ZoomInfo Technologies Inc. Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the ZoomInfo Second Quarter 2024 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. 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 2024. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; Cameron Hyzer, our Chief Financial Officer; and Graham O'Brien, who will become our interim Chief Financial Officer. After Henry and Cameron's 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 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. Let me start by discussing our financial results this quarter. In Q2, we saw a level of write-offs related to prior period sales that was higher than we had previously seen or had estimated for the quarter, particularly with SMBs. As a result, we conducted a comprehensive review culminating in a charge in Q2, and we accelerated operational changes around selling to small businesses, all of which we expect to reduce the volatility around future write-offs. We have revised our estimates for the collectibility of a portion of previously recognized revenue, which has led us to take a $33 million charge in the quarter and as a result, we are revising our full year guidance. Excluding this charge, our results would have been more in line with our guidance for the second quarter. Inclusive of this charge, GAAP revenue for the second quarter was $292 million, and adjusted operating income was $82 million, a margin of 28%. Our free cash flow was not impacted by this non-cash charge. The underlying driver for the high write-off rate is that in 2022 and 2023, we extended credit to a higher mix of SMB customers and the rate of non-payment by these customers increased throughout the past 24 months. Accordingly, we have made changes to the way we sell, renew and service these clients. In April, we deployed a new business risk model to flag and require prepayment from prospects at the greatest risk of non-payment. This move mitigates the risk of future write-offs and represents an investment in the long-term health of our business, creating some new business ACV for higher-quality bookings and focusing our efforts on customers more likely to pay, renew and grow with us over time. We transacted $11 million of ACV in Q2 through upfront prepayments, and with our new model in place, we turned away a meaningful amount of new business from smaller, riskier organizations. I am disappointed that this charge has impacted our financial results. We believe this charge puts the long tail of these challenges behind us and lets us focus on the operational improvements we have been seeing in the business, which, as I will describe, has positioned the company for future success. There were a number of fundamental improvements we saw this quarter. As you know, our focus over the past year has been to move up market, stabilize and improve net revenue retention and launch and monetize ZoomInfo Copilot. With our investment upmarket, Q2 was the best new business quarter in both the mid-market and enterprise ever. We meaningfully grew our $100,000 ACV customer cohort in both size and total ACV, the first time we've seen sequential growth in $100,000 customers since Q4 of 2022. This customer cohort now makes up 43% of our ACV. And we again grew our $1 million-plus customer cohort on a sequential basis with the most new million-dollar-plus customers since Q4 of 2022. ACV growth for million-dollar customers accelerated this quarter and is up 17% year-over-year. Reflecting these trends, in aggregate, enterprise ACV was up 9% year-over-year, and overall net new ARR was the best it has been in four quarters. This quarter was the first one since Q4 2021 where we saw net retention rates stabilize, which is an important milestone driven by stabilization of renewal rates and improvement on upsells. Over time, we expect to return to structurally higher levels of NRR through improving fundamentals and mix shift as we grow our upmarket business. During the quarter, we closed transactions with leading organizations such as PwC, Deutsche Bank, Morningstar and Manulife and we also signed our largest ever new business transaction. This customer is one of the largest employers in the United States, and they saw our solution, rich in data, data compliance and data integration capabilities, as mission-critical to their B2B motion. With the solution that matched their exacting needs, we had what one of their employees described as the fastest-moving contract in their history. This new business deal represents $1.4 million of ACV with a three-year commitment. Our operations and Data-as-a-Service offerings, which are often used to help underpin a company's investment in AI, are also delivering results, up 23% year-over-year and demonstrating strong 117% net retention rate, now representing 13% of our ACV. As companies look to invest in AI initiatives, they need a solid foundation of highly accurate data and we are steadily becoming the source for that. Representative of that, we closed our first Data-as-a-Service opportunity in EMEA to support a global network that allows financial institutions to send and receive secure messages and information about financial transactions. Leveraging ZoomInfo's data, the organization's operational and engineering teams are building an internal AI solution to identify fraudulent transactions. This is just one of the many ways that customers are able to use our data to continue to innovate their world-class business solutions. In June, Google announced ZoomInfo as a key partner in its strategy to make generative AI more reliable and accurate for enterprise use. Google selected us because of our specific trusted and authoritative data sets. The end goal is to help enterprises integrate more accurate data into their AI models and give users more relevant responses and better experiences. The past 12 months have marked one of the most innovative periods in our company's history. We successfully launched ZoomInfo Copilot, our AI-powered offering that combines our best-in-class proprietary data set with first-party data from our customers' sales and marketing systems, and digital buying signals to offer sales teams the best insight about their buyers. June was our first full month selling Copilot and we have performed solidly above our expectation. We now have more than $18 million of Copilot ACV across more than 1,000 logos, up from nothing just a few months ago. And we already see material improvements in engagement and utilization rates across Copilot users. Improvements in these rates have historically been closely correlated to renewal and retention rates. Early signs show that Copilot is expanding our value beyond top-of-funnel to support go-to-market teams along the entirety of the funnel. And by doing so, it expands our value proposition from sales development to account executives, account managers, customer success managers and revenue leadership. Our commitment to unmatched proprietary third-party data and signals, a growing ecosystem and continuous investments in AI continues to feed an aggressive Copilot roadmap. That roadmap is driving excitement across our customer base and in new customer conversations. Over 75% of our Copilot upsells were with mid-market or enterprise accounts. With the traction we are seeing on Copilot and our operations and Data-as-a-Service products, we believe we'll be able to continue to win new customers and increase upsells to our existing base, a key driver of net retention. Today, we also announced several changes at the board level. We thank Todd Crockett for his many years of service, representing TA Associates on our Board of Directors and we appreciate the positive impact he has had on the trajectory of the company. We welcome our newest board members who we believe will be immediately additive in helping us execute our growth strategy. Dominic Meda is a seasoned operating executive with experience leading scaled businesses and a very strong background in data and platforms. Dom spent 25-plus years at Bloomberg, where at different times he ran the terminal business, all of engineering and was Chief Data Officer. And we also welcome Owen Wurtzbacher, the Chief Investment Officer of HighStage Ventures, who brings a strong public equity investor perspective and capital markets background to our board. Over the last several years, we have rebuilt our executive team, expanded our bench, built great products, leaned into AI and diversified the leadership skills underpinning our board. We are focused on bringing in healthier new business relationships and doubled down on our enterprise relationships, where we know we have upside opportunities in the future. And over the past four quarters, we have retired more than 39 million shares of ZoomInfo, approximately 10% of total shares outstanding. We will continue to run this business efficiently while repurchasing shares. We have $400 million in an existing share repurchase authorization remaining as of June 30, and we anticipate aggressively deploying that. When you combine our continued strong cash generation with ongoing share count reduction, we believe the company will do at least $1 of levered free cash flow per share this year and that we will grow that number meaningfully in 2025. I recognize that our positive operating momentum is overshadowed by the change in estimates we announced today and the increased conservatism around our guidance. Our intention is to fully put these challenges behind us and share the details that you need to understand our financial profile while also highlighting our commitment to growing free cash flow per share. To that end, I intend to be a meaningful personal buyer of ZoomInfo stock as well. Before I hand it over to Cameron to discuss the results in greater detail, I want to touch on the leadership news we announced this afternoon. As you saw from our announcement, Cameron will be transitioning from his role as Chief Financial Officer. He will stay with us over the next few months to help ensure a smooth transition. Cameron, you've been a great partner to me personally and the business over the last nearly six years. And on behalf of myself and the entire company, I want to thank you for your many contributions and to wish you all the best. We've initiated a search for a permanent successor and are fortunate to have a deep bench of talent throughout our finance organization during this transition period. Graham O'Brien, our VP of FP&A, will take on the interim CFO role. Graham is intimately familiar with our strategic and financial growth plans, and we are confident this will be a seamless handoff. With the charge booked, we now start with a clean slate. With that, I'll turn the call over to Cameron.

Thank you, Henry. Before turning to our results, I do want to say a few words about leaving ZoomInfo. First, I want to thank the entire ZoomInfo team and the board for their partnership throughout my tenure. Over the years, we've achieved impressive growth with strong margins and free cash flow generation. We've navigated numerous challenges together, and I'm proud of what we've accomplished. I have full confidence in the future of ZoomInfo and I'm excited to see the company continue to innovate and lead in the market. Our financial health and strategic direction remains strong, thanks to the collaborative efforts of our talented team and leadership. Thank you for the support and trust you've placed in me. I look forward to tracking ZoomInfo's continued success. Now turning to our results. We have implemented a number of operational improvements to reduce the impact of write-offs. In Q2, we continued this progress by requiring riskier and smaller customers to pay by credit card or ACH, prior to gaining access to the platform, and segmenting our new sales team to drive more enterprise and mid-market business. As part of these improvements, we have increased our visibility and reevaluated our accounting estimates. We were disappointed and surprised to determine that our prior estimates for non-payment from customers needed to be increased in order to account for escalating write-offs that we incurred in June as well as additional write-offs that we now expect. This change in estimates combined with other discrete charges resulted in a total $33 million charge in Q2, of which $15 million reduced revenue, $14 million increased our bad debt expense and $4 million increased other expenses. The change in estimates related to previously recognized revenue primarily from 2023 and includes sufficient reserves to cover potential non-payment on our current receivables and related revenue recognized to date. With these one-time charges, we delivered GAAP revenue of $292 million and adjusted operating income of $82 million, which represents a margin of 28%. The underlying performance of the business excluding these charges would have indicated revenue of $307 million and adjusted operating income of $114 million. This GAAP accounting charge impacts revenue and profitability, but does not impact cash flow. Unlevered free cash flow for the quarter was $120 million. While this charge reflects challenges associated with transactions we signed, primarily in 2023, changes in estimates are reflected under GAAP in the period when new information becomes available which, in this case, is Q2 2024. We remain committed to driving high levels of profitability and growing free cash flow per share. And we are taking steps to adjust our level of expense commitments to reflect current levels of growth. As a result, we took impairment charges in the quarter related to a number of existing facilities, accounting for current market rates as we exit certain leases and consolidate our real estate footprint. In addition to the charges we are taking this quarter, in July, we restructured our Waltham lease agreement where we paid a $59 million termination fee, and we expect to recognize that $59 million in accelerated rent expense reflected as restructuring costs over the next six months as we transition to a smaller footprint. In aggregate, we are eliminating 126,000 square feet of space and expect to sublease an additional 250,000-plus square feet, reducing our total overall facility footprint by approximately 40%. Additionally, in July, we funded the $30 million settlement amount related to the right of publicity lawsuits following preliminary approval in June. The final approval hearing is set for November, and we are looking forward to putting these lawsuits completely behind us. While we spent time in Q2 to address historical deals and rightsize our facilities, we are also seeing improvements in the underlying operations of the business. In Q2, we stabilized net revenue retention at 85%, and as Henry indicated, this is the best performance with respect to change in NRR since Q4 2021. Retention in our software vertical, where we've seen the most material decline over the last two years, stabilized in Q1 and improved in Q2 for the first time since 2021. From a reporting perspective, we are including Copilot and advanced functionality. Advanced functionality had grown to one-third of our overall ACV in 2023. And in Q2, it increased to 35% of overall ACV as we experienced early traction from Copilot and drove growth in our operations and marketing solutions. Operating cash flow in Q2 was $126 million, up from $116 million in Q1 and included approximately $3 million of interest payments. We completed a repricing of our first lien credit agreement to SOFR plus 175 basis points which resulted in a 50 basis point reduction in interest and is expected to reduce our annual interest expense by approximately $3 million per year. Unlevered free cash flow for the quarter was $120 million. We ended the quarter with $399 million in cash, cash equivalents and short-term investments. We carried $1.24 billion in gross debt, the vast majority of which has fixed or hedged interest rates through 2025. During the quarter, we repurchased 10.8 million shares of ZoomInfo stock for $147 million. And as Henry indicated, we had $400 million of existing capacity remaining as of June 30 that we anticipate aggressively deploying. Our net leverage ratio is 1.8 times trailing 12 months adjusted EBITDA and 1.8 times 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 Q2 was $440 million and remaining performance obligations, or RPO, were $1.13 billion, of which $830 million are expected to be delivered in the next 12 months. There are obviously a number of moving pieces with respect to accounting this quarter. We took this action to create a fresh slate for the business and position the company for long-term growth and profitability with a focus on consistently growing free cash flow per share. Looking out to Q3 and the remainder of 2024, our guidance incorporates the impact from today's charge and increased conservatism related to our operating performance. With that, let me turn to guidance for Q3. We expect GAAP revenue in the range of $298 million to $301 million, adjusted operating income in the range of $107 million to $109 million and non-GAAP net income in the range of $0.21 to $0.22 per share. For the full year 2024, we now expect GAAP revenue in the range of $1.19 billion to $1.205 billion, and adjusted operating income in the range of $412 million to $418 million. We expect non-GAAP net income in the range of $0.86 to $0.88 per share based on 375 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $420 million to $430 million, which, consistent with historical reporting excludes the impact of restructuring and settlement payments. Our full year guidance implies negative 3% revenue growth and 35% adjusted operating margin at the midpoint of our guidance range, inclusive of the second quarter charges. We're as committed as ever to driving efficient operations and excluding the discrete items impacting this quarter, our guidance indicates adjusted operating margin of 37% for the year. We expect to grow annual margins from here. And as Henry noted, we view $1 per share of levered free cash flows as a floor on which we can build and compound growth into the future. We're also mindful of share count, and we have continued the shift to performance-based equity grants triggered on free cash flow per share growth, as we believe it is important to align the shares issued to executives with business performance and shareholder value creation. Finally, please note that in the top half of our guidance range, the sequential revenue growth implied in the fourth quarter is roughly flat to down 1%, and we believe that this is the most indicative view of our trajectory as we exit 2024. With that, let me turn it over to the operator to open the call for questions.

Operator provided instructions. And our first question comes from the line of Elizabeth Porter of Morgan Stanley. Your line is open.

Great. Thank you so much for the question. After Q2, the EBITDA, we should largely be through the renewal risk, which has pressured the business for a while now. So I'm just hoping to get a better understanding of the decline for the back half of the year. Are you assuming a second round of down-sells or has new business outlook changed materially? If we could just get some color on kind of where the incremental pressure is coming from and the assumption on NRR in the back half of the year, that would be great. Thank you.

Sure. Thanks, Elizabeth. I think there are a variety of factors that go into the guidance as we think about it. And certainly, we've elevated our assumptions with respect to continued write-off potential in the thought that the operational improvements that we've implemented probably won't really take hold until the end of this year or more so at the beginning of next year. Additionally, the operating environment under which we're operating continues to be pretty fluid. So we've inserted incremental conservatism with respect to the guidance. And I think that if you look out in the world as we see it, there's a lot of uncertainty, both for companies, but also for the people making decisions in terms of the growth of those companies.

And I would just add here, when we set the guidance here, what we wanted to make sure we did was to remove the volatility going forward in the business. And while we see a lot of operational improvements—I talked about growth in the $100,000 cohort, stabilization of net retention for the first time in a number of years, improvement in our enterprise and upmarket business—we're not assuming any of that trend continues in the back half of the year, and we're assuming that even with the operational improvements that we've done around taking upfront prepayment from our customers and the move up market in new business, that those trends also don't make an impact to the write-off rates in the back half of the year as well.

Thank you.

Our next question comes from the line of Mark Murphy of JPMorgan. Your line is open.

Thank you. I'm curious if the volume of newly announced layoffs in the technology industry since June and July might have surprised you at all because Henry, I think you just said that you're not assuming that any of these improvements that you did see in Q2 are going to continue in the second half. So we had these announcements from UiPath and Intuit and OpenText and Salesforce and Intel and others since then. So I'm just curious if you sense a second wave of layoffs that might be affecting go-to-market headcount in the last, say, five to eight weeks a little more than you might have expected? And I have a quick follow-up.

I think the thing to remember about our business is two things. One, there is a meaningful portion of our business that's not seat-based, that is usage based. We talked about the Data-as-a-Service and Operations OS business, which now makes up 13% of our ACV, that's not a seat or usage-based business. It's also growing 23% year-over-year. And then on the seat-based part of our business, we are not fully penetrated across really any of our enterprise or mid-market customers. And so we don't need the incremental seat from a hiring perspective to add to—for us to grow within our customer base. The other thing that I would add there is, one of the places where we're bullish about Copilot is that it's expanding our use case beyond just top-of-funnel prospecting to the full funnel. And so we're now seeing open opportunities where we're bringing in sets of users that otherwise in the past were not customers of ours or not users of ours. And so we have a lot of opportunity, both from a usage-based perspective and from a seat-based perspective to grow despite the layoffs in tech or shrinking go-to-market teams.

Okay. And then, Cameron, can you remind us on the non-collectability receivables, how often is it stemming from business failures versus something like a contract dispute or customer claiming that services were not provided? And then you did allude to some incremental write-off potential going forward, is it possible to put any balance on that? And just help us understand—have you factored something in there as an ongoing type of revenue offset in the second half, as you saw in Q2?

Yeah. So certainly, we have factored in continued escalation in terms of write-off rates. And the write-offs that we do see do stem from a number of different factors. Certainly, one of the larger ones is companies shutting down. And I think in a more challenging environment, an environment where access to capital is harder to get to, that is driving some of that increase. There are also instances where, particularly in the small business, when customers don't feel that they've achieved the value that they thought they were going to, we end up in a level of dispute with them. And so I think in a world where it's harder to make sales, getting that tangible value is also sometimes harder for them and that drives escalation. So our view is that while we are making operational changes to impact this—largely requiring prepayment upfront from many of those smaller and riskier customers as well as just generally shifting the business upmarket—we feel the prudent view is to assume that the write-off situation gets worse, particularly as there are questions about the strength of the economy over the next few quarters.

So Mark, I'll add here, too. We did assume that the write-off rates—the escalated write-off rates—continue through the back half of the year. I think the big thing to remember here is we extended credit to SMBs that were not creditworthy, and we've changed our practices now to require upfront prepayments against our riskier customers. And in the quarter, we had $11 million of our ACV transacted through upfront prepayments. That was up from $1 million in any of our previous quarters. And so we've made a commitment both operationally and in the way that we estimate for these collectibles to get rid of this type of volatility in our business.

Understood. Thank you.

Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open.

Great. Thanks so much for taking the question. Henry, it's no doubt a tough environment and ZoomInfo has outsized exposure to some of the tougher segments of the market. But as we think about an environment versus execution versus product-market fit, how much of what we're seeing in the numbers do you feel is within your control? And maybe just a quick one for Cameron. Cam, can you comment on the pricing trends that you saw in the quarter? Thanks so much, guys.

Yeah. I think that's actually the frustrating part about this quarter is that there's an incredible amount of operational improvement that we're seeing in the business. The $100,000 cohort growth, the first time we've seen that since Q4 of 2022. Stabilization in net retention rates, the first time we've seen that since Q4 of 2021. Stabilization in our software vertical net retention rates. Our enterprise business grew 9% year-over-year. Operations OS and our DaaS business grew 23% year-over-year with 117% net retention. Copilot sold solidly above our expectations in the customer base. And we're monetizing AI now throughout our customers. When we're monetizing that, we're also seeing that happen 75% of the time in mid-market and enterprise customers, and we continue to innovate there as well. So there's this tremendous amount of operational momentum and operational execution happening in the business, where I actually believe our product-market fit is getting stronger. Our sales motion is getting better in the upmarket. We're monetizing Copilot in the base, and you're seeing that operational performance come through in the business. Now at the same time, the write-offs escalated, we have to increase that estimate and we have to take this accounting charge this quarter to put that all behind us, to move forward with a clean slate and to take away this volatility from our business.

And Brad, I think with respect to the pricing changes in Q2, we didn't proactively make any changes to pricing. And we do continue to see some downsell pressure, particularly at the lower ends of the market. But we are starting to see some really good green shoots of pricing opportunity when people are taking Copilot. So Henry mentioned the monetization of Copilot. There are a number of opportunities where we're beginning to see pricing uplift from that. And that's something we're focused on continuing as we move into Q3 and Q4.

Very helpful color. Thanks so much, guys.

Our next question comes from the line of Raimo Lenschow of Barclays. Your line is open.

Thank you. Cameron, if you think about the ability to collect from clients, how does this current environment compare to what you've seen before? We had the shock in COVID 2020 and then through 2022; this seems to be either a change in behavior in 2023 or it's getting worse. Can you compare and contrast how this feels compared to previous times, because it is somewhat surprising given that you've been in tough markets before? Thank you.

It's Henry. Look, I think there are two things that happened or one big thing. We did see these rates elevate from the 2020 and 2021 rates. We saw this trend escalate and elevate in the 2022 and 2023 cohorts. They're writing off more, obviously more than what our historical rates were. That's why we've increased the estimates this year, and we've taken this accounting charge and we've accounted for those collectibility issues. The other thing that I would tell you is the way that you solve this moving forward is what we did with these upfront prepayments. When a risky or small SMB customer comes through, they can achieve a lot of value from ZoomInfo, but we require upfront prepayment from them now and going forward. That's a fundamental change in the way that we operate. And so we're going to significantly make a dent in the collectibility of our future contracts by doing that.

Okay, perfect. Thank you.

Our next question comes from the line of Parker Lane with Stifel. Your line is open.

Hey, thanks for taking the question. Just to stick on the idea of the new business risk model, Henry. Are the parameters there simply about the size of the customer that you're talking about? Or is it also based on number of seats or products they're adopting from you at the onset?

Yeah, it takes into account a number of firmographic-related data points and then a model that looks back at the collectibility of other accounts that look like those accounts. But you can think about it as size, industry, number of salespeople and then a compare against look-alikes who paid or didn't pay us in the past. We're using a number of key data points to assess the risk of the clients who come through; size is obviously one of them.

Got it. Thank you.

Our next question comes from the line of Alex Zukin of Wolfe Research. Your line is open.

Hey. Apologize for the background noise. Maybe two quick ones. First, Henry, your comments around improving retention rates in the quarter, particularly in the mid-market and enterprise parts, and also increasing charge-off rates—can you reconcile those? Maybe also comment on the linearity you saw of these increases, because non-retaining customers go out and do something different. Mechanistically, if you look at your bookings—which I think on a reported basis were down—how much of this bad debt can we take out of that bookings number to square it with Cameron's comment about flat to low single-digit trends once you start getting back some momentum?

Alex, we had a lot of trouble hearing you. So if you could repeat a portion, that would be helpful.

All right Alex. I think I'll be able to answer most of your questions. I think, first off, in terms of linearity, certainly, as it relates to retention, we had been seeing a stabilization of retention and that continued throughout the quarter. That's particularly true in the mid-market and enterprise, where we saw improvements in retention. As the quarter went on, we continued to see more pressure on SMBs. And with respect to the write-offs themselves, those did accelerate in June. So the impact of those was really an end-of-quarter issue more than it was throughout the quarter. And then you had asked about the bookings. Certainly, the bookings get impacted by the write-offs because we are basically impairing some of that remaining performance obligations. So when we're writing off a contract, we're writing off the continued performance obligation of that as well as any of the existing revenue or receivables that's out there.

And Alex, I'll just add this guide does not take into account any of the improvement that we saw in the quarter—the stabilization of net retention rates or the impact of the upfront prepayments. We haven't anticipated any improvement from either of those in this guide.

Understood. Thank you, guys. I apologize for the audio issue.

Our next question comes from the line of Kash Rangan of Goldman Sachs. Your line is open.

Hi. This is Kelly on for Kash. Thanks for all the color provided on the call. I had two quick ones. How has your sales cycle duration compared this quarter versus prior periods? And second, what lessons do you take away from the large customer win and the mid-market and enterprise improvement to close remaining deals in your pipeline?

Great. Thanks for the question. Sales cycles have stayed largely the same. We segmented the new business sales force in the quarter. Our enterprise deals obviously take longer than our SMB or mid-market deals, but they come in at two, three, four times the value of those deals. Nothing unexpected in the new business space. So sales cycles have stayed largely the same across those different segments. The thing we've learned from the largest deal we closed and continued improvement in mid-market and enterprise is that segmenting the new business reps and allocating resources to the upmarket is producing results for us. We had the highest mid-market and enterprise new business quarter on record. That came from increased focus in segmentation of the sales rep base against those different segments. We believe that's going to continue and set up a strong foundation as enterprise and mid-market customers grow more with us and retain at higher rates.

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

Thank you. I wanted to go back to framing how much exposure you have to SMB. It looks like bad debt accruals were similar year-over-year. What portion of that SMB business would you frame as still being at risk versus how much you're pre-baking in as additional weakness? At what point could we mark that the worse is behind you? We thought that a year ago, and clearly that didn't happen. Maybe frame overall SMB exposure would be helpful. Thanks.

So SMB continues to be around a third of our business. We've seen enterprise continue to grow in terms of mix, so that's above 40% at this point. Our focus has really been not on stopping serving SMB, but taking the credit risk out of SMB and forcing those customers that are smaller or riskier to prepay upfront. All of our product focus and sales investment at this point is going up market. So that is a clear focus of ours, but we're not going to turn away smaller customers that continue to get real value out of the system and continue to use it to drive their sales motions.

But Brent, I also think you should think about the actions we took today with the charge and the increase in estimates as we fully intend on putting this volatility in our business behind us. Going forward, after this charge and after increasing estimates, we do not anticipate write-offs will create volatility in our guidance going forward.

Helpful color. Thank you.

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

Thanks for taking the questions. A couple from me. Cam, on the write-downs headwind to guidance for the full year—does that carry into 2025? Is it a full year of impact? Does it affect 1Q '25? Could it potentially lead into Q2 '25 as well?

So certainly, the write-downs that we realized now were eliminating risk of non-payment on receivables that we have recognized revenue against. Another big portion of the change in guidance was taking out the revenue that we would have earned from those customers that we've written down over the remainder of the year. Our expectations at this point are the way we've defined guidance is to assume that those write-offs continue to escalate and that they would continue to have an impact on our results in the near term. Ultimately, the operational improvements we've put in place—requiring prepayment upfront from smaller and more risky customers as well as shifting the sales team to focus more on mid-market and enterprise—should eventually eliminate a lot of the volatility related to those small businesses. Think about the deals that we're selling today that we would potentially write off in six to nine months. So as we move into next year, we're aiming to significantly reduce the risk of those write-offs.

Got it, Henry. Thank you. And one quick follow-up: in prior quarters you talked about customers who left ZoomInfo and came back. I don't recall much commentary on that today. Any color on larger customers that have returned to the ZoomInfo platform?

This quarter was our best win-back quarter on record ever.

Our next question comes from the line of DJ Hynes of Canaccord Genuity. Your line is open.

Hi, thanks for taking the question. Henry, a lot of your data today is being piped into CRM systems. The CRM vendors are also trying to build copilots that help with activating intelligence and prompting next-best actions. What gives you confidence that AI-driven functionality will live with ZoomInfo versus the system of record or the CRM vendors that you partner with?

I would think about the data that gets piped into CRMs as contact or company data. The data needed to win from a Copilot perspective is a tremendous amount of signal data used to identify which customers to reach out to today, tomorrow and the reasons why. You can think of that as intent signals, new hire signals, funding signals, or digital signals like visiting your pricing page, visiting a competitor's review page, or researching a competitor. All of those signals are proprietary to ZoomInfo and they don't live in CRM, and that signal is necessary for Copilots to actually work and be useful. Copilot is built on data that extends beyond what sits in a CRM, so a CRM-only Copilot will miss critical signals. We've invested heavily to ensure we have the best signals around companies and people and have built a robust ecosystem of signal providers into our Copilot offering. The sales of Copilot and its monetization in our customer base were solidly above our expectations. It puts us ahead of competitors in the space and we feel really good about the innovation we've delivered in the last year.

Good to hear. Thanks for the color.

Our next question comes from the line of Taylor McGinnis of UBS. Your line is open.

Hi. Thanks so much for taking my question. Looking at the Q3 revenue guide, it assumes a sequential increase, which is a reversal from recent trends. I imagine some of that might be due to the write-downs in softer new business. Cameron, can you help us bridge the difference? You mentioned adjusted revenue of $307 million in the quarter. Can you quantify the pieces that make up the difference between that and what was reported? And as we look into Q3 and Q4, are you able to quantify the write-down and new business impact embedded in the guide? Thanks.

So in the second quarter, we took a charge related to the change of estimates around the collectibility of receivables from customers. With respect to revenue, that was $15 million of the charge, and that's revenue that we'd effectively recognized historically but due to the change in estimates needed to be run through Q2. So GAAP revenue in Q2 was $292 million, but that included $15 million of write-downs that shouldn't recur because we identified everything we felt was at risk and included it in Q2. Therefore, going forward, we want to start with a clean slate. Based on that, in Q3, while it will be growth compared to the $292 million, it would still be a decrease relative to the $307 million pro forma, if you back out that $15 million write-down.

Thanks so much.

Our next question comes from the line of Jackson Ader with KeyBanc Capital Markets. Your line is open.

Great. Thanks for taking our questions. Henry, on the positive trends in the business that you're not assuming will continue—are you already seeing some of the enterprise momentum slow here in early August? Or is this just conservatism? Or is it actually happening and that's why you're taking it out of guidance? Thanks.

No, we're not seeing momentum in the enterprise or upmarket slow. We feel really good about the operational improvements and success we've seen and we anticipate that we'll continue to execute against that.

Got it. Thank you.

Our next question comes from the line of Michael Turrin of Wells Fargo. Your line is open.

Hi, thanks for taking the question. On the margin impact of the write-offs, how can we think about how that flows through the rest of fiscal '24 on a margin percentage basis? And how should we think about that rolling into fiscal '25? Quick follow-up as well.

Sure. We had a number of discrete events laid out in the press release and in the 10-Q. When you look past those specific charges, the margins would have been materially higher—almost 10 percentage points higher. I'd expect that we won't have additional charges like that. So if you pro forma those charges out, that's the underlying performance of the business to start with from a modeling perspective.

Helpful. Quick follow-up for Henry. You mentioned you plan to be aggressively buying shares. What are the key drivers of your confidence in buying more shares moving forward?

The tough part about this quarter is that we had a tremendous amount of operational improvements. We saw net revenue retention stabilize for the first time since Q4 2021. We saw our DaaS business growing 23% year-over-year. We saw growth in our $100,000 cohort for the first time since Q4 2022. We continue to grow our $1 million cohort. We're addressing the write-off issue by taking a significant amount of our new business ACV through upfront prepayments. Copilot is solidly above our expectations from a sales perspective into the customer base. I think we have tremendous product-market fit there. That will be hard for many investors to see because of this accounting charge and the way we're thinking about guidance for the rest of the year. That said, I have tremendous confidence in ZoomInfo, and I'm excited to be a buyer.

Our next question comes from the line of Surinder Thind of Jefferies. Your line is open.

Thank you. Henry, any color on breaking down NRR between SMBs and mid-market? And when you look at the new business that you're winning, what is that mix between SMB and mid/enterprise? How does that compare to your current ARR mix? Thanks.

On the new business side, we had high watermarks for enterprise and mid-market new business. Those are significantly higher as a percentage in the quarter than we've seen historically. That was driven by segmenting the sales reps and allocating resources to the upmarket. In the customer base, think about the breakout as roughly 40% enterprise, a little under 30% mid-market and the rest in SMB. Our intention is to move the business significantly up market into mid-market and enterprise.

Got it. And a quick clarification on Copilot: the ARR figure you provided—$18 million—was that as of quarter end?

That was as of quarter end.

Our next question comes from the line of Brian Peterson of Raymond James. Your line is open.

Hi, thanks for taking the question. Cameron, on the $33 million in charges, how much of that is embedded in the Q2 NRR figure? Or would some of that have impacted prior periods or future periods? I want to understand how these charges are impacting NRR.

Most of the increase in write-offs and changes to the estimates really relate to new business that we've brought on, rather than impacting NRR. So NRR is not materially impacted by those charges.

Our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

Thanks for taking my question. You talked about the change in guidance where you're down about $50 million in revenue excluding the $15 million write-off. How much of that $50 million is write-offs versus softer new sales, downsells, or any cannibalization given Q4 is another strong renewal quarter?

The way to think about the entire change in guidance—the full roughly $60 million—is that roughly half of that relates to write-offs we've incurred. Part of that is the charge and part is the revenue we would have recognized from those customers over the second half of the year. The other half of the change is increased conservatism in the market overall, including increased assumptions around ongoing write-offs and conservatism around the sales and retention environment.

Thanks for the color.

Our next question comes from the line of Joshua Reilly with Needham. Your line is open.

Hi, thanks for taking my question. You mentioned increased write-offs in June for SMBs. What changed in that period relative to Q1? It seemed like renewals weren't great in Q1 for SMBs, so was there a temporary improvement then a deterioration, or what macro factor came into play in June? Thanks.

We did see an increase in the rates and the revenue associated with those write-offs. Part of that is timing and catching up: write-offs don't happen immediately. We're chasing payment for customers and it takes some time before we're ready to write something off. We've also seen further stretching of small businesses' access to capital, so increases in companies shutting down. Those factors changed as we got into June. If you look back at the trend from Q3 to Q4 to Q1, we actually saw improvements in our write-off rates, and then those reversed at the end of the quarter.

Got it. Thanks, guys.

Our next question comes from the line of Pat Walravens of Citizens JMP. Your line is open.

Hey. This is Austin Cole on for Pat. Appreciate you taking my question. I wanted to ask about the DaaS business, which is 13% of ACV. Can you talk about what you're doing to drive success there and how big you think it can get?

Last year we built a team of DaaS specialists responsible for helping customers integrate our data within their workflows and get that behind workflows like territory planning, account scoring or new AI workflows they're building. We anticipate this can continue to grow at the rates it's growing and be a meaningful part of our business going forward.

Great. Thanks.

I am showing no further questions at this time. I would like to turn the call over to Henry for closing remarks.

Thank you, everyone, for joining us tonight. I'd just like to take a moment to reiterate what I think are the most important key takeaways from tonight's call. First, we've taken necessary and comprehensive accounting charges this quarter to address our write-offs, and while they fully flow through Q2 results and negatively impact the quarter and our full year guidance, this action sets us up very well for the future. Additionally, we've made the necessary operational adjustments in the way that we extend credit to our customers to ensure that write-offs do not continue to be a headwind in our business. Second, we delivered strong operational performance: NRR stabilized, we had the best net new ARR quarter in a year, we're growing our $100,000 and $1 million customers, Copilot sales were solidly above our expectations, and we see Data-as-a-Service growth opportunities driven by AI use cases. And we are committed to driving long-term value creation through consistently growing free cash flow per share. I look forward to speaking with you and seeing you in person as we participate in a number of investor events over the coming weeks. Thank you.

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