ZoomInfo Technologies Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to ZoomInfo First Quarter 2023 Financial Results Conference Call. Please note that today's conference is being recorded. I will now hand the conference to your speaker today, Jerry Sisitsky, Investor Relations. Please go ahead.

Thanks, Amy. Welcome to ZoomInfo's financial results conference call for the first quarter of 2023. 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 sections of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement in the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I'll turn the call over to Henry.

Thank you, Jerry, and welcome, everyone. In Q1, we delivered 24% revenue growth, better-than-expected profitability with an adjusted operating income margin of 40% and more than $121 million in unlevered free cash flow. While we can't control the macroeconomic environment, we can control how we manage the business, and we are executing efficiently. Even when facing continued scrutiny on deals against the macro backdrop that we have not seen improve, our financial results demonstrate the value that our platform delivers to customers everywhere. With that backdrop, we continue to drive a leading combination of growth and profitability, while approximately 40% of our revenue comes from software companies. When you incorporate financial services, venture-backed companies and the broader technology space, the majority of our customers are being impacted by the current economic environment. We are confident that when there is a more stable and certain economic outlook, we will see even higher levels of growth accompanied by even stronger profitability. Until we get there, we are executing against our plans for the year with confidence and reaffirming our full year guidance, which calls for 17% revenue growth and more than $0.5 billion in unlevered free cash flow for the year. While we grew our $1 million cohort of customers materially quarter-over-quarter, our $100k cohort lost logos in Q1 as software companies down-sold. We ended the first quarter with 1,905 customers that have more than $100k in ACV, up approximately 17% year-over-year. Gross churn remains consistent and the total ACV for that cohort continues to grow. We also continue to see bright spots in less-affected end markets like manufacturing and transportation and logistics where we are seeing accelerating demand on the new business side and strong seat growth on the customer side. Given the incredibly large and growing addressable market, quick time to value and the strong ROI we deliver, we continue to invest in the business to drive future growth, widen our competitive moat and be even better positioned when the economy improves. We are capitalizing on opportunities to evolve our go-to-market approach and improve our own internal seller efficiency. By further specializing the roles of our sales and support teams, building persona-based centers of excellence across all functions and developing a more product-led motion for our downmarket customer segments, we're able to optimize our entire organization for greater effectiveness and efficiency. We're continuing to invest behind our PLG motion to drive additional ways for customers to transact with us from first touch through renewal. Today, SalesOS customers can buy additional seats and credits via self-submit with hundreds of transactions per quarter, leveraging our self-service stores since its launch in Q3 of 2022. This easier pathway to purchase is driving more and more customers to leverage self-service including enterprise customers looking to provision user trials and add seats. We expect to expand our product-led motion to be able to fully support acquisition, growth and retention motion allowing our go-to-market teams to focus on more complex, higher-value use cases. These levers are enabling us to invest behind our enterprise business while still maintaining our high velocity, high efficiency engine down market. Examples of these investments, which we are already seeing gains from include a more dynamic and rigorous pricing infrastructure, leveraging our platform and first-party data to synthesize critical signals and prescribe upsell, cross-sell and pricing motions to the field. The rollout of a new sophisticated sales methodology to drive transparency and accountability upmarket, up-leveling our sales talent and an overall more strategic and high-touch approach to our enterprise customers so that we can unlock their potential as customers and that they can unlock their potential as world-class go-to-market leaders themselves. In product, we are investing our resources to create delightful customer experiences, extend our data leadership and expand upmarket. Those investments are paying off with nearly every engagement metric increasing across our core SalesOS product and our Chrome extension reach-out. We view increased engagement as a positive leading indicator for retention. We are also laser-focused on driving seller productivity for our customers, something that Chief Revenue Officers are especially attuned to today. Within SalesOS, we added native sales engagement capabilities, enabling sellers to reach out to prospects in seconds without ever leaving the platform. Users can simultaneously log their activities and launch multi-touch campaigns in real time. Over the quarter, users of this new experience have demonstrated a 22% higher likelihood to become daily active users as we expand our use case more centrally into their day-to-day workflows. With Chorus, we continue to push the frontier of conversation intelligence and AI to increase seller productivity across account executive, account management and post-sales teams. Our new generative AI-powered meeting summaries automatically produce meeting notes and create action items to help sellers move deals forward, ensuring consistent follow-through and increased rep productivity. To use the words of one of our customers, Chorus' AI post-meeting summary is a feature that's completely changed my workflow. There is absolutely no reason to ever take notes during the call again. It captures every single relevant detail from a meeting along with key action items. We expect to continue investments in AI and workflow automation as we become an irreplaceable tool in every go-to-market tech stack. In MarketingOS, we introduced account deal stories, enabling sales and marketing teams to rally around the same deal and account insights by bringing all activities, engagements, intent signals, web forms and email correspondence that influence a deal into a single place. Now sales and marketing teams have access to complete information across the entire funnel, delivering a better customer experience and shortening time to close. Our newly released spend reports complement this experience, allowing customers to monitor and optimize the impact of their multichannel campaigns. On the partnership side, we're excited to announce a new partnership with Databricks, a leading data lakehouse provider, to deliver ZoomInfo's comprehensive B2B data sets directly to customers in the Databricks platform, creating a new channel for accessing and purchasing ZoomInfo through the Databricks marketplace. Our customers will be able to seamlessly leverage our powerful go-to-market data to unlock the full potential of their data workflow, analytics, modeling, machine learning and AI initiatives. During the quarter, we closed transactions with many of the world's strongest brands and leading enterprises, including Chevron, Choice Hotels, Dow Jones, JPMorgan, Juniper Networks, Panera Bread, Shaw Communications, UKG, U.S. Bank and Wyndham Hotels. These globally recognized brands turned to us not only because of our market-leading data and software, but also because of our industry-leading data privacy and notice practices. This advantage is especially powerful with our multinational clients, who are looking to expand with a trusted partner in Europe and beyond. This drives our success internationally, where despite stronger economic headwinds, we continue to grow faster than our domestic business. In the quarter, we saw this come to fruition as we expanded our global data set to two of the world's largest cloud software companies who switched to ZoomInfo away from legacy providers because they couldn't trust their privacy and data compliance practices. Our industry-leading rigorous standards for privacy and compliance were aligned with their values of customer trust and integrity. In addition to those, we also grew our customer footprint in EMEA with one of our largest global expansions with a U.K.-based multinational pest control enterprise. And with DMG Events, an international provider of exhibitions and media that brought on SalesOS to drive seller efficiency worldwide. We also continue to see strong enterprise demand for our TalentOS platform in a hiring market that remains very competitive for top talent. We brought on two Fortune 50 companies, one of the largest retail pharmacies and a major life insurance provider for property, casualty and life insurance, who are now leveraging our platform to quickly recruit candidates. A number of businesses replaced their existing ABM providers and switched to MarketingOS including a global technology company that wanted to target their entire addressable market more accurately and a Texas-based higher education software provider that wanted to save money and go to market more efficiently. We also sold our largest ever MarketingOS transaction to a food services company looking to target businesses more effectively as companies return to office. In closing, I've never been more confident in the ROI that our platform delivers and the innovation that we're delivering for our customers. The highly accurate data and insights powered by the triggered automation and workflow to activate that data, drive tremendous value and engagement. We remain early in the digital transformation of B2B sales as more and more businesses continue to discover the power that our data and insights provide. Despite the current economic environment and the business challenges our customers are facing, buyers continue to invest in modernizing their go-to-market, and as a result, we are confident that as the economic outlook stabilizes, our growth will accelerate. With that, I'll hand it over to Cameron.

Thanks, Henry. In Q1, we delivered revenue of $301 million, up 24% year-over-year and up 1.9% sequentially on an annualized basis when factoring in the two fewer days of revenue recognition in the first quarter. Excluding the impact of products acquired within the last 12 months, our organic revenue growth for the quarter was 23%. Given that we completed our most recent acquisitions at the beginning of Q2 2022, we do not anticipate inorganic revenue contribution next quarter. Adjusted operating income in Q1 was $120 million, a margin of 40%. GAAP net income was $45 million, and GAAP EPS was $0.11 per share. Non-GAAP EPS was $0.24 per share. Overall, the environment degraded in the first quarter, similar to the assumptions upon which we built the guidance. The majority of our customers operate in industries meaningfully impacted by the current economic environment, including software, other technology and financial services, and all customers are scrutinizing spending across vendors. This backdrop makes the starting point for renewals and upsells more challenging, impacting overall sales efficiency and putting downward pressure on NRR. As contemplated in our guidance, net retention activity was incrementally worse than what we experienced in Q4, while new sales was roughly flat relative to Q1 2022, slightly better than what we contemplated in the guidance. This better sales performance was partially offset by increased revenue reserves related to write-offs among our S&P customers. With this performance and more visibility into the remainder of the year, we are reaffirming our previously provided full year guidance, which calls for 17% revenue growth at the midpoint and an implied adjusted operating margin of 41%. International revenue grew 32% relative to Q1 2022, and international customers contributed 13% of the revenue in the quarter. Turning to cash flow. Operating cash flow in Q1 was $109 million, which included approximately $19 million of interest payments. Unlevered free cash flow for the quarter was $121 million or 101% of adjusted operating income. Cash flow conversion in Q1 exhibited lower-than-normal seasonality due to lower prior quarter billings relative to AOI, coupled with the banking crisis at the end of Q1 that delayed some payments to us and forced us to make certain benefits payments ahead of schedule. We expect these timing impacts to reverse in the coming quarters. As reflected in our guidance, we continue to expect unlevered free cash flow conversion in the range of 95% to 100% for the full year. With respect to the balance sheet, we ended the first quarter with $616 million in cash, cash equivalents and short-term investments. At the end of Q1, we continue to carry $1.25 billion in gross debt, all of which is fixed or hedged in terms of interest rates. During the quarter, we completed a repricing of our first lien credit agreement at par, which resulted in a four-year maturity extension to 2030 and a 25-basis point reduction in the interest. We again drove an improvement in our leverage ratios with a net leverage ratio of 1.3x trailing 12 months adjusted EBITDA and 1.2x trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. During the quarter, we repurchased approximately 1 million shares of ZoomInfo common stock at an average price of $23 per share. In aggregate, we deployed a total of $24 million of the $100 million share repurchase authorization that we announced on March 14, 2023. We remain in the market repurchasing shares, and we expect to continue to be opportunistic with respect to repurchase. With respect to liabilities and future performance obligations, unearned revenue at the end of the quarter was $451 million and remaining performance obligations, or RPO, were $1.1 billion, of which $839 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 and sometimes conflicting signals across these metrics, we focus on sequential annualized revenue growth, which was 1.9% in the first quarter. Furthermore, given that we are seeing sales efficiency begin to stabilize and April performance began the quarter better than January did, we expect sequential annualized revenue growth to accelerate in the second quarter as is reflected in our guidance. For Q2, we are providing guidance as follows: we expect revenue in the range of $310 million to $312 million, adjusted operating income in the range of $125 million to $127 million, and non-GAAP net income in the range of $0.22 to $0.23 per share. Our Q2 guidance implies year-over-year revenue growth of 16% and an adjusted operating margin of 41% at the midpoint of guidance. Another quarter of visibility, we have further confidence in our ability to achieve or exceed our full year guidance. As a result, we are reaffirming our full year 2023 guidance, which calls for revenue in the range of $1.275 billion to $1.285 billion and adjusted operating income in the range of $523 million to $533 million. We expect non-GAAP net income in the range of $0.99 to $1.01 per share, up from the prior range of $0.98 to $1.00 per share, with non-GAAP net income per share based on 417 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $507 million to $517 million. Our full year guidance implies 17% revenue growth at the midpoint and both adjusted operating 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.

We will now open the call for questions. Our first question is from Alex Zukin with Wolfe Research. Your line is open.

Hi, guys, thanks for taking the question, and I appreciate a lot of the detail on the underlying business. I guess, maybe start for Henry. It looks like kind of a tale of two businesses, right? You have the business where the underlying customers are impacted and you're doing really well with the new business, and obviously some headwinds on retention and upsell. Just maybe if you split those two out and you look at them separately, what would the non-impacted business look like versus the impacted business? And as you talk to customers, as you talk to other CEOs, kind of where are we on that timeline where we start to rebase into a new normal sales cycle on the impacted side?

Look, I think the way to think about this, Alex, is it's a little bit less like there is a group of companies that are doing really well and then a group of companies that are more challenged. Even within the tech and software vertical, a number of the companies that moved into our million-dollar cohort this quarter were from software or tech companies. What we've said in the past, which is still true, is that there is a lot of demand for our products and services. And so we continue to add quota-carrying headcount into our account management and account executive organization because as we are out there trying to upsell in our customer base and trying to cross-sell in our customer base, we're also affected on the other side by renewals taking longer and general sales cycles elongating for those same deals, and so we're not able to get to as much of the opportunity that's out there. So we're continuing to hire there and continue to hire those quota-carrying reps even in the industries that are impacted; we are seeing opportunity and demand. And as far as the sales cycles coming back to a more normal state, I'll echo what Cameron said, which is April as compared to January is off to a much better start than January was.

Perfect. And then maybe just on the competitive environment? We keep hearing anecdotes of fierce price competition and a lot of overlapping offerings increasingly coming into the space. As you look over the next 12 months and beyond, and you think about the incremental competitive differentiation of the offering, where are you seeing a show-through right now?

So what I'll tell you first is the competitive landscape has not changed. Our win rates have not changed as they relate to our competitors. If anything, we feel ourselves moving further and further away from the competitors in our space. ACV per customer was roughly flat and discounting was consistent to what we saw in Q4, and so we haven't been pressured in that way. I think when you think about differentiation in the space, there are two things. One, we're continuing to invest in our data and our data asset, so we're very clearly the leader when it comes to data coverage, breadth and accuracy, and we want to pull further and further ahead of anybody in the market there. And then second, as we bring everything together in an integrated experience, as you saw us really start doing this quarter by bringing in sales engagement into the core SalesOS platform, we think that interconnectivity between platforms and systems creates a long-term differentiation when put together with our best-in-class data assets.

Perfect. Thank you, guys.

One moment for our next question. Our next question is from Elizabeth Porter with Morgan Stanley. Your line is open.

Great. Thank you so much. I just wanted to ask a bit on NRR first. Directionally, it sounds like NRR got a little bit worse in Q1 versus Q4, which is what you'd expected in your guidance. Directionally, what's the risk that we could see incremental weakness, either through the year in NRR from that Q1 rate as the macro gets a little bit more difficult? And on the offset, while it's still early and there's a lot of uncertainty, is there an opportunity to improve upsell as we just lap some of the tough comps in the coming quarters? Thank you.

Thanks, Elizabeth. So, yes, we are starting to see upsell opportunities among many of our clients, and even in Q1, but more so as we move into Q2. I think there is a really significant opportunity for upsell and gross retention continues to hold in pretty well. That being said, there is the potential for down-sell, and I think we're seeing a little bit more down-sell as well, particularly in the software sector where there are a number of layoffs. But as we start to lap many of the harder renewals that we really started to see pressure on in Q2 of last year, as we get further into the year we feel that many of those renewals in the software space may actually start to go better.

Great. And then just as a follow-up. Given the recent leadership announcements, did you guys see any disruption from the changes in Q1? And if so, was it any better or worse than what you expected? And how should we think about the impact for the remainder of the year?

We've seen a real positive impact from Dave and Ally entering the Company. We didn't see any disruption in Q1 from them coming in. If anything, we feel their impact was increasingly positive on the organization, and they're both focused on improving productivity and org design, and for Dave, up-market execution. We feel really good about their contribution so far.

One moment for our next question. Our next question comes from Koji Ikeda with Bank of America. Your line is open.

Yes. Hi, guys. Thanks for taking my questions. I just wanted to ask a couple here. First one being about sales linearity, April being a better month than maybe March and February or even better than January like you stated. So could you talk about that a little bit more? What exactly does that mean? Does that mean that pipeline generation is better? I know there's more sales capacity in the sales department today versus the beginning of the year, so that kind of makes sense if that's the case, or is it sales productivity? I guess a little more color on how April is being better than the previous months.

So in terms of linearity, specifically, April was better than January. Typically we do have some level of linearity within the quarter, so the first month is oftentimes a little less than the second month, which has been less than the third month. But we do feel that momentum and on an adjusted basis comparing it to January gives us good confidence in where Q2 is going. And certainly from a closed sales perspective, we're seeing that improvement. From a pipeline perspective, I think we're seeing a similar dynamic of improvement in Q2.

Got it, thanks for that, Cameron. And then I wanted to ask a follow-up question on RPO. Current RPO growth slowed in the first quarter to the high-teens from the mid-to-high 20s last quarter, and it was even down sequentially in the first quarter. Could you walk us through some of the underlying mechanics there? Anything to call out specifically, maybe on duration or co-terming? Or anything that caught on the ARPU to help us understand that metric a little bit better? Thanks, guys.

We are seeing fewer long-term contracts and you can see the difference in RPO versus current RPO when looking at that. The other impact to RPO is we had a greater number of write-offs in the quarter related to small-business clients and that flows through RPO more dramatically because those are often contracts that haven't been billed yet.

One moment for our next question. Our next question is from Mark Murphy with JPMorgan. Your line is open.

Thank you very much. In the last week and a half, we've noticed some incremental layoff announcements at companies like Dropbox and Alteryx and Red Hat and Lenovo and F5. If you look at that trend, would you expect the over $100k customer cohort to continue contracting in the near term? Or based on the pipeline comments and how April started, is it possible that was more of a one-time event?

Our expectation is that we're going to continue to focus on driving more value for our largest clients and, as a result, focus on driving the $100k customer cohort higher. That being said, most of the degradation came from software companies which still comprise a good portion of $100k customers. To the extent that those layoffs are largely concentrated in software companies, particularly the degradation for us is among companies that are close to that $100k number, so a small down-sell ends up pushing them under. So it's the small and mid-size software companies where we have the most risk if you're purely focused on that $100,000 level.

Okay, that makes sense. And then as a follow-up. Henry, you mentioned a couple of Fortune 50 companies selected TalentOS for recruiting, and that surprised me a little bit. Can you dimensionalize those transactions just in terms of either how many seats or are they needle movers compared to some of the core marketing and sales products?

These are sort of high-five-figure or mid-five-figure transactions, but they're not million-dollar transactions, or they wouldn't enter the $100k cohort, mainly because talent acquisition teams are often much smaller than a sales organization. Those are also good starting points for us to continue to grow inside those organizations. For example, talent acquisition folks who are acquiring talent for IT or pharmacists provide an opportunity to expand into a broader set of users and use cases.

One moment for our next question. Our next question comes from Kash Rangan with Goldman Sachs. Your line is open.

Hi, thank you, guys, for the color. Cameron, I think you talked about net-new business being flat in Q1. Can you compare that to how net-new business was in Q4 of last year? I'm trying to understand the trajectory. Did it go from negative to flat, or did flat stay flat? And also when I look at the numbers on a go-forward basis, the question on the amount of new dollars to be added — we need to see some sequential acceleration in Q2, Q3 and Q4 to hit your guidance. What are the things that drive the numbers in such a way that we can get to that accelerating revenue growth in the second half versus the annualized growth rate that you put up based on a sequential subscription revenue growth rate in Q1? Thank you so much.

Q4 new sales were modestly up in Q4 2022 relative to 2021, so the trajectory is effectively a modest deceleration to flat. We are continuing to add sales capacity in both new and existing customer teams to drive new sales and upsell. As we look forward and develop our guidance and assumptions, we focus on the shape of expirations and renewals as well as our sales capacity. With added sales capacity and the renewal shape, we have confidence in our ability to see accelerating sequential revenue growth to hit guidance. We also already see April comparing favorably to January, which supports our view for Q2.

Could you say there are easier net-new business comps in the second half of this year relative to last year?

Yes, absolutely. We started to see pressure with net retention earlier, but the pressure more materially impacted Q3 and Q4 last year, which creates an easier comparable going forward.

One moment for our next question. Our next question is from Taylor McGinnis with UBS. Your line is open.

Hi. Thanks so much for taking my question. Maybe to piggyback off the last question with the guide implying your sequential growth to accelerate throughout the year. Cameron, can you break that down a little further into new versus existing? And what gives you comfort on those two different variables? More specifically, NRR came down a little bit further in this last quarter. How does that compare to what is embedded in the full-year guide? Is there any risk if the macro deteriorates further?

We expect that as we continue to grow the sales team throughout the year, that will support growth in new sales as well as potential upsells. There is also seasonality historically based on the shape of renewals and expirations that supports higher net retention activity as you move through the year. Those factors help support the assumptions in our guidance.

One moment for our next question. Our next question is from Raimo Lenschow with Barclays. Your line is open.

Thanks for squeezing me. Team, can you talk a little bit about what you're seeing in terms of pipeline quality? At the beginning of the crisis, people tended to down-sell seats, etc. But you have quite a few extra offerings out there. What are you seeing in terms of appetite to go into higher-value add solutions from you guys? And then a quick follow-on about buybacks: how are you thinking about buybacks at current levels?

Where we're seeing great results is in our mid-market and larger customers. Enterprise and mid-market customers are coupling together numerous of our platforms and products. Almost all of the big deals that closed in Q1 were multi-platform deals — combining Data-as-a-Service and OpsOS with SalesOS, adding TalentOS to SalesOS, and leveraging our company and contact data inside of platforms like Snowflake. We think the strategy of selling integrated, multi-platform solutions is working and we'll continue to see more of that.

In mid-March, we authorized a $100 million buyback through the end of the quarter. We repurchased about $24 million and continued to repurchase in April as well. Our expectation is to continue to be in the market and opportunistically repurchase shares in the second quarter. We have not agreed with the Board on any additional buybacks beyond the $100 million authorization.

One moment for our next question. Our next question is from Michael Turrin with Wells Fargo. Your line is open.

Hi, good afternoon, and thanks for taking the question and for all the detail. Maybe one on margin, Cameron. Any update on how you're thinking through trade-offs given mixed signals between the macro and ramping productivity on the sales side? How quickly are you able to dial up or dial down the need for sales capacity based on what you're seeing? Anything else we should be mindful of in thinking through margin and free cash flow impacts for the coming year? Thanks.

We expect to add roughly 50 basis points of margin in 2023 relative to 2022. Dialing down sales capacity is relatively easy; dialing up requires hiring and training. We're focused on hiring high-quality sales talent and promoting through training programs. This is something we've done for a long time and we're focused on efficiency across the organization. We feel comfortable that we can continue to add capacity as we move through the year.

One moment for our next question. Our next question is from Brad Zelnick with Deutsche Bank. Your line is open.

Great. Thanks for taking the question. Henry, you've talked about generative AI capabilities related to Chorus. Could you speak about the broader opportunities across the portfolio and perhaps direct-to-ZoomInfo opportunities from generative AI and other new competitors that are out there?

When we think about what ZoomInfo is doing, we are in the business of making go-to-market more productive, and we expect large language models to accelerate our leadership in intelligence and automation in two big ways. First, for our own products, we're going to be able to automate manual and mundane steps for our users. For example, instead of users having to find the next best customer manually and triangulate signals, we'll use AI to parse those signals, select the highest-conversion opportunities, pick the best channel and create personalized content to engage, because of all the context we know about companies and people. We already have multiple teams working on incorporating this technology into our platform. Second, for our customers, bad CRM data creates downstream issues in territory planning, rep efficiency and segmentation. Generative AI increases awareness of the need for clean, enriched CRM data because AI needs good data to work effectively. Companies that expect to get good results from these models must have data that is fully enriched, constantly cleansed, and we are a leading provider to help them do that. By helping them do that, we enable them to see the benefits of generative AI.

Helpful color. One quick housekeeping item for Cameron: any changes to full-year headcount plans and where you are tracking year-to-date?

We're focused on supporting our investments. At this point, we are still below where we ended in September 2022, but we'll hire tactically where most important, mostly in sales capacity, and focus on efficiency elsewhere. We'll hire where investments are warranted while driving efficiencies in other areas.

One moment for our next question. Our next question is from Brian Peterson with Raymond James. Your line is open.

Hi, thanks for taking the question. This is Jonathan McCarry on for Brian. We'll keep it to one. You mentioned the 40% exposure to software, but you've also seen some traction in other verticals recently. Can you talk about potential go-to-market investments or new partnerships necessary to further build on that expansion into newer verticals? Thanks.

A couple ways we're approaching new verticals: first, new pricing calculators for the field that show opportunities to upsell and cross-sell based on usage, data consumption and company characteristics; these plays often show up in non-impacted industries. Second, we continue to invest in product-led growth to unlock efficiencies down-market and in industries we historically sell to, letting customers transact without interacting with a direct seller and enabling efficient onboarding. Those initiatives should help drive growth in other industries.

One moment for our next question. Our next question is from Brent Bracelin with Piper Sandler. Your line is open.

Good afternoon. Cameron, I wanted to go back to renewals, particularly given the exposure to software. If we double-click into the seasonality of the software renewal expiry base, is there a large chunk that expires in Q2? Is it still more second half weighted? Any color there and on the puts and takes? I understand renewal risk but you also mentioned upside in upsells as companies optimize. Any more color would be helpful. Thanks.

Software renewals are a bit more heavily weighted toward Q4 than the rest of our business, though Q1 is another significant quarter for software. Going through the last two quarters, they were more materially impacted than Q2 or Q3 might be. Regarding upside, we see opportunities outside of software and within software for larger customers that are focused on efficiency and doing more with less. We're starting to see more sales opportunities in those areas, particularly where there are data opportunities with Data-as-a-Service, OperationsOS and MarketingOS.

One moment for our next question. Our next question is from Rishi Jaluria with RBC Capital Markets. Your line is open.

Thanks for taking my questions. Just one from me. What are you seeing in terms of advanced functionality uptake? I think you disclosed in the prepared remarks that advanced functionality continues to grow. Can you give color on adoption and how we should think about future adoption given macro uncertainty and scrutiny on budgets? Thanks.

Advanced functionality continues to be a growing portion of overall revenue and is growing faster than the overall business. That's an area where we are seeing upsell opportunities and we continue to execute against those. We remain excited about the value we provide customers in those scenarios.

One moment for our next question. Our next question comes from Parker Lane with Stifel. Your line is open.

Hi, guys. Thanks for taking the questions. Henry, you called out a material improvement in the $1 million cohort quarter-over-quarter. Can you give us a sense of the composition of those customers from a vertical and product perspective? On average, how long have they been working with ZoomInfo? Are you seeing more opportunities present themselves in that $1 million plus range from the onset, or are these longstanding customers?

These are longer-standing customers, and strategically we want to bring customers in and then expand them. It's a diverse group of companies that moved into the $1 million cohort: a textile rental company, a tech company, a number of financial services companies and a few fintech companies. We're excited about bringing Dave Justice in as Chief Revenue Officer to help build the methodology and process to go up-market in a higher-velocity, more predictable way. We expect that motion to continue to increase and to find more companies to move into that cohort.

Got it. And Cameron, one quick follow-up on unlevered free cash flow guidance — any change to the underlying assumption of $450 million plus reported free cash flow?

No, that remains unchanged.

One moment for our next question. Our next question comes from Siti Panigrahi with Mizuho. Your line is open.

Thanks for taking my question. I wanted to ask your confidence level in new business sales that you embedded in your 2023 guidance. What are your expectations in terms of self-sufficiency? What changes are you making to improve your top-down selling motion?

We continue to have good confidence in the new sales assumption. Given that we outperformed in Q1, that gives us even greater confidence. We're focused on ensuring high efficiency in that team and continuing to invest in more capacity. New sales target a diversified customer set — any business that sells to another business — which means we're not constrained by a single industry being impacted. We've been able to take advantage of continued new sales activity across different industries.

One moment for our next question. Our next question comes from David Hynes with Canaccord Genuity. Your line is open.

Hi, guys. Cameron, can you talk about what you're seeing in terms of pricing on like-for-like renewals? I'm curious if lower-priced, lower-quality alternatives are creating pressure on the renewal cycle.

We don't tend to see that in the renewal cycle except at the very low end. Small businesses that are cash-strapped might downgrade to a lower-quality provider. But for most customers, particularly larger customers, they are not willing to take a quality hit in order to pay less. So while there is some pressure at the lower end, most downside renewal changes come from customers taking out seats or removing functionality, especially in the software sector where layoffs are more prevalent. We don't see typical down-sell driven by price requests because adequate lower-quality alternatives aren't available at scale for many of our customers.

Got it. And Henry, one for you. You talked a bit about PLG and I saw ZoomInfo Lite in the earnings deck. Is that product meant to be a foot in the door leading to a formal sales process, or can it stand alone at the low end of the market? How are you thinking about it strategically?

We're thinking about ZoomInfo Lite in both ways. Small businesses can transact and get a limited version via ZoomInfo Lite and it can be a standalone product. We also use it as a way to identify usage within larger organizations — when multiple users from a mid-market or enterprise company sign up, that gives us an opportunity to engage with leadership and potentially sell broader agreements. The underlying technology for ZoomInfo Lite also enables auto-provisioning of enterprise users and seamless charging directly within the platform. So we capture downmarket customers we wouldn't reach with the regular demand funnel, international customers we wouldn't get otherwise, and we create opportunities to convert users into larger agreements.

One moment for our next question. Our next question comes from Joe Maeres for Truist Securities. Your line is open.

Great. This is Joe Maeres on for Terry Tillman. I appreciate you taking the questions. You mentioned most of the change on renewals is coming from customers taking out seats or removing functionality. Are there particular pieces of functionality that are more resilient or ones that are more likely to be removed?

When customers are laying off salespeople, user seats tend to be impacted. If a company reduces its go-to-market headcount, they're often not willing to continue paying for those licenses. In contrast, when customers are leveraging advanced functionality, workflow solutions or Data-as-a-Service plugged into systems of record, those capabilities are very difficult to unplug because they are embedded in workflows and not user-based.

Helpful. Follow-up: you recently introduced the ability to bring in outside intent sources like G2 and updated the platform's ability to capture intent from websites. Any early customer successes or usage you can share?

The first integration with G2 was one of our fastest-adopting integrations. It sets the stage for the platform's future: plugging in niche data sources, marrying that with ZoomInfo's third-party data and customers' first-party data from CRM and marketing automation systems, and building workflows across that intersection. We think that's the future of modernized go-to-market.

I am showing no further questions at this time.

Thank you, everyone, for joining us today. We look forward to seeing you at one of our many upcoming in-person or virtual investor events. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.