Zeta Global Holdings Corp. Q3 FY2022 Earnings Call

Thank you for joining us. This is the conference operator. Welcome to the Zeta Third Quarter 2022 Conference Call. Please note that all participants are in listen-only mode and the call is being recorded. After the presentation, there will be a chance to ask questions. I will now hand the conference over to Scott Schmitz, Senior Vice President, Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's third quarter 2022 conference call. Before we begin, I would 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. Our third quarter results were an incredible way to celebrate our 15-year anniversary. Our year-over-year revenue growth rate further accelerated to 32% or $152 million with adjusted EBITDA of $22.4 million, which was up 40% year-over-year. We generated $19.5 million in cash from operations, up 92% year-over-year, with $9.4 million in free cash flow, up 152% year-over-year. On the back of this momentum, we are once again increasing our fourth quarter and full year 2022 revenue and adjusted EBITDA guidance, which Chris will discuss in further detail shortly. Zooming out, there is no question that the macro environment is creating more uncertainty and driving more scrutiny on how and where enterprises invest. The pressure for enterprises to improve their ability to acquire, grow, and retain customers at a lower cost is greater now than ever. In the spirit of never wasting a crisis, CMOs are looking to emerge with a more efficient and effective solution with a better return on investment, which Zeta delivers. Marketing spend tied to measurable outcomes that delivers a strong verifiable return on investment has shifted from one of many objectives to the primary objective. That is why enterprises continue to invest in first-party data and customer data platforms or CDPs. That is why enterprises continue to invest in digital transformation. That is why enterprises continue to invest in more addressable and accountable methodologies that deliver greater precision and measurable value. In short, we believe the market is moving even closer to Zeta’s sweet spot, where our value proposition shines. And because we make sophisticated marketing simple and address the requirements for both revenue generation and cost savings. Our growth rate has continued to accelerate. The Zeta Marketing Platform or ZMP was purpose-built to improve marketing efficiency and efficacy, bringing marketers an array of benefits with data, AI, and activation in a single platform, a unique advantage that we have over our competitors. By resolving identity with our data cloud, we reduce waste, improve personalization, and bring more precision to measurement. By enriching a brand's knowledge of their customers, we uncover new insights and unlock new growth opportunities. And by leveraging cutting-edge technology that is flexible, modular, and scalable, we can wrap around an existing enterprise's tech stack, reducing the time to implementation to days or weeks and establishing a land to expand sales motion. This allows us to generate new relationships, even when most enterprises are looking to reduce their number of partners, as evidenced by the record 16 new scaled customers we added this quarter on the back of record RFP activity. We're replacing multiple incumbents as the broad capabilities of our platform enable enterprises to consolidate multiple point solutions and simplify their environment and further cut costs. The theme of driving through times of uncertainty was also front and center at our Zeta Live conference, a little over one month ago in New York City, with combined in-person and virtual viewers of over 8,000 people. The event generated over 1,500 new prospects for the company and continued to raise our profile. In attendance were Fortune 500 brands and many of the largest agency holding companies, as well as world-renowned entrepreneurs, marketers, and business leaders. With over half of the 50-plus guest speakers representing women and people of color, the event's panelists were not only exceptional; they were also as diverse as the market segments they represent. We were excited to bring many of the conversations Zeta has had with marketing leaders on a daily basis into a broader form to help other brands adapt and strengthen their own approach to marketing. If you missed any of the remarkable content, I would encourage you to view a replay of the panels, which are available on our website. A good example of an enterprise that made significant strides this quarter was one of the largest consumer goods companies, which began using our CDP to better identify and understand its existing customers and reduce their reliance on paid media channels. Our Agile Intelligence product delivered sharp insights and accelerated their time to revenue and ultimately return on investment. This case study highlights two themes: consolidating vendors and driving more activation to our platform. This starts with a better understanding of an enterprise's customers by creating more personalized experiences across channels; then we're able to help them measure with greater certainty, which continuously makes our AI platform smarter, and the results continue to get better and better. This is ROI realization and action and is what makes our customer relationships sticky with a high degree of visibility. One of our Fortune 100 customers stated during Zeta Live, the more data we put into the CDP, the more activation we deliver through Zeta's marketing platform, and the better results we see. That same customer identified Zeta as a mission-critical partner and expects to allocate more of their spend to us next year. This virtuous cycle is evidenced in another example, a leading automotive aftermarket retailer, which was already using Zeta’s CDP for retention marketing and extended their use cases by launching acquisition marketing with audio and CTV channels. Through the same platform, they were able to plan, execute, and measure the efficacy of audio and CTV impressions against in-store and online sales. This is one of the reasons we saw more than a 250% growth rate in our CTV business this quarter, and it also highlights the power of our CDP, which was recently identified as one of the largest and fastest-growing CDPs according to IDC. As I mentioned in my opening remarks, this past month was our 15th anniversary as a company. We celebrated with a day of service across the company, as we look to give back to our communities. Over the course of this year, we have also begun taking steps towards reducing our carbon footprint. We are working with cloud and technology partners to adhere to GHG standards and make sustainability a business imperative. I am incredibly pleased to announce that we are on track to achieve our goal of net carbon neutrality for Zeta in 2022. I am incredibly proud of the business we have built and the virtues embraced by our people. 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. And while we have come a long way, as we like to say at Zeta, we are just getting started. I would like to sincerely thank our Zeta team, our customers, our partners, and all of our shareholders for their 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. Three themes highlight another very strong set of results, all of which we will dive into more detail. First, we extended our track record of beat and raise execution with accelerating revenue growth and increasing profitability and cash generation. Second, the third quarter's outperformance was broad-based across industries, channels, and use cases, as well as throughout our Zeta 2025 KPIs, serving as a powerful demonstration of our ability to execute through a tough macro backdrop, along with demonstrating our business model's balance and our value proposition's durability. And third, on the back of this momentum, we're raising fourth quarter and full year 2022 guidance for revenue and adjusted EBITDA, with momentum across the business our confidence is increasing. We can exceed our targets of at least $1 billion in revenue and at least 20% adjusted EBITDA margins by 2025. Now let's dive into the results. While our overall business grew 32% this quarter, this elevated 30% plus growth rate has been evident across multiple areas of our business for many quarters now. US revenue in the third quarter was up 36%, representing 96% of total Zeta revenue. And year-to-date, the US is up 32% year-to-year. Scaled customer revenue was up 34% year-to-year, now representing 98% of total data revenue. Year-to-date, scaled customer revenue is up 30% year-to-year. Direct platform revenue was up 33% year-on-year, representing 74% of Zeta revenue. And on a year-to-date basis, direct revenue was up 35% year-to-year at a mix of 78%. And once again, six out of our top 10 industries grew 25% or more. We also executed ahead of plan against our five beta 2025 KPIs. Scaled customer count grew from 373 in Q2 to 389 in Q3 and is up 42% compared to Q3 2021 or up 12% year-to-year. In fact, year-to-date, we've added three times more scaled customers versus a year ago, tasting twice as fast as our Zeta 2025 model of 6% scaled customer count growth year-to-year. Digging a layer deeper provides context into the quality of new customer additions we continue to make. Speaking first to their size, we added six new superscale customers quarter-to-quarter, bringing our total to 106 greater than $1 million customers. From a breadth of industry contribution perspective, of the 16 new scaled customers we added, nine came from consumer retail, three from technology and media, while the remaining four came from advertising and marketing, among others. In terms of new versus existing, of the incremental 16 net new scale customers added, five were new to Zeta and 11 were existing customers that became scaled in the quarter. That's our go-to-market model working as designed. And finally, in terms of linearity, just like in Q2, we saw steady additions in scaled customers each month of the quarter, adding six in July, three in August, and seven in September. This acceleration in new customers reflects the growth of our pipeline, which is up 50% year-to-year, coupled with our strong win rates. And contributing to pipeline expansion is our growing IT analyst industry recognition from Forrester, Gartner, and IDC, which has translated into third quarter RFP activity, up 70% year-to-year. Scaled customer ARPU grew 19% year-to-year in Q3, ahead of the data 2025 model of 14% year-to-year growth. Powering ARPU expansion is the continued growth in super scale customers, whose average annualized ARPU of $4.5 million is more than 10 times greater than the $100,000 to $1 million cohort of $375,000 ARPU. The sales motion moving scaled customers to super scale customers is cross-selling more channels and use cases. This quarter, the average channels per super scaled customer increased by 25% year-to-year to 2.6, and the number of scaled customers using more than one use case grew by 36% year-to-year to 39. And this is a big future opportunity for Zeta. These data points speak to the strong productivity of our hunters and farmers and the outstanding leadership of our CROs and their sales leaders. And because we're seeing a strong ROI on our sales and marketing investment, we continue to add quota-carrying headcount, consistent with the Zeta 2025 plan we communicated in February. In that setting, from a sales capacity perspective, year-to-date, we have 121 quota carriers, pacing to our year-end projection of 120 to 130 quota carriers. But it's not just about quantity; quality matters most. Our sales academy, training programs, and product certification processes enable our sales teams to ramp quickly, while our sales management systems are creating a sales excellence culture. We continue to experience good stickiness, and we are tracking to our full year guidance range for net revenue retention of 110% to 115% for total data. Third quarter direct revenue mix was 74%, with a year-to-date mix of 78%, which compares to 75% year-to-date in 2021. This leaves third quarter integrated platform revenue mix of 26%, higher than a year ago of 19% due to channel mix and political candidate revenue, which was $3 million in the quarter and $2 million better than what we assumed in our third quarter guidance. As I spoke about in our second quarter call, we expected this seasonal mix change, which is the driver of our cost of revenue percentage increasing Q2 to Q3 by 100 basis points to 37.8%. It's worth noting, despite the same revenue mix as a year ago, our cost of revenue is better by 90 basis points through better scale and a more favorable mix within direct channels. Bringing it all together, we remain on track to reduce the cost of revenue by 200 basis points this year, well ahead of our annual data 2025 model of 60 basis points. On a GAAP basis, our net loss was $69 million, which includes $75 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been $16 million. From an expense to revenue perspective, we continue to drive strong operating leverage in R&D and G&A, both of which decreased by 120 basis points and 170 basis points year-to-year, respectively, excluding stock-based compensation. These points of leverage helped to generate $22.4 million of adjusted EBITDA, up 40% year-to-year, with a 14.7% adjusted EBITDA margin, up 90 basis points year-to-year. Finally, from a cash perspective, it was also a strong quarter as we remain focused on driving higher conversion rates. Year-to-date, 42% of our adjusted EBITDA converted to free cash flow, up from 7% through the first three quarters of 2021. Cash flow from operating activities was $19.5 million, with free cash flow generation of $9.4 million, up 152% year-over-year. We ended the quarter with a cash balance of $115 million after using $4.3 million for our share repurchase program. Now, I'll transition to our increased 2022 guidance. Based on the strong underlying fundamentals of our business, we're increasing our fourth quarter and full year 2022 guidance, putting us ahead of pace to achieve our Zeta 2025 plan. And like last quarter, even with this increase, we believe guidance continues to have a derisked profile. Full details, including guidance ranges can be found on slide 14 of our earnings supplemental. For the fourth quarter of 2022, we're increasing the midpoint of revenue guidance by $2 million to $160 million, up 19% year-to-year. And for clarity, we're assuming $4 million of political candidate revenue contribution in the fourth quarter, no change from prior guidance assumptions. We're increasing our fourth quarter adjusted EBITDA by $300,000 to $29.5 million, up 29% year-to-year, and representing 18.4% margin at the midpoint of guidance. Combination of our third quarter upside and higher fourth quarter outlook raises the midpoint of our full year 2022 revenue guidance by $13 million to $576 million, representing 26% growth year-to-year. On an adjusted EBITDA basis, we're increasing the midpoint of our full year 2022 guidance to $89.3 million, up 41% year-to-year. At the midpoint of our increased full year guidance, adjusted EBITDA margins would expand 170 basis points year-to-year to 15.5%. And as I've stated before, we're cementing a culture of high performance and a track record of consistent and predictable execution. With that, let me hand the call back to the operator for David and me to take your questions.

Thank you. We'll now start the question-and-answer session. Our first question comes from Ryan MacDonald with Needham. Please go ahead.

Hey, guys. This is Matt Shea on for Ryan MacDonald. Thank you for taking the question and congrats on a really nice quarter here. So first, I wanted to start with the 16 new scaled customers, some strong growth there. With the five up-sells, that seems to be tracking ahead of expectations. So just curious, what is driving these strong up-sells? And then, understanding the up-sells are not included in the 2025 outlook, so given their strong contributions, how is that changing your long-term vision?

Hey, Matt. It's great to connect with you. I wanted to share a few data points. In our recent additions, out of the net new 16, five were new to Zeta and eleven were existing customers. I'll pass it to David to discuss how we plan to expand these accounts and our go-to-market strategy. To highlight the significance of the record 16 additions, let’s look at some important statistics. Firstly, the distribution across the quarter was solid: we added six in July, three in August, and seven in September. This spread was really encouraging. Adding six new superscale customers, each exceeding $1 million, is a substantial achievement for us, representing over 24% year-over-year growth in that segment. As for industry representation, despite some macro pressure, nine of the sixteen came from consumer retail, with three from technology and media, two from advertising and marketing, and a few from other sectors. Overall, it was a strong quality result, and David will elaborate on how we can expand these accounts further.

Well, I also want to point out that what Chris just pointed out is emblematic of what we're seeing in the marketplace, right? CMOs are under more pressure than ever to focus on the efficiency of their marketing dollars. Their CEOs are coming down every day and saying, how do we do more with our existing budget? And one of the reasons we were able to win so many of these clients was our sales motion starts with a pilot that begins with a $50,000 or $100,000 test where we're testing in the market. We take their data, we put it into a CDP, we match it to our data ecosystem, and we're able to really rearchitect the journey that every one of their existing high-quality customers followed before becoming one of their customers. And we're able to then go find others in the over 235 million Americans who are opted into our data cloud today, and we're able to take out of the marketing funnel all of the people who either would not be interested in their product, are not currently in the market for their product, or wouldn't be credit approved for their product in certain cases. By removing all of that excess, you're able to target on the people who are in-market qualified for your products and launch your products. So you're able to be substantially more efficient, and we're able to move through that sales motion of a $50,000 to $100,000 test, and we were able to move, as we said, 16 customers pretty quickly into scaled customers. And I think also, as Chris pointed out, I'm also really excited we were able to have a very large increase in our super-scale customers. We think that we can continue to move from pilots to scale to super-scale as the efficiency of the platform, the data, and the artificial intelligence gets smarter and smarter. We have case study after case study that show that the longer an enterprise uses our platform, the more efficient the marketing gets, the better the return on investment for the enterprise client, the more they spend on the Zeta marketing platform.

Matt, one thing I wanted to point out on your question around being incremental to the model. You're correct in that we modeled ARPU growth in data 2025 on channels and the addition of channels. So as you heard in the prepared remarks, we grew the average channels per scaled customer by 15%. We're now at $1.94 per, and we added another 24% in terms of channel growth for super-scale customers. They're now at an average of 2.6%. But to your point, what's incremental to the model is the expansion of use cases. And as I talked about in this quarter's call, we now have 39 of our 389 scaled customers using more than one use case. That's up 36% year-over-year. That piece that you're correct is incremental to our ARPU, but the channels are built into it, just to clarify.

Next question, please.

The next question is from Jason Kreyer with Craig-Hallum. Please go ahead.

Thank you, everyone, and congratulations on an outstanding quarter. I would like to inquire about the six super-scaled customers. Can you share any metrics regarding that, including the timeframe to reach that super-scaled level? Additionally, are there any specific use cases or channels where you're experiencing acceleration that assists customers in achieving that level more quickly?

Yeah. So what I would say is it really does differ by customer, Jason, how quickly they scale. What we've said and what I'll continue to say is we're seeing faster growth from pilots to super-scaled customers than we've ever seen before. And I think that is shown in the record scale client growth. I don't know if we can say that this was a super-scaled client growth record, but I can't remember ever adding this many before. But the reality is that what's happening today is in the time of uncertainty, we are seeing clients grow faster than ever as they're consolidating from multiple vendors to a one-point solution, which quite frankly, I think we're the only company I know of that can be that true single point solution. And we're seeing them consolidate those spends onto our platform faster than they have in the past. The other thing we've said is we continue to be at record RFP requests. And I think a lot of that is also what's going on in the market. So listen, as Machiavelli once said, never waste a crisis, and we are investing heavily into our sales team, our sales motion, and we are making sure that we are getting the word out. I think Zeta Live, I want to reiterate again, not only did we have over 8,000 people attend either in-person or virtually, but we generated over 1,500 high-quality leads for the company to have our sales team really go after. So we're really seeing a really exciting time right now at Zeta. Chris?

Yes, Jason, regarding the channel growth and use case growth, CTV continues to be a significant highlight. It's impressive. A year ago, its usage was in the low single digits on the platform, and now it has reached double digits, reflecting a growth of 250%. However, beyond CTV's exceptional performance, all our channels experienced strong double-digit growth this quarter, demonstrating a well-rounded performance. In terms of use cases, all have grown year-over-year, which further showcases our balance. The growth in acquiring use cases is particularly strong. This provides additional context to your question.

Thanks Jason.

The next question is from Elizabeth Porter with Morgan Stanley. Please go ahead.

Hi, great. Thank you so much. Just a question on Q4 guidance which implies about 2018 to 2019 growth year-over-year compared to just over 30 that you did in Q3. So just wanted to figure out what conservatism you have baked in for macro? Just given that usually Q4 is a pretty strong quarter, and any assumptions that you're including in the outlook. Thank you.

Hi, Elizabeth. It's always great to hear from you. Right now, our focus is on execution, and we're seeing the business perform exceptionally well. At the same time, we aim to provide the most conservative guidance possible. I believe Chris will correct me if I'm mistaken, but we've beaten and raised our expectations for six consecutive quarters as a public company. We want to ensure we remain in a position to continue that trend. Currently, we are not observing anything in the business that indicates a slowdown. Additionally, we are experiencing significant growth. Last year, we had a strong fourth quarter. We're setting ourselves up to maintain our success, and we do not see any deceleration in the business.

Got it. And then, I just had a quick follow-up on the impressive kind of new customer adds. I know that the partnership with AWS and Snowflake has an opportunity to kind of introduce you to new customers. So is that starting to have a benefit, or is that still a separate opportunity that we should kind of look forward to in the future that hasn't yet shown up in results?

That's actually a great question, Elizabeth. The answer is that we're seeing more deal flow from strategic partners than we've ever seen before. But quite frankly, it's not resulted in what you're seeing in the current results. I think it's going to continue to fuel the business going into next year and will help us continue to grow the business at a sizable pace. What I would tell you is that a number of clients that we have engaged have been because we're integrated into AWS and because we're integrated into Snowflake. They haven't come in through those channels, although I would say that a big part of the record RFPs that we're seeing are now coming through those channels, if you know what I'm saying. So I think they've been incredibly important partners from a credibility and technology perspective to date, I think they will be incredibly important clients from new scaled customer adds going into the foreseeable future. Chris, does that make sense?

Yeah. Yeah. Totally.

Thanks, Elizabeth.

Thank you.

The next question is from Arjun Bhatia with William Blair. Please go ahead.

Perfect. Thank you and congrats on another great quarter, guys. I wanted to maybe just continue on the theme of the customer additions. I mean, it's not just customer additions, right? I think you're seeing pretty good ARPU growth. You're seeing large customers. You're seeing your super-scaled customers, add to your cohorts. But when you just think about the business for 2023, we know we're entering a little bit more of an uncertain macro here. What does that do? What does this traction that you're seeing today with new customers do for your confidence in your 2023 growth plans? And then, what does it do, Chris, for visibility into your future revenue streams now that you have a more sizable and more established base of customers that you can sell into if things do get tougher?

You're right. What we've said is that our confidence is increasing that we can exceed the 2025 plan. And we think it's why it was so important for us to not just throw the GAAP on the revenue and where prop could be. But to give you and our investors the mile markers along the way of scaled customer count of ARPU of mix of net revenue retention, so that we have the same yard stick for the type of progress we're making. We'll talk about 2023 in February. But you should leave this call feeling like our confidence has only been increasing with the quarters that we're putting up. And you're right, in terms of the super-scaled customers, they have a higher net revenue retention rate than those that are $100,000 to $1 million, which makes them very sticky, easier to predict and rely upon, but also there's a 10x difference in the ARPU for greater than $1 million customer versus $100,000 to $1 million. As David said, the faster and faster we're getting them to that $1 million-plus, you can almost see them moving as fast past that $1 million to the average of what is now over $4 million per.

Yes. Without discussing 2023 specifically, as we will provide guidance on that in February, I believe that times of uncertainty and the possibility of a downturn can actually be beneficial for our firm. I don’t want to suggest we are countercyclical; rather, I want to emphasize that during challenging times, companies seek new ways to cut costs. We are the most efficient marketing platform in the market. At scale, we are currently experiencing a record number of RFP requests. We are even hiring more people to respond to these requests. Additionally, with Zeta Live attracting 8,000 attendees and generating 1,500 high-quality leads, we see this as a significant opportunity. I would argue that as conditions become more challenging, it actually benefits us, and we aim to make the most of this situation. We are continuing to recruit excellent salespeople and have stated our goal of reaching 120 to 130 by year-end, with our current number above 120 reflecting high quality. We are still refining our team and would have had an even larger number if not for our selective process. Moreover, during uncertain times, we have seen an increase in the quality and quantity of potential salespeople and engineers. As we outperform other companies in RFPs, we are attracting those salespeople who want to join us. Although Chris and I cannot discuss every metric during each call, I can tell you that our new salespeople are reaching their first transactions faster than ever before, thanks to the quality of the individuals we're bringing on board and our effective sales training. In a downturn, I believe we can accelerate the hiring of top talent and see more enterprises willing to take risks on pilot projects when we can demonstrate that we can reduce their costs by up to 50% for creating, maintaining, and monetizing customers.

Perfect. That's super helpful. And then, maybe just the last one for me. And David, you kind of touched on it a little bit there, but I was hoping to put a finer point on it is, when you think about investing, not just in the go-to-market motion, but also in developers and product, how are you approaching that at this time? Should we expect a balance between growth profitability? Are you leaning one way or another as the market evolves here?

I think one of the great things about our budgeting process and how flexible we are is we build a rollable budget, so we sort of look at the first quarter before we make all of our investment decisions for Q2 and Q2 for Q3. So we don't take any meaningful risk there. Although, before I throw it over to Chris to give better detail on that, I've been speaking, and I regularly speak to a lot of business leaders, and it's funny. I continue to hear from a lot of other business leaders. My business is executing incredibly well, I'm seeing my pipeline full, I'm seeing more requests than I've seen in the past, but I'm really nervous because of all of the noise out there and everybody talking about it. I think we'd be naïve if we weren't at least thinking about how we would roll forward that investment, but we're prepared to make the investments we need to execute on the business that we're closing. We can do it on a rolling basis, which I think gives us a lot of flexibility. Chris?

Yes, and Arjun, we'll do what we said we would do in the dated 2025 plan. So as David mentioned earlier, we'll continue to invest in sales and marketing. We've said it will grow on an absolute dollars basis as fast or slightly faster than revenue growth. And on R&D and G&A, like you saw this quarter, where the R&D ETR was better 120 basis points, and the G&A ETR was better 170, similar mix last quarter in Q2, we'll get efficiencies. What the team has done exceptionally well is continue to utilize a global footprint for both R&D and G&A so we can add people at a very compelling cost point. And we've done so, right? I think that's something we'll continue to focus on.

Thanks, Arjun.

Very helpful. Thank you, guys.

Thank you.

The next question is from Richard Baldry with ROTH Capital. Please go ahead.

Thanks. Can you talk a little bit about the competitive win rates? I'm sort of curious as the RFP percentage or growth in RFPs goes up so much. Are those more competitive, or are you seeing sort of the same people involved, or are they somehow less competitive because they're only targeting a limited number of vendors that they invite in?

That's a great question, Rich. I expect the percentage of RFPs we close to decrease as a portion of our win rate. You can't quadruple the number of RFPs and still maintain a win rate over 50 percent. However, we are winning a significantly higher percentage of them than our market share would suggest. As our reputation grows, we will inevitably start receiving some RFPs from companies that just want to go out to bid without considering changing their current vendor. Previously, we did not respond to those RFPs due to lack of resources, but now we are responding to demonstrate our capabilities, even if they aren’t seriously thinking of switching. One of the strengths of our platform is our ability to integrate with existing tech stacks. If another company is using a particular CRM, we can serve as their customer acquisition platform. If a company employs a specific agency for customer acquisition instead of a software platform like ours, we can easily plug into their CRM. I think we actually won over half of the RFPs last quarter, although I anticipate that percentage will drop to the 30s or 40s. Closing 33 percent of quadrupled RFPs is better than maintaining a 50 percent closure rate on a smaller number. We need to stay focused on the challenges ahead. In response to your second question, we are not observing new competitors entering our market. Only a limited number of companies can handle the scale of enterprises we manage, and we're seeing some large incumbents completely exit the market while others continue to succeed as enterprises evaluate their overall suite of products, which includes offerings we don’t provide. Even companies that relied on these incumbents are starting to come back to us for assistance with specific components.

One for Chris, it's good to see the buyback start up. You talked about using more on cash flow than drawing down the balance sheet. But you're still under half of which your free cash flow was in the quarter. So I'm sort of curious your thought process around how aggressive you expect to be on that, either finishing up the year on a go-forward basis overall? Thanks.

Yeah. You're right. We devoted $4.3 million towards the programs. What we said is that we've kind of earmarked in our own minds, if you will, anywhere around 50%, maybe as high as 75%, but probably more likely 50% of the free cash flow we generated. So we kind of right on plan for this quarter.

Yeah. Remember, $9.6 million, $9.4 million in free cash flow, $4.2 million in buyback, we were slightly below that. But I think we'll continue to target around 50%.

Thanks, Rich.

Thanks.

The next question is from DJ Hynes with Canaccord Genuity. Please go ahead.

Hey, guys. Congrats on the results and nice to hear of the continued pipeline strength. I have two questions for Chris. So Chris, I'm often asked by investors about visibility into variable or usage-based revenue. Can you just quantify how much that accounts for, how you think about forecasting that part of the business? Any color on the commitments that are made to you on that front? That would be helpful.

Yeah. I think the simplest way to think about it, and one of our customers said this at Zeta Live, which is the more data they run through our CDP, it results in the more they want to activate. And it's that activation that happens that's the point of ROI realization. And that's what compels them to continue to double down and spend more on that part of our revenue stream. So as long as we continue to tie our results to the ROI and they get it in a very fast time to value, that revenue becomes very easy to predict. It's frankly, if you – when working with my team on the planning side, it's one of the fastest models they're able to pull together because there are so many customers, with so much predictable replenishment – and for many of our contracts, as we've said, are getting longer in duration, has only added to our ability to predict it, forecast it, and rely on it as a solid revenue stream.

Yeah. Okay. That's helpful and good to hear. And then the follow-up would be, look, we have your data 2025 targets, right, $200 million plus in EBITDA. You're clearly tracking ahead of that for now. What do you think free cash flow conversion on that $200 million in EBITDA might look like? Have you put any thought to that?

We frequently receive inquiries from the analyst community and investors regarding this topic. It's definitely something we are considering updating as part of our 2023 data and the 2025 update in February. The progression we've made since last year is notable; we have achieved a 42% conversion year-to-date compared to just 7% at the same time last year. Our approach to running the business is focused on securing very profitable contracts, which is increasingly contributing to our free cash flow. I anticipate that we will provide more detailed insights on this when we address it in February.

Yes. It sounds like a plan. Well, congrats on the results. Thanks guys.

Thank you.

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Thanks for taking the question. Please see – three straight quarters of accelerating top line. Guys given your improving market opportunity, any additional interest in adding new features to acquisition? And maybe any areas in particular that might make sense there? Thanks.

Thank you, Ryan. We've been quite proactive regarding mergers and acquisitions over the years, and we see potential opportunities ahead. We believe we've developed most of the essential features and functions internally. However, we constantly seek to enhance our team and acquire proprietary, differentiated data in the marketplace. We maintain our stance that the future of marketing lies with Customer Data Platforms and Connected TV. While there are intriguing opportunities on the horizon, I want to clarify that Zeta has never pursued a transformative acquisition and has none planned currently. Our focus remains on acquiring smaller businesses that can contribute valuable people and products to our platform, which we can then offer to our over 1,000 global enterprise clients. We will keep an eye out for such deals and interesting tuck-ins.

Appreciate the color there. And it's also nice to see that the scaled customers are using more than one use case, that's up 36% year-over-year. Any use case in particular that's particularly resonating with these scale customers, maybe it's CDP or opportunity explorer, a little more color there? Thank you.

Yes. CTV and CDP, what David said is we see as our big, big future growth products, are the products being most added by super-scale customers and scaled customers.

The other thing we debuted at Zeta Live, which I'm super excited about is our agile intelligence product, which is really the evolution of the opportunity explorer. What that does is not only does it put all of the data at the fingertips of the marketer, it puts all of the data at the fingertips of the business intelligence assets inside our enterprise clients. So, they're able to use that data to figure out everything from where should they put their next physical location to where should they be investing the next best marketing dollar. And as we evolve our Explorer product to the Agile Intelligence product, I think it just is going to go to the next level. Now, I'm old that I talked about Internet Explorer instead of opportunity Explorer, but I hope you all know what I meant.

We got the picture. I appreciate the color there. Thanks so much, guys.

Thanks, Ryan.

This concludes the question-and-answer session. I'd like to turn the conference back over to David Steinberg for any closing remarks.

We feel like we did an exceptional job this quarter. It really comes down to the people that we have at Zeta. We have some of the most amazing people I've ever had the honor of working with, and you're seeing people's grit, you're seeing their focus, and you're seeing it first through a global pandemic, now you're seeing it through probably the first rising interest rate environment that the vast majority of them have ever experienced in their careers. Most of them are not sort of old like me, and you're seeing it in an environment where competition is as tough as ever. Our people continue to be what drives us to the next level; grit, hard work, and wanting to win is really the culture that we focus on here. And I'll tell you, I could not be more proud of this quarter, I could not be more proud of this team, and I could not be more proud to be the leader of Zeta Global. I hope everybody has a great day, week, and month. Take care. Bye.

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