ZoomInfo Technologies Inc. Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the ZoomInfo Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. The operator provided instructions. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sisitsky, Investor Relations. Please go ahead.

Thanks, Amy. Welcome to ZoomInfo's financial results conference call for the second quarter 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. We delivered $309 million in revenue in the second quarter and adjusted operating income of $126 million with a margin of 41%. Our customers, sales leaders who sit disproportionately in the software vertical, are reducing spending in the context of a lower growth environment. For high-growth companies in particular, where the demand has been reduced and investors are expecting higher levels of profitability, these cuts have proved substantial and have meaningfully impacted ZoomInfo's ability to expand our solution. Over the last quarter, I've talked to dozens of our high-growth technology clients, all of which share a similar trajectory. I'll highlight one of them, a member of our 100k cohort as an example. In 2021, the SaaS company raised over $400 million of funding, was growing 70% year-over-year, had 50 sales reps and expected that would grow to more than 100. They built that growth into their ZoomInfo agreements. In the back half of 2022, while on a path to get to breakeven in 2024 and while growing 40% year-over-year, their investors demanded something different: 40% free cash flow by the end of 2023 and scaled back growth to 5% to 10% year-over-year. Their sales team—all ZoomInfo license holders—went from 100 to 20 effectively overnight. Our account managers have been managing through this headwind since the beginning of the year. As we look forward, reviewing our customer health, we no longer believe that these budgetary pressures and their corresponding downward pressure on renewals will ease in the near term. Our adjusted expectations for the full year, which now call for 12% revenue growth, reflect this belief. While these results reflect a challenging time for our customers, I expected us to do better. The ZoomInfo platform delivers a compelling ROI to our customers regardless of their growth environment, and we have not done a good enough job to date in demonstrating this value to them. There are several initiatives that we have been rolling out, which I'm confident will drive performance improvement. We know that our customers need the most accurate data, both domestically and internationally, with the most coverage. To deliver that for them, we've applied a fresh focus on data over the last few quarters. We meaningfully increased our matching and phone number coverage since the beginning of the year, adding 37 million net new international contact profiles and surpassing coverage on over 300 million business professionals. We have invested in enterprise-grade engineering processes under the leadership of our new CTO, Ali Dasdan, which has improved the stability and performance of our platform. Sales OS application load times decreased by 65% and contact search latency decreased by 72% in the quarter. We've allocated sales resources to focus on our enterprise business, where we see larger contract values, our most loyal customers and momentum in our $1 million cohort. In the SMB segment, where we see lower price and lower quality competitors, we still see strong performance with more pipeline created, higher win rates, faster close times and higher average selling prices. These metrics also indicate our value proposition when compared to our competition remains obvious. We've been investing more in post-sales to drive retention rates around our more complex API and data cube offerings. We're intentionally growing our customer base among non-software businesses who are less impacted by the environment and we're resourcing our sales team to match demand on new business where we continue to see strong performance and where demand is coming in higher than we previously resourced for. We're also increasing our focus on customer adoption and engagement, knowing that customers who engage at the highest rates also retain at the highest rates. This focus has driven our NPS up 6 percentage points since the beginning of the year. In June, we adjusted staffing levels at the company, further streamlining the organization to operate and execute more efficiently. We continue to make sure that we are resourced appropriately and that we have the right team and the right roles to drive our long-term success. As we undertake these improvement efforts, we're also focused on pressing our core advantages to demonstrate the power of our solution across our large total addressable market. First, with growth among clients outside of the software vertical, a segment that is growing 20% year-over-year. Second, with our expansion in our $1 million customer cohort, which increased 40% year-over-year, a reflection that more customers are using the ZoomInfo platform as a critical component of their go-to-market infrastructure. Third, we believe that every AI initiative starts with data and having an accurate and comprehensive data platform is more important now than ever. We believe the highly accurate data and insights in the ZoomInfo platform can be the foundational data that companies will use to leverage AI and large language models in their go-to-market motion. I'll provide more details on recent customer stories that will help illustrate what we are doing to press these advantages and grow ZoomInfo for the long term. This quarter, we closed Cox Communications, Principal Financial Group, See’s Candies, Singapore Telecom, Snapchat, TikTok, UScellular, and the Boston Celtics. These leading organizations across finance, telecommunications, social media, and the sporting world continue to choose ZoomInfo, a testament to the large market need that our platform addresses as organizations of all sizes and industries modernize their go-to-market motion. We saw especially strong growth among our transportation and logistics customers, a segment that grew 37% year-over-year. This included a global logistics company, which following a workforce reduction of 400 employees, increased their partnership with ZoomInfo by over $250,000 by deploying a centralized data strategy. Leveraging ZoomInfo's deep contact, company and intent data, they improved demand generation, customer insights and sales intelligence. As a result, the customer more effectively targeted their total addressable market and successfully integrated multiple CRM instances. We're looking for more opportunities to replicate this motion: helping customers who've experienced reduction in force on their go-to-market teams redeploy ZoomInfo through a centralized data strategy, maintaining or increasing overall spend. We've also seen strong expansions within our customer base outside of software, including Hitachi, which leveraged ZoomInfo to enrich several datasets to drive more proactive marketing outreach. They needed accurate data to power their outreach and we helped them realize the power of continuous enrichment by providing them with a steady stream of the latest, most highly accurate data. Our ongoing enrichment offering combined with cleansing and routing of that high-quality data is driving meaningful efficiencies for their go-to-market organization. A Fortune 50 financial services and banking company expanded its usage of ZoomInfo from $100k a year to a multi-million dollar annual spend as they quickly standardized on ZoomInfo data for company and contact information across their business units. And a multi-million dollar IT service provider used ZoomInfo to clean up their data throughout their marketing automation and CRM systems using our data-as-a-service solutions to decrease their email bounce rates by more than half and discovered that a third of their data in their marketing automation system was duplicative. As these companies and many across our customer base have realized, ZoomInfo's data is an infrastructural element to their CRM systems, sales campaigns, customer 360 initiatives, and their AI initiatives. With this, we see increased demand for our data and our data-as-a-service business. In response, we've recently dedicated intent data cubes to complement our firmographic, technographic, and contact data cube. And ZI Labs, our strategic services arm, is also launching an AI-focused practice in response to the growing demand for AI solutions. We have already contracted for service modules with multiple strategic customers like the software company Boomi, which has leaned into incorporating AI into its go-to-market strategy to drive one-to-one personalization and their customer engagement strategies by leveraging ZoomInfo Data. We're also leveraging generative AI to drive frontline efficiencies. As we've discussed before, we are taking the burden off sellers with Chorus generative AI meeting summaries. Following the release of this generative AI-powered functionality, our NPS on Chorus increased by more than 20 percentage points, hitting a high for the last 18 months. We've now delivered over 1 million meeting summaries since its release in May and over 10% of our customer base has already integrated meeting summaries with Slack. We're also continuing to drive industry-leading profitability and remain steadfast in our commitment to compounding free cash flow growth. We expect to maintain a 40% margin while we invest in product excellence, strengthen our longstanding AI leadership, invest in data and platform expansion and add more sales capacity on the new business side where we see increasing levels of demand. I remain confident in the value proposition of our platform, the ROI we are driving for our customers and the improvements we're making to the product and our operation. Amid challenging conditions, we've seized the opportunity to prioritize enhancing our efficiency, refining our product offerings, and optimizing our go-to-market and post-sales strategies. By doing that, we aim to position ourselves to capitalize on the demand rebound as conditions in our customer base stabilize. With that, I'll turn the call over to Cameron.

Thanks, Henry. In Q2, we delivered revenue of $309 million, up 16% year-over-year and up 1.5% sequentially as adjusted for days of revenue recognition. Adjusted operating income was $126 million in Q2 with a better-than-expected margin of 41%. GAAP net income was $38 million and GAAP EPS was $0.09 per share. Non-GAAP EPS was $0.26 per share. As Henry indicated, the environment further degraded toward the end of the second quarter relative to expectations, putting incremental downward pressure on net retention. Software customers took further action to address the challenges in their business, renewing for even less than what we had expected. This is particularly true of renewals that we are beginning to lap from last year where some of the previous overbuying had already been addressed. As those customers on average further reduce spend this year, given that we are beginning the second round of renewals in the current economic environment, we are prudently assuming that the renewal cycle through the end of the year continues to prove more challenging than last year. Additionally, during the quarter, we saw continued elevated write-offs for smaller customers. The pressure on our software customers has manifested in revenue for those customers declining year-over-year, whereas ACV for the non-software industry grew 20-plus percent relative to this time last year. The contribution from the software vertical now represents 35% of our overall business, down from 40% a year ago. Meanwhile, many of our biggest customers are going deeper with the platform as evidenced by the 40% increase in $1 million-plus customers. They are leveraging more operating systems and increasing spend as they are getting tremendous value from the platform. Revenue from advanced functionality continues to help drive growth and now comprises a third of our total revenue. Digging deeper into net retention, we saw fewer upsells and more downsells in Q2 with the mid-market impacted the most. We saw customers for whom renewals were impacted last year further reduced their spend this year, with customers from the 2021 and 2022 cohorts being particularly challenged. Taking that together, we are adjusting our guidance for the full year. We are assuming that the climate will become even more challenging in the third and fourth quarters this year. As such, for the year, we expect to deliver 12% revenue growth at the midpoint, down from our prior guidance of 17% growth. We remain committed to profitability and expect to maintain a 40% adjusted operating margin even with the lower-than-expected revenue. We will continue to focus on efficiency and selectively hiring where we expect the investments will make the greatest impact. Turning to cash flow. Operating cash flow in Q2 was $117 million, which included approximately $6 million of interest payments, with lower interest payments related to the successful repricing of our first-lien credit agreement in Q1. Unlevered free cash flow for the quarter was $122 million, a 39% unlevered free cash flow margin and representing 97% of adjusted operating income. For the full year with lowered expectations for growth, we expect unlevered free cash flow conversion in the 90s as a percentage of adjusted operating income. With respect to the balance sheet, we ended the second quarter with $660 million in cash, cash equivalents and short-term investments. At the end of Q2, we carried approximately $1.25 billion in gross debt, all of which has fixed or hedged interest rates. We again drove an improvement in our leverage ratios with a net leverage ratio of 1.1 times trailing 12 months adjusted EBITDA and 1.0 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreement. Down from 2.3 times and 1.8 times respectively as of June 2022. During the second quarter, we repurchased 2.8 million shares of ZoomInfo stock at an average price of $21.99 per share. To date, we have deployed a total of $87 million of the $100 million share repurchase authorization approved in March and today we announced that our Board has authorized a new $500 million share repurchase program. Given our strong free cash flow generation and healthy balance sheet, we expect to continue to opportunistically repurchase shares. With respect to liabilities and future performance obligations, unearned revenue at the end of the quarter was $443 million, and remaining performance obligations or RPO were $1.1 billion, of which $849 million are expected to be delivered in the next 12 months. With that, let me turn to guidance. For Q3, we expect revenue in the range of $309 million to $312 million, adjusted operating income in the range of $124 million to $126 million and non-GAAP net income in the range of $0.24 to $0.25 per share. For the full year, we now expect to deliver revenue in the range of $1.225 billion to $1.235 billion and adjusted operating income in the range of $493 million to $498 million. We expect non-GAAP net income in the range of $0.99 to $1 per share based on 415 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $445 million to $455 million. Our full year guidance implies 12% revenue growth at the midpoint and an adjusted operating margin of 40%. With that, let me turn it over to the operator to open the call for questions.

Thank you. The operator provided instructions. Our first question comes from Mark Murphy with JPMorgan. Your line is open.

Yes, thank you very much. I'm interested — when you look back in retrospect, why do you believe that the month of April or April and May together were seasonally stronger and then demand, sounds like, downshifted again thereafter because from the standpoint of macro headlines, we look around and we have the CPI readings improving. There's actually good GDP growth in Q2, the Fed is slowing rate hikes, the banking crisis didn't spread so far anyway. What do you think is — what is it that is causing incremental cautiousness for your customers later in Q2 or exiting out of Q2?

Yes. Thanks, Mark. So the biggest driver in my mind is we started to lap those renewals that saw more scrutiny last year. And those renewals really started to tick down much more than we expected. I also feel that we focused really on that new growth segment of our customers and that continues to be more challenging. I think people are focusing more on their existing businesses than necessarily finding new customers. So while the June impact had a modest impact to Q2, we have many more of those renewals coming up that were impacted last year that we feel have some incremental risk at this point based on this first cohort of renewals coming through. And therefore we want to make sure that we're taking a prudent view of the rest of the year and assume that those renewal trends worsen, which we think is the right way to set expectations for the second half.

Yes. Okay. That makes sense. And then, Henry, when we look at one of the items you're announcing in the earnings press release, you have 28 number-one grid rankings in G2. I'm not sure how often we see that. It seems to convey industry leadership. Do you think that ZoomInfo's revenue growth of 12% this year is translating into higher or lower market share, just when you compare across, if you think about that universe of your direct competitors, whether they be public or private, because it feels like this market has seen kind of the double or triple lightning strike and it's maybe at times a little hard to just understand whether you're actually outperforming — quite possibly outperforming what's happening in the broader industry right now?

Yes. Thanks, Mark. I think, first, when I talk to my peers in the front office, particularly around sales and marketing technology, I hear a very similar sentiment of really tough renewals, really tough selling environment. I mean, I think about our peers and I think about LinkedIn. And if you look at LinkedIn, they came down from nearly 30% growth a year ago to 5% growth today. And it’s largely the same buyers who are buying us for different reasons, but it is at the front office sales and marketing side of the house. And so, I think as it relates to our broader competitive set, when I look at—when I think about our selling ability against them and our market leadership, as you pointed out, through G2 or TrustRadius, what I see is when we're in competitive situations, our win rates are increasing, we're getting higher ASPs, our pipeline is increasing in the SMB segment where we see those competitors. And so I see us really reinforcing our competitive position more so than—much more so than any sort of speculation around losing market share here.

Yes. Thank you very much. It's very helpful to add that color around LinkedIn, which we did see in the recent Microsoft results. Thank you for that, Henry.

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

Great. Thank you very much. I was hoping to unpack retention a little bit more and get some color on what's happening on the gross retention side, particularly as some of the 100k ACV logos were down again quarter-over-quarter. So does the incremental NRR downside—how much is that impacted by gross retention? Thank you.

Yes. So we are seeing modestly more cancellations this year than we saw last year. So we do expect gross retention to tick down a little. But more of the net retention in terms of our expectation is being impacted by fewer upsells and more downsells. So it's more—we're keeping those customers, but we're seeing the renewals being more challenging. And so yes, I think that's the real focus with respect to gross retention in 2023.

Got you. And then just as a quick follow-up on sales efficiency. I believe last quarter you started to see some stabilization in Q1. How did that trend in Q2? And any sort of read-through as it relates to your investment—continued investment in sales and marketing heads? Thanks.

Yeah. So we did see that sales efficiency also ticked down in June more than any other month. And I think a lot of that is based more on retention than it is necessarily on new sales. We are planning to continue to grow our sales capacity and particularly on the new sales side to meet the demand that we see out there. And we expect that overall sales and marketing spend should grow more or less in line with revenue during the foreseeable future.

Thank you.

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

Hi. Thank you very much. Henry, I'm curious to get your take on the composition of the renewals with existing customers versus the downshifting of SKUs versus lower capacity expansion. That is, there's a non-renewal factor, and there is shrinkage of seats. If you could just dissect those three different variables—how are those trends looking? And also, what is the first quarter—maybe this is for Cameron—where the trends really start to normalize and when you would comp against this compounding effect of these three factors? When do the trends bottom out? Thank you so much.

Sure. So I'll talk a little bit about the full cancellations, which we are seeing a little bit more of, particularly as our small business customers are challenged. But the bigger issue is more downselling that we see, particularly in technology. A bunch of that is reducing seats, but we also have customers that are just looking to spend less as they're looking to optimize their cost structure. So oftentimes we'll see not only a seat reduction, but sometimes a downshift from a lead to advanced or perhaps removing some of the other functionality that they either aren't using or don't perceive the same level of value in. So yes, I think the softness for us is more focused on seats, but we do see it in other places in terms of people trying to reduce their spend and really just trying to get to a spend point, particularly as it relates to new sales for them—they're trying to take that down as much as they can. And I think for us, when does that bottom? We're expecting a worsening environment through the remainder of the year in this renewal cycle. And then our belief is that, once we see the other side of that, once these customers are fully lapping their higher overbuy watermarks and the rethinking of their cost structure, there is the opportunity for us to accelerate that sequential growth, particularly in a world where ideally we'll see a stabilization and improvement in the macro environment as well.

Thank you. One moment for our next question. Our next question comes from Joshua Reilly with Needham. Your line is open.

Yes. Thanks for taking my questions here. If you look at the churn that's coming online here a little bit more than expected, how much of that is seats within the company and contact database subscriptions versus the advanced functionality products? And how should we think about the growth trajectory of advanced functionality here relative to the company and contact database subscriptions for the balance of the year?

So certainly, we do see a fair amount of pressure within, I'll call it, the core functionality that we offer. And a big part of that is seat reductions from clients that are looking to optimize their spend levels. There is some pressure on what I think of as advanced functionality, but advanced functionality does continue to grow much more quickly than the core data functionality that we offer, as evidenced by the fact that it's now a third of our total revenue. I think that as we think forward, I think the renewal opportunity for us will continue to be challenged through the remainder of the year based on our guidance. And I'd expect a similar dynamic where customers will be looking to optimize their spend and some of that will come from reducing the seats that they're utilizing. And I think that when they have the opportunities, they may also look to reducing some of their advanced functionality where they can.

And then just a quick follow-up on that. When these customers, like the one in the opening example, come to you and say I want to reduce my seats from 100 to 20, are you letting them cut their contracts before renewal? Or how are you managing these downsells that may be coming in near term more than you previously expected?

Yes, pre-renewal, what we're trying to do with them if they've laid off a chunk of their go-to-market teams, which we're obviously seeing a lot of, is work with them on a centralized data strategy, like the transportation and logistics company example where they can exchange essentially their seats and Sales OS for data that cleanses and enriches their CRM, marketing automation systems, their Snowflake or Databricks databases. And so, we're driving them to this centralized data strategy, which with that transportation and logistics firm actually increased overall spend with ZoomInfo. Our goal is to maintain that spend when there is a drastic cut until renewal, and we know that at renewal time, if we can swap in data-as-a-service and enrichment, then we can maintain that spend.

But just to be clear—we don't allow customers to reduce their spend before the renewal. But we do encourage people to swap in services that they can use if they're not using all of their seats or some other portion of their functionality.

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

Hey, guys. Thanks for taking the question. I wanted to ask you a question on how to think about when revenue growth could bottom and potentially reaccelerate. So when we look at the full year guidance here, the implied exit growth rate is right about 3%. So if that proves true and we look at the setup for 2024, the first half of 2024 really has some tough comps here. And I realize you're not guiding to 2024 today, but just how should we be thinking about when revenue growth could bottom and start to reaccelerate?

Yes. So at this point, we are not guiding to 2024. We do continue to believe that the current momentum in the business is best measured by the sequential revenue growth that we generate. We're expecting that we will have challenging renewal cycles through the end of the year. We do believe that once we get through these renewal cycles, and realistically, I view the peak of kind of layoffs and negativity as being probably Q1 of 2023. So once we're through the renewal cycle that lapped that, I do believe that there's the opportunity to reaccelerate growth, particularly as the macroeconomic environment potentially stabilizes or improves in that time period as well.

Got it. Thanks, Cam. And just maybe one follow-up here. Net revenue retention realized, it was 104% exit in 2022. And I know you guys don't give it on a quarterly basis. But any sort of commentary or color on what did it look like in the second quarter and maybe even bifurcate it between software and other verticals, too? Thanks guys.

Yes. So we continue to see pressure, particularly in the software world. So I think if you back into the guidance, you'd see that our expectations for net revenue retention are closer to 90% or even in the high 80s through the end of the year assuming the incremental pressure that we expect in Q3 and Q4.

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

Hey, guys. Henry, did advancements in AI in any way make it easier for a data upstart to ramp up or companies themselves to source more of their B2B data independently without the need for a third-party solution? I'm trying to assess whether AI could actually create a competitive shift against you guys in any way.

D.J., I have spent a ton of time trying to really understand that question and try to really understand how generative AI could help a startup sort of jump out of the gates with something that was maybe more unique or accurate or had more coverage. And I've had the smartest people here at ZoomInfo who spend time on that as well. And everywhere we look, what we realize is ultimately what large language models—whether it's Bard or OpenAI or anything else—are doing is collecting data from the public web. And we collect data from the public web too and we incorporate it into our platform. It's additive, but it's not the reason why customers buy ZoomInfo. They buy ZoomInfo for all of the proprietary data, all of the proprietary signals and the proprietary data assets that we're able to put together through our community additions, through our customer contributory network, through our DSP that collects intent data, through our social graph that gathers IP-to-company data. These are unique proprietary data signals across billions and billions of data points that are not available publicly and they're not available to the LLMs. And so, if you want to know the 10 largest companies in Atlanta, the LLM is pretty good at telling you that. But further than that, you get really stuck with either junky data, unavailable data, or not accurate data. And what we know from 17 years of operating in this space is that 70% or 80% accuracy data just does not do the trick for B2B sellers and B2B marketers. And so not only is the dataset incredibly proprietary and not available, but also that additional work that we've done to take data sets to 90% or 95% accuracy—that work is necessary for sales and marketing professionals and it's where we make a really big difference.

Yes. Okay. That makes sense. Cameron, one quick one for you just on guidance philosophy. I mean, I hear you talk. It sounds like you're taking a pretty cautious outlook at the back half of the year. Would you say there's more conservatism in there than may have been contemplated in prior periods?

Yes. There's more conservatism in there than may have been contemplated in prior periods. I think we're seeing—we're continuing to see a degradation in the trend, particularly with respect to software and technology clients, but just overall renewals. And we think it's a healthy point of view to expect that to degrade in the second half of the year versus our prior guidance, which had assumed a stabilization, which we did see at the end of Q1 and beginning of Q2. But I think that given what we saw in June, it's a healthy view to insert more conservatism into the second half.

Yes. Understood. Thank you, guys.

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

Hey, thanks. I appreciate you taking the question. I just want to go back to the commentary on renewal impacts and the degradation and just see if we can spend some more time understanding what's assumed for the back half? And maybe if there's any way to just think through how that compares to today. And part of the question is intended to understand the software cohort— is it fair to assume that that sector is more biased towards the end of year? And if that seasonal shape is right, just help us think through how you're approaching forecasts into that group with what's embedded here for the rest of the year? Thanks.

Yes, sure. So yes, the software cohort is a little bit more weighted towards Q4 than other quarters, but we do see software expirations and renewals obviously in every quarter. What we really began to see at the end of Q2 was those renewals that were more challenging last year and where some people have taken out some of the overbuying from previous timeframes. Yes, I think you naturally would have assumed that those might have been a little bit more stable as we come into that second renewal with them. And what we've seen is that they've renewed for even less. Part of that is that their view of the world has probably degraded since they first saw the kind of challenges in their business. And I think that for many companies that view of the world continued to degrade through to Q1 of 2023. So based on that evidence where we're seeing more challenging renewals for those customers in this first set that we're really renewing at the end of Q2, we think it's a prudent way to view the world to assume that that gets even worse in Q3 and Q4 as we go forward. And so that is the assumption that we built the guidance off of.

A tiny follow-up—you mentioned June worsening. Is there anything you can add just if that has held consistent through July or where we currently sit?

I think July is consistent with June. So it hasn't necessarily worsened, but it certainly has not gotten better and stayed consistent with where we ended the quarter.

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

Yes, guys. Thanks for taking the question. Henry, when you look at the 40% growth in $1 million-plus customers this quarter, I was wondering if you could give us a better understanding of the composition of those customers. Obviously, there's a lot of headwinds in the technology and software space, but when you look at the uptick there, is that primarily that cohort that is evolving into $1 million-plus? Are you seeing a healthy amount of non-software and technology companies coming in there as well?

Yes, we're seeing a good amount of financial services companies come in there. We're seeing transportation and logistics companies find their way in there. And then we are still seeing large enterprise tech that has weathered this storm in a very different way. They're not going from 100 sales reps to 20 sales reps like the example that I talked about. And so, they continue to be large customers in our $1 million cohort. That cohort is buying a multitude of our platforms: they're buying Sales OS, they're buying data-as-a-service, they're buying Marketing OS. There's not a single customer in the $1 million cohort that's buying just one platform or one product offering from ZoomInfo— they're buying multiple of the products. In the strategic enterprise, we're seeing that multi-product strategy really play out for us. There still continues to be a decent amount of software and technology companies in the $1 million cohort, but we're also seeing these new entrants come in as well.

Got it. Thanks for the color. I'll jump back in the queue.

One moment for our next question. Our next question comes from Alex Zukin with Wolfe Research. Your line is open.

Hey, guys. Thanks for taking the question. So maybe just at a high level, if we think about the percentage of the business in the tech vertical, the 35% down from 40% a year ago—where does that go? As you exit the year, if we think about kind of a low single digit growth rate to exit the year, as we think about the rest of the non-tech cohort growing ACV at 20%, I know you're not giving guidance for calendar 2024. But at a high level, we're trying to all get a sense around the magnitude of the deceleration and at least a map on how it gets back on track. Is the thought process here that tech overbought, they prebought, and now they are rightsizing? And over the next 12 months, tech is going to go from 40% to 10% of the business and then this 20% growth in the rest of the business is going to drive a reacceleration back into the teams? Or what’s the conceptual math for how you don't grow low single digits next year?

So I would continue to think of the world, Alex, in terms of sequential growth. And I think as we think about sequential growth certainly through the current renewal cycle, which would take us through Q4 and maybe Q1, I do think that we're going to have a challenging timeframe. I think that after that, there is potential for tech to have cleared out their historical overbuying. Depending on where their businesses go, to the extent that they start thinking about growth again, there's the potential for that segment of our business to improve. And I think with respect to the other industries that are out there, those are industries that we are still very lightly penetrated in, and there's a ton of opportunity for us to continue to help people modernize and improve their go-to-market motions. While there's inertia—many of those businesses have been around for decades, sometimes centuries—we have good success in helping them go to market in a more advanced way. I think that, yes, we'd like to see that part of the business continue to grow at a good clip and overall between those two, we do see some opportunity to accelerate from the sequential growth that we'll see in the second half of this year.

And I think, Alex, one of the things we're doing internally operationally is working with those customers as they downsize so that they stay with us and we have an opportunity to grow with them in the future. We have another customer example that had literally 600 salespeople in 2021 and has 20 today. That's a contract that was in our 100k cohort and is now a $30,000-a-year contract. Our mentality around that is let's work with this customer, let's keep the contract. We're both on the same page about growing back up with them in the future. So from a gross retention perspective, we're doing everything we can to hold on to those customers so that as they turn the corner and start thinking about growth again, we're a trusted partner on that journey.

That makes sense. And then I guess maybe just from the AI angle— a lot of companies have either talked about products or SKUs or strategies. As I sit back and think about ZoomInfo, you're kind of at the center of making sure that the data pipeline is healthy, the data is clean and accurate. When you think about your ability to monetize, productize and create a new growth lever from what looks like strategic positioning, is that a six months? Is that a quarter? Is that a year? How does that ultimately look for you guys?

Yes. Look, I think about this in a couple of ways. One is everybody is pretty focused on the last mile when it comes to generative AI and go-to-market. When you hear people talking about it—can you write the email for me? Can you contextualize the email for me? Can you make it personalized and one-on-one to my customers?—they get really wrapped around and excited about that last mile of generative AI, which by the way, generative AI is best at writing things when fed the right prompt. What they lose focus on is everything that has to go into the model to actually get you good context and good content on the way out. We think we're really well positioned, number one, to say if you really focus on that last mile, you can't get there without an infrastructure element of our data, feeding that continuously, keeping it enriched and up to date and giving you a full view of the customer you're reaching out to. Secondly, we think we're in a pretty interesting position to actually deliver the last mile as well. Internally, we have a number of generative AI projects already out in beta in our customers' hands that they're testing—everything from search in our platform to contextualizing emails based on Chorus conversations and ZoomInfo Data. Those are already out with customers. The ones that we believe will drive the most value for our end users, we're going to release. We expect to have a number of releases in the back half of this year around there.

Perfect. Thank you, guys.

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

Hi. Thanks so much for taking my question. This might be a tough one to answer. But Cameron, you mentioned some of these customers that may have overbought. So as we look throughout the rest of the year, where do we stand in terms of innings and working through those renewals where customers may have overbought or are still rightsizing? Is there still a fair amount of those customers that are coming up for renewal in Q3 and Q4 of this year? Any color on how this upcoming renewal base might compare to what we saw in the first half of this year and Q4 of last year? Thanks.

Yes. Certainly, I think based on our guidance and the view that the renewal environment could get more challenging as we go into the third and fourth quarters, there are definitely a number of clients who still have the potential to downsell in the second half. I think when you think about overbuying, part of this is a question of overbuying and what's their base. To the extent that their view of the world changed between when they renewed perhaps in September, November, December versus where it is coming this year, I think that's the conservatism we want to make sure we've built in because we're seeing those customers that put additional scrutiny on renewals in June of last year as the environment started to degrade. And then we're seeing them come back and further reduce their spend with us. So in terms of this renewal cycle, this renewal cycle probably goes through Q4, if not Q1. And I think you can decide what inning that is, but it's certainly not the seventh or eighth.

Great. Thank you so much.

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

Hey, thank you. Can I just—I'm sorry to kind of beat the dead horse here—but if you think about, Cameron, what you saw in Q1, Q2 on renewals and the day seats outstanding that you delivered in that? And then if I think about the second half where you are kind of hitting some comps that already kind of had peaking down numbers, why would it get worse? The moment you renew clean renewals from people that had never cut anything and you're getting a certain number out there, in the second half, you kind of renew people that already kind of cut once and kind of might cut again. Why is it getting worse? I might have a mental blockage here.

And that is the point we are laying out, Raimo: a normal mental model is they cut once last year and therefore that has the potential to be more smooth this year. That created room in our previous view that there are other ones that didn't cut last year that we have room to reduce against and that we should see a kind of stable environment in terms of sales efficiency. What we're saying is that the June cohort, which are really the first ones that were able to apply that additional scrutiny based on pressure they were seeing in their businesses last year, are renewing worse. So in a world where those are renewing worse and the ones that didn't have that sort of scrutiny last year who are a little late to the game also have potential risk to them, that creates a harder environment than we had last year.

Yes. Okay. Perfect. That's all I had, actually. Thank you.

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

Great. Thanks so much for taking my questions. Henry, I appreciate your answer to Alex's question about generative AI and delivering the last mile. But in the world that's moving pretty fast with Sales Copilot from Microsoft, Sales GPT from Salesforce and everybody singing the AI song, is there any reason to believe this is maybe another factor slowing down customer decisions as they acclimate to all this change that's happening around them?

I haven't seen any evidence of that when I talk to our customers. I haven't seen any evidence that the pace of change with generative AI is driving a slowdown in their decision making. Whether you're using Microsoft's Copilot or Salesforce’s Einstein or anything else from a generative AI perspective in your go-to-market motion, it has to go grab data that exists somewhere in your systems in order to generate who you should be reaching out to, why you should be reaching out to them, when you should be reaching out to them, what you should be saying to them, what technologies and partners they currently use, whether they just raised funding, how big they are, who the CIO is, who the direct reports to the CIO are, how to actually get in contact with them. All of that tends to get overlooked because the LLM can write a really great message. But what goes into it is largely leveraged from the systems you already have. If you go around any customer and ask them how they feel about the data in their CRM, their marketing automation system or their data warehouses, not a single one of them will tell you it's good enough to put into a generative AI model to spit out automated content that gets sent out to their most important customers. So we sit in a really important position today as customers leverage those tools and begin realizing that they actually can't leverage them in a real way unless they're coming to ZoomInfo. We had a large multinational media company come to us this quarter with exactly that vision: they want bespoke messages sent out to customers using generative AI. As they tried to execute, they realized they didn't have the data to write bespoke messages to the right customers at the right time with the right messaging. We become that infrastructural element. Now it's incumbent on us to make sure customers understand that, but that is a meaningful change in the world that should be a tailwind for us in the future.

Thanks for that color, Henry. That's really helpful. Cameron, a quick one for you. Is it fair to assume your average discount is actually improving as customers cut seats? Because I have to believe it's critical that the reps your customers have left are as productive as possible. So are you able to renegotiate pricing up in the direction of list price as seats compress? Thank you.

At this point, we haven't seen a material improvement with respect to that. And I think a big part of that is that we have a number of customers that are struggling with their business and we want to make sure that we continue to be good partners with them. So we've gone out to our AM team and started to give them more prescriptive pricing, which is: if it's a company that's growing and using the platform a lot, yes, we're going to drive a price increase. If it's a customer that's really struggling and has lowered their headcount and therefore lowered their usage and everything else, we're going to work with that customer to get them a price point that makes sense for them and that we can grow with them in the future once they turn that around.

Okay. Thank you so much.

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

Thank you. This is Johnathan McCary on for Brian Peterson. So it's related to some previous questions. I know there's lots of time spent on software, but hoping we could touch on some of the other verticals: how those trended in terms of linearity? I know you mentioned that non-software is now 65% of total revenue. How much of that is business services versus other industries? Any color would be helpful. Thanks guys.

Yes. So business services actually continues to do reasonably well, in line with that 20-plus percent growth rate. It really depends on the vertical: the best-performing verticals are things like transportation, logistics and financial services. But we do see that a number of those more traditional industries continue to do much better and continue to look for ways to improve their efficiency with respect to go-to-market.

Our next question comes from Brent Bracelin with Piper Sandler. Your line is open.

Good afternoon. Henry, I'm going to step back from some of the near-term challenges and try to get your view on the industry as a whole. How much vendor disruption given some of the challenges you're seeing do you think occurs? There's a plethora of sales tech apps out there, it sounds like software industry conditions are challenging and will persist here. Consolidation was a really important tool helping you build this $1 billion software platform over the last 17 years. How important and how much will you lean in on consolidation going forward?

Thanks, Brent. We did a lot of acquisitions over the last 24 months. We feel really good about those acquisitions, but we're really focused on driving value for our customers against those acquisitions. I think we get there by having an incredibly integrated suite of those applications. Right now, we're not focused on M&A from a consolidation perspective. We do think that there are a tremendous number of tools in sales tech land. The most important tools are those that drive really obvious value to sales development reps, account executives and account managers. We think we have a real opportunity to be the single pane of glass for those end users. We get there by having data and insights, by having the ability to use our platform to engage with your customers and then be able to use tools like Chorus to win faster with those customers. We're focused on making all of that easy to use for our customers. One of the places generative AI can add value in this space is by simplifying the user experience. A number of the betas we have out today with customers show opportunities to take something that would take 10, 15 or 20 clicks and bring that down to one or two clicks via generative AI and the user experience. We're pretty excited about that and how that can drive better usage, adoption and engagement among our customers.

Helpful color. Then my last question for Cameron: are you seeing the downgrades across all software cohorts? Is it concentrated within smaller venture-backed cohorts that are focusing on profitability? Just trying to understand how broad-based and pervasive the renewal downgrades are across that whole software cohort? Thanks.

It is more focused in the mid-market and maybe a little less so at the larger enterprise end, although we still see some at the smaller end of enterprise. Larger enterprise software customers tend to act like larger enterprise companies in general. But yes, it's more focused in the mid-market than anywhere else.

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

Wonderful. Thanks so much for squeezing me in. Just one question on my side: how would you think about any potential changes in pricing and packaging given the tough demand environment and continued macro challenges? Some customers and partners you've talked to have maybe bought at the high ticket price in this economy. Would you consider making some changes there, especially to make the on-ramp for new customers and new use cases a little easier and less daunting in first class? Thank you.

Thank you for the question. I think of this in two ways. Number one, we have to do a better job of demonstrating the value that we're creating for our customers. We have to do a better job of showing them how our data, our insights, and our platform is driving value for them. The disconnect around pricing maybe that you're hearing is that we're not doing a better job in quarterly business reviews and executive conversations to really highlight the value that we're driving for our customers. That being said, I think there is an opportunity in our SMB segment to simplify pricing and packaging to bring together a number of the areas in our platform that drive the most value for our customers and can get them to a higher sense of value faster by simplifying pricing and packaging. We'll be out in market testing now with a number of our SMB customers in the quarter.

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

Thanks for taking my question. You guys talked about renewal was somewhere mid-90s, but now expecting maybe high 80s. That means your new sales has to really grow either in line or better than what you expected at the beginning of the year. Wondering what sort of changes you guys have done after Dev joined that gives you increased confidence in achieving that target?

Yes, Siti. When I run the model and build the guidance, I do see that new sales would also be down modestly from where we were at the beginning of the year. We do see that new sales continues to do reasonably well, but the assumption would still be that it's down from last year based on how I run the guidance model.

One moment for our next question. Our next question comes from Patrick Walravens with JMP Securities. Your line is open.

Great. Thank you. So Henry, one of the comments we got from a customer was—and I'm sure you've heard similar things to this—they said we are locked down on all spending until the market turns the corner. What do you think these companies are thinking? What are they looking for? What constitutes 'turning the corner' for them? When did they start to feel like things were changing?

If I had that crystal ball, Pat, that would be great. But here's what I see those types of customers doing. They basically decided there's no opportunity for growth in the new-customer segment, so they're not going to go out and try to acquire new logos. Instead, they're taking all of the resources away from new business and focusing them on the customer base. They're trying to keep all of their existing customers and grow them marginally. Once they see stabilization in their customer base, they may start to add more resources to new business again. My expectation is they are trying to see stabilization in their customer base before they go spend resources on acquiring the next logo. For those customers, what we want to be able to do is keep them as customers in a smaller way so that as they start thinking about new-customer acquisition in a more meaningful way, we can step in and help again. From a product perspective, what's required is that our products are designed with user experiences that lend themselves to growing within accounts—account manager interfaces where they can plug in accounts and understand who's growing, who's shrinking, who's hiring, who's raised funding, who's got an active project relevant to their business. Over the back half of the year, we can start releasing those types of products. It puts us in a strong position to help companies grow their customer base and be in the right place when they start to pursue new-logo acquisition again.

All right, great. Thanks for that perspective.

One moment for our next question. Our next question comes from Terry Tillman with Truist Securities. Your line is open.

Hey, guys. Thanks for taking the question. This is Joe Myers on for Terry. I'm curious around the Databricks partnership—if you could go into a little bit of detail around strategic rationale there and then from a broader view how you're thinking about partner strategy currently? Thanks so much.

Great. Thanks for the question. We think that when customers run propensity-to-buy models internally, when they build a customer 360 view, or when they want to use generative AI, the data they're using to do that is in their CRM systems, marketing automation systems, or data lakes and warehouses like Databricks. The partnership with Databricks puts our data and our data cubes right where customers are doing that analysis or building those models, and they can easily bring ZoomInfo data in and enrich their existing data so they always have the most accurate and enriched data inside the places they're leveraging to build models, territories and segments. We want to live natively where that's happening and for many of our customers that's happening inside Databricks.

And I'm showing no further questions at this time. This concludes today's conference call. Thank you all for participating. You may now disconnect.