ZoomInfo Technologies Inc. Q3 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the ZoomInfo Third Quarter Financial Results Conference Call. Operator provides instructions. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Jerry Sisitsky. Please go ahead.

Thanks, John. Welcome to ZoomInfo's financial results conference call, highlighting our results for the third quarter of 2022. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; and Cameron Hyzer, our Chief Financial Officer. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate and believe and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the slides that we have posted to our Investor Relations website at ir.zoominfo.com. All metrics discussed on this call are non-GAAP unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides that we've posted to our IR website. With that, I'll turn the call over to our CEO, Henry Schuck.

Thank you, Jerry, and welcome, everyone. Today, more than ever, go-to-market teams are looking to do more with less, and the ZoomInfo platform is the only solution that can deliver exactly that for companies of all sizes. We're at the beginning of a generational shift of digital transformation for B2B sellers and our business model has proven powerful even in a challenging macroeconomic environment. Our all-in-one platform drives efficiency at a time when every dollar spent is being scrutinized, and it does that by connecting businesses with the people who are most likely to purchase their solutions and giving them the technology they need to engage at scale. ZoomInfo's Q3 results once again beat expectations on the top and bottom line, and we're again raising our full year guidance — our full year revenue and profitability guidance. In the third quarter, we delivered GAAP revenue of $288 million and adjusted operating income of $118 million. This represents year-over-year growth of 46% and an adjusted operating income margin of 41%, up approximately 120 basis points sequentially and up approximately 180 basis points from last year. We generated $100 million in unlevered free cash flow in the quarter or nearly $1 per share on an annualized basis, underpinning our leading combination of growth and profitability at scale. In Q3, we sold the largest expansion deal in the company's history, another 8-figure TCV client. We also sold the largest new business deal in company history, our first land to exceed $1 million with SalesOS, OperationsOS, Engage and Enrich being leveraged. The platform strategy is increasingly resonating, and we continue to consolidate point solutions across sales engagement, conversation intelligence, data and account-based marketing like we did this quarter with Ryder Systems, Taylor Corporation and USI. While these deals demonstrate that we're continuing to execute well, as we made our way through Q3, we began to see increased macro pressure on deals, causing the level of deal review to increase and sales cycles to elongate further. Since this started very late in the quarter, it only modestly impacted Q3 results. This elongation trend has continued into Q4, and we do expect it to impact growth in the short term. While we can't control the macro, and we know that we could deliver even more growth in a more stable economic environment, we can control how we manage the business. And you will see the resiliency of our model play out in the form of strong and consistent margin gains driving earnings. We are confident in raising guidance for 2022, and we expect to continue driving a sustainable combination of best-in-class growth, profitability and free cash flow generation at scale. With that, let me highlight some of the many customer successes in the quarter. First, we ended the quarter with 1,848 customers who spend more than $100,000 a year with us. That's up 40-plus percent year-over-year. We again drove record ACV per customer. And as I mentioned earlier, we saw the largest expansion and new business deal in the company's history. We continue to close transactions with customers across all industries, seeing the strongest growth in the transportation and logistics, finance, insurance, real estate and manufacturing verticals. Advanced functionality now represents 30% of ACV, and we continue to go deeper and increase our strategic value to our customers. More than ever, organizations want to work with fewer, more strategic partners. And as a result, the full stack of our integrated best-in-class platform is even more relevant. As an example, a top news and entertainment broadcasting company went from a demo with a single rep to a multimillion dollar transaction that went wall-to-wall across their entire sales team. This deal accelerated the digitization of their sales motion, given their sales and sales ops professionals the best opportunity to win with highly accurate data and insights that are cleansed and routed to the right sales reps plus the automation, workflows and engagement tools needed to efficiently close a deal. Their team said it best. There are going to be two types of sales teams going forward: successful and efficient teams that have ZoomInfo, and mediocre teams that do not. Next, a Fortune 50 consulting infrastructure and software company expanded their licenses to further streamline their go-to-market strategy with best-in-class global data, insights and automation. As an enterprise organization, they needed to select a vendor that they could trust, and our investments in privacy and data stewardship gave them the confidence in our platform and our company. Their investment expanded their SalesOS users by more than 300% to over 3,500 professionals across 63 countries. ZoomInfo allows them to reach the right stakeholders at the right time when they are in market. A large public telecommunications company with more than 3 million customers wanted to improve efficiency by consolidating several vendor relationships. They already use ZoomInfo for data orchestration but decided to unify their go-to-market strategy by expanding with SalesOS, MarketingOS and OperationsOS. This full stack deal represented a more than 10x expansion with ZoomInfo. And a $15 billion market cap financial data services company was looking to rationalize spend across their tech stack without losing the efficiency of their sales team in the face of an uncertain macro environment. We helped them consolidate vendors by adding our intent and chat products, providing them one end-to-end go-to-market suite while growing their SalesOS seats by 50%. We continue to focus our development efforts to create integrated experiences across the entire platform and to deliver data-driven engagement workflows to help our customers drive efficient growth. In SalesOS, we continue to invest behind unifying the sales professional experience for prospecting, engagement and closing deals onto a single platform by integrating our core sales intelligence, Engage and Chorus conversation intelligence products. Customers are now able to streamline prospecting and engagement in SalesOS, using one-click engagement, advanced sales automation and the integration of conversation intelligence. We also continue to invest in our footprint across the go-to-market organization, adding products for account executives, account management and customer success teams. We've integrated ZoomInfo Intelligence into the post-call and pipeline review process via Chorus. So contact, company and engagement functionality is available without leaving the platform. This includes our new meeting brief that helps our customers run effective meetings by pushing company, participants and competitive intelligence along with deal risks and engagement highlights right to our customers' inboxes. In MarketingOS, we focus on automating key activities to help marketers achieve better targeting and alignment between sales and marketing. As part of our multiyear product vision, we're building out an integrated platform that optimizes end-to-end go-to-market motions by unlocking omnichannel cross-departmental use cases. This strategy is resonating with customers. Over 75% of MarketingOS customers are already SalesOS customers who want to get their teams onto the same tools, leveraging the same data. In the quarter, we added lead expansion capability, which allows users to expand their advertising audiences to similar target personas within the same account to influence a larger portion of the buying committee and better multithreaded deals. Additionally, we know that responding to interested prospects within less than 90 seconds increases conversion rates by close to 40%. That's why we integrated Slack into our workflow engine, putting the right market and buyer intelligence in front of the right people in seconds. For example, if a prospect from one of your assigned accounts visits a high-value page on your website, we can automatically alert you and attach the relevant account and deal context for immediate outreach. We also expanded our campaign reporting capabilities to include insights into account creative and domain placement for DSP campaigns, which supports quick A/B testing and helps streamline workflows. In OperationsOS, we're helping customers move beyond static data quality enrichment and into a world of continuously updated, ready-to-action data inside their CRM. Customers can now automatically capture all relevant companies inside their predefined total addressable market and operationalize them through sophisticated routing. They can append new information such as buying committees or sales signals to all accounts within the CRM, and they can track data changes through dynamic triggers to allow teams to take action on any detected changes at scale. For example, we will capture relevant sales signals such as a key contact moving to a new company and then automatically capture the replacement contact at the account and alert the sales reps so they can take action on this change while automatically generating related records in the CRM. And from a data access standpoint, we delivered massive performance improvements to our APIs, reducing our API call time by 55%. The enterprise demand for our APIs has grown rapidly with the number of API customers more than doubling this year alone. ZoomInfo APIs not only provide organizations with a means of connecting systems and applications but often play a critical role in company-wide digital transformation initiatives. A second focus area in Q3 was to introduce new market signals to help provide our customers with the most actionable and complete data set. Intent data is an extremely important signal that sales and marketing teams increasingly rely on for prioritizing the right accounts to engage with. This quarter, we introduced the ability to bring outside intent sources into the ZoomInfo platform, starting with G2 intent data. Layering G2's intent signals on top of our powerful company and contact intelligence allows customers to take better advantage of their G2 intent signals by enabling direct action against those signals in our platform. In addition, we've improved our website offering so that customers can indicate high, medium and low buying intent driven by visits to individual web pages, such as a pricing page visit being a higher buying signal than a visit to a careers page. These signals can then be leveraged to create high-intent audiences to power advertising campaigns or sales outreach. The third area of focus was to reduce friction in setup and user management processes for admins. As ZoomInfo's RevOS platform has become a solution for entire go-to-market teams, we are focused on delivering deeper account control with frictionless setup. We have made multiple updates to automate the provisioning and deprovisioning of users, the ability for admins to manage and connect email accounts across their user base, driving better adoption within Chorus as well as a self-service path for purchasing additional seats, data credit and advertising media spend. And lastly, we've made continued investments to our data foundation, further deepening our competitive advantage. From a data coverage standpoint, we've invested in machine learning, data acquisition and enhanced location-based matching technologies, increasing our data coverage. We nearly doubled our non-headquarter company locations to more than 35 million locations. We now list revenue, headcount and industry classifications for 100% of companies, including their NAICS and SIC codes. And we also expanded our technographic data set, and now track more than 300 million pairings between companies and the distinct technologies, platforms, programming languages and hardware they use. ZoomInfo can identify technologies across more than 200 technology categories, including a company's CRM, corporate performance management system or even their travel and expense management system. Companies can leverage our technographics data to identify their competitors' customers, allowing sales teams to make their case for displacement and win back business or to gauge the relative sophistication of customers and determine their ideal customer profile. Nearly 90% of our active tech-company pairings have been updated within the past three months. Before I wrap up, I wanted to welcome the newest members of the ZoomInfo team, including the recently added leaders in HR, sales, marketing and security and the more than 150 employees across the company that we hired in Q3. There remains a huge opportunity ahead of us, and we continue to upgrade our team to support our long-term growth outlook while prudently investing in the business in the short term. In closing, we are the clear platform leader. Companies in all industries are looking to drive efficiencies across their go-to-market motion, and we are well positioned to capitalize on the generational shift as more and more sales teams use data and insights to drive the go-to-market motion. We have an amazing group of customers from enterprise to small businesses that we're helping grow efficiently, and we continue to invest in the platform and the team to drive customer success, a key part of the sustainable long-term growth plan. While the economic outlook remains uncertain, we remain committed to driving improved margin performance. Our financial model puts us in the elite category of high-growth software companies that are delivering expanded profitability and free cash flow at scale. With that, I'll hand it over to our Chief Financial Officer, Cameron Hyzer.

Thanks, Henry. Q3 was another quarter of consistent execution and we again delivered results that exceeded our expectations and guidance. We prudently adjusted our expense profile driving better-than-expected profitability in the quarter and showing the inherent leverage in our model. We are pleased to be in a position to again raise our top and bottom line guidance for the year. While we are more insulated from macro challenges relative to many companies and we benefit from long-term secular trends towards digitization, we are not immune to the macroeconomic environment in the short term. Towards the end of Q3 and as we entered Q4, we saw a greater level of financial scrutiny from buyers, which further elongated sales cycles. All deals, including straight renewals, are requiring more effort to reach an outcome, which stretches our sales team and capacity. As reps are spending more time on renewals, we see that their capacity to drive incremental upsells is becoming a limiting factor to growth of existing customers. As a result of the more challenging environment, we now expect dollar-based net retention in 2022 to retrace the gains that we were able to achieve in 2021. In short, we are taking a prudent view of the near-term growth expectations for Q4 and 2023 until we see more definitive signs that the economic environment is improving. That said, we are still raising our guidance for the year and are confident in the value proposition that we deliver to our customers. For 2022, we now expect revenue to be in the range of $1.04 billion to $1.096 billion. We expect adjusted operating income to be in the range of $442 million to $444 million. At the midpoint, this represents revenue growth of 47% relative to 2021 and adjusted operating income margin of 40%, and we expect to deliver more than $1 per share in unlevered free cash flow in 2022. In Q3, we delivered GAAP revenue of $288 million, up 46% year-over-year, which implies 7% sequential growth compared to Q2 2022 as adjusted for days in the quarter. Excluding the impact of acquisitions in the first 12 months, we maintained organic revenue growth for the quarter at 42%, consistent with Q2. Adjusted operating income in Q3 was $118 million, a margin of 41%, the highest level of margin performance in the last 12 months. We continue to place an emphasis on efficiency and profitability; we expect to increase adjusted operating margins over time. Turning to the balance sheet and cash flow. We ended the third quarter with $445 million in cash, cash equivalents and short-term investments. Operating cash flow in Q3 was $86 million, which included approximately $18 million in interest payments. Unlevered free cash flow was $100 million for the quarter or 84% of adjusted operating income. While this was consistent with seasonal patterns, we are adjusting our cash flow expectations in the short term to reflect the potential for more flexibility in payment terms related to a worsening macro environment. With respect to liabilities and future performance obligations, unearned revenue at the end of the quarter was $381 million and remaining performance obligations, or RPO, were $979 million, of which $757 million are expected to be delivered in the next 12 months. We believe that calculated both billings, bookings and RPO are precise metrics to assess in-period activity and forward momentum. If you are analyzing similar metrics, it is important to remember that the comparative period of Q3 2021 should be adjusted for acquisitions. Because of the inherent noise in those metrics, we focus on days-adjusted sequential revenue growth. We delivered 7% days-adjusted sequential revenue growth in the third quarter. With respect to debt, at the end of Q3, we carried $1.25 billion in gross debt, all of which has fixed or hedged interest rates, with about half of that coming due in 2026 and the remainder coming due in 2029. With continued growth and profitability, we again drove an improvement in our leverage ratios with a net leverage ratio of 1.9x trailing 12 months adjusted EBITDA and 1.6x trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreement. With that, I will provide our outlook for the fourth quarter and our increased outlook for the full year 2022. For Q4, we expect GAAP revenue in the range of $298 million to $300 million and adjusted operating income in the range of $121 million to $123 million. Non-GAAP net income is expected to be in the range of $0.21 to $0.22 per share. Our guidance implies year-over-year GAAP revenue growth of 35% at the midpoint and an adjusted operating income margin of 41%. We are providing updated full year 2022 guidance as follows: we expect GAAP revenue in the range of $1.094 billion to $1.096 billion, up $10 million from our prior guidance at the midpoint and adjusted operating income in the range of $442 million to $444 million, up from $435 million at the midpoint of our prior guidance. We expect non-GAAP net income in the range of $0.83 to $0.84 per share based on 411 million weighted average diluted shares outstanding, up from $0.79 at the midpoint previously. For unlevered free cash flow, we expect to generate between $430 million and $435 million as compared to $442 million at the midpoint of our prior guidance. Our full year guidance implies 47% GAAP revenue growth at the midpoint and both adjusted operating income margin and unlevered free cash flow margin of approximately 40%. With that, let me turn it over to the operator to open the call for questions.

Operator provides instructions. Our first question comes from DJ Hynes from Canaccord.

So Cameron, I'll start with you. So you alluded to this in your comments, but we're getting sub-20% calculated billings growth, so 20% CRPO-based bookings, calcs. You mentioned this, but sometimes we can kind of glean false signals from these data points. I'm curious, in this case, just given kind of the slowdown you're talking about, is that a decent barometer for kind of organic bookings growth? Or is there something we should be aware of that's impacting these metrics in the quarter?

We certainly focus on sequential revenue growth as a better indicator of in-period activity. I think particularly if you're looking at bookings growth and billings growth for that matter, you need to adjust for the acquired RPO and acquired unearned revenue in Q3 of last year. RPO as an example was close to $24 million of acquired RPO in Q3 of 2021 — it needs to be adjusted for. And billings similarly; I get a number that's closer to 30% when I adjust for those things overall.

Okay. Okay. That's helpful commentary. And then, Henry, maybe as a more strategic follow-up for you. Just how do you think about kind of the investment strategy in a slower growth environment? I mean you already have best-in-class margins. Do you use that to your advantage? And do you continue to invest? Or do you think about getting more measured with your spend, maybe investing perhaps a little bit more kind of behind the demand curve?

Yes. I think, first, we're going to continue to manage the business from a margin perspective prudently. And as we've said before, as growth slows, we expect margins to increase, and that will continue to be a guiding philosophy in our business. That being said, I think where you will see us invest is to continue to build sales capacity and account management capacity in our customer base. We see that as the leverage point to continue to grow the business. And so that would be the area where we continue to invest.

Our next question comes from Brent Bracelin with Piper Sandler.

Cameron, we'll start with you here. You talked about additional layers of scrutiny on new deals and renewals. Certainly not surprising to hear that given the current environment. But wondering if you could provide just another layer of detail around the renewal discussions. Is it just taking longer to close the renewals? Are customers looking to downsize the size of a renewal? Or are they looking for more flexible payment terms from a timing perspective?

From a renewals perspective, we're actually seeing continued levels of really high gross retention. So we're continuing to see those renewals happen. And we are — I think, as you might expect — customers are looking for flexibility in other places, including payment terms. I think one of the things about our business that's important to remember is that we're really driving value for an individual salesperson. Sometimes the decision maker might be a little further away from that pain or the value that we're providing. So in a time when people are layering on additional scrutiny on all of their vendors, it takes a little bit more effort for us to make sure that those decision-makers are hearing from the users themselves and how important this is in terms of driving their success and efficiency within the sales and marketing motions. So that incremental effort is obviously weighing on our team, a team that's already really efficient and doesn't have slack in the system to go out and necessarily just put in that incremental effort, which then impacts some of the upsell efforts that we're able to go after.

Helpful color there. And then Henry, certainly encouraged to see several wins and expand outside of the software tech vertical that you're so strong in. I think you talked about Ryder, M&T Bank, FactSet, Unilever. What can you do to further accelerate the adoption of ZoomInfo outside of that core software tech vertical?

One of the things that we're seeing in this macroeconomic environment is that there are industries and companies that are much more immune to the macro changes. You see that in insurance, you see it in financial services. You see it in banking and transportation and logistics. And so we've identified those industries and the companies within those industries, and we're making sure that our sales teams are focusing around those companies during this period of time. And it's mainly a sales capacity opportunity for us to really increase capacity across those additional industries.

Our next question comes from Alex Zukin from Wolfe Research.

I guess maybe just a few for me. I guess, first, Cameron, can you talk about just some more color on a couple of things. Maybe days sales outstanding growth exiting September, was the renewal commentary — was this a couple of deals? Was this one very large deal that — and these renewals that seemingly were pushed, are they on track to close this quarter? And then can you be a little bit more specific on the retracing of the dollar — of the net expansion rate? Is that to 116% from the end of last year or 108% the year before?

Let me take the first part. We've already had a number of deals that slipped from Q3 into Q4 that have already closed. Some are larger deals that slipped out of the quarter, and those have already come in. We saw a similar trend in Q2 to Q3. And so that elongation of the cycle — we're seeing these deals again come to fruition and our gross retention rates have stayed largely the same. So those are closing. They're just taking longer to close, and we've already seen a number of them come through.

Yes. The way that we think about payment terms: we do see a little bit less kind of upfront annual payments. So it's down about 5% from where we saw last year in terms of annual upfront payments as a percentage of the total deals that we have. We think of the sales outstanding in terms of billings outstanding and those are a little bit behind where we were previously. But I think most of our expectation is that a number of customers are focusing more on cash contribution, and we're prudently expecting that that could deteriorate additionally. When we think about net retention, we've improved in 2021 up to 116% from previously; we've been in the mid-to-high kind of single digits over 100%. I think that the complexion of retention will be a little bit different than what we saw historically in that kind of mid-to-high single digits over 100%. What we are seeing is that gross retention continues to be really strong, over 90%. So we still have customers that are renewing, and we have seen an acceleration in terms of functionality upsells. Where we're seeing more pressure is with respect to the seat expansions and data expansions that we had seen historically. That's the area where we feel our team isn't able to go after as much of the upsell opportunity given the incremental time that they're spending on renewals and deals in general. As a kind of data point, we found that overall, our conversations and effort required to get to an outcome with respect to NBOS are about 20% higher than they used to be.

Understood. And I guess maybe just a broader macro question then for Henry. If we think about where — is there any concentration of these issues in a particular vertical, like tech or software? Or is it broad-based? Is it one geography that may have been weaker than others — like what was the kind of incremental surprise for some of this from what you were previously thinking?

I think in the second quarter, we saw more of this materialize in Europe and in larger deals. I think in Q3, you saw these cycles elongate really across the board, and so there isn't an area of specific concentration. But then you saw industries that were largely immune to this: transportation and logistics, media, insurance and financial services stayed largely unaffected. And so there are areas of opportunity that we are focusing our sales teams on to sort of shift away from the areas that are less immune right now.

Our next question comes from Phil Winslow of Credit Suisse.

I just want to follow up on the push deals. I appreciate your comments about geography and industry vertical, but is there anything else that's sort of consistent amongst them? Are they really for the multiproduct deals, sort of multiple components of RevOS? Or are these push deals sort of across the board? Any extra color there from a product level would be helpful.

For sure, when we're selling a consolidated platform, there is a slightly longer sales cycle as we're displacing numerous point solutions. If you take a look at those companies I talked about — Ryder, USI, Taylor Corporation — we consolidated throughout those accounts sales engagement, conversation intelligence, account-based marketing platforms and data providers, and so it takes a bit more time to do those consolidations. That's irrespective of the macro environment. I think what we're seeing as part of the macro changes here is just broader-based additional levels of scrutiny and review. Instead of a deal getting done at a director level or a VP level, you see that deal go to a U.S.-based CFO then a global CFO. That not only drags the deal out, but it also increases the time and effort that our account managers are spending per deal. It limits their capacity in that way. More calls, more emails, more executive business reviews. And that's really what we're seeing affect our ability to continue to upsell within the customer base.

Got it. And just a follow-up on that. Obviously, we saw a deceleration of sales and marketing spend in Q3, obviously off of elevated organic levels. Cameron, wonder if you could use some color on sort of your expectations Q4 and to your point about sort of managing both margin and growth in the context of sales and marketing efficiency and capacity.

We're continuing to invest into sales and marketing capacity. Obviously, we'd love to continue to see improvements in terms of the efficiency that we're getting out of those investments. Certainly, there is a natural level of operating leverage that we get from sales and marketing. So in this quarter, sales and marketing as a percentage of revenue is down, but we want to continue to see that drive more and more net new revenues. We're continuing to move forward.

Our next question comes from Mark Murphy with JPMorgan.

Yes. Thank you very much. I'm curious, Henry, when you're out there speaking with customers, I know this just came up recently, but what do you think would come their nerves or instill more business confidence? For instance, do you think that they're waiting to see a Fed pivot or waiting to see lower inflation numbers? Or is there some other kind of macro indicator that you think that they're waiting on?

I don't know if they're waiting on a macro indicator more than their own internal changes. They are experiencing similar levels of additional scrutiny and executive reviews in their own businesses. I think what they're looking for is the change in that environment. What I will tell you is the largest new business deal and the largest expansion deal in our history — those customers are coming to us and saying, 'I'm going to forego the next three or four headcount from a sales perspective and I'm going to use those dollars to invest in ZoomInfo and make the entire additional team more productive, more efficient and more effective.' We hear that over and over again. So I think the thinking around how do I make the rest of my team more efficient — how do I grow without adding headcount — is starting to materialize throughout our customer base and prospects. The historical view of growth being adding headcount is shifting, and that's the message we're trying to land with our customer base as well.

Okay. And as a quick follow-up, I guess I'm curious, what is your gut feel on IT budget flush spending activity at year-end here in Q4? Presumably, you think that that will be a bit compressed, but do you see that maybe dragging down the 7% days-adjusted figure? Is that something that would lower or compress even despite potential for some budget flush activity?

Historically, we don't play as directly in the IT budget as many software companies. I think we are purchased largely by a sales leader that's looking at his team and saying, how can I make this more effective and efficient — they're effectively creating budget as opposed to dipping into a pool set at the beginning of the year. So I don't think we've focused on budget flush as a driver historically and don't necessarily expect that to be as meaningful this year. In this environment where people are scrutinizing everything more seriously than they have before, I do worry that for other vendors that need that budget, it may not exist to the same extent that it has in the past.

Yes. Okay. And just here then maybe just in a similar form, do you think that that 7% days-adjusted figure is — I mean, do you think at some point that will be compressing a little bit lower given all the macro headwinds out there?

We're obviously guiding to a lower level than that. And certainly, our guidance contemplates that there's a wide variety or spectrum of potential outcomes that include a degradation in the overall environment that would drive that.

Our next question comes from Elizabeth Porter of Morgan Stanley.

I wanted to follow up on the payment flexibility that you noted. Is that something that's impacting Q3? Or is that something incremental that could happen in Q4? And any sort of way for us to potentially size what the impact could be from payment flexibility?

Certainly, it has impacted the year thus far, including Q3. We've seen our annual payments as a percentage of the total decline roughly 5% versus where it had been. Historically, annual payments have been more than half of the total, but we are seeing customers requiring or looking for additional flexibility. Certainly, that's part of our expectation and guidance that it could impact Q4 even more than it has so far this year.

Got it. And then as it relates to the go-to-market strategy, you mentioned focusing on some verticals like transportation that weren't as impacted, but anything else that you guys are doing just to adapt the go-to-market to the current environment, whether it's focusing more on the existing or new or moderating Europe? Any color there would be helpful.

One of the things we've done is make a number of personnel moves across the account management organization to make sure that we're building more capacity for our account management team so they're able to drive more upsell and cross-sell into our base. We're leveraging our enablement function to drive the ability of our full account management team to sell additional products like Chorus and Engage instead of those being owned solely by our overlay teams. So we'll get a bigger impact by having a full set of account managers selling these additional products. Those are two big areas.

Our next question comes from Brad Zelnick of Deutsche Bank.

Henry, at the end of September, you announced the hiring of a Senior Vice President of Business Development. In the press release, you talked about him 'redefining' ZoomInfo's go-to-market process, playbooks and training, which was a little surprising to me given your go-to-market has always seemed very unique and special to many of us. I can understand the need to continuously evolve, but why the need to redefine?

We're shifting from playing in a $24 billion total addressable market focused on global and domestic data to a $100 billion total addressable market that drives a full go-to-market end-to-end revenue operations suite. That includes solutions like conversation intelligence and sales automation and B2B chat and an account-based marketing platform on top of our best-in-class data asset. As we shift to having more platform-related conversations, we're going to enable our sellers in a more robust way. Upfront, we may land most often with sales intelligence — our core data and sales intelligence — but as we expand those accounts, our expansion motion is much more focused on selling a holistic platform story. We see that landing: more than 75% of our MarketingOS customers are also SalesOS customers; they're buying MarketingOS and SalesOS together to unlock sales and marketing alignment. But it does require us to tell a broader story. So that's what we were getting at with that comment in the press release.

That makes a lot of sense, and I appreciate that. Maybe just a follow-up for you, Cameron. There was no mention of win rates changing. So I'll assume — and it would be great if you could confirm — that they're more or less in line with what they've been historically. But as well, when we think about retracing on and you talked about expansion being more limited, is there also any change in gross churn across the different market segments that's worth noting?

Deals are taking longer. We do see the highest levels of demand that we've seen. We're continuing to win those, but it's taking more effort and longer time. You have to expand the time frame over which you define win rates in order to reflect this. Competitive win rates in terms of win-loss analysis remain strong.

From a competitive perspective, we actually see a number of competitors pulling back on the resources they are pushing into the market. So I think we continue to see really strong competitive win rates overall. On gross churn, gross churn actually held up very well despite the macroeconomic environment. Gross retention continues to be well over 90%. So I think we feel really good about that. The change in the NRR aspect has much more to do with those seat-based expansion opportunities where our team is spending more time getting those renewals due to greater scrutiny that's being applied by customers, and therefore are getting fewer opportunities to push those upsells that we've seen historically.

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

I wanted to follow up on Brad’s question. Thinking about the sales organization, it sounds like you're shifting some resources over to account management but also shifting some resources to higher level sales processes. So it does sound like a pretty big sales reorganization. Is that the right way to think about it? And if so, are all the sales reorg shifts completed for the growth strategy for the next 18 to 24 months?

No. It's not a major sales team reorganization. It's really just inserting some additional resources into account management and the customer base to give some capacity back to the account managers who are spending more time on renewals and upsells than they had historically. It's nowhere near the magnitude of a major reorganization.

Got it. And then on the account management focus, you were talking about more time on renewals. One question I get from investors a lot is any sort of unused licenses in sales, marketing and recruiting departments. Is that an area of focus heading into renewal periods? And if so, could you talk about how sales teams are focusing on retaining that kind of customer spend?

I don't think that's a huge part of what we see. The big thing we're seeing over the last two quarters are macro-related changes that have materialized into deal cycle elongation — which causes a drag on capacity for frontline sales and account management. Deals taking longer means more meetings, more leadership reviews, more calls and emails to drive the same outcome. While our gross retention has stayed largely the same, our upsell motion has felt these macro headwinds. At the same time, in the quarter we closed the largest new business deal and the largest expansion deal in company history. We're seeing new business ACV on MarketingOS be close to three times the ACV of SalesOS platform. We see the majority of MarketingOS customers also buy SalesOS to unlock the platform story. We're seeing meaningful consolidation uplifts. But ultimately, the macro situation creates sales elongation which creates more time spent by our sellers, and that's a capacity drag. We're making organizational decisions to relieve as much of that drag as possible.

Our next question comes from Siti Panigrahi from Mizuho.

Henry, you talked about the macro pressure and sales elongation. I'm just wondering what sort of trend you are seeing on the pipeline mainly top of the funnel? Also you talked about pressure on seat expansion and data expansion, but what do you expect if macro worsened demand for your newer products like SalesOS and MarketingOS? Do you expect that to offset any kind of slowdown?

We're continuing to see really strong demand. In the quarter, we had the highest delivered marketing qualified leads to the sales and account management organization. Even though demand is strong, deals are just taking longer to close. MarketingOS is the fastest-growing product and platform we believe, and we're really excited about that. Today, it's still a small portion of our business. So while we anticipate continuing to sell more MarketingOS and more data orchestration and conversational intelligence, those remain small portions of our overall revenue base today.

Okay. And then a follow-up on your international expansion opportunity, that's one of your growth drivers. What sort of progress are you making at this point, given geopolitical uncertainty in Europe?

From an international perspective, we are still seeing growth — stronger than many parts of our business historically. Certainly, particularly in Europe we've seen headwinds from the geopolitical situation, so we're not growing as quickly as we did in 2021. We're continuing to invest in Europe and our other international venues and customers to take advantage of the long-term opportunity.

Our next question comes from Michael Turrin of Wells Fargo Securities.

Great. Just on margin, can we go back to some of the comments around resilience and the margin offsets. Cameron, are you still confident in the offsets you have there if growth starts to moderate more meaningfully than what we're seeing currently? And then between operating margin and free cash flow conversion, the implied for Q4 and what we're seeing in Q3 is below the target levels. There have been comments around adjustments you're making in payment terms and other areas. Anything you can add there and around confidence in the ability to return to the targeted levels if that remains the case?

From a margin perspective, we're continuing along the path we laid out: as growth moderates we expect natural operating leverage in the business to continue to push margins up over time. That's the expectation we continue to have. We're not expecting a step function, but we expect a steady increase in margins as we realize operating leverage. Part of that is natural operating leverage in sales and marketing as growth moderates; sales and marketing as a percentage of revenue should go down. In terms of unlevered free cash flow, we are seeing some flexibility that customers are asking for in payment schedules and that certainly in the short term impacts conversion of free cash flow from adjusted operating income. So we're prudently setting expectations that conversion rate could be a little lower than in a more normal operating environment.

That's helpful. Just a small follow-up. You had a few stats laid out around annual payments and the duration changing from prior periods. Do you have the duration mix or average duration in front of you? Anything you can add around how it compares currently versus prior periods would help provide context on impacts?

The duration mix: historically we've seen well over half of payments received as annual upfront payments. What we've seen is that that has decreased by about 5 percentage points, which changes the overall mix. I do think that percentage of annual payments has the potential to move around over time. That decrease is far smaller than what we saw in Q1 and Q2 of 2020. But certainly, customers' attitude is that they are looking for more flexibility as they're dealing with similar macro pressures.

Our next question comes from Rishi Jaluria with RBC Capital Markets.

First, I wanted to start with this metric of 30% of ACV coming from advanced functionality. It continues to move in the right direction, but that seems to be only up slightly from Q2 when it was 29%. At the end of last year it was 24%. The growth rate there seems to have slowed. Can you walk us through the dynamics and why we shouldn't be too worried about this as a leading indicator and something that could spread to a slowdown at the core? Then a very quick follow-up.

We continue to see strong uptake in advanced functionality, but most of that is upsold to our existing customers. While it's less impacted than just leads or data, it is impacted by the capacity issue we've discussed. So I don't see that as a long-term indicator of slowdown in advanced functionality. As advanced functionality gets to a bigger and bigger base, its percentage growth can look smaller even as absolute dollars increase.

Okay. Got it. That's helpful. Very quick point: you mentioned unused licenses earlier. I want to flip that: is there any worry heading into more uncertainty in the macro environment that we could see outright license sharing? Or are there measures you take to limit or prevent that from happening?

Yes. There are technical implementations and measures we put in to avoid license sharing, and we've had those in place for a long time.

Our next question comes from Taylor McGinnis with UBS.

Can you comment on what you're seeing with new logo activity and the size of average lands? How much of the lighter outlook was attributed to softness here? And related, with expansion rates coming down, are you assuming more growth needs to come from new business than recent trends? Does that impact your comfort with some of the out-year revenue targets you had discussed?

We continue to see strength on the new business side. As we attach more of the advanced functionality and see some larger customers, we've actually seen ASP go up in Q3 and continue to see strong new business activity. So new business continues to do well relative to historical trends, whereas capacity on the account management side is a short-term impact from macroeconomic challenges. Overall, we expect the macro challenge to be temporary and retention rates to recover as the buyer environment stabilizes.

Our next question comes from Terry Tillman with Truist Securities.

Henry, a big-picture question: vendor consolidation. It seems like that's likely to pick up steam as the macro continues to be weak or worsen. There's a lot of $100 million-plus sales engagement and CI tool vendors. What are you seeing now? What do you think the tipping point is for you to potentially win that vendor consolidation opportunity? Is that more in '23 under a weaker macro, or how do you think about the timing?

I think we're in the early innings of vendor consolidation. The consolidation stories we've outlined around the platform are not purely macro-driven — they're good business-driven. As the macro environment continues, companies will take the idea of consolidating to strategic vendors more seriously, and we'll gain mind share. The wins we're seeing now would have been achieved regardless of macro uncertainty, but we expect that opportunity to accelerate as we better enable our sellers to position the full consolidation story.

I would now like to turn it over to Henry for closing remarks.

Thank you, everybody, for your time tonight. We have an active IR calendar coming up, and we look forward to speaking with everyone and seeing you all over the course of the next several weeks.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.