ZoomInfo Technologies Inc. Q4 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the ZoomInfo Fourth Quarter and Full Year 2022 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to your speaker for today, Jerry Sisitsky. Please go ahead.

Thanks, Lisa. Welcome to ZoomInfo’s financial results conference call for the fourth quarter and full year 2022. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; and Cameron Hyzer, our CFO. 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 SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement on the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I will turn the call over to Henry.

Thank you, Jerry, and welcome, everyone. A year ago, you joined me on our earnings call as we talked about our expectations for 36% revenue growth for 2022. A lot has happened between that initial guidance and now, and even in the face of a more challenging economic environment, we continuously raised our guidance as we moved through the year and delivered 47% revenue growth in 2022. We delivered that growth efficiently, with an adjusted operating income margin of 41% for the year and more than $450 million in unlevered free cash flow. In the fourth quarter, we delivered over $300 million in revenue with a 42% adjusted operating income margin, which was up 100 basis points sequentially and up more than 350 basis points from Q4 last year. Structurally, we are a profitable company, and we remain committed to driving topline growth while expanding profitability and efficiently growing free cash flow. This combination of growth and profitability differentiates us from many other growth-oriented software companies that have struggled with a clear path to profitability. We have always operated with discipline, efficiency and a focus that allowed us to generate profitable growth and we will continue to do so. While these are good results, we can be doing better. Our customers are challenged by the current state of the economy. Within our largest vertical, software, companies are laying off employees and cutting back spending. Many companies, regardless of size or vertical, have materially lower growth prospects than they did a year ago. All companies are looking to do more with less. We remain early in the digital transformation of B2B sales and while our platform drives meaningful efficiencies for companies in all industries, as our customers reduce their sales budgets and headcount, they take a harder look at all their spending. As we had indicated earlier in the year, the more challenging economic environment has impacted our upsell and cross-sell motions with increased customer scrutiny causing an elongation of sales cycles. The economy has had a direct impact on our business to be sure. But to continue to grow and scale through this time, we will be intensely focused on four priorities: surrounding ourselves with the right people, investing in enterprise solutions, delivering delightful product experiences and executing with excellence and efficiency. I continue to dedicate my energy to those priorities every day. And as I have communicated to everyone in the company, if it is not driving us forward across these four initiatives, it is not a priority. With regard to the first priority, I have made significant changes to the leadership team over the last few months. We announced last week that our CTO, Nir Keren, is leaving ZoomInfo. Nir joined ZoomInfo in its startup phase and has helped us grow the engineering team from its very earliest days. I want to thank him for being a strong leader and a great partner. The new executives we have hired bring strong relevant experience, leading great teams, driving customer success and building highly scalable world-class products. These leaders and others across the organization will help create the foundation we need to scale for the next phase of growth. First, Ali Dasdan joins us as our new Chief Technology Officer from Atlassian, where he was Head of Engineering for Work Management, Confluence, Trello, Jira and Atlas. He is coming from an organization that is universally recognized as having the best product-led growth motion supported by a remarkably well-integrated underlying platform and he brings more than two decades of experience scaling global technology companies. We are excited to have him join the company and lead our innovation and development efforts. Also, Dave Justice is joining ZoomInfo as our Chief Revenue Officer. Dave has more than two decades of experience leading global sales in the software space, serving as Chief Revenue Officer of PagerDuty for the past three years. Between PagerDuty, Salesforce and Cisco, he has helped sales organizations at all levels of the company, with a particular focus on enterprise sales. We need the right people in the right roles focused on the things that matter most and I believe we have that now. With regard to the second corporate priority, investing in our enterprise business, we recently surveyed thousands of ZoomInfo users to understand the impact our tools and data have on their day-to-day productivity, and the value that they derive from the platform. Their responses underscore just how essential we are at a time when companies are trying to hit their targets with fewer resources. 67% of sales leaders reported immediate topline revenue gains after implementing ZoomInfo. Sales development representatives cut their time researching prospects in half. Account executives reduced deal cycles by nearly 40% and increased win rates by more than 45%. SDRs, AEs and account managers increased quota attainment by more than 50% and the average quota attainment with ZoomInfo was more than 90%. 70% of marketers reduced spend due to more accurate targeting and the average recruiter using ZoomInfo reduced the time to hire by 20%. These results tell us that the ZoomInfo platform is mission-critical for our customers and delivers tremendous ROI. With our platform, marketers are able to reduce spend and target leads more accurately. Sales teams spend less time researching and more time selling, and with more accurate data, drive more than double the response rates. Recruiters find better candidates and get them in the door faster. When our customers win, we win and we will continue to ensure their success as we cement ZoomInfo as the essential revenue operating system for efficient businesses. Our net retention rate, which was 104%, was a disappointment this year and in large part reflected the more difficult operating environment. The biggest driver in terms of lower net retention in 2022 was a lower level of upselling as the continued elongation of sales cycles impacted our reps' ability to sell more seats and more data into our installed base. Customers continue to renew as our gross retention rate remained in the 90s, but upsell opportunities were diminished as customers look to cut costs, particularly in the second half. We ended the year with 1,926 customers who spend more than $100,000 annually with us, up approximately 30% year-over-year and advanced functionality now represents 31% of ACV. There is a tremendous opportunity with enterprise customers and we are making it even more of a priority to unlock that opportunity. During the quarter, we closed transactions with leading organizations like Amazon Web Services, Bank of the West, Barclays, Cigna, Edward Jones, Goodwin Proctor, FedEx, Panasonic, ServiceNow, Sodexo and Waste Management. Companies are increasingly looking to work with fewer vendors and consolidate their tech stack. They choose ZoomInfo because our integrated platform aligns sales and marketing teams to optimize conversion and it can expand with them as they grow and develop a more sophisticated go-to-market strategy. As examples, a leading provider of human capital management solutions traditionally only leveraged company data from ZoomInfo to drive their territory planning activities. After a Sales OS pilot that delivered significant ROI in a short amount of time, they rolled out Sales OS to thousands of their account executives, expanding their use of the platform. One of the largest financial institutions in the world doubled its investment in ZoomInfo, adding more Sales OS seats and is now integrating our data into Salesforce for their commercial banking unit, while leveraging intent data to improve their targeting efforts. We are focusing our 2023 development efforts on extending our lead in data excellence, delivering a scalable enterprise experience, developing and training customers on high-impact plays that drive go-to-market efficiencies directly from the ZoomInfo platform and investing behind more product-led growth opportunities. We will continue to invest in accuracy and coverage to further extend our data leadership and optimize our search experience. We will also invest in more robust bidirectional sync with CRMs and APIs to meet the needs of our enterprise customers, and in holistic signals and unified scoring mechanisms to meet the needs of sales and marketing teams that use ZoomInfo as their shared source of data truth. When I think about building a world-class enterprise experience, it comes down to the scalability and simplicity of our product to create a delightful experience for users. As we move upmarket to serve larger global enterprises and deliver predictable and efficient performance for our customers, our product focus is shifting to driving scalability, automating workflows and simplifying everyday tasks for our users and their admins. We will invest more in enterprise-grade settings and permissions for admins, simplified account setups and integration, in product analytics and performance dashboards for leadership and a better self-guided product onboarding experience to help unlock value along the user journey. In the recent G2 Winter Grid report, ZoomInfo ranked in first place across 29 grids and was listed as the number one enterprise solution in eight different sections. For the eighth straight quarter, we led all four of the sales intelligence, marketing account intelligence, account data management and lead intelligence enterprise grids. We are also doubling down on our investments in Marketing OS. We will continue to build out our advertising capabilities related to our proprietary B2B demand-side platform, build deeper account-based marketing functionality, expand reporting capabilities and invest more in unified scoring mechanisms. Marketing OS is a common upsell pathway after customers have successfully implemented Sales OS, and we are seeing more traction with sales and marketing teams who want to share the same foundational data, tools and processes. We will also invest heavily in supporting our customers to execute high-impact go-to-market plays. Customers are looking to do more with less, whether that means smaller teams or fewer advertising dollars. Being able to take timely action on signal is key to successful and sustainable go-to-market motion. We will continue to invest in both user-level workflows enabled through Sales OS and Marketing OS, and organization-wide workflows and workflow management through Operations OS. Scalable workflows supported by our RingLead and DAS offerings have been integral for companies looking to become more efficient and automate time-consuming motion. In closing, I am confident that we have the team, the platform and the strategy to win this market. A huge opportunity remains ahead of us and we are well positioned to capitalize on it as more and more sales teams use data and insights to find, acquire and grow customers. Our customers are generating significant ROI and our users are reporting phenomenal results as they leverage the ZoomInfo platform. We have added a number of leaders who will continue to help us grow and scale, and who bring a wealth of enterprise experience and a customer-first mentality to the organization. As I mentioned last quarter, while we can’t control the macro, we can control how we manage the business. I am all in, the team is all in and we are ensuring that we are consistently delivering the results that you have come to expect from us. While Cameron will be sharing our specific guidance for next year, I will share with you the framework we use in developing our guidance. We have assumed that the economic environment does not get better, and at the low end of the guidance, we have assumed that things get progressively worse. We understand that while our new leadership is great for the long term, we may see some disruption while the team gets up to speed. We remain steadfast in our belief that we will continue to expand profitability and we will continue to lead with efficiency, focusing on compounding free cash flow growth over the long term. With that, I will hand it over to Cameron.

Thanks, Henry. In Q4, we delivered revenue of $302 million, up 36% year-over-year, which implies 5% to 6% sequential growth compared to Q3 2022. Excluding the impact of products acquired within the last 12 months, our organic revenue growth for the quarter was 34%. Adjusted operating income in Q4 was $127 million, a margin of 42%, up 100 basis points sequentially and up 360 basis points compared to the fourth quarter of last year. For the full year, we delivered revenue of $1.1 billion, up 47% compared to 2021 and meaningfully better than our initial full year guidance of 36% growth. Organic revenue growth in 2022 was 41%. Adjusted operating income was $448 million, a margin of 41% and unlevered free cash flow was $457 million. We were GAAP profitable for the year, with net income of $63 million and GAAP EPS of $0.16 per share. Non-GAAP EPS was $0.88 per share. We are initiating guidance for 2023 with revenue growth at 17% at the midpoint, with an implied AOI margin of 41%, up 50 basis points compared to 2022. For 2023, we expect to deliver $512 million in unlevered free cash flow at the midpoint of guidance, which implies more than $450 million in free cash flow for the year. It is no secret that the tech sector is seeing layoffs and companies regardless of vertical are being pressured to cut costs and drive efficiency. We believe that our focus on driving an efficient go-to-market motion for our customers, and the strong and near-median ROI our platform provides across verticals has enabled us to continue to deliver a leading combination of revenue growth and profitability even in this more challenging environment. Longer sales cycles and the increased time our reps are spending on renewals has impacted our ability to upsell and cross-sell existing customers, which was a meaningful driver of growth and net revenue retention expansion in the past. As Henry indicated, net revenue retention for the year was 104% as we operate in this more challenging economic environment. Bridging from our prior net revenue retention, the biggest driver, approximately 10 points of the change, was driven by reduced upsell. Similar to many other software companies, our sales reps continue to spend more time on deals and renewals than they have in the past, limiting their ability to drive more upsell opportunities with existing customers. In addition to adding more capacity, we have shifted account loads, reallocated resources to higher potential customers and automated low-end tasks, creating the potential to improve efficiency. While we believe these efforts will yield positive results, we are cognizant of the ongoing macro challenges and acknowledge that our improvements could be offset by further deterioration in buyer sentiment and behavior. As a result, we think it is prudent to model net revenue retention at lower levels for the foreseeable future. New customer additions remain a larger driver of revenue growth in 2023 and our expectation is that will continue to be true in 2023. International customers contributed 13% of revenue in the quarter, which grew 49% relative to Q4 2021. International markets are seeing a similar and in some cases worse economic environment relative to the U.S. During the year, we grew our employee base approximately 30%, which was slower than revenue growth. In the second half, we intentionally moderated the pace of headcount growth, raised the bar with respect to performance and eliminated some positions. As a result, we are currently at a headcount level below where we ended September. In 2023, we expect to realize operating leverage in the business as we continue to grow our overall team less quickly than revenue while focusing on adding sales capacity. Turning to cash flow, operating cash flow in Q4 was $120 million, which included approximately $6 million of interest payments. Unlevered free cash flow for the quarter was $122 million or 96% of adjusted operating income. For the full year, unlevered free cash flow was $457 million or 102% of adjusted operating income, yielding a margin of 42%. Going forward, we expect unlevered free cash flow conversion in the range of 95% to 100% for the year. With respect to the balance sheet, we ended the fourth quarter with $546 million in cash, cash equivalents and short-term investments. At the end of Q4, we continue to carry $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. Additionally, we successfully transitioned from LIBOR to SOFR during the quarter. We again drove an improvement to our leverage ratios, with a net leverage ratio of 1.5 times trailing 12 months adjusted EBITDA and 1.3 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreement. This represents approximately a full turn improvement from the beginning of the year. With respect to liabilities and future performance obligations, unearned revenue at the end of the year was $420 million and remaining performance obligations or RPO were $1.1 billion, of which $842 million are expected to be delivered in the next 12 months. We believe that calculated billings, bookings and RPO are imprecise metrics to assess in-period activity and forward momentum. Because of the inherent noise in those metrics, we focus on days-adjusted sequential revenue growth, which was 5% in the fourth quarter. As we move to guidance, we have developed a prudent set of assumptions. The low end of guidance includes an expectation that there is a further deterioration of the macro environment and buyer sentiment in 2023, as well as some near-term disruption as we onboard new leaders. With that, I will provide our outlook for the first quarter and initial outlook for the full year 2023. For Q1, we expect revenue in the range of $299 million to $301 million, reflecting the fewer days of revenue recognition in Q1 relative to Q4. We expect adjusted operating income in the range of $118 million to $120 million and non-GAAP net income in the range of $0.21 to $0.22 per share. Our Q1 guidance implies year-over-year revenue growth of 24% and an adjusted operating income margin of 40% at the midpoint of guidance. We are providing initial full year 2023 guidance as follows. We expect revenue in the range of $1.275 billion to $1.285 billion, adjusted operating income in the range of $523 million to $533 million and non-GAAP net income in the range of $0.98 per share to $1 per share based on 418 million weighted average diluted shares outstanding. For unlevered free cash flow, we expect to generate between $507 million and $517 million. Our full year guidance implies 17% revenue growth at the midpoint and both adjusted operating income margin and unlevered free cash flow margin at or above 40%. With that, let me turn it over to the Operator to open the call for questions.

Thank you. One moment while we prepare for our Q&A session. The first question that I have is coming from Mark Murphy of JPMorgan. Your line is open.

Yeah. Thank you very much. So I wanted to drill in, just given your exposure to the software vertical, I believe it’s around 40% of ARR. What are you embedding into the guidance there? In other words, do you assume that this wave of layoffs continues to intensify through the year? We hear of SDR teams being let go and that that would put more pressure on seat expansions into the software vertical or do you see a scenario where perhaps that would kind of level off sometime in the next couple of quarters? And then I have a quick follow-up.

Yeah. Thanks, Mark. Certainly our guidance contemplates that we continue to see a challenging macro environment and I think that would include continuing to see layoffs occur. We did experience a bunch of that in Q4, as I am sure you can imagine, and the guidance assumes that things will get worse as we go through the year.

Okay. As a follow-up, we had heard some feedback that seat growth is obviously very, very sluggish, very challenged out there broadly across the entire software vertical. But there are cases where companies are continuing to consume bulk credits or data credits. Is that something that aligns with your observations or do you think the trajectories are pretty similar if we toggle between seat growth and bulk credit growth?

So I think that when you look internally at the results, bulk credit usage is performing better than seat growth or net expansion that we see. Part of our strategy for 2023 has been to focus on our Data-as-a-Service offerings, our RingLead plus enrichment offerings, and our Databricks offerings that are available inside of Snowflake and Google BigQuery and Amazon AWS. Those are performing better in this environment.

Okay. And sorry, one final question for you. Cameron, I believe you are guiding above on the unlevered free cash flow for 2023. I know it’s above our model. Could you remind us what is underpinning your ability to preserve margin like this and to drive free cash flow better than much of the industry even when we have such challenges out there in the environment?

We are continually focusing on managing the business and driving better margin. Overall, our expectation is that operating income as a percentage of revenue will increase by about 50 basis points in 2023. We are expecting a little bit less free cash flow conversion. But overall, we are laser-focused on continuing to be efficient and drive efficiency in the business, which has been a core thesis of ours since I have been here.

Excellent. Thank you very much.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Elizabeth Porter of Morgan Stanley. Your line is open.

Thank you so much for the question. I first wanted to ask just about the management changes. Can you provide some more clarity on what Dave is expected to change within the sales organization and how we should think about the impact from disruptions? Is it something that might take us a quarter to work through or is it going to extend through a greater period of time? Thank you.

Yeah. We are super excited about having Dave here. If you followed his tenure at PagerDuty, Dave was known for building a really strong land-and-expand motion and re-architecting that business for growth. He has a long tenure of enterprise leadership and that’s an area where we believe we have a tremendous amount of opportunity. So where we think we are going to get quick impact from Dave is really driving that land-and-expand motion within our customer base and really driving our opportunity within the enterprise. We are especially excited about that. From a timing or a disruption perspective, we are hopeful that Dave hits the ground running quickly and he’s making an impact right away. That being said, we are being really conservative about that impact, and when we guide forward, we are assuming some disruption before we are feeling the full impact of his tenure here.

Got it. And then just as a follow-up, I think that the headwinds on the expansion of seats are pretty well understood. But could you give some more color on top-of-funnel demand trends and changes over the last three months and kind of what the outlook on particularly the new customer side is that’s incorporated into guidance?

Sure. With respect to guidance, we are expecting that the environment becomes more challenging in 2023 and that includes both the customer side as well as new sales, where we are expecting flat to lower new sales in 2023 versus 2022. From a pipeline perspective, we continue to see more pipeline than we have ever had, and win rates are actually modestly starting to improve if we look at Q4 relative to what we have seen previously.

Thank you. One moment while we prepare for our next question. Our next question is coming from Raimo Lenschow of Barclays. Your line is open.

Hey. Thank you. Could we talk a little bit about the seasonality that you guys are expecting for the year? The issue on missing upsell or less upsell is something that should play out as people come up for renewal. Should I think about that as being spread across Q1, Q2, Q3, Q4 until you go through this big one year of renewals and then are we kind of there, or are there other factors we should think about?

So when you think about seasonality, there’s potential upside as we lap people that have maybe down-sold because they went through a restructuring of their firm or down-sold for another reason as we get into the second half of the year. But that’s not explicitly contemplated in our guidance. We don’t see evidence of that happening yet, and while it may be upside, we are not counting on that being a big driver of growth this year.

Yeah. And then if you think about the environment where people are revisiting internal cost and investment levels, you obviously were always much more profitable and much better built. How do you think about revisiting your own plans internally?

We have a process where we revisit our trajectory and plans on a monthly basis and make bigger moves on a quarterly basis. That was a big part of the reason why we were able to adjust our hiring plans and investments as we were exiting Q2 and into Q3, which helped drive improvement as we got through to the end of the year.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Siti Panigrahi of Mizuho. Your line is open.

Hi. Siti Panigrahi. Thanks for taking my question. On NRR at 104%, looking at that upsell opportunity, Henry, what can you do to improve the upsell opportunity? Is it more about company go-to-market strategy changes that can drive demand or what’s your view on driving more upsell given the RevOS platform you built over the last couple of years?

I think part of the way we are thinking about this is where we see the most opportunity within our customer base. We see tremendous opportunity in the enterprise, around our Marketing OS products and our DAS product. So making sure our go-to-market organization is designed to go after those opportunities is how we’re thinking about it. We have made a number of shifts in the back half of the year to make sure we are resourced to drive Data-as-a-Service, to drive Marketing OS, which are higher-dollar ASPs into the enterprise and upper end of the mid-market customer base. We think that will drive efficiency and use our resources best. When customers buy Marketing OS, the ASP is over five times our average Sales OS pricing. When prospects buy Marketing OS, the ASP is over three times our Sales OS pricing. So the focus is on where the return on our resource investment is highest and making sure we have resources dedicated to those areas.

Thanks for that color. And when you think about growth opportunity, where does international expansion stand and what are you seeing right now on the international front?

We continue to have a strong international team that’s driving new business and expansion. But there are areas, particularly in Europe, where the economic environment might be more challenging than in the U.S. Long-term, there’s a real opportunity for international to be a much larger percentage of overall revenue, but that’s not something we see in the short term.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Brad Zelnick of Deutsche Bank. Your line is open.

Hi. Can you guys hear me?

Yeah, Brad. Yeah.

Yeah.

Excellent. Thank you so much for the question. First for you, Cameron. If we look at the Q1 sequential guide, I believe you have guided to roughly flat sequential growth days-adjusted. What trends are you seeing in January that inform your view and has anything materially changed in customer budgets this year?

January has gone reasonably well. We actually had less change in linearity with respect to Q4, where there was less activity in the last couple of weeks of the year that is partially impacting Q1 as well. Additionally, Q1 is a timeframe where we are at least contemplating some disruption from the management changes we have executed, so we want to be prudent with respect to the guide.

I would add that our pipeline in January was the strongest it’s ever been. We generated more MQLs than we ever have in our history. There’s real demand out there in the market for our products. But ultimately, customers are waiting; they are not making purchase decisions at the velocity levels they were a year ago. But there is real demand and we are generating that pipeline. As uncertainty fades, we feel we will be in a great position to accelerate.

That’s helpful color. And Henry, maybe a follow-up. Your message has been fairly consistent that the headwinds you faced to date are macro related, which makes sense. But now you are bringing in a new CRO from the outside, which could be disruptive. Why is now an external CRO the right hire given your unique go-to-market? What’s the risk or opportunity to modify your go-to-market under Dave to be more like some of the other great companies he’s worked for in the past?

The big thing is that there is a real growth opportunity within our enterprise customer base. Today, we have 35,000 customers and we are driving growth across our enterprise customers, but within the enterprise we think we can significantly accelerate. Bringing in a Chief Revenue Officer with substantial enterprise experience felt like the right time. We see that segment as the biggest growth opportunity and we wanted someone with significant land-and-expand expertise across the enterprise.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Brian Peterson of Raymond James. Your line is open.

One for Cameron. Given the magnitude of the upsell/downsell dynamic of the roughly 10 points you referenced, could you shed light on linearity changes over the year — third quarter, fourth quarter — how did that trend? And when you said we should model a lower NRR going forward, was that versus the 104%? I just want to make sure we are clear on that comment. Thanks.

Yes, the reference point is against the 104% that reflects the activity for the year. Most of our backlog from 2021 expired in the last four months of the year, when we saw a lot of macroeconomic pressure. We are expecting that could continue and perhaps get worse in 2023, so the base case is net revenue retention could be lower in 2023.

Thanks. Anything on the linearity of how that trended over the course of the year, could you comment on fourth quarter versus third quarter or how that progressed?

It certainly got worse particularly in the last four months of the year. That being said, almost half of our bookings from 2022 and 2021 were in those last four months, which is a good indication of when we are renewing contracts as well.

Thank you. One moment while we prepare for our next question. Our next question is coming from Brent Bracelin of Piper Sandler. Your line is open.

Hello. Can you hear me?

Yeah, Brent.

Yeah.

As we think about an increasing enterprise opportunity and enterprise focus going forward, what is the revenue split today as you think about customers over $100,000? What are they generating of the mix versus smaller customers?

Customers that spend more than $100,000 annually generate roughly 45% of overall revenue. The number of customers has grown and the revenue per customer is at the highest level we have seen.

Got it. Super helpful. The million-dollar question is how quickly and what else are you contemplating besides the new CRO to accelerate pipeline build outside of software? You have built a great business and a de facto standard in the software ecosystem. How do you replicate that outside of software and how fast can you pivot?

The rest of the industries outside of software are growing faster than our software and technology base of customers. We talked about companies like Waste Management, Barclays, ABM Industries and Capital One who are large clients. We continue to grow our share in non-tech companies. We will do specific vertical mapping and for the first time have account managers aligned to financial services and business services verticals. It’s more specialized service where they can build relationships with customers and position us to upsell within the non-tech customer base.

Thank you. One moment while we prepare for our next question. Our next question will be coming from DJ Hynes of Canaccord Genuity. Your line is open.

Hey, guys. In the context of the layoffs we are seeing in the tech space, when customers come to you looking to trim commitments, what levers do you have to stave off that partial churn? Are you offering additional modules to preserve ACV? How often is that happening? Any color would be helpful as we think about NRR dynamics.

We have seen a reduction in seats driven by layoffs and that impacts both upsells and downsells, which definitely occurred in Q4. We run plays that include offering additional functionality or finding other pockets of the organization that could benefit from our software. But realistically, those plays haven’t worked as well as we want, particularly given that buyer behavior is fragile when people are executing a restructuring. In some cases, the plays work, but in many cases, particularly in Q4, there was an impact related to layoffs.

Got it. And then, Henry, a follow-up on M&A appetite in 2023: do you intend to batten down and make sure the house is in order first or be opportunistic as a consolidator of peers facing similar challenges?

There’s nothing on the near-term horizon from an M&A perspective. Our criteria remain the same but we have a much higher bar. We want M&A that improves the customer experience, fits within our go-to-market motion and is accretive in the short- to medium-term. We will be meaningfully more selective in this environment. Again, nothing on the near-term horizon and my focus is on driving the business, landing these executives and growing the topline profitably.

Thank you. One moment while we prepare for our next question. Our next question is coming from Taylor McGinnis of UBS. Your line is open.

Hi. Thanks so much for taking the question. It sounds like new business is expected to hold up this year. Cameron, can you give some color on the mix of new logo versus existing implied in this growth guide and how that might compare to last year?

When you look at organic growth of 34% in the quarter and net revenue retention at 104%, that implies roughly 30% of growth in 2022 came from new business. Our guidance contemplates both new business and net revenue retention will be challenged. I’d expect new business to be likely flat to down based on deteriorating buyer behavior and the macro environment, and similarly net revenue retention will be more challenged.

Got it. One follow-up on margins: with potential NRR deterioration and risks on the sales side and continued investments in capacity, does that risk the margin upside this year? If not, where will the leverage come from?

We are focused on being efficient and harvesting operating leverage. A more challenging environment impacts sales and marketing efficiency, but we expect to realize operating leverage from other areas. We expect cost of revenue to decrease as a percentage of revenue, which will probably be the biggest driver of operating leverage, and we will also get some from G&A and R&D as the year progresses.

Thank you. One moment while we prepare for our next question. Our next question is coming from Alex Zukin of Wolfe. Your line is open.

Hi, guys. With respect to sales cycles and the demand environment, do you feel like we have reached peak uncertainty or a trough in demand? Is it getting better or is the level of uncertainty persisting? Also, have you had to deal with more competitive intensity, particularly on calls as cost is often mentioned as an issue for getting deals done?

We haven’t seen any material change in buyer behavior related to uncertainty or the macro environment. From a demand and pipeline generation perspective, January was our largest pipeline ever. We are generating more MQLs than ever. When buyers are buying, they are buying decisively and at strong ASPs and we are seeing less competition in our deals in Q4. Where we do see competition is primarily in the SMB segment. We are seeing the highest in-month win rate ever for a non-end-of-quarter month, which tells me that while there is room for improvement in execution, it’s mainly customer uncertainty about the broader economy holding us back. As uncertainty fades, we are confident we can accelerate.

Perfect. And Cameron, on the margin side, if I look at the free cash flow margin guide versus the operating margin guide, they are a little inverted from where they have been historically. Historically, free cash flow margins have exceeded operating margins. Walk us through the assumptions and in general, with growth moderating, what is the decision point to unlock greater margin leverage?

We expect free cash flow conversion in 2023 of 95% to 100% as opposed to historically above 100%. The big factors impacting conversion are that customers are shifting more to quarterly payments versus upfront annual payments, which impacts cash flow, and lower growth changes the weighting of upfront payments. Regarding margin leverage, we expect to improve sales and marketing efficiency over time, particularly as the environment stabilizes, which will enable acceleration or harvesting more operating leverage.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Parker Lane of Stifel. Your line is open.

Hi guys. When you look at the cohort of customers that have announced layoffs or cost-reduction plans, can you give a sense of the share of them that have already come up for renewal? As we think about 2023, will the impact of those renewals be evenly spread through the year or more skewed toward the third and fourth quarters you referenced earlier?

The timing of those renewals is slightly more skewed into Q4, so we have seen a bunch of software companies renewing in that period. That said, it’s not heavily weighted only to Q4; almost half of our customers renew in the last four months of the year and the remainder renew in the first eight months of the year.

Got it. And as a quick follow-up, regarding the headcount reductions you did from September to year-end, was that evenly distributed across the organization or were particular areas impacted more heavily?

We focused on raising the bar for performance. While some actions were somewhat more focused in R&D and G&A, it was fairly consistent across the board as we worked to ensure we have the best team supporting the company’s growth.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Koji Ikeda of Bank of America. Your line is open.

Hey, guys. Thanks for taking the question. You ended the year at 104% NRR. If you consider a tableau that calls for, say, 102% for 2023, would that be an improvement from the exit MRR rate for Q4? And thinking about the 17% guide, assuming low single-digit NRR and mid-teens growth from new customers, where are you most excited from a vertical perspective outside of software or what products are you most excited about as growth drivers for 2023?

Regarding the first part, 102% would be higher than what is implied in our guidance. In a worsening environment, we expect retention below that. Henry can address the product and verticals.

We are seeing a lot of success in financial services, and that’s one of the key areas we reorganized specialists around on the account management side. We have quotes in the slides from Capital One highlighting ZoomInfo as integral to their sales enablement strategy. The same sentiment applies to other financial services companies that sell to businesses. In addition, Marketing OS, our ABM platform, is showing strong ASPs—when customers buy Marketing OS, ASP is over five times average Sales OS pricing and for new customers it's over three times. We also see strong retention with our Data-as-a-Service products including enrichment and RingLead. We will continue to invest behind DAS and Marketing OS as meaningful drivers in the current environment.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Michael Turrin of Wells Fargo. Your line is open.

Thanks. There are some moving pieces in the guide relative to Q1. The optics are flat sequential growth in Q1 then a return to sequential growth. You mentioned days adjusted as a factor and worsening macro. Can you spell out how much of the days-adjusted portion impacts Q1 and what else we should take into account from a modeling perspective for sequential trends through the year?

Because there are fewer days in Q1 — 90 days versus 92 days in Q4 — that’s roughly a 2% headwind to the absolute level of revenue you will see. The revenue guide at the midpoint implies about 2% sequential growth on a days-adjusted basis. Seasonality and Q4 linearity were different than normal, so Q1 seasonality is a bit different historically. By doing the math, you will see slightly better sequential growth in the latter part of the year to get to the 17% full-year growth.

Just squaring improving sequential growth with worsening macro — help us understand the inputs you are using and what informs that view.

In starting out the year, we have a higher mix of ramped sales folks, so our ability to convert pipeline has improved and we will continue to grow that capacity. We also assume some near-term disruption from management changes. We balance those factors in our guidance assumptions.

Thank you. One moment while we prepare for our next question. Our next question will be coming from Terry Tillman of Truist. Your line is open.

Hi, guys. This is Joe Meares on for Terry. In the weaker economy, can you give updated thoughts on your ability to drive vendor consolidation and displace point solution vendors in areas like conversational intelligence and sales engagement?

We are continuing to drive consolidation, particularly around sales engagement providers, conversation intelligence products and ancillary data providers. That is a meaningful part of our strategy in 2023. We will be releasing in February an integrated experience that brings sales engagement and conversation intelligence natively inside the Sales OS platform and we are excited about that.

Great. And last quarter you noted an eight-figure expansion, your largest ever, and you also had a $1 million-plus land, your first of that size. Any more successes like that in the fourth quarter and how does the macro affect the size of your land logos?

We referenced an HCM company that grew thousands of additional seats across their sales and account executive teams. That was a seven-figure transaction in the quarter and it leaves room for further expansion. In a typical larger transaction you might have seen adoption across more seats; in Q4, those expansions were ratcheted back but there is still tremendous upside to grow there.

Thank you. One moment while we prepare for our next question. Our next question is coming from Jacob Satel of Goldman Sachs. Your line is open.

Hi. Thank you very much, Henry and Cameron. You guys were arguably among the first to see the impact of the downturn because people cut back on sales. Your product has tremendous productivity benefits, so what is holding customers back since it is very useful, especially in this economy? Secondly, if you are early to see the cutbacks, shouldn't you be among the first to see improvement as the industry stabilizes? We have easier comps in Q3 next year and have cycled through layoffs. Wouldn’t we see better conditions in the second half based on that logic?

That logic outlines an upside case, but we operate conservatively and don’t rely on that upside. We are investing to have the potential to realize that upside when the environment stabilizes, but we don’t have a crystal ball to say exactly when that will occur.

I would add that this category is still early, which means selling is often evangelistic. The category is not yet a standard budget line item, so executives need to be convinced of the value. We sell into a challenging environment, particularly where we have exposure in tech companies. The slowdown isn’t unique to us; other companies selling sales productivity products have seen similar slowdowns. We don’t expect it to last forever and as uncertainty fades we are confident we will accelerate.

If you take the non-tech slice of your business, which is maybe 50% to 60%, what are the business trends there and how much better is it relative to the overall company guidance?

It is better, but not so meaningfully better that it would imply a totally different outcome. We saw software more impacted from layoffs, but all companies are looking to cut costs and manage for potential recession. It’s challenging regardless of vertical. If buyer behavior stabilizes, that would be positive.

This concludes today’s Q&A session. I will now turn the call back over to Henry Schuck for closing remarks.

Great. Thank you everyone for joining us tonight. We look forward to sharing our continued progress with you at our upcoming investor events. Thank you.

Thank you for joining today’s conference call. You may all disconnect and everyone enjoy the rest of your day.