Zeta Global Holdings Corp. Q2 FY2022 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Zeta Second Quarter 2022 Conference Call. And the conference is being recorded. I would now like to turn the conference over to Scott Schmitz, Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's second quarter 2022 conference call. Before we begin, I'd like to mention that today's presentation and earnings release are available on Zeta's Investor Relations website, where you will also find links to our SEC filings, along with other information about Zeta. Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer; and Chris Greiner, Zeta's Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made on this call, as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition and revenues of our products, and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for GAAP results. We use these non-GAAP measures in managing the business and believe they provide useful information for our investors. Reconciliation of the non-GAAP measures to corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website, as well as in the earnings release and our filings with the SEC. With that, I will now turn the call over to David.

Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. I wanted to start with a quick look back 15 years ago when John Sculley and I co-founded Zeta. Our founding vision of using data and software to deliver a better and substantially more efficient marketing platform rings true more than ever in the current environment. I am incredibly proud of the business we have built. Approximately 600,000 companies were founded in 2007 when we started Zeta. Less than 10% of those businesses have survived, and fewer than 100 are generating more than $100 million a year in revenue. The opportunity in front of us is immense, and I could not be more excited about our position in the marketplace, which is manifesting itself in our results. Simply put, our second quarter was incredibly strong across the board as the efficiency of our platform continues to deliver a greater return on investment for marketers. In the second quarter, we generated revenue of $137 million with an adjusted EBITDA of $18.6 million, both well ahead of our guidance. Despite broader macro concerns in the market, our revenue growth accelerated to 28% year-over-year with significant margin expansion and strong cash flow generation. In the quarter, we generated $14.7 million of cash from operations, up 93% year-over-year. The strength of our business was driven by record new customer wins, progress against our go-to-market investments and our proven ability to deliver a higher return on investment for marketers at a time when efficiency is at a premium. During periods of economic uncertainty, each marketing dollar becomes even more precious. As retail magnate John Wanamaker said in the late 1800s, I know half my advertising spend is wasted. The trouble is I do not know which half resonates with the modern CMO. With uncertainty around macro forces such as inflation at a 40-year high, marketing spend that is neither addressable nor accountable is simply no longer sustainable. Frankly, with the tools that we have available today, there is no excuse to continue. In short, marketing efficiency and efficacy have never been more important than they are today, and improving efficiency is one of the easiest and fastest ways for enterprises to capture savings. Marketers can drive efficiency by accelerating digital transformation, focusing on hyper-targeting, and allocating more investment to addressable channels. These are the reasons more marketers are choosing Zeta. Zeta's industry-leading marketing platform powered by first-party data and artificial intelligence delivers actionable intelligence, omnichannel technology, and deterministic measurement to enable more efficient and accountable marketing across the ecosystem. The best ways to prove this is through our recent customer wins. We recently signed a multiyear 8-figure deal with a premier U.S. financial services firm to help accelerate their digital transformation by unifying their disparate data assets, standardizing business intelligence, and adding more activation channels, bringing personalization and scale for their marketing efforts. We continue to beat large legacy incumbents, including Oracle and Salesforce in this case by demonstrating a better value proposition through the depth and breadth of our capabilities in the Zeta Marketing Platform. As another example, we recently increased our share of wallet at a leading direct-to-consumer retailer, where efficiency of marketing investments was reevaluated across vendors with return on investment being the most important parameter. While others lost budget, Zeta's share was increased. As other vendors have lost the ability to measure with precision due to changes by large technology providers, marketers are looking for alternatives. Because we are not dependent on Apple's IDFA tracking mechanism or third-party cookies to identify individuals and measure business outcomes, we are able to leverage our data and software advantage to deliver a better return on investment for marketers today and in the future. As enterprises look to capture the value of their first-party data, they are seeking new ways of ingesting, synthesizing, storing, and activating data. This has made the consumer data platform or CDP a transformational technology for marketers. Importantly, CDPs not only represent the next generation of technology, but they are also substantially less expensive to operate than legacy solutions. At Zeta, we are investing to extend our CDP leadership position with the expansion of data utility tools such as Agile Intelligence, which elevates an enterprise's ability to not only make marketing decisions but also answer mission-critical questions such as where to open a new location by moving from insights to intelligence. The CDP underpins all our channels, bringing addressability and accountability to areas that have not enabled precision targeting and measurement. Connected TV is the perfect example, and we continue to invest in it. In the second quarter, our CTV business grew greater than 200%. Switching gears, we also want to acknowledge the feedback we have received from investors regarding potential stock sales to cover required tax withholdings due upon vesting of restricted stock awards. In response to that feedback, the Board of Directors has authorized the withholding of shares from executive officers as an alternative to selling to cover these taxes upon these vesting events. With this program, the company may pay the withholding taxes in exchange for the cancellation of such executive shares. On a side note, Chris Greiner, Steve Gerber, and I have no intentions for the foreseeable future of selling any shares into the open market. Secondly, our Board of Directors has authorized a stock repurchase program of up to $50 million of Zeta's Class A common shares through December 31, 2024. We plan to fund both programs out of the company's free cash flow. The $50 million will be a total between the RSA retirement and the share repurchase program. We are highly confident in the strength of our business, and outside of our people and our products, we believe the best use of our free cash flow is to buy back shares at these levels. More details can be found on Slide 29 of our earnings supplemental. Lastly, I want to invite you to hear directly from our customers, partners, and industry experts in person or through the webcast of our Zeta Live Conference on September 28 and 29. As our world changes at lightning speed with disruption across every industry from the post-pandemic economy to advancements in technology including the expansion of Web3, the evolution of customer identity, and the maturation of artificial intelligence, we have designed our annual conference to bring together the industry's most forward-thinking leaders to discuss the most critical topics impacting business and marketing today. I hope you will be able to join us. In conclusion, we believe Zeta is incredibly well positioned in the current uncertain macro environment as the efficiency of our marketing platform continues to deliver a greater return on investment for marketers. Our revenue growth accelerated in Q2, and we have strong momentum heading into Q3 on the back of our growing mix of multiyear recurring revenue deals. While we are very cognizant of the macro environment, we are not seeing an impact on our pipeline, sales cycle, or deal size. However, to be prudent, we are taking an appropriately cautious view with our projections, which Chris will expand upon shortly. We believe our share price represents an extremely attractive opportunity, and we intend to use the strong cash generation capabilities of the business to repurchase shares at these levels. We feel incredibly confident in our Zeta 2025 plan and are pacing ahead of our targets to reach at least $1 billion in revenue and greater than 20% adjusted EBITDA margin. The need for data-driven identity-based marketing has never been stronger, and we are just beginning to scratch the surface of the huge opportunity in front of us. I'd like to thank our 1,400 Zeta employees for their great work every day to deliver better experiences for consumers and better outcomes for our customers, the world's leading marketers. I would also like to thank our customers, partners, and all our shareholders for the ongoing support of our vision. Now let me hand it off to Chris to discuss our results in greater detail.

Thank you, David, and good afternoon, everyone. I want to cover four main points on today's call. First, our results. On every dimension, our performance and KPIs once again are demonstrating how the value proposition of the Zeta Marketing Platform is resonating with our customers. This rings true even more in the current macro environment. Second, our guidance. We're raising the midpoint of full year 2022 revenue guidance by $5 million to the high end of the previous range of $563 million. We are guiding third quarter revenue and profit that is higher than consensus, which is a clear sign of our confidence and the strong visibility into our business. At the same time, we're purposefully embedding conservatism into our full year guidance. This should be received as Zeta recognizing current investor sentiment around an uncertain macro backdrop, even though we are not seeing a negative impact on our results or a slowing of pipeline demand or a change in our sales cycles or metrics at this time. We want this to be very clearly understood. With these top line details, we're also increasing full year 2022 adjusted EBITDA by more than we beat in the second quarter. Third, the bigger picture. Any way you slice it, be it revenue, scaled customer count, margin expansion, adjusted EBITDA, or even cash generation, we're pacing ahead of our Zeta 2025 long-term plan of greater than $1 billion in revenue and at least 20% adjusted EBITDA margins. And finally, with these factors in mind, we're announcing a $50 million share repurchase program, believing that in addition to investing for profitable growth, repurchasing Zeta shares at current price levels is the next best investment of the company's capital. We plan to fund this from our quarterly free cash flow generation. Now let's dive into each of these more deeply to understand what is driving our results, confidence, long-term trajectory, and capital allocation decisions. In terms of second quarter results, we generated $137 million of revenue, up 28% year-over-year, up 9% quarter-over-quarter, and 6% better than the midpoint of our guidance, a very strong wrap around last year's second quarter growth rate of 39%. We set a record by adding 14 new scaled customers quarter-over-quarter, reaching 373 scaled customers and 100 super scaled customers. The addition of new scaled customers was diverse, coming from advertising and marketing, healthcare, consumer retail, and financial services industries. Scaled customers now represent 97% of total Zeta revenue. The ARPU of our scaled customers grew by 19%, once again ahead of our long-term model of mid-teens growth, driven by new customers getting bigger and our longest-tenured customers also growing their spend with Zeta. This is now a multi-quarter trend. The direct revenue mix, which represents our customers' reliance on Zeta's marketing platform and digital channels once again exceeded 80%, resulting in a 290 basis points year-over-year improvement in our cost of revenue percentage to 36.6%, or 390 basis points improvement, excluding stock-based compensation, to 35.3%. We're tracking ahead of our target to reduce cost of revenue by 200 basis points for the year. On a GAAP basis, our net loss was $86 million, which includes $82 million of stock-based compensation and $5.7 million of other expenses, mostly related to the equity component of prior M&A deals. From an industry perspective, we remain balanced across verticals. This quarter, no industry represented more than 14% of revenue, and on a trailing 12-month measure, 6 out of our 10 largest industries grew over 25%. Our U.S. business, which accounts for 96% of revenue, grew 32% year-over-year. We continue to execute our plan to increase quota carriers, reaching 115 at the end of Q2, on pace with our estimate to have between 120 to 130 quota carriers by year-end. At the same time, from an expense-to-revenue perspective, we're getting operating leverage from R&D and G&A, both decreasing by 100 basis points and 240 basis points year-over-year, respectively, excluding stock-based compensation. Revenue growth continues to be increasingly profitable. We generated $18.6 million of adjusted EBITDA, up 63% year-over-year, with a 13.5% adjusted EBITDA margin, up 290 basis points year-over-year. Finally, cash from operations was $14.7 million, with free cash flow of $6.2 million. We ended the quarter with $110.8 million of cash on our balance sheet. Now I'll transition to our increased guidance. Our visibility continues to improve with the addition of more recurring revenue and multiyear customers, a trend that has continued over the past several quarters. For the third quarter of 2022, we're projecting the midpoint of third quarter revenue to be $141 million, up 22% year-over-year with a range of $139 million to $143 million. This is an increase of $2 million from where consensus estimates are today. We expect to generate third quarter adjusted EBITDA of $20.1 million at the midpoint of guidance, which would be up 26% year-over-year and represents a 14.2% margin. Our range of adjusted EBITDA is $19.8 million to $20.3 million. Simultaneously, we recognize there is uncertainty in the current macro backdrop. For this reason, we wanted to be purposely conservative in setting full year and implied Q4 guidance. For the full year 2022, we're raising the midpoint of revenue guidance to $563 million from $558 million, representing growth of 23%. Our new range is $560 million to $566 million, or growth of 22% to 24%. This implies the midpoint of Q4 guidance is $158 million or 17.5% growth. I want to be clear, our business is performing extremely well. Our pipelines are growing much faster than revenue. We're seeing record RFP volumes; win rates remain robust, and sales cycles are not changing. We do not currently see anything that suggests the business is slowing down, but we want to be appropriately cautious in our outlook nevertheless. On an adjusted EBITDA basis, we're increasing the midpoint of full year 2022 guidance from $83.4 million to $86.4 million, with a new range of $85.8 million to $87.3 million. This updated range represents a year-over-year increase of 36% to 38%. At the midpoint of our increased full year guidance, adjusted EBITDA margins would expand by 160 basis points year-over-year. Which brings me to my third point, our pacing to the Zeta 2025 long-term plan. With very strong first half results, including 26% revenue growth and 250 basis points of adjusted EBITDA margin expansion, we're pacing ahead of our Zeta 2025 targets of at least $1 billion in revenue and at least 20% adjusted EBITDA margin. All the KPIs included in our Zeta 2025 plan, which include sales headcount, scaled customer count, scaled customer ARPU, net revenue retention and direct platform mix are tracking at or ahead of plan. These are the results of the investments we've made in our products, people, and go-to-market initiatives over the last two years and a byproduct of our execution culture and adding to the track record we're establishing as a public company. As our business continues to perform and we generate even more free cash flow, we believe the next best use of our cash is to repurchase shares at current price levels. As David mentioned, the Board of Directors has authorized a $50 million share repurchase program and a share withholding program to remove shares that would otherwise have come to market for tax purposes. To be clear, we do not intend to draw down our cash balance, but instead, we plan to fund the buyback using our positive free cash flow generation. Now I'll close out with key takeaways from today's call. First, demand for our platform is resilient. Our sales pipelines and deal metrics reflect this. We have record RFP volume, and pipelines are growing faster than revenue in value and opportunity count. We do not see an elongation of sales cycles. Like last quarter, deal sizes continue to get bigger while contract durations continue to get longer. Second, we've purposely set Q3 and Q4 guidance conservatively in recognition of investor sentiment and broader macro uncertainty despite not seeing signs of softness in our results or demand pipeline. Finally, adjusted EBITDA and cash generation are growing significantly faster than revenue, while we're taking a disciplined approach to deploying capital. As I've stated before, we're building a culture of high performance and a track record of consistent and predictable execution.

The first question comes from Arjun Bhatia with William Blair.

This is Chris on for Arjun. First question for me, so you guys were very clear that the business is performing well, and you're not seeing any impacts to pipeline or anything else on the business right now. But can you help us unpack the scenario that's built into guidance? What are the underlying assumptions and how did you arrive at that?

Well, we're looking, first and foremost, Chris, at our guaranteed contracts, which at this point are pretty high. We have very good visibility into any quarter that we come into. Quite frankly, we really feel like we have 85% visibility into any year we're entering. So we feel pretty solid about where we are. It's funny because there's been a lot of talk about the downturn of marketing. Really, if you look at it, most of the companies that have had challenges are mobile-only companies that are very focused on what's going on in the US and the elimination of Apple's IDFA and the rise of TikTok and others; we have seen our pipelines grow over the last few months. Quite frankly, that's partly due to Forrester putting us at the far right-hand corner, not supposed to say we are the leader, but it's pretty evident if you look at the report for marketing automation, and that really increased our RFP flow. What we've also seen is we've seen even in the parts of our business that are focused on marketing; we're seeing them grow at a faster pace than other parts of our business, because as marketers are looking for that marketing efficiency, they're just not finding it in other vendors. So they're moving additional budgets to us, and we're winning more.

Chris, just to add to that, I think what we really want to be clearly understood, and I think you acknowledged it in your question, is we're really just derisking. In terms of how the outlook and guidance is built, it's built the same way that we've done over the last four quarters as a public company where we've built a track record of beating and raising on the top and the bottom line, bottoms up by scaled customer with, as David mentioned, very little yield required from incremental new business at current levels. So a very conservative, derisked outlook, but the business is performing exceptionally well.

Quite frankly, it's performing as well as it has ever performed in the 15 years since we founded it.

And then changing gears a bit. So looking at the Zeta 2025 plan, kind of thinking about the catalysts there. The go-to-market expansion seems to be going exceptionally well. Obviously, great to see the 14 new scaled customers in the quarter. But where do you see the most opportunity in terms of product innovation over the next couple of quarters to help start to drive customer ARPU up to that long-term target?

Well, we're getting pretty close to the long-term target, quite frankly, we grew ARPU by 18% this quarter. As you recognize, Chris, it was a record quarter for us on adding scaled customers. Interestingly enough, we're seeing customers who are coming on board starting at much higher levels than they ever have in the past. We've traditionally had a sales motion where we've started with a small proof of concept and then scaled from there. What we're seeing is we're seeing them come in and literally become scaled customers right off the bat. The other three products that I think are going to change the game for us. First and foremost is CTV. We were pretty clear that division grew another 200% last quarter. I’ll remind you it grew 399% a few quarters ago. That's not a slowing down; it’s just that the numbers are getting much bigger. A 200% year-over-year growth this quarter was greater dollar growth than 399% a few quarters ago. The other is CDPs. We are the player in the CDP ecosystem. If you look at our ability to put in multiple types of CDPs, I think this is something most people do not understand. We can put in the most comprehensive and deep CDP possible, and we can put in a CDP that allows us to sit next to some of our large competitors but still allow the client to access our data in that CDP ecosystem and activate it seamlessly through the Zeta Marketing Platform. So we don't need to rip out our large competitors upfront; we can start with the CDP light. We can give them a taste of the data, help them segment, use algorithms to help them target and lower their acquisition cost and then deploy. We find we win the vast majority of the RFPs for ripping out the competitor when they start there and then grow. Lastly, our Agile Intelligence product is one that I'm incredibly excited about, which gives enterprises for the first time from Zeta, the ability to perform mission-critical business functions and make mission-critical business decisions that don't necessarily revolve around marketing. One of the largest hotel companies in the world is using our Agile Intelligence product to determine what their wallet share is in different geographies and has completely changed their strategy. They intend on opening 600 new hotels over the next two years based on where their competitors and existing customers are spending the most money. They are now using our Agile Intelligence product as a primary determinant for placing those 600 locations. So, CDP, CTV, and Agile Intelligence; in my opinion, we are just getting started. We're innovating every day, and we want to roll out new products every day.

The next question comes from Ryan MacWilliams with Barclays.

Really good to see the record new scaled customer adds in the quarter, especially when many of your peers are calling out longer sales cycles and some difficulties in the enterprise. Is there anything about Zeta's go-to-market or ROI that's allowing deals to get done? And what does it look like for your pipeline for the next few quarters for these scaled customers?

Ryan, I will go ahead and take that one, and David can certainly jump in. Our customers are gracious enough to speak with us after we close deals and help us understand why we won. One of the first reasons they listed was the importance of having an ROI value proposition that's not just verifiable but could be measured in months and quarters, not years. We fit into that really well. They've also highlighted the fact that we can come in and replace multiple point solutions. Our data continues to be a massive advantage for them. The pipelines are great. As I said in the prepared remarks, the overall value of the pipe is up 44%. We’re seeing deals, as David mentioned, have multiple channels built into them, which is driving a higher initial ARPU, while at the same time, our longest, most tenured customers are also increasing their spending with Zeta. So, it's a really nice combination. The pipelines are healthy. Win rates continue to be north of 50%. So we are feeling very good about the execution and productivity ramping of the sales force.

Yes, I think that's very well said. It's funny; I've been doing this for 15 years. I used to joke that this industry was primarily driven by wine and steak. Today, it's driven by data and results, and the efficiency of our platform, coupled with the efficacy of our platform. You've seen some of the large technology companies battling it out. Everybody is saying, oh, Google has pushed out the elimination of the third-party cookie, but what you're seeing is more and more people are opting out of it. So, even though they're pushing it out, they're making it easier to opt out of it, which both of those things really play to us because we've never used Apple's IDFA or third-party cookies to identify individuals or build our attribution models. We're able to continue to prove the efficiency and effectiveness of our model, whereas a lot of our competitors are not able to do that as well as us. And it was very purposeful that we said our sales cycles are not extending; we are actually closing deals faster than ever. As Machiavelli once said, never waste a crisis. We see the current downturn as an incredible opportunity for Zeta to win and take bigger market share, and the good news is we've effectively doubled our sales force in the last couple of years. We're very well positioned right now to do that, and we feel like we're going to continue to see that.

And just have you seen any outside macro impact to the recurring or like the usage revenue side of the business at this point?

Our recurring business grew faster than our recurring business last quarter.

The next question comes from DJ Hynes with Canaccord.

This is Luke on for DJ. So maybe just to go back to that recurring revenue topic. Can you help us think about the durability of that revenue stream? How are those contracts structured? How has that revenue stream trended in prior market downturns? And what gives you the confidence that customers will replenish those budgets in a tougher macro setup?

We don't publicly disclose or report on the breakdown of those revenue streams, but I certainly understand the intent of the question. So let me try to answer without going into what we don't disclose. The best way to look at that type of revenue with our customers, which as David mentioned, had really strong growth in the quarter, is we look at them over their tenure with Zeta. In our publicly filed materials, we break out those scaled customers based on how long they've been with Zeta. This continued to be a trend: the stickiness of those scaled customers, which you can infer certainly that about half have a recurring component, and about half have a reoccurring component. The net revenue retention rate for those customers that have been scaled for the last two years has been over 120%. You'd expect that the longer they stay with us, the bigger they're becoming. We're able to predict their usage-based spend through ROI that we generate and through the very good relationships our farmers have with those accounts. We are able to add channels as we're more effective and efficient; we've also been able to add use cases. Many of those contracts, as you see, are multi-month, multi-quarter in nature. So, we have good visibility, which is why we have been able to predict and beat and raise consistently.

I think that's something Chris touched on that's important. Even the recurring business has contracts associated with it that go out anywhere from a quarter to a year; they're just not three-year subscription contracts. We enter any given year with 85% visibility into the revenue. Right now, we tell you we don't need any additional new customers to hit the numbers that we're putting out for Q3, Q4. We're merely trying to derisk the quarter in an environment where there's a lot of uncertainty. As Chris also said, we've been public for four quarters. We have beaten all four quarters and have raised all four quarters. That's something we think is important. Our goal is to continue doing that. We feel that we have the visibility. I want to reiterate again; I believe there is an overestimation of the downturn of marketing. I think you're going to see digital marketing grow over the next year. You might not see that in linear, but I certainly think you're going to see that. I've never seen a time when our pipelines were healthier; companies are looking to do digital transformation and really focus on efficiency and efficacy of marketing. That is the purpose of the Zeta Marketing Platform.

It's great to hear and very helpful. I have another quick question. You've mentioned ROI quite a bit. With ROI and time to value being important for many customers, can you discuss how long implementation cycles are for your different use cases? How soon can customers and prospects expect to see that return reflected in our numbers?

It depends on the type of company and the type of industry, but because we're 100% cloud-based, we can plug into any open API. We can literally have a customer up within 7 days of executing a contract, depending on the product. Some products take longer; some products can be up faster. We have seen an independent study that showed for every dollar invested in the Zeta Marketing Platform, we are able to return $10 in revenue to our client, and that's been very powerful. It depends on the industry. If you're in automotive insurance, it might take several months. If you are an e-commerce retailer, it can take hours. We are able to prove the efficiency, efficacy, and the return on investment.

The next question comes from Richard Baldry with ROTH Capital.

In your supplementary deck, it calls out that you have a 6% customer, which at this scale now would be north of a year for a single player. Could you talk a little bit about that use case, maybe not by name, but vertical? How many channels are they using? How long have they been with you, or how replicable that could arguably be across its own vertical, maybe across others because it's obviously a best case that you have?

Rich, that's actually data from 2021, but we would be in that realm for 2022. However, to the spirit of your question, what allows them to get as large as they do, you're right; it's the addition of channels and the addition of use cases. As we think about channel usage right now in our business, more than half are using more than one channel, which was an important threshold that we crossed last quarter. Moreover, if you look at the number of scaled customers using four or more, it's now past double digits as a percentage of the total scaled customer count. Adding more channels has been an effective path for us. I think the big opportunity is adding more use cases. Interestingly, 89% of our scaled customers only use Zeta for one of the three use cases. We can do all three for them, which is a massive opportunity not built into any of our longer-term models or guidance.

The better an enterprise understands their metrics, the better we can partner with them. The company in question is one of the most metrics-oriented companies in the world. That's where we excel and show the return on investment at scale. Some of these companies are willing to move substantial percentages of their marketing budget. In this case, that 6% represents about 5% of their marketing budget, but we think we can get that one customer to much higher than that.

The next question comes from Jason Kreyer with Craig-Hallum.

David, you talked about customers reaching scaled levels more quickly than they have in the past. Can you talk about what's driving that? Are people adopting more channels and use cases earlier or just making larger commitments upfront?

I think it's the latter. What we're seeing is as marketers are under more pressure to not just create a return on investment for their enterprises but to also prove it to their bosses. They're looking at the Zeta Data Cloud, combined with the Zeta Marketing Platform, with the CDP at the core, and they almost can't believe how good it is. Sometimes we have to prove we can actually do what we say we can do. And then as soon as we prove it, we see them scale very quickly. It used to be we would do a $50,000 proof of concept; now clients come in requesting $250,000 proof of concepts and then executing contracts for a year or two within a week of that. It's been very exciting.

And then just wanted to get some further color from you on Google's decision to push out cookie deprecation. It seems like the later adopters are not going to get kicked out another year. I’m wondering if that creates any sort of a void in those people potentially being Zeta customers or if you think you can continue to fill that in despite the deadline being kicked out a little bit further?

I think that everybody who understands the industry recognizes that Google is not really doing this for consumer privacy; they are doing it for their own benefit. They're under pressure from a regulatory perspective. What I think a lot of regulators are seeing is that they're not necessarily doing this for privacy as much as they are to take a more meaningful hold on Internet marketing. As it relates to pushing it out, I don’t believe it matters. Google's figuring this out rather smartly. People are opting out at a much greater rate. Thus, if they just make it easier to opt out, it goes away without them formally getting rid of it. For Zeta, we don't use it today, and we're not planning on implementing it for sure. However, as other organizations depend on it, I think it helps us that they push the deadline out.

The next question comes from Koji Ikeda with Bank of America.

This is Tanika on for Koji. Thanks for taking my question, and nice quarter, especially with all the noise out there and the advertising demand. My question was around your partnership strategy. I saw that you guys had an announcement on a deeper integration with Amazon Web Services. I wanted to understand exactly what that deeper integration entails and if that will help you further with existing customers, land more customers, or anything on that partnership?

First of all, thank you for the compliment. We're very excited about the quarter and appreciate it. When you look at the big partnerships we've announced, the three big ones thus far are Dun & Bradstreet, Snowflake, and AWS. Focusing on AWS, we’re the first marketing cloud to ever be in the AWS store, and we see that as a significant competitive advantage. Snowflake has already been an incredible partner. We've won multiple deals with a joint go-to-market strategy. Most other marketing clouds have partnered with system integrators, but we don't need one. Our platform is plug and play, cloud-based, and allows us to do whatever customization is necessary to help the client get set up. We generally don’t charge for that. As clients want to grow, AWS and Snowflake help us win in both ways. They give us credibility with Zeta being fully integrated into AWS and Snowflake, which allows our existing clients to grow their relationship with us. It's a win-win. I spend a sizable percentage of my personal time on partnerships as I believe one partnership can equal what 15 or 20 of our salespeople can do, and we focus on using our time efficiently on that.

The next question comes from Ryan MacDonald with Needham.

Congrats on a great quarter. David, my first question for you, you talked multiple times in the prepared remarks about share opportunities for wallet share gains within existing customers. Just curious, given the broader macro environment, even though Zeta is not seeing any impact. When you talk to your customers, are you starting to see consolidation of spend at all? And if so, how are you positioning or strategizing from a go-to-market perspective with your farmers to take advantage of those additional wallet share opportunities?

Let me not to sound contrite, but we are actually noticing an effect from the market downturn; it's aiding us. What we're observing is that the downturn is increasing pressure on marketers to enhance the efficiency of their marketing efforts and demonstrate results. One of the case studies I shared in my prepared remarks focused on gaining market share or wallet share. That specific client significantly reduced their marketing budget while simultaneously increasing their spending with Zeta. These are crucial developments. Consequently, I believe we are witnessing a consolidation trend, particularly among partners that can provide efficiency and validate it. I anticipate this trend will persist, which is the exciting aspect; marketers are gravitating toward our offerings.

And then, Chris, maybe a follow-up for you. You talked about the size of the pipeline or the growth of the pipeline in terms of value size being really strong, up 44%. I'm curious what you're seeing in terms of that pipeline mix between early-stage and late-stage. I'm really just curious, given the strong net customer adds in the quarter of 14, were you seeing any pull forward of demand, so to speak in the quarter?

We saw no pull forward. The results were due to good old-fashioned sales execution, and that team deserves an enormous pat on the back. In terms of the health of the pipeline, it's where you want it. It has a good balance between what sits at the top and what is well progressed and ready to close. We're excited about our sales productivity. When you look at our seller cohorts, and as you know, we measure our sellers, those who have been with us 12 months, 12 months to 24 months, and greater than 24 months, it's the progression you want to see, both in the size of their pipe and the size of the deals they're closing. Our newer sellers may carry less in pipeline value than our most experienced sellers, but they are closing exactly on schedule. We’re happy with sales productivity, and the health of the pipeline is very good in terms of what sits at the top and bottom of the funnel.

The next question comes from Elizabeth Porter with Morgan Stanley.

I just wanted to ask about the cadence of investments. With EBITDA coming in nicely ahead, what's the propensity to accelerate investments, just given the good returns you're getting? How do you think about that balance, especially in an environment where many tech companies seem to be pulling back?

For us, we're going to stick to the plan that we've communicated. Our hiring cadence in sales and in marketing is right along the path. We're at 115. We expect it to be between 120 and 130 quota carriers. The growth in the sales and marketing investment line in the P&L was up about 50%. That will begin to moderate because of the timing of many of our hires last year. We'll continue to invest on the plan we've communicated in sales and marketing, mostly now in the headcount realm for more sellers. While at the same time, and we spoke about this in the remarks, we're getting the efficiency that we desired out of R&D and out of G&A. R&D as a percentage of revenue was down 100 basis points year-over-year, and G&A was down more than double that, about 240 basis points. We'll continue to get productivity in R&D and G&A while continuing to invest on our plan in sales and marketing.

As you observed, being ahead by 290 basis points in gross margin is beneficial. I want to highlight that the quality of applicants we are receiving right now is exceptional; as other tech companies reduce their hiring, we are sticking to our existing plan and discovering candidates of significantly higher quality than we might have earlier. It's been very exciting.

Just a really quick follow-up. I wanted to touch on the political campaign uplift from this year. In the past, you talked about a contribution in Q3 and Q4. I wanted to see if there are any changes in the thought process there and how that contributes to the back half?

That continues to be our assumption. We're starting to see deal flow and the pipeline fill up. This is another good example of the conservatism we built into the forecast. But that remains our assumption, about an uplift in Q3 and another uplift in Q4.

The next question comes from Brian Schwartz with Oppenheimer.

This is Camden Levy sitting in for Brian Schwartz. On your CDP product in regards to the audience enrichment that Zeta is capable of delivering by pairing customer data with your data cloud. Do you see any catalyst or risk over the near term coming from privacy legislation or data regulation that could impact the enrichment that you're capable of delivering today?

One of the things we do when we enrich the data is we eliminate any personally identifiable information. We import all their first-party data into the CDP, remove names and identifying information, and then match it to a Zeta ID number. Typically, we also import an average of 1,700 incremental data attributes, which keeps us on the absolute right side of privacy. We never share anyone's information. If they want to activate, they must use the Zeta Marketing Platform because we never load the Zeta ID into any third-party activation methodology. It keeps us totally compliant with current and future privacy policies. For example, when CCPA was passed, we were already compliant. I think we are ahead of the curve. We would like to see a little more regulation, as we believe we are a good actor and other actors are becoming a little aggressive, and we want to see them curtailed. Well, thank you, everybody, for coming today. In summary, in the 15 years since John and I founded the company, I've never seen the business executing better. Revenue was up 28%. EBITDA was up 63%. Operating cash flow was up 93%. We raised Q3 guidance. We raised the year. We're being incredibly conservative around Q4 because we feel that is prudent in the current market, not because we believe we will not have additional quarters of beating and raising, but because we're trying to be cautious. The important metric is that the business is working; clients are coming to us, they're growing faster, and our existing clients are giving us additional wallet share, and we're winning new clients at a record pace as you saw in our most recent results. I must close by saying how incredibly proud I am of the 1,400 people at Zeta, who work diligently every day to deliver better experiences for consumers and better outcomes for our customers. Thank you, everyone, for joining.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.