Greetings. Welcome to the Zeta's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Scott Schmitz, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's fourth quarter and full year 2023 conference call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com 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 our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website as well as our earnings release and other 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. 2023 was a record year for Zeta that finished with a strong Q4, once again exceeding our expectations. For the full year of 2023, we delivered revenue of $729 million, up 23% year-over-year. This marks our fourth consecutive year exceeding 20% revenue growth, and we are guiding to a fifth year of 20% growth in 2024. Over the past four years, we have also expanded our adjusted EBITDA margins by 1,000 basis points, with over 200 basis points of expansion this past year alone to 17.8%, or $129 million in adjusted EBITDA. Today, the marketing ecosystem is in a state of change. AI has moved from theoretical to a boardroom conversation with Chief Marketing Officers mandated to make AI more actionable, to deliver greater efficiency and better experiences for consumers. These CMOs are increasingly looking to Zeta, as evidenced by the strong growth in our RFPs and our sales pipeline. Because AI has been at the core of the Zeta Marketing Platform for many years, as opposed to many months, we believe that we are at the forefront of a wave that is driving a replacement cycle. We currently have more than 125 patents issued and/or pending around AI, machine learning, and other advanced technologies. Marketing has not been able to capitalize on the AI revolution because of an enduring problem. In most enterprises, data is abundant, but intelligence is scarce. The Zeta Marketing Platform is closing this intelligence gap by allowing customers to use our generative AI with their data and not share it back to the collective. Our investments in 2024 are about making AI more actionable, delivering better experiences for consumers, and widening Zeta's moat. These investments include strengthening our agile intelligence offering, expanding our mobile capabilities, and extending Gen AI into new and additional use cases. One of the most exciting developments is the rollout of a new product initially called Intelligent Agent Composer. This creates Gen AI agents that provide dozens of intelligent and automated tools that make our customers more efficient and more effective. Customers will be empowered to build their own intelligent agents within our platform, allowing them to power workflows and customer experiences specific to their brand and their needs. In this model, Zeta becomes even more essential and a stickier partner to our clients. Early Gen AI products have unlocked creativity and personal productivity, but they have yet to realize their transformative potential for enterprise marketing ecosystems. Our Intelligent Agent Composer has the power to change that. We expect to monetize this new product and additional Gen AI functionality in multiple ways, creating new billable modules, generating higher consumption, and lowering the burden of marketing resources within enterprises and agencies. Going deeper into our mobile strategy for 2024. Today, mobile engagement largely operates as a point solution within enterprise environments. We see a dual opportunity. First, integrate mobile into a more comprehensive platform, and second, deliver conversational experiences using Gen AI. We believe our intelligent platform provides a competitive advantage for marketers looking to deliver real-time personalized experiences for consumers, and as a natural fit for mobile environments. For example, we are currently working with a large national retailer to develop a mobile solution to enhance the in-store selling experience by putting Zeta's Data Cloud and the ZMP in the hands of salespeople to deliver real-time customer engagement at the point of sale. This simplifies the complex task of logging into multiple systems for answers on the status of an order, inventory, or personalized client data. The ZMP connects to all subsystems and provides information via a simple conversational interface on a mobile device. Today, mobile accounts for less than 2% of revenue through our platform. But we believe it has the potential to be our next $100 million plus business, similar to how connected TV is scaling. Our unique position in the market and continued investment in AI-powered marketing technology is also creating interest across the ecosystem as we expand our relationships with system integrators. We are in advanced discussions with an array of systems integrators, including an exciting joint implementation at a large enterprise where solutions spanning data management as well as customer acquisition, growth, and retention will be replaced by the ZMP. Overall, our SI implementation is a multi-year rollout, and we expect it to have a larger impact into 2025 and beyond. Zooming back out, I also wanted to spend a minute on recent industry headlines related to cookie deprivation and email deliverability. These changes only elevate the importance of Zeta's proprietary first-party data, as opposed to relying on third-party cookie data to identify individuals. In terms of email, the new requirements from Google and Yahoo are in line with what we have already incorporated into our infrastructure. Our observations pre and post their rollout show equal to, and in some cases, even better deliverability and higher open rates. In short, we believe these changes enhance our competitive position by elevating the value of our identity graph and further improving the effectiveness and return on investment for the ZMP for engagement. Building upon what we discussed at our September 2023 Investor Day, we are taking action on investor feedback related to dilution and stock-based compensation. First, we are guiding to bring dilution from incentive-based compensation down from 5% in 2023 to 3.5% to 3.75% in 2024. In terms of stock-based compensation, we're also planning to evolve how we incentivize senior management. By way of example, Chris Greiner and I, along with others, are planning not to receive any restricted shares this year. Instead, equity incentive compensation would be based on performance stock units, which are tied to the appreciation of Zeta's share price and will more closely align us with shareholder value creation. These changes, in addition to continuing to benefit from a lower level of pre-IPO stock-based compensation flowing through our P&L, places Zeta on a trajectory to achieve GAAP-based profitability in the fourth quarter of 2024. At the same time, our goal is to continue to invest in innovation and build a strong culture with the foundation of corporate responsibility. In fact, for the second year in a row, I am proud to share the Zeta was recognized as one of built-in's best places to work. I am also pleased to announce that for the second year in a row, we achieved carbon net neutrality, which is an important accomplishment for prospective and existing customers, as well as our employees. In closing, 2023 was an incredible year for Zeta, but we believe 2024 will be even better. As always, I would like to sincerely thank our customers, our partners, team Zeta, and all of our shareholders for their ongoing support of our vision. Now, let me turn it over to Chris to discuss our results in greater detail.

Thank you, David. I'm excited about all that we're covering today, but let me start with the punch line. First, we're taking share while growing efficiently. I'll cover what is contributing to another quarter and year of exceeding guidance, being above the rule of 40, and growing faster than the market. Second, we're leveraging our flywheel. I'll share the financial profile and the flywheel effect of our direct and integrated revenue streams and how we're expanding and cross-selling our new large agency customers to Zeta-owned channels. And third, we're guiding ahead of the street, while remaining prudently conservative. I'll wrap up by outlining how 2023's headwinds shift to become 2024 tailwinds. Altogether, we're executing on our plan, capitalizing on our competitive advantages, and guiding 2024 from a position of strength. Now, let's dive into each of these with more color. Starting with the fourth quarter and full year 2023 results. In Q4, we delivered revenue of $210 million, up 20% year-to-year, or 22%, excluding M&A and the prior year's political revenue. The full year's revenue was $729 million, up 23% year-to-year, or 24%, excluding M&A and the prior year's political revenue. This exceeded our initial 2023 guide of $691 million by $38 million, or 5.5%, and also includes a seven-point growth headwind from our two challenged verticals of automotive and insurance. Combined, these two verticals accounted for approximately 10% of revenue in 2023, meaning 90% of Zeta grew over 30% in 2023. Our ability to consistently exceed guidance and drive 20% plus revenue growth over the past four years comes from strong visibility into our Zeta 2025 KPIs. Let's dive into those now. We ended the year with 452 scaled customers, who, as a reminder, account for 97% of total Zeta revenue and spend at least $100,000 on a trailing 12-month basis. This was up 12% from Q3 and 49, or 12% from a year ago at the high end of our 8% to 12% model. We saw accelerated growth in our one million plus superscaled customers, which increased by 7% quarter-to-quarter to 131 and up 27% year-to-year. The addition of scaled customers are coming from an array of industries, most notably consumer retail, education, tech and media, and travel and hospitality in addition to others, demonstrating the wide application of our platform and continued healthy diversification of customers. To that end, six of our 10 largest verticals once again grew more than 25% year-to-year. In terms of scaled customer ARPU, Q4 grew 7%, with the full year up 10% to $1.57 million, coming in at the midpoint of our 8% to 12% growth model. This was driven by customers using two or more channels, which increased 27% year-to-year. Our scaled customer cohort trend slide on number 12 in the supplemental deck shows how ARPU reliably increases the longer our customers are on the platform and really illustrates the drivers of high net revenue retention. For example, scaled customers less than a year on the platform spend an average of $600,000 with many starting at smaller pilots. This group accounted for less than 10% of 2023 revenue. Scaled customers with one to three years on the platform spend an average of $1.3 million, or 2.3 times more than those with less than a year on the platform. And scaled customers with three or more years tenure spend an average of $2.1 million, or 3.6 times more than those with less than a year on the platform. The progression of these cohorts is important for a couple of reasons. Of the 49 scaled customers added in the last 12 months, 27 are in the $100K to $600K band, meaning this cohort has the potential to more than double in the next 12 months. And with 90% of Zeta's revenue generated from customers with us for more than a year, we have strong forecasting visibility. This is a good lead-in to net revenue retention, which is 111% for the year, excluding the impact of the automotive and insurance industry, net revenue retention would have finished the year at 118%. Our model net revenue retention is 110% to 115%. And as we sit here today, I would expect us to be towards the high end of that range in 2024. Switching to another one of our Zeta 2025 KPIs, direct revenue mix, which is an area you want to help investors understand. Definitionally, direct platform revenue is generated when customers use Zeta's data, analytics, and owned channels to perform their marketing activities on the ZMP, whereas integrated revenue is generated from non-Zeta-owned channels, principally social networks like Meta, TikTok, and others. In terms of the financial attributes of direct revenue, direct mix is consistently greater than 70% of total Zeta, with a 70% to 75% margin profile, with approximately two-thirds of direct revenue being recurring. From a growth perspective, direct revenue grew 15% year-to-year, or 23%, excluding the two challenged industries of automotive and insurance. If we simply assume the percentage of 2024 direct revenue is consistent with 2023, which I see as a balanced assumption, you have a $600 million direct business growing approximately 20% with margins and recurring revenue mix about 10 points above the corporate average. Where the flywheel comes into play is the customer journey from social to Zeta-owned channels. This is most relevant with our new large agency customers, as illustrated on Slide 13 in our supplemental deck. Agencies utilize Zeta's data cloud and intelligence products to identify individuals who are in market and reachable inside the walled garden. This powerful proof point of Zeta's intelligence and seamless connection points into the walled gardens forms the foundation for building omni-channel journeys on Zeta's owned channels. This dynamic of direct and integrated revenue mix was the primary driver of changes in GAAP cost of revenue throughout 2023. Cost of revenue in the quarter was 40.2%, up 260 basis points year-to-year, and 130 basis points quarter-to-quarter, driven primarily by the growth in integrated revenue from newly added agency customers starting their journey on social channels. Our fourth quarter GAAP net loss was $35 million, which includes $63 million of stock-based compensation. Full-year 2023 GAAP net loss was $187 million, which includes $243 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been $102 million. Q4 total operating expense, growth slowed to 3% year-to-year, excluding stock-based compensation, and is down 640 basis points as a percentage of revenue. This same leverage was visible over the full year, down 410 basis points as a percentage of revenue. Our disciplined expense management and better sales productivity resulted in continued adjusted EBITDA margin expansion. In the quarter, we generated $44.8 million in adjusted EBITDA, up 38% year-to-year, with 280 basis points of margin expansion to 21.3%. On a run rate basis, we're two years ahead of the 20% implied margin target as part of Zeta 2025. And Q4 was the 12th straight quarter we've expanded adjusted EBITDA margins year-to-year. Full-year 2023, we delivered adjusted EBITDA of $129.4 million, up 40% year-to-year, with adjusted EBITDA margins of 17.8%, up 220 basis points year-to-year. Cash flow from Q4 operating activities was $27 million, up 17% year-to-year, with free cash flow of $18 million, up 32% year-to-year. For the full year, cash flow from operating activities was $91 million, up 15% year-to-year, with free cash flow of $55 million, up 39% year-to-year. This, despite a $25 million working capital headwind, primarily from the expansion of our agency business. Now I'll wrap with guidance. First, a handful of points to communicate our approach to guidance and slides you can reference in our supplemental deck. One, even by starting ahead of the Street, we see our full-year guide in revenue and adjusted EBITDA as prudently conservative, which is outlined on Slide 17 in the supplemental. Two, like last year, we're providing guidance for each quarter of the year on Slide 18, which is based upon the skew of 2022 to take into consideration political cyclicality. Three, along those lines, as seen on Slide 19, we're showing how much of each quarter's revenue is associated with political candidates. We see this as simply a starting point. Four, we're guiding to the full year 2024 free cash flow, showing an increase in cash conversion as we wrap on working capital headwinds from newly added agency HoldCo customers. And five, as David mentioned, we're targeting a decrease in dilution from incentive-based stock compensation at 5% to 3.5% to 3.75% en route to GAAP profitability by the fourth quarter of 2024. As for the details, we're guiding the midpoint of full-year 2024 revenue to $875 million, up 20% year-to-year and the first quarter revenue at $187 million, up 19% year-to-year at the midpoint of our range. We have a starting placeholder of political candidate revenue in 2024 of $15 million, with $2 million in Q2, $5 million in Q3, and $8 million in Q4. We're guiding adjusted EBITDA at the midpoint of full-year guidance of $166 million, or 19% margin, with first quarter adjusted EBITDA of $29.1 million, representing a margin of 15.5% at the midpoint of our range. We're guiding full-year free cash flow in the range of $75 million to $85 million, translating to 48% conversion of adjusted EBITDA at the midpoint, up from 42% in 2023. In summary, we see our 2024 guidance, which already exceeds the Street's growth rate by 300 basis points, and adjusted EBITDA by $8 million, as a good starting point, with high visibility to tailwinds that layer throughout the year. With that, let me hand the call back to the operator for David and me to take your questions.

Thank you. Our first question is from Ryan MacDonald with Needham & Company. Please proceed.

Hi. Thank you for taking my questions and congratulations on a great quarter. David, as we look ahead to 2024, you mentioned some compelling priorities for the strategy and notable product investments. Regarding the Intelligent Agent Composer and the mobile strategy, how do you assess the potential impact, or how are you factoring in the contributions from these new offerings into your outlook for 2024?

Thank you, Ryan. We're very proud of the quarter. When discussing new developments, it's important to note that we don't rely on them to meet our guidance. Our investments in the intelligent agent and mobile are fully integrated into our overall investment strategy and our guidance outlook. However, we haven't included them in our revenue expectations yet. We see the intelligent agent as a significant revenue opportunity because, for the first time, we aim to sell our AI products rather than just using them for operational efficiency. Regarding mobile, I humorously liken the post-IDFA landscape to a Wild West, as many organizations are working with a limited sample size and making broad assumptions. In contrast, we can leverage the mobile ecosystem for precise attribution using the Zeta ID. If either of these initiatives succeeds, we anticipate that they will boost our estimates. Chris mentioned that we’re starting this year at 20%, compared to 17% at the beginning of last year, where we ultimately finished at 23%. We believe these figures are already aligned, and they could contribute to additional growth.

Really helpful. Maybe as a follow up, Chris, for you. So maybe two topics to talk about with the guidance as well. So obviously, auto insurance industries challenged last year, can you just talk about what you're seeing in terms of sightlines or pipeline building that gives you confidence and maybe a stabilization or recovery there this year? And then just curious on the conservatism that you're building in from the political contributions this year, maybe what you're seeing in the market, why you felt that $15 million was the right starting point and maybe potential for upside from there? Thanks.

Thanks, Ryan. On the first question around the two challenged verticals, the automotive vertical and the insurance vertical, the short answer is very good visibility into the sales pipeline. Much of that, frankly, already starting late Q4. So it will already start to feather in beginning in the first quarter. So, feeling really good about the return of those industries back to growth in 2024, probably even starting to see some in the latter part of the first half of this year. As it relates to your other question, which was around our political assumptions, you'll recall that in 2020, we did $15 million of political revenue, and we did about half of that, $7.5 million in 2022. We wanted to just start with the baseline of what 2020 was knowing that it was likely conservative. What's also good to recall, though, is that advocacy tends to draft off of political. So the combination of candidate revenue and the work we do with advocacy groups, both are probably conservative in our outlook and would have upside throughout the year, and we'll continue to provide visibility as to what we're assuming for political candidate revenue as well.

Excellent. Congrats again.

Our next question is from Elizabeth Porter with Morgan Stanley. Please proceed.

Hi. Thank you so much. I wanted to go back to the example that you provided in mobile. You talked about getting the technology in the hands of salespeople, which I thought was interesting, and it sounds like you may be getting into a new end user there outside of the traditional marketing department. So if so, kind of would love to hear who you might expect to compete within the segment. Should we do this as a TAM expander? And how you plan on addressing a potentially new buyer segment with an additional wallet opportunity? Thank you.

Great question, as usual, Elizabeth, we appreciate it. The answer is yes to both. So we see an opportunity to add mobile as a channel to our existing scaled and super scaled customers, which today would increase our TAM pretty dramatically when you think about it, because we've never really played in that mobile ecosystem, because, quite frankly, while the IDFA was around, there was a lot of efficacy there, and there were a lot of players running around there. With the elimination of the IDFA, the efficacy of that channel has dissipated radically. So it puts us in a very unique position where we can take assets that we already own, which is the $240 million plus opted-in individuals, which we can tie back to the Zeta ID number, which we can identify in the mobile ecosystem. So it gives us an advantage that nobody else in the mobile ecosystem has outside of the walled gardens. So it's a very unique opportunity to do that. At the same time, what we're finding is CIOs want to buy our technology as well. So there's the opportunity to expand from just focusing on the marketing to also selling the technology directly to the CIOs. And I think you're going to see some very big developments out of Zeta this year as it relates to the sale of our technology to CIOs to power other functions of their businesses in addition to the marketing function.

Great. And just as a follow-up, I wanted to ask about the sales cycles that you have with working with agencies versus directly with enterprises. On one hand, you might have more decision-makers sitting at the table, but on the other hand, you have that trusted agency partner. Is there any opportunity for accelerated sales cycles or lengthening sales cycles as you're working with more agencies?

Yes. So it's another great question. I think when you work with agencies, you work with them in one of two ways. It's very interesting. You go in as a master relationship to the agency, and then you go from enterprise to enterprise, which is dramatically faster than when we go directly to an enterprise ourselves. To put in perspective, some Fortune 500 companies can take up to six months to move from contract through procurement, through data security, through legal, whereas when you're doing it in partnership with the HoldCo, it's turning it on. So it moves very, very quickly. The other thing is there are some agencies that literally manage the marketing on behalf of the enterprise themselves. And what we're starting to do is, as we've expanded from one to now what are three agency HoldCo clients, where they're able to just say, let's do this. And we're seeing that side of the business scaling quickly, but massively shortening the sales cycle.

Elizabeth, first, welcome back. On Slide 13, because this is a topic we spend a lot of time with investors on recently, is understanding the relationship between direct revenue and integrated revenue and the role that our new agency HoldCos are playing in that. And what we've shown on Slide 13 is the journey of our first HoldCo from now several years ago to recent HoldCos. And what you'll note is that those recent HoldCos are starting significantly bigger initial investments with Zeta, with the same opportunity to expand, but also evolve and shift to their mix over time. So it's laid out, I think, well on Slide 13. Thanks for your question.

Okay. Thank you. Our next question is from Jason Kreyer with Craig-Hallum. Please proceed.

Great. Thank you. David, I just wanted to ask if you can maybe summarize how your conversations with customers have evolved around AI over the last couple of quarters, and then maybe how you see Zeta's opportunity evolving with that?

As I think I said in my sort of scripted notes, and it's something I say a lot, AI has moved from theoretical to really starting in the boardroom. And what I'm seeing is the Board is saying to the CEO, what's your AI strategy? And then they're saying, and make sure that our data stays secure inside of that strategy. They then go down and they sort of yell at the CMO, what's our AI strategy and how do we keep our data protected and safe? And those CMOs are often calling me and saying, what do we do here, right? So when you look at our ability to put a CDP in place, which creates a closed ecosystem for the client's data, you're then able to append our data in. You're adding, in many cases, billions and in some cases, even trillions of data points to their data. And the algorithm can operate inside of that. So by way of example, you've got a lot of people talking about large language models. You've got some people talking about small language models. I like to joke, we're a midsize language model. We have the benefits of the large language models with the security, safety, and privacy of the small language models for our data. And every CMO that I'm talking to is asking for products around efficiency for their business. And once again, you look at our new agent product, that is going to disintermediate very highly paid data scientists inside of our clients' ecosystems. And in some cases, it's not disintermediating anybody. They just can't even get enough bodies to do the work. So our ability to automate all of that and now sell it to them. And the way we look at it is, listen, if they're paying a data scientist $250,000 a year, why not pay us $50,000 a year per instance? And you're talking $4,000, $5,000 a month on a subscription basis as you roll that out. And you just have to do that thousands of times, which is actually not as hard to do with the number of scaled and superscaled clients we have. So I would tell you, Jason, that this is becoming day-to-day conversation. But the solution that Zeta has by putting the CDP in place, allowing the algorithms to operate with their data in conjunction with our data, without ever risking their data going out into the environment or out into the ether, has been a game-changer in our conversations. And by the way, I think it's one of the reasons you're seeing that ripple through our numbers and ripple through our projections.

Thank you. I wanted to ask Chris about gross margins. You've discussed agency influence and direct and indirect factors, and I believe you've clearly outlined the expected trajectory of gross margins. I want to know if, based on what we saw from Q3 to Q4, you think we've reached the lowest point in gross margins for 2024, or do you have an estimate for when we might see that bottoming out before the direct mix starts to recover?

Thank you for the question. Regarding gross margins, I believe you've captured it well. I think we reached a low point in Q4, and there is potential for improvement in 2024. Establishing a base at around 60% is key, and the potential for growth beyond that depends on how quickly we transition our new large agency customers from integrated to direct channels. The second factor is the pace at which our automotive and insurance clients, who typically represent a higher gross margin, begin to see growth again on the direct platform. Lastly, we also need to consider the role of political and advocacy factors. These three aspects should contribute to an upward trend throughout the year, starting from that base of approximately 60%.

Our next question is from Koji Ikeda with Bank of America. Please proceed.

Hey, guys. Thanks so much for taking the questions. A couple from me here. First one, I wanted to ask a question about boomerang customers with you. You guys have been in the market for over a decade now, and I'm sure over the past 10 years plus, many customers have tried out the Zeta platform before, but my gosh, the Zeta platform has changed quite a bit since the early days. And so just wanted to hear a little bit about commentary about how customers have come back to Zeta after trying the Zeta before? What are some of the most common reasons why you've seen customers come back?

Koji, so it's actually really, we're laughing here because it's been a big thing lately where we've been sort of like using the term back to the future, where, I mean, one of the world's largest fashion houses very recently came back to us at scale after leaving us for three years because they felt like they needed to use one global platform for everything. Think one of the large marketing clouds, which might be owned by a large technology holding corporation. And what they found was their marketing clouds couldn't deliver what the Zeta marketing platform could. And it's funny, we talk a lot about disintermediating point solutions, but there was a big move a few years ago that you had to move everything. You're publishing all of your sales force management to one company globally, and you saw some companies over the years leave us to go to those bigger platforms. We are, quite frankly, even surprised by how many of them are coming back because those guys just can't deliver on what they talk about in the marketing cloud. Now, they might be really good at sales force automation. They might be really good at publishing, right? They might be great on financial services packages and databases, but they're not great marketing clouds, and they're really not able to deliver the data with the artificial intelligence is native to the application layer, which is becoming a bigger and bigger problem. So it's funny you ask it, and it's been a trend that has been something that's literally been to the point that we have been focusing on revisiting with companies that we lost a few years ago and winning them back at a higher rate than even our traditional RFP win rate.

Got it. Now, that's super helpful. And a follow-up here, maybe for Chris. As I look at the deck for the fourth quarter and compare it against the deck for the third quarter, a question here really on stock-based compensation. It looks like it ended up this year about $10 million and the $12 million higher than were on the non-IPO side than when it was originally guided to last quarter, and it looks like it's about $10 million higher for 2024. So I just really wanted to understand the dynamics there? Thanks.

On the stock-based compensation side, much of that was the awards that happened in the first half of 2023. There were some compensation-related end-of-year grants that were made. But I think more importantly, kind of zooming out to the prepared remarks, we are very focused, and we're really acting on three primary areas from being on the road extensively in 2023, feedback-specific items from investors. The first is taking dilution down tied to incentive compensation. So, going from 5% in 2023 dilution to now guiding to a pretty substantial reduction year-over-year to a dilution rate of 3.5% to 3.75% en route to 3% over time. The second area of feedback was around our guidance approach and wanting to just continue to be more predictable and tighter in guidance rather than have these wild swings and beats. We're going to continue to be a beat and raise company, but tightening that up a little bit. And then, David, you can talk to the third area.

The key focus in Koji has been my involvement with Chris and Scott over the last few quarters, and that trend will continue. As I dedicate more time to engage with investors, we've received feedback highlighting that while our work is impressive, it can be perplexing for Wall Street. We need to simplify our message and provide case studies. Therefore, for the first time in Zeta's history, we are presenting multiple named client case studies, and we anticipate this will be an ongoing initiative. Our aim is to collaborate with our enterprise clients to generate more case studies. Chris is noting that I should highlight Slides 27, 28, and 29, which I wouldn't have remembered without his help. Ultimately, the impact we are making for our enterprise and agency clients is significant, and sharing these case studies should support our growth as a company. That was a lengthy response to a brief question about stock-based compensation. However, I want to emphasize that we’re reducing our historic dilution from over 5% to a range of 3.5% to 3.75%, working towards a target of 3%. Additionally, our senior management team has decided to forego restricted shares this year. We will only receive performance stock units, which includes myself, Chris Greiner, Steve Gerber, and Steve Vine. This aligns our interests with shareholders since our stock price must increase for these units to vest, not just the passage of time. We want our existing shareholders to know their concerns are being addressed, and we are committed to improving in the areas they value.

Got it. Thank you so much guys. Appreciate it.

Our next question is from DJ Hynes with Canaccord Genuity. Please proceed.

This is Luke on for DJ. Thanks for taking the question. So I was wondering if you could flesh out your comments a bit on the intelligent agent and mobile opportunity. I recognize it's still early days there, but any early thoughts on sort of penetration potential across your existing customer base? And then also on how that rollout could impact margins over time?

Yes. Listen, we're really excited about this intelligent agent product. Because to me, and I don't want to get too ahead of ourselves here, but not only does this begin to help our enterprise clients to do a better job running their business. But it gets into what I really, really am excited about long-term, which is business intelligence. We talk about intelligence at the core of our product today. How do we extrapolate that down the road into true business intelligence products? And I believe this is the first jump into that. We have almost 500, I think, I can say that, scaled clients. And the goal is to get a disproportionate percentage of them to adapt these products or adopt these products in the coming months, quarters, and years. And once again, I want to reiterate, they're not baked into what we think are conservative projections around 20%. But they're upside to that. And I think that they carry traditional software margins. So you're talking, I don't know if that's mid-80s or high 80s. But you're talking about a high-margin product, but it's coming into a pretty sizable base company, meaning we'll have to get a bunch of clients on board to move the needle from a margin perspective. What I can tell you is, we believe our clients are going to adopt them. We believe they're going to adopt them at scale. And we do believe that in the long run, these products will help us continue to move our gross margins up.

That's great to hear. And just a follow-up. A lot of streaming companies are rolling out ad tiers nowadays. And we think that probably notionally increases the size of the CTV market opportunity for you guys. Do you have a similar perspective there? And, any impacts on your business as you've seen that roll out?

Yes, to answer your question, the increasing number of streaming platforms that introduce ads, whether at the start, in the middle, or at the end of the content, presents a significant opportunity for us. We are already integrated with all of these platforms, which allows us to see this as a unique chance for expansion. Initially, the largest platform aimed to establish high minimum requirements for partnerships, but that strategy didn't unfold as intended. However, they have revisited this approach, and we are identifying unique opportunities to grow our business with all streaming platforms, including the largest one.

We had a neat growth quarter, actually, in the fourth quarter, Luke, on CTV. It grew 30% quarter-to-quarter. And if you follow the pattern of CTV's usage around advocacy and political, one word for shadow would be a nice year in 2024 as well.

Chris beat me to the punch as usual. I shudder to use the term political. I generally call it all advocacy for a host of reasons. But obviously, our advocacy business does encapsulate political. Very CTV-centric, very focused on hyper-targeting nowadays. And the way to really do that is CTV, not linear. So we see this as a big opportunity, to your point, Luke.

Hi. Good afternoon, David and Chris, congrats on the strong 4Q, and thanks for taking my questions. Chris, my first one is more of just a clarifying question. I believe there's a year-over-year decline in your super-scaled customer ARPU here in Q4. I'm assuming most of that's related to headwinds with auto and insurance, but just wanted to get some clarity around that and expectations for growth in that metric moving forward?

Yes. No, I think that is the driver. What's interesting on the scaled customer count side, we've got 131 now, which is up seven quarter-to-quarter, but on a year-over-year basis, was up 27% in count with the revenue associated with super-scaled customers up 25%. There's a good slide that we update annually in the slide deck that demonstrates the progression of scaled customers in their tenure, which I think is a really good kind of progression, if you will, on how they spend with us, where those year-one scaled customers, which was around 10% of this year's revenue, their average revenue spend is around $600,000. If you go to that next tier of one to three-year scaled customers, they spend more than two times that on average, at $1.3 million. And then you go to that next cohort of now more than three-year tenured scaled customers, they're spending 3.5 times as much as the year one at over $2 million. So it's a nice way to demonstrate the stickiness of the platform. As we talked about, the net revenue retention for the year was right in our model of 110% to 115% at 111%. But if you exclude automotive and insurance to your question, that net revenue retention was 118%. And as I said, as part of the prepared remarks, we think we will be at the high-end of that 110% to 115% range just as we sit here today in 2024.

Understood. And my one follow-up question is, most of your growth over the past couple of years has really just been driven by your direct go-to-market motion and investing in that. But it seems you're starting to get more opportunities on the partnership side, especially the system integrators. So just curious of how you're thinking about investments in the direct channel versus maybe leaning into some of these channel partnership opportunities?

It's a great question, Zach. Obviously, we've added channel partners in Snowflake, AWS. We've added the agency channel, which is sometimes directly with the agency, sometimes partnering with them to go to other enterprises. We are going live with our first two SI integrations, probably be done with them this quarter, perhaps early second quarter. So this has also gone from sort of what we want to do to what we're doing. We're very excited about the SI environment. And what we're seeing is enterprises are going to their SI vendors and asking them to work with us in addition to us going to the SIs and saying we'd like to partner with you. I want to reiterate again, and I'm sure I'll sound like a broken record, but if I don't, Scott will kick me under the table, our currently conservative projections do not include meaningful revenue in the SI channel for this year, which is not to say we don't think it could be meaningful this year, and which is not to say that we don't expect it to be meaningful in the years to come. But to have gone from talking about this to we're knee deep in two integrations with them now, which will launch two separate systems integrators with two separate enterprises. We're very excited about those prospects.

Great. Well, thanks for taking my questions and best of luck in the coming quarter.

Of course. Thank you.

Our next question is from Arjun Bhatia with William Blair. Please proceed.

Hey, guys. Thank you and nice job on a strong Q4 here. When we kind of talk to customers and agencies throughout the ecosystem, it seems like the CDP layer certainly is an important differentiator to drive more personalization. I know, you guys have a pretty strong CDP layer yourself. But can you maybe just talk about when you're going up against or going to customers in RFPs, like how much of a factor is that in deciding to choose Zeta versus some of the other players? And maybe if you could compare, contrast the CDP layer relative to your data capabilities, where customers are placing more emphasis in recent RFPs?

It's a great question, Arjun. Listen, I would say that our CDP technology is as good, if not better, than any other CDP technology in the world. And I will also tell you that the vast majority of the large HoldCos, as it relates to technology holding corporations, that say they have CDPs are really DMPs that they've sort of rebranded. So when we go up against a lot of those big guys, we're really able to talk about what a CDP is, right? What does that stand for? It's a Consumer Data Platform. And what does that mean? It means you can see to the absolute individual level of your customers by record. It doesn't mean you're building cohorts. It doesn't mean you're putting together large sort of segments. It means you can see an individual. Most of these other large companies can't do that, right? It's just not there. And most of the smaller guys who are coming up, they either run it as a standalone product, which is quite hard, or it's part of another, perhaps roll up or something that it's sitting inside of there. So when we look at our technology, we think it's best to breathe. Now, it's hard to bifurcate that from our data and data quality, because it's such an important component of how we sell the product, right, the ability to import all of your data to the CDP, the ability to match on average greater than 80% of that data to the Zeta data cloud, the ability to append into your data, hundreds if not thousands of incremental data elements, the ability to seamlessly integrate our algorithms around natural language processing and now Generative AI, into that CDP while keeping all of their data safe, while simultaneously importing the data from the Zeta data cloud just nobody else out there that can do those things. So I don't know why people choose us as it relates to. Is our technology superior? Is our data superior? Is our superior? What I know is we're winning greater than 50% of the RFPs and engagements we get invited to participate in. And there's an average of 12 enterprises that show up to compete in each one of those RFPs. So I think that the collective's really important. And to just finalize, put a final sort of footnote on that, I can't think of anybody who's bought a CDP from us that didn't integrate our data, right? There's just no reason not to. Like it's extra data that imports that you can't get from any other source in the world because we don't sell our data to anybody at any time at any price. So I do think it's pretty interconnected. If a client came to us and said, we'd like to buy your CDP and we don't want to integrate it with your data cloud, we're more than happy to do that. And I think we would win that as well, if that makes sense.

Yes, that's clear, super helpful. And if I can maybe follow-up again on some of the agency traction that you're seeing in the mix between direct and indirect, do you have a sense for some of these newer agencies that have come on since you started this initiative, how their mix is either shifting or how they're kind of indicating to you that they may shift the mix in 2024? Like, are we getting signs that they're shifting more to direct, or is it a little bit too early to tell at this point?

Yes. So, it is early to tell. But I think as Chris eloquently pointed out, we think that gross margins sort of hit bottom in Q4. And one of the big opportunities is migrating those large agency holding corporations the exact way we've migrated the first one that we worked with, where I know there's a great slide on that in our deck, because they showed it to me earlier today, but we went, Slide 13. Chris is writing it down for me again. So on Slide 13 of our supplemental investor deck, you can see how that client started at sub-10% and grew to greater than 70%, right, over the years. We believe that our other two scaled agency hold corps are going to follow a very similar pattern. Now, the one caveat is we're drinking out of the fire hose with some of these guys. I mean, it's growing rapidly. And as those divisions are growing rapidly, are you able to migrate the other guys fast enough for the third or new guys coming in? What I really care about, and this might be an unpopular thing to say, but to me, I've always aspired to run a company that was at the rule of 40. And that's sort of what I've looked at, right? Not only did we deliver our seventh quarter in a row above the rule of 40, we have guided this year to the rule of 40. And a lot of that is because even if the gross margins stay in the low 60s. The gross margin on the agency hold companies is substantially higher than our operating margins. It's higher than our long-term operating margin goals, and they take on very limited incremental overhead. So, most of that money drops to the EBITDA line at a substantially higher percentage than the actual current operating margins, even in the fourth quarter. So, yes, we think they'll come back. Yes, we think we'll migrate them. But to me, what matters is, are we going to grow the business greater than 20%? We believe we will. And are we going to see greater than a 20% operating margin? We believe we will. So I think we're in good shape for this year.

Appreciate that. Thank you.

Our final question is from Richard Baldry with ROTH Capital Partners. Please proceed.

Thanks. First one may or may not even be a question, but I think in the past I've heard that the average number of people in each RFP was higher. I have a number of 17 in my head. If I'm wrong, then just disregard. But if it is higher, who would you be seeing sort of fading out of the competition, sort of smaller, midsize, or larger? And then the second question would be around free cash flow. And I came on later, so I'm not sure if this has been addressed, but you know, over this year's guidance and then, the 2025 guide that you're ahead of, you generate something close to $200 million in free cash flow. Could you talk maybe about where your priorities are to deploy that, either more aggressive buybacks, offensively on acquisitions, pay down of debt, just so we have some idea where that's going to get deployed? Thanks.

Rich, so no, thank you for joining. We know you're on vacation. I didn't even know you took vacation. So I appreciate your joining us from it. Yes, it used to be a larger number showing up to the RFPs. And what we're seeing is the point solutions are just not being invited the way they used to be, right? So you've got, especially around CDPs, where you have a lot of small independent CDPs that are really having a tough time as standalone businesses, and quite frankly, we're not seeing some of the former European players who were talking a big game a couple of years ago. We're just not seeing them anymore. So it is down. And I have said 17 in the past, and now I would say 12. I had a funny joke to make around the $200 million in free cash flow, which Chris told me not to tell. But I will let Chris talk to what we're going to do with the next two years, just to quantify for anybody else listening that would be about $200 million between '24 and '25 combined.

I think we'll continue to be opportunistic on share buyback. We'll continue to be opportunistic on M&A. And I think, you know, Steve Vine and David did a really neat job laying out what is opportunistic mean for M&A at our Investor Day. But we were very focused on increasing free cash flow conversion, you'll see that the guide, this is the first time we've put out an in-year guide on free cash flow. We've obviously had a long-term model, but at $80 million in free cash flow at the end of 2024, that represents 48% conversion up from 42% the last two years. So continuing to get up to that 55% level. I think it's interesting, we talked about in the prepared remarks, Rich, we had a $25 million working capital headwind from the agencies and just their difference in payment cycles than our enterprise customers. If not for that headwind, if it just would have been neutral, conversion would have been in the 60's. So we see a nice clear path as we get through the years of continuing to increase that percentage. David, anything you'd want to close with?

Yes, just, and to that point, we knew that was going to happen and we said it was going to happen at Analyst Day, right? So when we did our Investor Day, we were clear about that. One of the things you do when you work with these very large agency hold companies is you understand that you're going to be paid a little bit slower than you're normally paid. The good news is we've collected 99.999% of the revenue. I'm not allowed to say 100%. I can't think of ever writing any of it off, but I'm sure somebody slow paid or didn't pay us on a dollar at some point. I'm being facetious, so I shouldn't do that on this call. But we collect it all. And it's put us in a very unique position that we have the balance sheet to be able to do that, where a number of the smaller competitors do not have the balance sheet to partner with those large agency hold companies, which is giving us yet another competitive advantage as we move into the marketplace. And by the way, Rich, as we put more cash on the balance sheet, it puts us in a position to do more M&A, more buybacks, but it also puts us in a position to do more deals like this, where we're able to expand and scale even faster as a company.

Great. Thanks for the commentary and congrats on a great quarter.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to David Steinberg for closing remarks.

I will wrap up as I have in previous calls by expressing my gratitude. I truly value everyone involved in our organization, especially our Zeta team, which I believe is one of the best in the world. Recently, an organization that was getting to know us mentioned they had never encountered such an exceptional management team and suggested we could lead a company ten times our size. I eagerly responded that I look forward to that in the next five to ten years. The reality is, we have an outstanding team dedicated to delivering for our clients, staying innovative, and creating a great workplace. I also want to extend my appreciation to the analysts who cover us, understanding that your time is valuable and there are many companies to choose from. Additionally, I am thankful for our loyal shareholders who have supported us; we aim to make you proud in the coming years as we keep delivering results. Internally, I often say we have now achieved our tenth consecutive quarter of beating and raising expectations. I look forward to next December or February when I can report our fourteenth consecutive quarter of impressive performance. Lastly, I want to thank our customers for their trust in our team and platform. Thank you, and I wish everyone a wonderful day.

Thank you. This does conclude our conference. Thank you for your participation. You may now disconnect.