very unlikely to pay and that will quickly turn into a, you know, midterm tailwind as we have a higher quality of revenue in 2025.

Great, thank you so much.

One moment for a next question.

Speaker Change: Our next question will come from the line of R.T. Vula from J.P. Morgan. Your line is open.

Speaker Change: Thanks for taking the question. This is already on from Mark Murphy.

Speaker Change: My question was, you know, I know there's kind of a lot of moving pieces in terms of hiring in the stall base, but for some of these companies that are really investing in kind of agentic solutions and hiring behind that, are you seeing any of that benefit across from the stall base, maybe across the larger customers? Thanks.

Speaker Change: Sorry, I just want to make sure I understand the question. Is this companies that are building agentic solutions for the broader market or who are building it for their own use cases?

Speaker Change: Yes, that's correct bill going after in the broader market and kind of hiring sales reps to go out there and sell that.

Speaker Change: Yeah, that's correct. Building it for the broader market and kind of hiring sales reps to go out there and sell that.

Speaker Change: Sure.

Speaker Change: Got it for the broader market.

Got it. For the broader market, we're not seeing...

Speaker Change: We're not seeing.

Speaker Change: We're not seeing those types of customers come in I think where we are seeing that benefit is where internal large customers are building their own AI solutions for internal usage for their own sellers to use where they are leveraging our data solutions to be the foundational data component.

Speaker Change: We're not seeing those types of customers come in. I think where we are seeing that benefit...

is where internal large customers.

Speaker Change: are building their own AI solutions for internal usage, for their own sellers to use, where they're leveraging our DAS solutions to be the foundational data component to those solutions.

Speaker Change: Two dose solution.

Speaker Change: Got it thank you.

Speaker Change: One moment our next question.

So, thank you.

One moment for our next question.

Speaker Change: Our next question comes from the line of Jackson Ader from Keybanc capital markets. Your line is open.

Speaker Change: Our next question will come from Jackson Ader from Key Bank Capital Markets. Your line is open.

Speaker Change: Great. Thanks for taking my questions guys.

Speaker Change: Yes.

Great, thanks for taking our questions guys.

I just had a question about the kind of difference between.

Speaker Change: I just had a question about kind of the difference between SMBs and the mid-market.

Speaker Change: <unk> and the mid market so.

Speaker Change: I'm just curious like what what that Smbs are.

Speaker Change: I'm just curious, why aren't the SMBs seeing the value that a mid-market customer would that's kind of keeping them from staying on the platform and expanding with ZoomInfo at the moment?

Right.

Speaker Change: Why arent the SMB is seeing the value that our mid market customer would that kind of keeping them from staying on the platform and expanding with zoom into at the moment.

https://www.kenhub.com

Speaker Change: I think a big portion of our SMB base is seeing the value and we can grow with those customers. This is really a lower end of SMB.

Speaker Change: You know, I think a big portion of our SMB base is seeing the value and we can grow with those customers. This is really a lower end of SMB.

Speaker Change: Cash question, where we want to make sure that we are not extending credit to high risk customers. So there are there is a broad swath of SMB, where we want to go and sell to those customers and grow with those customers.

Speaker Change: cash question where we want to make sure that we are not extending credit to high-risk customers. So there are there's a broad swath of SMB where you know we want to go and sell to those customers and grow with those customers.

Speaker Change: Okay, and then I guess for a quick follow up I mean, if we think about.

Thank you for watching!

Speaker Change: Okay, and then I guess for a quick follow-up, I mean, if we think about

Speaker Change: Take all the noise from the last few years right the pandemic noise kind of out of our <unk>.

Speaker Change: Thanks to our pre pandemic life versus today, how should we be thinking about your data mode right today relative to your competition is it wider narrower whereas in about the same.

Speaker Change: We feel really good about our data moat, we continue to grow our contributory network. We continue to grow our community network. We're now expanding that data moat with a variety of new signals that we're ingesting and integrating into our platform and so the from a data perspective theyre more contributors there more community members.

Speaker Change: There is more signal data that we're licensing and integrating into our co pilot product and so that ecosystem is getting larger and so I feel really good about that data moat continuing to expand.

Speaker Change: Got it okay. Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from the line of Michael <unk> from Wells Fargo. Your line is open.

Speaker Change: Hi, you've got Michael Berg on for Michael turn here. Thanks for the question and congrats on the quarter.

Speaker Change: I wanted to get a better sense of maybe a better characterization of what the incremental conservatism is including here you talked a lot about about the the write downs and ongoing macro but maybe some incremental color there and then I got a quick follow up.

Speaker Change: Sure.

Speaker Change: We value consistency with the guide and we're going to craft guidance with an expectation that we can meet or exceed the ranges provided.

As Henry indicated we intend to take a conservative approach to our guidance communications going forward and part of that is discounting positive operating momentum from recent quarters. The general philosophy is that we model and consider a wide range of outcomes based on all the information we have at hand at the time.

Got it helpful. And then in terms of the co pilot you mentioned $60 million in ACB is that incremental to the $80 million. In Q2, you saw or is it six months total sense since launch.

Speaker Change: That's been exiting total so that includes the $18 million.

Speaker Change: Got it helpful. Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Yeah.

Speaker Change: Our next question comes from the line of Brian Peterson from Raymond James Your line is open.

Speaker Change: Hey, Thank you. This is jonathan to carry on for Brian just just one from US here is there any update you can share on the call about <unk> split by vertical and how Thats performing Graham you answered. This in part on the software <unk> stabilizing our software NR stabilizing but curious to hear about how the traction is building outside of the software and tech exposure more broadly.

If you can get anything there. Thanks.

Graham O'Brien: Sure, Yes, we had software retention improve sequentially for the second quarter in a row after declining back through I think the end of 2021.

Graham O'Brien: The other verticals at least we're continuing to see.

Graham O'Brien: Cross some of them double digit growth if not high single digit growth.

Graham O'Brien: One a.

Graham O'Brien: A couple of them that we wanted to highlight.

Graham O'Brien: Manufacturing has strong growth in Q3 after finance <unk>.

Graham O'Brien: <unk> and logistics.

Speaker Change: Great. Thank you.

Graham O'Brien: One moment for our next question.

Speaker Change: Our next question will come from the line of Tyler Radke from Citi. Your line is open.

Tyler Radke: Yes, thanks for taking the question.

Tyler Radke: As you look out at <unk> can you can you just walk us through the puts and takes there. It sounds like you are seeing some positive momentum on the enterprise business and presumably.

Tyler Radke: Focus on higher quality customers.

Tyler Radke: It should provide a benefit to that so when do you think that starts to improve.

Tyler Radke: And then secondly, as you think about.

Tyler Radke: The initiative to reduce the lower quality customers I believe you talked about that are extending.

Tyler Radke: The restrictions.

Tyler Radke: Prepayment.

Tyler Radke: 55% of the customer base is that is that kind of as high as you think youll go or do you or do you think that there is further enforcements in.

Speaker Change: Our room to take that higher thank you.

Tyler Radke: Sure.

Tyler Radke: On the <unk>.

Tyler Radke: Puts and takes into retention.

Tyler Radke: Enterprise certainly getting that.

Tyler Radke: Maintaining and getting that above 100% and then getting mid market back closer to a 100% like those are the big drivers of improving retention over time.

The thing we want to call out and retention is that this is a trailing 12 month or year over year view, so the in period activity.

Tyler Radke: Effectively it takes a little longer to show up in that year over year view and we were optimistic about the trajectory there and then on the the disqualification.

Tyler Radke: I guess, that's clip that we have right now coming out of Q3 I would characterize it as this is the level that 2 million plus.

Tyler Radke: We would expect to continue at a minimum.

Tyler Radke: At that level, moving forward and continuing to run.

Tyler Radke: The great the greater portion of our new sales pipeline through this.

Tyler Radke: Ms rest model.

Speaker Change: Thank you.

I think if I just add it on there I think if you're thinking about where if I'm thinking about where I see the opportunity from an NR perspective, I think first in the Midmarket and enterprise segments of our business. We have this real opportunity with co pilot, where we're gaining momentum and our ability to take that to the customer base that helps us when we attach.

Speaker Change: From an upsell perspective or on a renewal perspective. There are also places where it is helping us mitigate down sell and I think we're seeing that with the improvement in mid market, particularly in the software sector, where we're able to leverage co pilot to get that segment.

Speaker Change: Back to growth and then in our way up market segment, our strategic segment.

Speaker Change: I think what we're seeing there is much more.

Speaker Change: Interest in our Das solutions as they continue to build AI internally and they need cleansed and accurate and complete data assets to be able to do that and so we're pushing on co pilot in mid market and enterprise. We continue to see great growth from a das and operations perspective, and a strategic segment.

Speaker Change: And then in the SMB segment, we're bringing on much healthier customers today, who are paying us upfront and so we get a dual benefit of that once we lap that.

Speaker Change: The moment in time, where we started doing that in Q2.

Speaker Change: This year, we will see that in Q2 of next year, where we have this healthier customer base, who pay us upfront and so we won't have that headwind of write offs and then we have and we've disqualified the riskiest highest churn customers out of that cohort anyways and so we end up with a healthier group of customers and in new business, we're selling more mid market.

Speaker Change: And enterprise customers upfront and so the installed base is much healthier.

Speaker Change: When you lap Q2 of next year.

Speaker Change: Thank you and our next question comes from the line of Rishi Deloria from RBC capital markets. Your line is open.

Rishi Deloria: Wonderful. Thanks, so much for taking my questions and apologize for any background noise I'm in transit right. Now just really quickly I wanted to hit again on a co pilot maybe help us understand how do you feel about your right to win and copilot, especially versus maybe more neutral platforms that can integrate with their data and.

Rishi Deloria: If you think about maybe the whole kind of argument copilot, Firstly agenda AI can you talk about some of that cash flow egencia capability.

Speaker Change: Our our intent to build thank.

Thank you so much.

Speaker Change: Yes look I think a couple of things first of all we really believe that if youre trying to build any go to market AI on top of just your internal data or potentially data that lived in your CRM or your data warehouse, if youre trying to build go to market AI on top of those data assets.

Speaker Change: And we're hearing this from our customers. They just can't build solid AI solutions with that with that data not only do you need data, that's cleansed and accurate, but the information that lives inside of your systems of record. They don't give you a complete picture of the market in front of you. It's not your total addressable market, it's not dynamic.

Speaker Change: Data, that's constantly changing with news releases and job postings in earnings calls and interviews.

An expert calls all of that information is constantly changing and thats not appearing in a dynamic way inside of your CRM or your data warehouse and so when you go try to build go to market AI on top of static scale and almost always outdated data youre going to get a pretty bad AI solution on the other side of it and so.

Speaker Change: We have a lot of confidence that the foundation that we start with are the best <unk> data asset in the World is the foundation that you need in order to build AI for go to market and then anybody else who starts with a foundation thats any different than that just ends up at roadblock after roadblock after roadblock.

Speaker Change: And so we absolutely believe that the <unk> data asset that we put together over the last 20 years. In addition to all of the new signals that we're adding on top of that data asset gives us the right to win.

Speaker Change: Our go to market and to be the go to market AI platform of the future when we think about <unk>.

Speaker Change: Additions to the platform the way we think about it is first you have this data foundation.

Speaker Change: That gives you a full view of any company's total addressable market, including the companies. The people at those companies. The signals that they are demonstrating that would tell you whether they're in market or not and then we use that foundation to start building out the different tasks that an account executive and account manager and SDR is doing every.

Speaker Change: Today, we start with prospect research, we moved to account planning.

Speaker Change: We moved from there to flagging risk in the customer base to building the communications to reach out to customers to building the follow ups to reach out to customers and so we're taking every slice of what an account executive and account manager and SDR, a robot and a sales op professional does and we're using the AI capabilities.

Speaker Change: To automate those tasks out of their day to day.

Speaker Change: And we're building that on the only data foundation you can actually built go to market AI on top of.

Speaker Change: Alright wonderful thank you.

Thank you one moment for our next question. Thanks.

Okay.

Speaker Change: Our next question comes from the line of Patrick <unk> from citizens JMP. Your line is open.

Speaker Change: Oh, great. Thank you Henry.

Henry Schuck: Henry how do you see this.

Speaker Change: How do you see the space.

Speaker Change: Solid hitting over the next few years.

Speaker Change: If I step back and look at it I feel like Theres five segment.

Speaker Change: There's data there's revenue enablement like seismic.

Speaker Change: As engagement like sales locked at outreach Theres conversational tells us like gone as revenue forecasting clary.

Speaker Change: You guys have a lot of a little bit of these categories already where does this all go.

Speaker Change: With the fundamental belief that when generative AI came to the market a gun went off to a new res and a lot of competitors are people in this space laid back and said Oh, we're going to see how this plays out and we leaned in and we put up a bunch of investment between <unk>.

Speaker Change: <unk> and engineering and our teams behind co pilot, we enabled our go to market teams, we re architected our platform to be AI first and we leaned into this opportunity and so I think like all of the segments that you see today will be fundamentally changed over the next two to three years, but the constant the constant and.

Speaker Change: All of that is that every one of those solution is going to need the highest quality data as its foundation to build AI for the future and so I think were fundamentally benefited from the fact that in this space with a lot of different players doing a lot of different things, we start with the foundational asset that you need to build AI.

Speaker Change: We have the scale in this space, we leaned in at the right time, and we're going to continue to build AI around the only data Foundation you can build go to market AI or app.

Speaker Change: Sure.

Speaker Change: And if I could ask a follow up you made an interesting comment in your remarks about reactivating dormant seats with with the co pilot can you can you explain that a little more.

Speaker Change: Sure I think there are like.

Speaker Change: Across any user base. There are users who are leveraging the platform and a day to day or a week to week motion and then there are users who are not.

Speaker Change: And what copilot has done for US is its reactivated a number of seats that were historically being on used as frequently as we would like to have seen them.

Speaker Change: And we're doing that because now day to day, we are sending our everyday we are sending our users and our customers.

Speaker Change: Key signals on their target accounts, and so we're able to understand who their target accounts are we're able through our AI to understand what would be happening within those target accounts that they would care about and so and then we're using all of that data that intent data those earnings call transcripts podcast interview.

Speaker Change: His job posting to identify key moments at those target accounts, and then deliver that to our customers through E mail through slack and teams messages through notifications on mobile and so we're putting the key moment happening at their customers right in front of them and then giving them one click to engage with the right buyers with those companies.

Speaker Change: Great. Thank you.

Thank you.

Speaker Change: Now I'll turn it back over to Henry for any closing remarks.

Henry Schuck: Alright. Thank you everyone for joining US Tonight, we realized that one or two quarters do not make a trend line, but we are excited about the operating momentum in the business and the number of Green shoots. We're seeing we continue to believe that the best path for long term shareholder value creation is to delight our customers.

Henry Schuck: And by doing so grow levered free cash flow per share and we continue to expect to do that.

Henry Schuck: Thank you and good night.