ZoomInfo Technologies Inc. Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the ZoomInfo First Quarter 2024 Financial Results Conference Call. Operator instructions were provided. Please be advised that this conference is being recorded. I would now like to turn the call over to your speaker today, Jerry Sisitsky. Please go ahead.

Thanks, Kevin. Welcome to ZoomInfo's Financial Results Conference Call for the First Quarter of 2024. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; and Cameron Hyzer, our CFO. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology "may," "will," "expect," "anticipate" and "believe" and expressions which reflect something other than historical facts, are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the forward-looking statements 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. Revenue for the first quarter was $310 million, and adjusted operating income was $119 million, a margin of 39%. We delivered another quarter of better-than-expected profitability as we remain committed to profitable growth. Our Board approved another $500 million share repurchase authorization, and we continue to aggressively buy back shares of ZoomInfo at attractive share prices. Our ZoomInfo Copilot development efforts are well underway. Beta customers are seeing significant ROI and the feedback has been extremely positive. We feel confident that we have a differentiated solution, and we look forward to releasing this new version of our platform shortly. We continue to navigate through a difficult operating environment, one that has not improved over the last few months. We had expected that this quarter would be challenging, and it was, but we are starting to see signs of stabilization. As it relates to net revenue retention, in the quarter, our SMB business continued to be challenged and performed worse than prior periods. And while down in Q1, given a higher mix of those businesses coming up for renewal, company-wide NRR was better than expected at 85%. Mid-market retention was similar to Q4, and Q1 was the second quarter in a row of sequential renewal rate improvement, reflecting sustained stabilization. We saw enterprise retention stabilize, and we saw renewal rates there improved year-over-year for the first time since 2022. Software retention also stayed flat sequentially for the first time since Q1 of '22. These stabilization trends have continued into Q2 and are promising signs that suggest we have reached a bottom, which we view as a precursor to a potential inflection to growth. We also had another quarter of strong win-back performance. Customers continue to come back in record numbers after trying low-cost, low-quality providers. In Q1, we again saw hundreds of customers come back to ZoomInfo, maintaining the record levels from Q4 and Q3 2023. One software vendor who left ZoomInfo in December 2023 for a lower-cost competitor, on the promise of even better data for a fraction of the cost, has already returned to us. Their frustrated account executive and business development managers missed demand generation and quota targets, and their leadership team was self-aware enough to correct the mistake. Buy cheap, buy twice. In the quarter, we recorded our largest increase in the $1 million customer cohort since Q1 of 2023 as we continue to drive traction in the enterprise. ACV from our $1 million customer cohort is up 16% year-over-year. In our marketing solutions, we continue to see strength with improving retention and increasing ad spend on the platform, and operations was the fastest-growing area of the platform, up 18% year-over-year as companies are increasingly using ZoomInfo to solve the data challenges within their CRM system and using our data and insights to power their AI strategies. During the quarter, we closed transactions with companies of all sizes and in all industries, including Walgreens, Kirkland & Ellis, Marsh & McLennan, Universal Robots, Spring Health, MSG Entertainment, Carrot Fertility, OW Logistics and GoFreight. A multinational staffing company ran an RFP for a vendor to clean up their CRM data to improve their modeling and predictive analytics on candidates. In a competitive deal where high-quality accurate data was paramount, we fixed their existing data problems, future-proofed their data strategy and provided a foundation for them to run predictive analytics and expand with their use of AI. This resulted in an up-sell representing $925,000 in annual contract value, which over the life of the contract, will be worth $2.7 million of total contract value. We also expanded with a mid-market data query and deep learning software company as they were looking to save money, reduce vendors and consolidate on a single platform. Like many of our mid-market tech customers, they came into our renewal conversations with a mandate to reduce spend by 20% across all vendors. We turned that initial mandate into a 60% increase in ACV by replacing multiple vendors and consolidating on ZoomInfo sales, operations and marketing solutions, all while providing a better user experience at a better price point. We were also named a leader in Forrester's Marketing And Sales Data Providers Wave and won two Google Cloud Technology Partner of the Year Awards, as a Google Cloud Partner that most effectively helps customers enhance their analytics and AI initiatives through prebuilt data solutions and data sets. Last quarter, I introduced what we believe is one of the most impactful and innovative products for go-to-market teams, ZoomInfo Copilot. ZoomInfo Copilot is the first AI-powered go-to-market solution that uses a trusted data foundation to automatically prioritize who, when and how to engage buyers from first signal to content creation and engagement. Modern sales is becoming a science, and we built Copilot to enable our customers to make every seller their best seller. Today, sellers need to know which companies to contact, who the right person is at those companies and exactly when to reach out to them. Critically, they must also know what problems those companies are facing and how they solve those problems today. Trying to gather and triangulate the data necessary to know these answers today is incredibly challenging. Surfacing these often buried insights is what we built ZoomInfo Copilot to do. And in doing that, Copilot turns ZoomInfo from a lookup tool to a platform that surfaces the key insights sellers need to take action against each day. A unique strategic advantage of our Copilot platform is that it's built on top of our world-class proprietary data. Our data covers the universe of companies that you may sell to, tens of thousands of attributes on those companies, hundreds of millions of people who work at those companies, and the most robust set of signals and insights that we constantly validate and update. What sets ZoomInfo's Copilot apart from any other solution in the market is that it's sitting on top of our AI-ready trusted data foundation that drives decisions, personalization and confidence. For our users, Copilot surfaces diverse and differentiated signals, attributes and activities that already exist in our proprietary data asset and our partner ecosystem, which we continue to expand with some of the most trusted vendors in the market, including most recently with TrustRadius and TechnologyAdvice. Copilot takes signals like website visitors, spikes in job postings, earnings call transcripts, contract renewal dates and expert calls that indicate spending or competitive threats, then uses advanced entity resolution and matching to combine them with customers' first-party data. It then applies AI technology to model and inform users immediately about which companies are in the market for their product and how and why you should engage with them. You can think of this similarly to financial trading. Understanding the company's sector and closing price doesn't tell you much about what a stock will do tomorrow. You need indicators around trading volumes, technical indicators, investor sentiment, financial news, expert calls and many other signals in order to create alpha. Similarly, for our customers, understanding firmographics alone is not sufficient to understand whether or not your next buyer is about to be in market for your product. It's only when you surround that core data with signals that you're able to predict who your next customer should be. Other generative AI or Copilot products from classic software vendors face a significant problem. They are all layered on top of static CRM data. This data limits the value that can be gleaned from any AI tool for three reasons. First, it's limited in scope to what salespeople have manually entered historically. Second, it's outdated, stale and likely inaccurate. And third, it lacks the outside signals and insights that drive modern go-to-market motions. ZoomInfo Copilot delivers a full picture built on the foundation of the world's most accurate and up-to-date business data, publishes real-time insights and turns that into personalized and relevant content. More than 20,000 beta users have had access to our Copilot beta. Throughout the quarter, their results and feedback have been overwhelmingly positive. Highlights include that on average, Copilot beta users reduced their time spent on account research and manual tasks by 10 hours per week, giving them back almost one quarter of their time to spend on more value-added activities. Copilot beta users identified signals that were responsible for 45% of total opportunities created, proving that Copilot helps sellers get to buyers faster. And Copilot users created nearly twice as many opportunities compared to nonusers in the same roles at the same companies. I can confidently say that Copilot is one of the best pieces of software we built at ZoomInfo, across ease-of-use, end-to-end understanding of our customers' pain points and product market fit. We have had leading AI models in production for years. But with Copilot, our product and engineering teams have shown how to put our data and AI differentiation into one of the first real go-to-market AI products that actually delivers value at scale. At the same time, our go-to-market team spent the last quarter using Copilot, dialing in talk tracks, sales collateral testing and more, to be prepared to bring ZoomInfo Copilot to market. We expect to monetize Copilot and we'll roll it out in a thoughtful way, focusing first on the customers who are most likely to get significant value out of the advanced platform. Our go-to-market teams are excited to bring this to their customers, and I have a lot of conviction around the upgrade paths in our customer base. I look forward to sharing more details about this motion and our learnings in the back half of the year. In conclusion, we continue to make progress towards reaccelerating our business. NRR was better than expected. We're driving traction in the enterprise, and we're seeing promising signs that suggest a stabilization in trends. We have a strong and differentiated data foundation, and we're excited to bring ZoomInfo Copilot to market shortly. We are committed to profitable growth, and we continue to repurchase shares of ZoomInfo. With that, I'll turn the call over to Cameron.

Thanks, Henry. In Q1, we delivered revenue of $310 million, up 3% year-over-year. Annualized revenue based on days of revenue recognition was $1.25 billion. Revenue came in slightly ahead of our guidance, and our focus on efficiency enabled us to deliver adjusted operating income of $119 million, representing a margin of 39%, which was above expectations. GAAP net income was $15 million, yielding $0.04 per share, and non-GAAP EPS was $0.26 per share. Retention among our enterprise and mid-market customers has stabilized with signs of potential improvement as we look ahead to expirations in Q2 and Q3, while our small business customers were more challenged in Q1 than we anticipated. We continue to take a prudent view of the environment and trends among different customer cohorts as we consider the remainder of the year. As a result, we are narrowing and adjusting our range of guidance for the full year. As we reduced shares outstanding through share repurchases, this results in increasing our guidance on a per share basis. In Q1, net revenue retention was 85%. With an outsized small business renewal pool in the first quarter, we anticipated NRR to decrease and are pleased to see early signs of stabilization. As we move through 2024, we believe there are opportunities to drive improvements to net retention. And as a reminder, our guidance for 2024 assumes that net revenue retention does not improve. In the enterprise, we saw success with our largest clients. Million dollar-plus clients now contribute more than 10% of overall ACV. Average revenue for $100,000-plus customers continue to grow, largely offsetting the decline in the number of those customers as smaller customers continue to experience down-sell pressure with some falling below the $100,000 level. Advanced functionality remained at approximately one-third of our overall ACV with operations and marketing continuing to gain traction with customers and both growing double digits, while some of our other functionality was more challenged. From an industry perspective, the fastest-growing industries this quarter were retail, manufacturing and transportation logistics, while software and tech continued to experience down-sell pressure, particularly for smaller customers. Write-offs were lower than we experienced during the past two quarters but continued to impact us in Q1. We are focused on reducing this headwind by being more selective in deals, leveraging our product-led growth motion at the lower end of the market. We are now requiring a majority of smaller and more risky clients to pay via credit card or ACH at checkout, which should help drive an improvement in write-offs and allow us to capture the low end of the market more effectively. As we indicated in our 8-K filing in February, we entered into a settlement agreement that addresses both existing and potential class action lawsuits related to right of publicity statutes in four states. We accrued $30 million in the quarter related to these settlements, which is reflected in G&A expense. We expect to make cash outlays related to the settlement later this year. We are as committed as ever to driving growth and profitability, and as such, aim to maintain head count at current levels while allocating more resources to support our AI and Copilot initiatives as well as augment sales and marketing capacity. Based on these hiring needs, we are exploring options to optimize our real estate portfolio relative to a number of leases that we signed in 2021 and early 2022, into which we will gain access in 2024. We anticipate incurring restructuring charges related to potential negotiations and/or subleasing arrangements. Our focus remains on maximizing operational efficiency and driving profitable growth in the evolving market landscape. Operating cash flow in Q1 was $116 million, which included approximately $18 million of interest payments. Unlevered free cash flow for the quarter was $123 million, representing 103% conversion of adjusted operating income. We ended the quarter with $440 million in cash, cash equivalents and short-term investments, and we carried approximately $1.24 billion in gross debt, the vast majority of which has fixed or hedged interest rates. During the quarter, we repurchased approximately 10 million shares of ZoomInfo stock for $153 million. Over the past four quarters, we've retired more than 31 million shares of ZoomInfo, nearly 8% of total shares outstanding. We are confident that these repurchases will drive meaningful economic return for our shareholders, and we will continue to aggressively repurchase shares as we take advantage of disconnects between our share price and the intrinsic value of our growing cash flow-generative business. Our net leverage ratio is 1.5x trailing 12 months adjusted EBITDA and 1.5x trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of Q1 was $444 million and remaining performance obligations or RPO were $1.13 billion, of which $838 million are expected to be delivered in the next 12 months. With that, let me turn to guidance for Q2. We expect revenue in the range of $306 million to $309 million, adjusted operating income in the range of $114 million to $116 million, and non-GAAP net income in the range of $0.23 to $0.24 per share. For the full year 2024, we now expect revenue in the range of $1.255 billion to $1.27 billion and adjusted operating income in the range of $488 million to $495 million. We expect non-GAAP net income in the range of $1 to $1.02 per share based on 394 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $440 million to $455 million. Our full year guidance implies 2% revenue growth from 39% adjusted operating margin at the midpoint of our guidance range. With that, let me turn it over to the operator to open the call for questions.

Operator instructions were provided. Our first question comes from Koji Ikeda with Bank of America.

A couple from me here. On the revenue side, lots of positive commentary in the prepared remarks, especially on net revenue retention. But you did lower the guide a bit, so something did get worse. I know you guys called out SMB weakness, but is there anything else in the guide that we should be thinking about?

So certainly, the SMB weakness is something that impacted us, particularly in Q1 as we had a higher or a larger pool of renewals coming in in Q1. We also saw new business a little behind where we wanted it to be, also based on there being a fair amount of SMB concentration within new business as well as our shift to be more selective in the deals that we're pulling in. So expecting that, that should help us remove some of the headwinds around write-offs as we get further into the second half of the year.

Got it. And I recall in prior calls, you've talked about 10% of ACV that needs to renew still. And a lot of those were attached to some of the larger software vendors or tech vendors out there that had big contracts, three-year contracts that were renewing sometime in the second quarter. So is there any way you could provide an update there? Anything we should be thinking about within that cohort that still needs to renew?

Yes. So not all of that 10% will renew in the second quarter. I think it's a few percentage points for a few quarters to come still. But certainly, those larger clients that we're seeing, we're seeing solid utilization and feel good about the renewal rates and customers that are coming up in Q2 and Q3, particularly among larger customers.

Our next question comes from Elizabeth Porter with Morgan Stanley.

I wanted to ask on the Copilot product. It sounds like a lot of interesting features going on there. Just give us some more clarity on how you expect to monetize. Is this something that comes upon renewal and takes some time to get phased in, even though it's going GA in the back half of the year? And is this more of a seat-based model? And kind of how do you look to raise prices in a tougher environment there?

I think the first—our go-to-market plan is to make sure we phase this out to the customers who we believe will see the highest value from Copilot first. And so we built a model that looks at usage, integrations and their ICP. And so we're going after, first, the customers who are most likely to see the highest value and most likely to up-sell into Copilot. I think ultimately, on monetization, it is around monetizing additional value per seat, and we think it's going to be an up-sell relative to where our customers would have ended up, whether that's an increase in certain renewals or in certain renewals where they have fewer users, that might be a flat renewal where historically, it would have been a down-sell. And new business, we think that we're going to increase win rates and conversion rates because of Copilot, but we think we have the biggest opportunity within the customer base to drive monetization.

And certainly, Elizabeth, I was just going to say, we've typically run these migration motions over a couple of years in the past. So we don't expect it to all come now. But as we get further on in the year, it's still early now, it hasn't even gone to GA, but we'll have a better view on the potential uplift across our customer base. And we intend to host an Analyst Day in the fourth quarter to dig more into those metrics as well as provide a view into the longer-term model based on them.

Got it. And as a quick follow-up, I believe last quarter, you talked to some shortening sales cycles in Q4. Is that something that continued into Q1? You highlighted a lot of other green shoots in more of the mid-market enterprise. But just curious on an update for the sales cycle period.

We didn't have any change in sales cycle length in the quarter. It stayed consistent.

Our next question comes from DJ Hynes with Canaccord Genuity.

Cameron, maybe a couple for you. I just want to focus on that $100,000-plus ACV cohort. I appreciate your commentary on improving retention dynamics. I think you said it was the second straight quarter. I was a little surprised in light of that to see the absolute number of customers declined by as much as it did. So question one is, do you see that bottoming? I know it's a hard question to answer. And then question two would be it sounds like the ACV in that cohort grew nicely. I think you said 16%. Just talk a little bit about what's driving that. Is it new personas? I know you said operations hubs growing nicely. Is it advanced functionality? Any color with the puts and takes there would be super helpful.

Sure. So the ACV for the cohort that grew 16% were the larger customers, the $1 million-plus customers. And obviously, that's a subset of the $100,000-plus. What we really see there is that larger enterprises and customers that have really leaned into the system are growing and growing nicely. But there are a number of mid-market, in some cases even smaller customers, that are just over the $100,000 level and still experiencing down-sell pressure, whether they've laid people off over the last 12 or 18 months relative to their expiration or that they're continuing to face serious budget pressure. And those are the customers that we continue to see falling out of that cohort. There are still a number of those. But we are, to a large extent, lapped what we think of as peak negativity with respect to layoffs and so forth. So we feel that that pressure going forward won't be as significant as we've seen over the last three or four quarters.

Our next question comes from Mark Murphy with JPMorgan.

So Henry, we've definitely been noticing for many months that software companies are simply not hiring like they see a real demand recovery out there. And so very commonly, the head count growth now is way below the revenue growth in the software industry, and it's extremely unusual. I'm just wondering, and I think we hear a lot of different conjecture on why that might be, but how would you explain that phenomenon? Because I would assume, if reps are seeing—if they're reaching quota attainment, we think software companies would kind of lean in on the hiring. So I'm just wondering if you think it's that simple or something else is going on. And then I have a quick follow-up.

I think the world out there in go-to-market is all about productivity today. And so people are looking across their account executive and account management teams. Instead of asking the question of, if I added 10 additional people, could I drive more revenue growth, they're saying, can I do this with 10 fewer people? Are they at full capacity? Can I get them more leads and generate the same amount? Can I drive productivity within my team? There is a fundamental shift in the way people are thinking about the unit economics of their businesses, and so they want to do more with less. Where that's happening in our customer base, we're not going to expand by number of seats. But Copilot gives us a real opportunity to expand ACV through that functionality without having to expand through seat count. In organizations where it might have been flat, we think there's an opportunity to expand ACV in organizations where there would have been down-sell because there are just fewer people to hold licenses. We think there are opportunities to keep that flat. And so we're going to use that as a real opportunity in the customer base, but I think there is a focus on productivity.

Yes. Okay. And then, Henry, this is very well said. I did want to ask you because Copilot, we've heard very good feedback and it's intriguing to turn a weak seller into a strong seller. But then the flip side is we just haven't seen much generative AI monetization at the application layer across all software. I mean it's been very minimal. So I just want to understand, based on—you gave a very compelling assessment of some differences. Do you think that ZoomInfo is going to be an outlier? Because there's a lot of companies, it feels like it's going to take a while before their gen AI application is driving a meaningful tailwind, for instance.

Look, do I think ZoomInfo will be an outlier in our ability to generate and to monetize through our AI solutions? Yes. Do I think it's going to be in the back half of 2024, where it shows up that way? No, I do think it's going to take longer than that. I have a lot of confidence because I personally pitched this product across dozens of our customers, across all segments and all industries. From a product market fit perspective, I don't think we've ever been so close to fit as we have been with Copilot, outside of the core company and contact data. I have a tremendous amount of confidence that we're going to be able to turn that enthusiasm into monetization, but I also expect it to happen over time.

Our next question comes from Jackson Ader with KeyBanc.

The first one is on the downmarket cohort. I'm just curious, is that—with the SMB weakness, does that have more to do maybe with macro environment pressures? Or is there something happening competitively downmarket where people think they can go somewhere else rather than picking ZoomInfo?

Thank you for the question. It is fundamentally downmarket. We're seeing much more of a macro effect than a competitive effect. Specifically as it relates to competition, we've not seen a material change in the competitive landscape or an increased impact to our business from competitors. Our new business win rates haven't seen any increased pressure, either overall or particularly in the SMB where our competition is most concentrated. And then we had another quarter of just about record win-back performance, so we feel really good about how we line up competitively. We feel especially good about how we show up with Copilot as we roll it out this year.

Okay. Great. And then just a quick follow-up either for you, Henry, or for Cameron. How much—can you give us a sense for how much of the revenue mix actually comes from what you would consider SMB today?

Yes. So our enterprise business is right at 40% of the business. SMB is still around one-third. And then mid-market is a little below 30%, making up the rest of that.

Next question comes from Aleksandr Zukin with Wolfe Research.

I guess maybe just going on to the back of that question about the SMB versus the enterprise versus mid-market. Can you maybe just walk through the difference in growth rates in those three businesses as they currently stand for the year? And when does the kind of negative anchor fully roll through? Or is there a potential spiral where each renewal cohort, for instance in the SMB, could get worse? And then just mechanically, I appreciate, Henry, the comments on win rates and win backs. But what about pricing? Like specifically, are you having to discount more aggressively to either win new business or retain business? Is that something you're seeing in the marketplace?

So Alex, I'll start with the growth rates between the different cohorts. Realistically, enterprise has been pretty solid. As we went through early 2023 and through the quarters, I think it was challenged, but it was the first group for us to see stability with. We did see continued down-sell pressure through 2023 in the mid-market world, and that was particularly acute on the software side where we saw customers really taking out seats either due to layoffs that they've done or overbuying historically. As we came through the end of the year in Q4 and Q1, we have started to see that stabilize. But mid-market was certainly down on an absolute basis across that period. SMB actually held in reasonably well as we went through 2023. But really in Q1, we've seen a change in that trend. It does feel like the SMB cohort is more sensitive to the higher-for-longer interest-rate discussion that we've seen over the last few months. I think a lot of those companies were hoping for a light at the end of the tunnel. If that's changed, they're more sensitive to the environment, and we've seen real pressure. So I think that's a change that we saw in Q1 more than anything else. I'll let Henry address the pricing question.

One thing Alex, that we have not seen from our competitors downmarket or upmarket is that they haven't innovated on data, they haven't innovated on product and they haven't innovated on software. There's been no innovation—it's been lower cost. The one place that they have innovated is around their go-to-market motion, where they built product-led growth motions that can attract a large segment of low-end SMB buyers. We were behind on that, and over the last year, we've spent a lot of time building up our PLG motion. Inevitably, with PLG you sell at a lower price point for much smaller customers, and then you look to grow them as they come into the customer base. So where there has been a pricing difference this quarter versus historically has been in that PLG cohort that comes in at a lower price and then grows with us over time.

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

This is Michael Berg on for Michael Turrin. Really appreciate the color on NRR earlier in the call. I know there's been a lot of questions asked on this, but I want to take a different angle. As you look towards the rest of the year, in particular the second half of the year, how can we think about the key drivers to potentially improve the NRR rate? Is it enterprise strength, SMB weakness rolling off, new products rolling out? Maybe help us understand what drives NRR improvement from here?

I think there are a couple of things that improve NRR from here. One is renewal rate and the other is our ability to up-sell products that we're innovating or add new users into the customer base. From a renewal rate perspective, we are seeing stabilization in mid-market and improvement in renewal rates in our enterprise cohort. We've seen those trends continue into Q2, so we think that's a trend that can continue through the back half of the year. If renewal rates continue to stay stable and improve, that drives up NRR. We have the new product with Copilot that we'll take into the customer base. That should drive up NRR as well. Between renewal rate and improved products that we can sell into the customer base, those two things make a big impact. We also, as Cameron mentioned, have expirations coming up and multiyear contracts that will be a tailwind to us this year as well.

Got it. Helpful. And then Cameron, one quick follow-up. As you talk about SMB cohort and being more selective there in terms of the deals you take on, would that benefit free cash flow conversion over time? Can we think about this going from low 90s to mid or even high 90s in the back half as the quality of the customer base improves?

Certainly, our goal in taking more upfront payments for those lower-quality or smaller customers is largely to lower write-offs. In a world with fewer write-offs, that should improve cash flow and help us be more efficient in terms of where we're dedicating our time. But realistically, that's probably something that happens around the edges. The bigger driver of cash flow conversion will be reaccelerating growth. Where we're able to get growth back into double-digit territory, that would ultimately push cash flow conversion higher into the mid-90s or even higher, based on a bigger proportion of our revenue coming in upfront.

Our next question comes from Brad Zelnick with Deutsche Bank.

Cameron, I think through your prepared remarks and a lot of the questions that have already been asked, I feel like I have a pretty good sense of how to bridge from the prior guidance for the full year and the updated guide. But maybe if you could give any help—because it sounds like the small business downtick. It sounds like there was some green-shoot stabilization that you see ahead, perhaps even some upside in enterprise. But when you actually unpacked and came up with the guide, can you give us any help with where to think about where it's coming from specifically?

Yes. During Q1, we saw a continuation of a trend in enterprise and mid-market that was stabilizing. I think that was expected. The real change in trend was in the small business cohort. Because that was a big cohort of expirations in Q1 and came in at a level that was much worse than we've seen historically, that impacted the run rate coming out of Q1. We're adjusting our assumptions going forward and assuming that pressure continues through the year. The combination of the big cohort that underperformed in Q1 and the assumption that continues reflects a tougher environment than what we set our guidance under at the beginning of the year.

Thanks for confirming. That's helpful color. And maybe just for you, Henry. As we think about that segment of the market, it obviously has different characteristics, higher churn for every software company that's selling into the segment. Is there anything you could do—once we get past the cyclicality in the environment—to help offset what we naturally know about SMBs, whether it's integrations, go-to-market partnerships? What can you do structurally to improve your chances in that theater?

I think, number one, we sell more from a new business perspective and renew more from a new business perspective than many competitors combined. We're not losing share here. From a churn perspective, ZoomInfo as a platform has largely been one that you pull information out of. Our SMB customers are busy and running small businesses; a platform that's not dead simple is hard to extract value from. One lens we built Copilot with was to move ZoomInfo from a pull platform to a push platform: one that with AI understands the customer base, understands what they'll care about in ZoomInfo, looks at their CRM data to understand the customers they sell to, understands their ICP, and then starts delivering their next best customers without them having to learn a complex system. The system auto-configures for them and starts immediately delivering value. We think that significantly improves utilization and engagement for SMBs, and increased utilization is directly correlated with renewal rate.

Our next question comes from Brent Bracelin with Piper Sandler.

Cameron, I get SMB is weak and has been weak. It seems broader industry trend. I wanted to go back to the enterprise business, which did grow double digits year-over-year. Can you double-click into the durability essentially of that enterprise growth? I can't imagine seats are expanding much in this environment. So was it mix shift to DaaS? Vendor consolidation? Walk me through the enterprise ACV growth and the durability of that.

Certainly, DaaS has been a good fit and is largely an enterprise product or at least enterprise in the higher end of mid-market. That is a place where we are seeing real traction and it's becoming a more material mix of the business. Enterprises are investing in AI or automation and recognize they need high-quality data as an input. Also, in the enterprise we're still fairly underpenetrated in terms of total seats available. I don't think there are a lot of enterprises piling on seats; in fact, you see a lot of companies still laying people off. But there are pockets within enterprises where we're able to drive additional value and efficiency, and that's driving growth.

Helpful color there. And then Henry, I want to go back to the sales optimization narrative. Copilot could be a huge productivity uplift. But why won't we, a year from now, be in the same environment where Copilot indirectly drives more efficiency above what you can monetize? Is there a plan to move more away from seat-based pricing, move towards platform fees, drive higher DaaS attach rates and monetize Copilot on top of DaaS? Just trying to think through these changing environments and whether Copilot actually can provide an uplift or not.

One interesting thing we've seen across the upper end of mid-market and enterprise is that when you show them Copilot, customers say things like, 'We've been trying to build that here for the last five years.' We have an opportunity to deliver what many enterprises would spend years and dozens of developers to build. We can monetize the value we're driving both in terms of productivity uplift and avoidance of having to build that type of software internally. We believe that will enable monetization beyond just seat count.

Our next question comes from Brian Peterson with Raymond James.

This is Johnathan McCary on for Brian. How would you characterize the demand environment in the non-software verticals? You guys have spoken to that previously. Specifically, do the NRR trends there mirror what we're seeing in the broader business? Or is there more strength on the net new side? How would you characterize the non-software verticals?

As we look at the last 12 months, software and technology have been under significant pressure and are down on an absolute dollar basis year-over-year and at a net retention level well below our overall net retention. The non-software segments have grown more significantly—many are growing mid-teens or more if you look at retail or transportation and logistics. The net retention for those businesses is well above the overall company average. We've gone through a year where our software customers have been digesting re-platforming and operating model changes. There's opportunity for larger and mid-market software companies to stabilize a bit more, but the rest of the business didn't have the same dynamics and is relatively better.

Our next question comes from Tyler Radke with Citi.

Cameron, as I look at the guidance for the full year, it's come down a little bit but still implies that sequential growth has to pick up in the second half of the year. Can you remind us what's driving that sequential acceleration? And how have you seen the first month or so trend in the second quarter relative to what you saw in Q1?

The acceleration in the second half is largely because our expirations in Q2 and Q3 are much smaller than they were in Q1 and Q4. A lower number of expirations provides less opportunity for down-sell among our customers, so up-sells and new business will have a bigger impact on revenue as we go through. April was very much on trend with those comments, so we feel that the smaller expiration pool and the success we continue to see with up-selling and new sales are already on course.

I was going to sneak in a follow-up. As we look at the trajectory for the rest of the year, can you remind us how you're thinking about the $100,000 customer count? Should that bottom and start to grow again at a certain point? And similarly, when do we expect to see the bottom in NRR?

From the $100,000 perspective, the real pressure is among smaller customers that are just over that level who have down-sell pressure driven by budget pressure or layoffs. We haven't fully gotten through all of those customers, but we've gotten through some big cohorts that peaked with layoffs early in 2023. The ACV levels in that cohort are pretty stable because larger customers continue to grow and make up for losing some smaller customers. Retention among enterprise and mid-market is stabilizing and multiyear customers continue to grow, which helps retention as well. Our guidance assumes retention does not improve, but we see trends that could enable improvement.

Our next question comes from Joshua Reilly with Needham & Company.

I have two quick questions. We talked about the PLG motion. How broadly is this now rolled out to both new and existing customers? And then quick on sales and marketing—spend was above my estimate by a healthy amount for the quarter while R&D was below. Curious how you're thinking about sales and marketing spend for the balance of the year relative to the updated operating income guidance.

On PLG, it depends on how you define it. If PLG is purely self-service—a free trial converting to paid—that part is limited to certain lead cohorts through our website and isn't open to every user. If we're talking about PLG as the ability to manage invoices, upgrade users, add ad spend and manage renewals via self-service, that capability is available to all of our customers.

From an operating expense perspective, sales and marketing we are continuing to invest in. There were some one-off items around payroll taxes and how we pay taxes on stock compensation that created a blip in Q1 related to sales and marketing that won't necessarily recur. We'll continue to invest in marketing and selling Copilot as we move into the second half of the year. Regarding R&D, we've been focusing R&D on the Copilot initiative and there's more capitalization happening there, which may not have been incorporated into everyone's models if looking only at prior trends.

Our next question comes from Raimo Lenschow with Barclays.

Since I'm at the back of the call, maybe more of a high-level question. Henry, looking at what's happening to you guys at the moment—it's not ZoomInfo specific, it's where the market is at and where customers are. That impacts the whole industry. How do you think the industry will reemerge given that many competitors are private? You're well funded and profitable. How do you think that's playing out and have you seen competitive situations already?

We're taking a durable approach. The products we're building today, like Copilot, build a foundation to continue operating for the future. Copilot won't be the last AI product we build—it's the first and builds a foundation for future products. Looking at the space, it's easier to see why our core solution is important to go-to-market teams today and in the future. In a generative AI world, our data and insights become more valuable while application-layer software may be more easily disrupted because AI will make building some application layers easier. Core data providers that built flywheels and networks to gather high-quality data will be harder to disrupt. We have confidence in that positioning and think the application layer is more disruptible.

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

I'll keep it to one given time. Henry, I wanted to follow back on the PLG motion. Help us understand traction for the self-service customers who can become a paying customer without engaging with a salesperson. How is that motion going? And why not go even deeper down that path given friction in adopting ZoomInfo compared to some competitors? I imagine the contribution margin is high for PLG.

The number of customers and accounts we bring in from a PLG motion has increased. We also have an efficient sales-led motion. When there are leads best served by sales-led, we push them there. When leads are best served through PLG, we push them through PLG. We'll continue to have both motions and leverage each where our internal models show better optimization. Over time, we'll continue to drive more into the PLG motion where appropriate.

Our next question comes from Pat Walravens with Citizens JMP.

Shifting to the settlement of the right of publicity class actions. Henry, delighted to see it settled. Two questions: it resolved the claims in four states—are there any others in other states? And are you making any changes to the Community edition or directory pages as a result? Does any of that impact your plans for new PLG motions for SMB?

These settlements will handle all of the states where there are claims, so we feel really good about putting that behind us. There are minor changes to our community pages in those states, but we don't anticipate those causing any issues for us from a community perspective or from a PLG perspective.

I'm not showing any further questions at this time. This does conclude today's conference. Thank you for your participation. You may now disconnect, and have a wonderful day.