Zeta Global Holdings Corp. Q1 FY2025 Earnings Call

Greetings, and welcome to the Zeta First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Pfau, Senior Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's first quarter 2025 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, 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. Reconciliation 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 our other filings with the SEC. With that, I will now turn the call over to David.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. 2025 began much like 2024 ended, with Zeta exceeding expectations and gaining share in a dynamic market. This marks our 15th consecutive quarter of beating and raising our guidance, reflecting the strength of our innovation, execution, and consistent delivery of customer value. While macro uncertainty has become more pronounced at the start of the second quarter, Zeta's value proposition continues to stand out, particularly in environments where marketers are under pressure to deliver measurable results and do more with less. Our omnichannel, people-based artificial intelligence platform delivers both scale and precision, enabling marketers to target, personalize, measure, and optimize across owned and paid media more efficiently and effectively than alternative solutions. We proved the strength of our model during COVID-19 and the tech reset of 2022, growing revenue by 20% in 2020 and 29% in 2022, despite challenging macro conditions. Our focus on delivering predictable, profitable, and measurable ROI is driving continued market share gains and has contributed to our strong first quarter results. In the first quarter of 2025, we generated revenue of $264 million, up 36% year-over-year, with adjusted EBITDA of $47 million, up 53% year-over-year, both well ahead of our guidance. Given our first quarter's outperformance, strong pipeline, and second quarter visibility, we are raising our second quarter and full year 2025 guidance. While our momentum supports a larger raise, we're taking a disciplined and conservative approach in light of the ongoing macro uncertainty. We believe one of the key reasons our business has remained resilient is our focus on performance-based outcomes and exposure primarily to lower funnel marketing. Let me share a few examples of existing Super Scaled customers that illustrate this. For a large telecommunications customer, we have consistently outperformed their benchmark for new customer acquisition cost, most recently beating their target by 53%. Our ability to be a repeatable, scalable solution has led to an increase in commitments culminating in the recent signing of a two-year agreement that more than doubles their annual investment with Zeta. For a major insurance provider, we helped drive 37% lower new customer acquisition cost versus their 2024 target. We expect this success to drive a 50% increase in spend with us this year. For a financial institution, we beat their target new customer acquisition cost by 14% in 2024, and the customer is expected to increase their spend in 2025 by close to 20% after a nearly 150% increase in 2024. Importantly, these results are not self-scored. They're validated either directly by our customer or through third-party attribution methods. Now let's talk about one of our biggest long-term drivers, artificial intelligence. This quarter we launched AI Agent Studio, a suite of generative AI tools that enable users to select and activate pre-built agents, create custom agents, and link them together to execute complex marketing tasks. As a part of AI Agent Studio, we also announced agentic workflows, which were available in beta. Agentic workflows give marketers the ability to build and customize AI agents that work together to complete complex tasks across the entire customer journey. Unlike generic tools, agentic workflows are flexible and adaptive, making AI not only actionable but also potentially transformational to a marketer's productivity. Here is a real-world example of how a customer uses our agentic workflows. The customer needed a multi-agent workflow to identify high-value audiences and activate to them across multiple channels. With one prompt, this workflow coordinates intelligent agents to speed up planning and execution. Through this workflow, our insights agent finds target audience segments. The strategy agent crafts the messaging and personas, and the activation agent deploys the marketing to multiple channels. This process streamlines collaboration, reduces time from insight to execution, enhances precision, and creates meaningful return on investment all within a single AI powered workflow. Now I'd like to provide an update on our agency business which has seen great momentum to the start of the year. I'll begin with an update on our efforts with independent agencies. We executed and platformed two new independent agencies in the first quarter and are finalizing agreements with two additional ones, proving early traction in a market with over 1,000 potential prospects. We also experienced solid year-over-year growth with large holding companies in the first quarter. For our holding company customers, we believe Zeta is by far one of their most profitable partners, which is important in good times, but even more important during challenging times. Agencies choose to partner and expand with Zeta, not only because we drive efficiencies in their businesses, but also because our platform offers advantages that assist in securing new business. For example, one of the independent agencies we platformed in the first quarter used our retail audience intelligence to support its pitch to a prospective new customer. Zeta's deterministic attribution capabilities were a key differentiator, providing a level of measurement that the agency had not previously been able to offer. These capabilities help the agency secure the customer's business, which in turn creates additional revenue opportunities for Zeta, a true win-win-win. At Zeta, we have faced challenging macro times before and emerged stronger by controlling the controllable. How we think, how we act, how we deliver value for our customers. In the end, execution is the difference between surviving uncertainty and thriving through it. As always, I would like to sincerely thank our customers, our partners, team Zeta, and all our shareholders for the ongoing support of our vision. Now let me turn it over to Chris to discuss our results in greater detail.

Thank you, David, and good afternoon, everyone. Before diving into the details of our quarterly results and updated 2025 guidance, I want to highlight four key takeaways. First, despite global macro uncertainty, we report a strong quarter with broad-based contribution across all areas of our business. Second, our increased 2025 projections are reflective of our momentum exiting the first quarter and the good visibility we have into the second quarter, while being thoughtfully conservative in the second half, given macroeconomic and policy uncertainty. Third, we've looked at our capital allocation strategy and are taking significant steps to reduce dilution and stock-based compensation expense. And fourth, our increased focus on free cash flow generation is evident in our first quarter results, with free cash flow growth significantly ahead of revenue and adjusted EBITDA, and a substantial improvement in free cash flow conversion. Now, let's get into the details of our first quarter results. In Q1, we delivered revenue of $264 million, up 36% year-over-year, or 26% excluding the contribution from LiveIntent. Total scaled customer count grew to 548, up 19% year-over-year, and an addition of 21 customers sequentially. We had 159 Super Scaled customers at the end of the first quarter, an increase of 10% year-over-year and 11% quarter-to-quarter. Scaled customer quarterly ARPU of $467,000 increased 12% year-over-year and Super Scaled customer quarterly ARPU of $1.4 million increased 23% year-over-year. From an industry perspective on a trailing 12 month basis, six of our top 10 verticals grew faster than 20% year-over-year. We ended the quarter with 173 quota carriers, up 22% year-over-year and down from seven heads sequentially. The sequential decline was in line with our expectations and driven by the completion of the LiveIntent integration. Our direct mix in the first quarter was 73%, down from 74% in the fourth quarter of 2024, but up from 67% a year ago, resulting in direct revenue growth of 48% year-over-year. Our GAAP cost of revenue in the quarter was 39.1%, a 90 basis point improvement sequentially, and a 30 basis point improvement from the first quarter of 2024. This improvement in cost of revenue, as well as leverage in other areas of our operating expenses, resulted in our 17th straight quarter of expanding adjusted EBITDA margins year-over-year. In the first quarter, we generated $46.7 million of adjusted EBITDA at a margin of 17.7%, 200 basis points higher year-over-year, and $2.2 million better than the midpoint of our guidance. One of the addbacks to adjusted EBITDA was $3 million of restructuring expenses, which were anticipated and primarily related to the integration of LiveIntent. Our GAAP net loss for the first quarter was $22 million, an improvement from $40 million in the first quarter of 2024. First quarter net cash provided by operating activities was $34.8 million, up 41% year-over-year, with free cash flow of $28.2 million, up 87% and representing a margin of 10.7%. This translated to a free cash flow conversion of 60%, a significant improvement from 45% in the fourth quarter of 2024 and 50% in the first quarter of 2024. We also repurchased 1.6 million shares for $25 million, accounting for 89% of our free cash flow generated in the quarter. We continue to repurchase shares after the close of the quarter, acquiring an additional 1.8 million shares for $21 million between April 1st and April 25th. We have approximately $38 million remaining under our current share repurchase authorization and upon completion of this authorization, we plan to initiate a new one. Before diving into our 2025 guidance, I want to highlight a few key elements of our business model that are especially relevant given the current macro environment and informed how we approached guidance. First, as David discussed earlier, we deliver a clear, measurable ROI to our customers. This value proposition has helped us maintain an annual net revenue retention rate of 111% or higher every year since our IPO in 2021. Second, nearly all of the marketing and advertising spend we support is tied to measurable KPIs, particularly lower funnel conversion metrics. We believe this makes our platform more resilient in volatile macro environments as lower funnel spend tends to be less discretionary than top of funnel brand awareness efforts. Third, we primarily address large enterprises whose marketing spend tends to be more stable than small businesses in our view. And fourth, typically more than 90% of our annual revenue comes from customers that have been with us more than a year. These dynamics have contributed to our relative outperformance during challenging periods. For example, in 2022, a year when many tech companies experienced a sharp slowdown in growth and were rising inflation and broader budget rationalization, our revenue growth accelerated by 4 percentage points, reaching 29%. Lastly, and relevant in the context of the current macro environment, our direct exposure to the Federal Government and China is minimal. Following a strong quarter and considering our current data points, including a robust sales pipeline, positive customer interactions, and good visibility into the second quarter, we would typically revise our full-year guidance upwards by the amount we exceeded the first quarter's expectations, as well as increase our second quarter forecast. However, we'd all agree these are not typical circumstances. Because of this, we prefer to adopt a thoughtful approach that blends short-term momentum and visibility with second half conservatism. We are increasing our second quarter revenue outlook by $2 million while adjusting our growth expectations for the second half of the year. The conservatism in our guidance can be seen through three lenses. First, we are one month into our second quarter and have good visibility for this period. Second, although we continue to see healthy demand, our guidance assumes a softer macro in the second half of the year. Third, to meet our guidance, our four fastest growing industries in the first half of the year only need to grow at half that rate in the second half. To be clear, our customers have not expressed intentions to decrease their investments with Zeta due to macro uncertainty, nor has there been pull forward in spending. Our intent is to create a buffer by exercising prudent conservatism regarding expectations for the remainder of 2025. Our 2025 revenue guidance is now $1.242 billion at the midpoint, an increase of $2 million versus the midpoint of our prior guidance. This represents reported growth of 23%, growth of 21% when adjusting for LiveIntent, and political candidate revenue in the year-over-year comps. For the second quarter, we now expect revenue of $297 million at the midpoint, $2 million higher than our previous guidance. For adjusted EBITDA, we're increasing the midpoint for our 2025 guidance to $258.5 million, up $2 million from our prior guidance, and representing a year-over-year increase of 34% at a margin of 21%. In alignment with our conservative approach to revenue projections, we're confident we can achieve our adjusted EBITDA margin target for 2025 just through leverage in sales and marketing, R&D, and G&A. We have many levers we can pull within operating expenses and are confident we can protect our margins in the event our top line is adversely affected due to macro weakness. For the second quarter of 2025, we now expect adjusted EBITDA of $54.9 million at the midpoint, up from our previous expectation of $54.4 million and representing growth of 42% at a margin of 18.5%. We are increasing the midpoint of our 2025 free cash flow guidance to $131.5 million, up $2 million from the midpoint of our previous guidance, and representing year-over-year growth of 43%. As I mentioned up front, we revisited our capital allocation strategy. In addition to aggressively buying back shares, we have also decided to significantly reduce dilution and stock-based compensation. As such, we're introducing a new guidance item this quarter, stock-based compensation expense, which we expect to be $190 million for 2025, lower than the $195 million in 2024. In addition, for 2025, we expect our normal core share count dilution to be 4% to 6%, and for 2026, we expect to improve further to 3% to 4%. This is a significant reduction from 15% total dilution in 2024, which included 8% normal course equity grant dilution. Slide 20 in our earnings supplemental outlines how we plan on achieving these targets. Part of the improvement will be driven by David, Steve Gerber, and myself not participating in the annual equity grant process in 2025, and instead, we'll have our compensation tied to longer-term goals. We recognize that stock-based compensation expense and dilution are important topics for our investors, and we're taking significant steps to improve both. Lastly, we remain confident in our Zeta 2028 plan and are reaffirming our long-term targets, which project over $2 billion in annual revenue, at least 25% adjusted EBITDA margin, and 16% plus free cash flow margin in 2028. Now let me hand the call back over to the operator for David and me to take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Terry Tillman with Truist Securities. Please proceed with your question.

Yes. Hey, David, Chris, and Matt. Bear with me. I've got my own preamble here. First of all, congrats on the 15th beat and raise quarter and then also on the color on the second half guidance velocity. That's actually very helpful. My first question relates to like progress on One Zeta. In terms of accelerating the cross-sell and use case expansion. I know you all brought in some key leaders recently, some talent acquisition, but just maybe an update on One Zeta and how that's tracking? And then I had a follow-up. Thank you.

Well, let me start by saying thank you, Terry. I'm losing my voice here a little bit. But you know, the One Zeta strategy is ahead of schedule. I just got back from the possible conference where during the course of the contract, we signed a deal which will be one of our biggest deals in history around this very same stuff. The concept of wrapping it together where instead of using one use case in multiple channels, they have multiple use cases and multiple channels continues to be one of the biggest drivers of the business. In the first quarter, obviously, you saw 36% year-over-year growth with 26% of that being organic. A big piece of that was One Zeta and how we're progressing on it. I was sort of joking with someone the other day. I remember a few years ago when our goal was how do we get five or five customers to $5 million to $10 million a year. We're now looking at how do we get five or six customers to $100 million a year. And we're actually well on our way to that exiting the first quarter?

Just bringing the data points to life there, Terry, for you. All three of our use cases, the acquire, grow, and retain, all three grew double digits year-over-year. And our fastest growing cohort in terms of channel expansion were those scaled customers that are using three or more and that's up 42% year-over-year. So just to kind of bring the data to David's point.

That's great. Thank you for that both of you. Just one question is, when we think about the growth algorithm kind of excluding LiveIntent which I'm sure you'll get some questions on. I'm just curious, how are you thinking about the rest of the year as it relates to scaled customers and ARPU from scaled customers?

I believe our performance aligns with our model. In the quarter, ARPU growth was 12% year-over-year, which matches our model's expectation of 12% to 16%. The number of scaled customers rose by 19% year-over-year. While the growth in scaled customer count is supported by LiveIntent, ARPU has been negatively affected by LiveIntent due to the average size of their customers. However, I anticipate we will continue to operate similarly to the first quarter for the rest of the year regarding scaled customer count and ARPU growth.

That's great. Thank you.

Our next question comes from Jason Kreyer with Craig-Hallum. Please proceed with your question.

Wonderful. Thank you. Great job again guys. David you had mentioned in your prepared remarks just maybe more pronounced macro uncertainty at the start of Q2. Maybe you can break that down a little bit, kind of what Zeta is seeing or what Zeta customers are seeing versus the broader macro.

Thanks Jason, I appreciate it. At this point we're not seeing any turbulence inside of Zeta either for Q2 or for the back half of the year. We've not had one client pause and we have not had one client leave. So we continue to see that. Now, at the same time, we're trying to be thoughtful in a world where there's a lot of uncertainty. We just wanted to make sure that we were being conservative in the back half. But as it relates to the Zeta platform itself, at this time we have seen zero changes.

In fact, Jason, April ended just as strong as March did. So the quarter itself is even off to a great start, which gives us the type of confidence we did, we had to have to raise the quarter.

Perfect, good to hear. Wanted to also just ask about this independent agent opportunity. Curious there if the go-to-market, like how to go to market with independents is different than holdcos. And then Chris, in the past we've dealt with kind of some headwinds to margin and cash flow as you've seen greater opportunities with holdcos. So just curious if there's anything we need to think about as you deepen that opportunity with independent agents.

So, interestingly enough, you don't have those headwinds with independent agencies. Traditionally, we are platforming the entire independent agency at once, Jason. So you're seeing long-term contracts where you've got a lot more visibility, almost all of it's on platform, and we're getting paid more in line with our normal DSOs than the DSOs from the agency holdcos. Although I will say, our largest agency holdco in the first quarter did execute and move to a multi-year contract, and we expect that client to continue to be very, very solid and grow in the years to come.

Jason, on the cash flow point, and I'm glad you raised it. Throughout the course of the quarter as we were meeting with investors, there were three things that were important to them that we delivered on. The desire to have a clean quarter with clean comps, we clearly delivered that. To address stock-based compensation and dilution. I think we've definitively addressed that as well. And then the third was to continue to focus on more and more free cash flow conversion and generation. So to your point, this quarter had a 60% conversion from adjusted EBITDA was a record for us on an ad reported basis. That still included a headwind in terms of working capital by virtue of the growth we're having with the agencies. But I feel like we've more than covered for that in our guidance conservatism for free cash flow conversion, which is right around 50%, again compared to the 60% that we just generated this quarter. David?

And, I would think about it, Jason, that the independent agency space is more like just signing a very large multinational enterprise where you're looking at comparable margins and comparable term of contracts to those versus with the agency holdcos.

In fact, this week, in addition to the promise, we just signed another independent agency.

Yes, I mean, the independent agency ecosystem has over 1,000 potential prospects in it, and we doubled that business in the first quarter over last year. And I think that's a trend. I think you can't probably double it every quarter from a cyclical perspective. But I would say, I would expect that strategy to continue to bear fruit in the form of expanded on-platform revenue and expanded conversion of EBITDA to free cash flow from where we originally projected.

All right. Great stuff, guys. Thanks.

Thanks, Jason.

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

Hey guys, congrats on the next quarter and glad to hear April closed equally as strong. David, you gave us some great expansion examples in telco and insurance and finance. If you think about some of the verticals that maybe you're keeping a closer eye on today in this current environment, what are those and where would the impact show up first? Is it in ARPU? What are you paying attention to and what are the verticals?

Oh, yes. Sorry. Thank you DJ. I would say listen, I came into April most worried about automotive. We have a bunch of automotive manufacturing clients who are international in addition to manufacturing in the US, but as we all know I think even organizations in the US that manufacture here are bringing parts and they have supply chain issues in there. We saw the opposite. We actually saw the automotive space grow a little faster. Then we started looking with that pull forward. And it does not appear to be because most of the increase came from new contracts and new agreements that were signed for the calendar year or longer. But I would have been most worried about automotive. We're not seeing anything there yet. And then retail, right? As retailers look at their businesses, how did they perform? And very similar. Through April, we've seen no disruption in the retail space. In fact, it's interesting. One retailer who I met with at the possible conference made a comment that because we are by far their most efficient partner, we might see additional growth out of them that we might not have expected as they shift budget from partners that don't have the type of return on investment and, quite frankly, the ability to prove it that we currently have in evidence.

Yes, DJ, I would like to provide some insights on the industry verticals, as this is quite important for understanding our guidance. As I mentioned earlier, over the past 12 months, six of our top ten verticals saw growth exceeding 20%. If we look solely at the first quarter, seven out of ten grew significantly above 20%. Considering our guidance, even if our four fastest growing verticals only achieve half that growth in the second half, we will still meet our targets. We are not seeing any data-driven reasons in our sales pipeline that would lead us to believe otherwise; it's merely a conservative approach and an additional buffer we've implemented. In the consumer and retail segments, we've conducted a detailed analysis on a customer-by-customer basis, assessing their sensitivity to China and their position in terms of discretionary spending. From that analysis, we feel very confident in the guidance we have set regarding our exposure and their respective risks.

Yes. Okay. That's all very helpful color. Chris maybe this is probably not a fair question, given the way you're talking about the business and kind of the optimism going forward, but if growth were to slow to sub 20%, is it right to think that the trade-off would be showing more operating leverage? Maybe you could just talk philosophically with respect to kind of the internal scenario planning that you're doing?

Yes, our business model allows us to grow without having to choose between different priorities. We have experienced 17 consecutive quarters of adjusted EBITDA margin expansion. If there were to be a slowdown, we have the flexibility to adjust our sales and marketing expenses, particularly in terms of commissions, which can be scaled back if revenue decreases. Additionally, we have been optimizing our G&A and R&D efforts by reallocating work to the most effective areas, leveraging our global distribution capabilities. It's worth noting that while we didn't realize the full revenue expectations, we did exceed our adjusted EBITDA projections for the first quarter and throughout the full year, along with strong free cash flow, signaling to the market that we have further operational leverage available as the year progresses.

Yes. Very helpful. Thank you guys.

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

Perfect. Thank you guys and congrats on a strong start to the year. David, I think you were kind of right to point out earlier in the call that you grew through 2020, you grew through the post-COVID kind of slowdown. But if I think about the business, it seems like you're in a very different situation now than you were two years ago or five years ago. Just the business has grown. You have a lot more growth avenues. So if there is in the back half of the year some sort of a macro slowdown, I'm curious what strategies you have at your disposal now that you can maybe undertake to protect the growth rate somewhat, not suggesting that you'd be immune, but I'm sure there's maybe new products or different use cases or different customer types that you can lean into at this point, but I'm curious what that looks like.

Arjun, you are absolutely correct. Looking at our business today, the additional use cases and channels we have enable us to adapt in ways that were not possible in 2020 or 2022. Additionally, our attribution capabilities have significantly improved over the past two years. When we evaluate return on investment, the value we provide to clients now is better than it has ever been. We believe that even if there were macro challenges, which we are not currently experiencing, we will not be as impacted as others due to this strong return on investment. We are actively engaging with clients, demonstrating clear returns, and we are seeing unexpected upsells because we are more proactive in our client relationships. Furthermore, as Chris mentioned, in addition to our levers for EBITDA and free cash flow, we also have various growth options. It is important to note that our relationships with holding companies benefit us. When they experience volatility, they recognize our profitability compared to other partners and are introducing us to new brands to potentially scale in the latter half of the year. Again, we do not want anyone to mistake our cautious approach for weakness in the business.

All right. Perfect. Very helpful. And then one for you, Chris. It's encouraging to see the cash flow conversion get better, obviously something investors have been focused on. But what are you doing actually to drive cash flow conversion higher and maybe what's still available to get that metric to move higher through the year?

Yes, we have discussed with investors our expectations regarding capital expenditures. We anticipate continued efficiency in this area, as evidenced by a significant decrease in capital expenditures, including software and data capitalization, from the fourth quarter. We believe these efforts are contributing positively to our bottom line. The main challenge we face is the timing of payments from agencies, but we are optimistic about our performance at the end of the first quarter.

All right. Perfect. Thank you guys.

Thanks, Arjun.

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

Great. Thank you so much for the question. I first just wanted to ask on the mix between integrated and direct. The direct growth remained really strong and elevated. Well, it looks like integrated just slowed a bit. So I was wondering if there was anything to call out there as it relates to customer changing their mix or agencies that typically spend more on that integrated platform?

No, Elizabeth. We're actually going through the process we expected to go through, right? So we've been saying for a while that we expected the early agencies to follow the same pattern as our first agency client, which started very, very highly on integrated and then moved to direct, we're already seeing the agencies that are scaling very, very rapidly begin to move to direct a little faster than we expected them to.

In fact, Elizabeth, amongst our fastest growing channels, CTV is still the fastest, but social grew really nicely. So nothing there at all that alarmed us or caused us any concern.

Great. As a follow-up, I would like to gain more insight into how you view the long-term growth potential with agencies. It accounted for about 20% of the business last year, and considering the shift towards the independent side, could we consider the agency business becoming the majority portion in the near future? Additionally, are there any short-term changes we should keep in mind regarding the cohort in 2025?

Yeah. So let me say that, in order for that agency business to get to 50%, it would have to grow substantially faster than we're currently growing and what we expect. So I think it's going to continue to grow. It'll continue to inch up as a percentage of revenue. But as they move from indirect to direct, I think we'll continue to see on platform and cost of goods sold continue to get better. Right now, we're seeing that as very, very solid. But our direct enterprise business is still growing very rapidly. So we're not seeing a slowdown there. And I will also point out that I think it's important to note that the independent agencies of which we doubled that business in Q1 over Q4 and we expect to continue to grow that at an accelerated pace, really acts like the enterprise business. You're platforming there, cost of goods sold is very, very low, and we're able to work with them as it relates to cash flow. So I think right now we've got a really good mix, and I think it's going to continue at its current pace.

Thanks.

Our next question comes from Ryan MacDonald with Needham & Co. Please proceed with your question.

Hi, thanks for taking my question and congrats on a nice quarter. David, curious to know about sort of how the generative AI adoption continues to trend throughout Q1, particularly with the launch of Agent Studio. And as you think about within this environment, are you seeing sort of maybe a tighter budgetary environment, if that happens, being a catalyst for faster adoption of sort of AI agents doing more with less? Or do you think this causes maybe more of a pausing on some AI initiatives? What's the sense you're getting from your customers?

We are not seeing any pausing whatsoever Ryan on AI adoption. In fact, if anything, I think the uncertainty is accelerating it. We saw a meaningful step up in adoption in Q1. I think that's one of the reasons you saw the numbers flow through. Our AI adoption leads to a substantially higher revenue from customers who adopt it. And we continue to invest in it. As Chris said, our percentage of capital investment lowered as a percentage of revenue. We expect that to continue, but that's because revenue is growing so fast. We're still spending more money on innovation almost exclusively in artificial intelligence than we've ever spent on innovation in our entire corporate life. So, we continue to invest there. We continue to see adoption there. And I believe that's one of the reasons we saw the numbers come in where they did and why we feel very comfortable raising the year.

Super helpful, Color. Chris, maybe for you as a follow-up. I notice that in the updated guidance that the expectation for LiveIntent didn't really change much. I know it's obviously a small portion of the business relative to the overall size. But is there any reason to believe that that business acts differently or would be more or less resilient than the core business to the extent you have that visibility given how new it is?

Look, it performed right in line with what we expected it to do. I think it did like $19.5 million compared to the $20 million guide that we had in place. So it's right on the trajectory for the year that we expected to be on. You're not necessarily seeing show up in LiveIntent because that's kind of their standalone business' performance. All of the synergies and the products that we're creating, that that's actually benefiting the organic side of the business to some degree. But combined, the standalone capabilities in the business model of LiveIntent has added new channels for us to sell, which is additive to the business model. And then the products that we're jointly developing with them that are in market are actively being sold and contributing to the overall performance of the company. So very, very happy with how LiveIntent is performing out of the gate.

Appreciate the color. Congrats again.

Thanks, Ryan.

Thanks, Ryan.

Our next question comes from Richard Baldry with ROTH Capital Partners. Please proceed with your question.

Thanks. So you're saying that agencies mix move overall from indirect to direct. I'm sort of curious, is that because some of their brands are maturing and moving along that? Or as they're onboarding new brands, are they bringing them on also more direct given the experiences they've had with initial clients?

Thanks, Rich. The answer is yes to both. Because we're able to evidence that the on-platform business delivers a higher return on investment than the integrated component of the business, we're just seeing the agency holdcos move clients over faster. Some are starting there. A big chunk of them are migrating from integrated to direct. But both of those are tailwinds right now for that part of the business.

And given the strength strategically of the LiveIntent acquisition, sort of curious your thoughts overall on M&A as you go forward. You've been using a lot of free cash flow to do buybacks, but are there other tuck-in technologies or channels that you'd still like to be adding to the suite of offerings? Thanks.

Yes. I mean, Rich, as you know, we'll continue to look at our M&A pillars, and we have a very, very strong balance sheet, and we're currently spending free cash flow on share buybacks. But quite frankly, I've been spending a disproportionate percentage of my time taking calls from people trying to buy us over the last few weeks. And that's been keeping us busy.

Our next question comes from Matt Sonson with RBC Capital Markets. Please proceed with your question.

Yes. Thank you, all. And my congrats on the quarter. It's not too much trouble, another macro one. I guess typically in a macro downturn, we see the expand motion come easier than land, right? Because your existing customers already kind of get the ROI joke and story. Throughout those 2020 and 2022 periods, did you see any kind of difference in mix where maybe it was easier to focus on ARPU than the new lands?

It's interesting, Matt. If you look at our net revenue retention range, it's been like 111% to 114% since from 2021 to 2024. And if you look at our growth rate, it's more or less half what the growth rate has been over that period as well. So half from existing, half from new, and it's been very consistent. And that's also what our expectation is going to be for 2025, is about half the growth comes from the base, half from new. I think it's an interesting point. David, you were going to add?

I will answer the question more in line with what I think you were asking. We did not see an increase in retention or growth compared to new customer acquisition from a use case perspective for 2022 or 2020. However, when your revenue net retention rate is between 111% and 114%, it often raises the question of how to expand from one use case to two. Customers traditionally focused on new acquisition, which I believe Chris intended to convey, tend to expand into retention and monetization quickly during downturns compared to more stable times. It's beneficial to have all three use cases, and it's positive that they all performed well in the first quarter and continued to do so through April. We believe this trend will persist.

That's really helpful. And then I know, Chris, previously when you've talked about guidance, you've mentioned the Zeta Economic Index is something that you guys look at as kind of a barometer of health. Is that still a good way to think about or for us to kind of keep an eye on to think about the overall, I guess, macro environment as it relates to your business throughout the year?

Yes, so we definitely look at the ZEI and I would tell you even in the most recent ZEI, we're seeing more concern from customers than slowing spend. And I think that's a trend that continues, which is one of the reasons I think that enterprises that we work with at least have not cut back. I would not, if there were to be an unexpected downturn in the ZEI, look at that as an unexpected downturn in Zeta. I would simply say it is a good indicator of what is happening behind the scenes with the economy. I will further say, and I'll point out, that what we often see is in times of uncertainty, Zeta has grown faster than we expected it to because of our ability to drive return on investment that other enterprises we compete with do not do. And that to me would be the better thing to look at. And listen, there's not a lot of companies that are raising annual guidance right now, raising the quarter. We wouldn't be doing that if we didn't feel we were in a position to do it after obviously beating guidance and raising guidance 15 consecutive quarters as a public company.

Our next question comes from Jackson Ader with KeyBank. Please proceed with your question.

Great, thanks. Hey, good evening, guys. David, can I just confirm, did you say that you've been fielding calls from people interested in buying Zeta the company or buying Zeta's software?

No, it was the prior, but I probably shouldn't have said it. It was yes. But it's neither here nor there. The reality is, right now we are executing the company. As we continue to grow and take significant market share, we're just attracting a lot of attention that we hadn't received in the past.

Understood. Second question, a little bit maybe capital allocation wise, right? So the idea that you're looking to buy back more shares, $25 million a quarter, you have $30 million, $40 million left. And coupled with the comment that you continue to spend money on innovation, but why spend the $25 million, $30 million, $40 million buying back a relatively small number of your shares each quarter if you are seeing a direct correlation to the amount of money you are spending on innovation driving revenue growth?

Listen, first of all that's a great question Jackson. If we could spend more money on innovation faster, we would. The challenge is we are very, very selective about the engineers we bring into this company, the architects we bring into this company. And we have a large number of open job racks currently. So we are quite frankly in a position right now that we're able to deliver on the innovation and quite frankly sales rep goals that we are looking to deliver on while simultaneously retiring shares. I think the buyback goes back to sort of our M&A thesis around our five pillars of M&A. And as I look out onto the landscape at the multiples that we've been trading at, with the profitability we have, I don't think I could buy any company at that rate. So by retiring our own stock, it benefits all of our existing shareholders who we want to reward as a part of sticking with us.

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

Yes. Hey guys. Thanks so much for taking the questions. I wanted to go back to the commentary on the demand environment and the guidance on the conservatism in the guidance. And so, loud and clear, you guys aren't seeing any change in the demand environment. And it sounds like the conversations you're having with customers are really good. And I totally get the conservatism. I really do appreciate all the color that you gave on the call and the prepared remarks about the guidance. But I'm just curious. It feels like something outside of just the high-level macro uncertainty is informing the more conservative second half. And so if you could share what are you seeing? Or maybe the better question is, what are you not seeing out there that is tilting you more conservative in the second half?

Koji, thank you for your question. Let me be 100% clear. This is conservatism. That's it. We are not seeing any change to our business. I'll remind you, 90 plus percent of our customers have been with us for greater than one year. We have seen no pullbacks. We've seen no pauses. In this environment, we thought that it spoke volumes to the quality of our business to raise the second quarter and quite frankly to raise the year at all in an environment where most companies are lucky to be reaffirming. So we want to very clearly send a message. The business is executing as we would hope it would, and we are seeing nothing in the back half, but at the same time, we want to show we're being conservative and thoughtful as it relates to the uncertainty of the environment.

Yes. And Koji, just this week we signed two very large contracts. I was very specific in my comments to say that every metric we are currently assessing is consistent with what David mentioned, indicating that we expect to have our usual significant performance. However, as David pointed out, we want to align with the actions of other public companies during this time.

Yes. I mean, listen, we listened to or read the transcripts of call it a 100 different earning calls before getting to ours. And we wanted to make sure that we were showing shareholders and potential shareholders, not just that the business is executing incredibly well, but that we were meaningfully de-risking our back half in a situation where we could then show that we would be able to continue to beat and raise as a company and continue to execute.

Got it. Thank you for that. I have a quick follow-up regarding ARPU. We noticed a sequential decline, and I heard your comments about LiveIntent being a factor. It seems there might be some post-political cycle deflation in ARPU, but I want to confirm if there are any other issues to address in that ARPU number for the first quarter.

The sequential decline in ARPU is quite typical from the fourth quarter to the first quarter. Looking at it on a year-over-year basis, total ARPU is up 12%, and the Super Scaled ARPU is nearly 25% higher than last year. We also added 11 Super Scaled customers from quarter to quarter, marking one of our largest increases. Overall, ARPU appears strong, and I want to highlight that our fastest growing group consists of scaled customers who are now using three or more channels, which has increased by 42% year-over-year.

We were particularly proud, Koji, to get to 159 Super Scaled customers. And that doesn't include a number of Super Scaled clients we've signed in the last 30 days.

Got it. Thanks guys. Thanks for taking the questions.

Thanks, Koji.

Our next question comes from Brian Schwartz with Oppenheimer & Co. Please proceed with your question.

Yes. Hi, thanks for taking my questions this afternoon. David, I wanted to circle back on the AI agentic studio product. Just wanted to ask you what you're seeing in terms of consumption trends. Are the early customer adapters, are they fully scaled in production with agentic AI and they're coming back to buy more from you, or is it still early and most are testing and piloting the deployments?

We have a significant percentage of our customers who have adopted agentic AI, and I believe the number is growing at more than 40% in terms of consumption revenue year-over-year. Organizations that adopt agentic AI are experiencing much faster growth. The major advancement, currently in beta, involves linking them together in what we call agentic workflow. To clarify, when you connect four agents, each additional agent significantly improves performance. One agent offers regular functionality, two provide a marked enhancement, three deliver two additional levels of improvement, and four yield three levels of improvement. Thus, we see substantial opportunities with this beta that should yield positive outcomes in the latter half of the year.

Thank you, David. And then the follow-up I have for Chris, what can you share with us from what you're seeing in the rates of RFPs, the cadence of conversions, the size of your lands. How have they been trending in Q1 and year to date? Thanks.

The trend is similar to the end of last year, with our sales pipeline growing at a faster rate than the company's overall revenue, which has always been our approach and it remains true. We have a very strong backdrop for RFPs and excellent sales productivity where it matters most. We are observing impressive sales results from all of our groups. The sellers in their first year, particularly those in the 12 to 24 month range, are performing well, while our most experienced sellers continue to be the most productive.

Yes. I mean, Brian, I'll just make an off the cuff comment that I've never seen our pipeline RFPs or conversions at a better place than they are right now. We've signed three of the biggest deals we've ever done in the last 90 days.

Thanks.

Thanks, Brian.

Our next question comes from Zach Cummins with B. Riley Securities. Please proceed with your question.

Hi, good afternoon, David and Chris. Thanks for taking my questions. Chris, I wanted to start off, I don't think I saw it in your script or within the presentation, but in terms of all the new scaled customers added here in Q1, is it fair to assume essentially all of those are from the organic business rather than from any sort of LiveIntent customers?

It's all fully integrated now. There are some LiveIntent customers contributing to it, but it's all fully blended now. While it's helping the skilled customer count, it does affect the skilled customer ARPU, as they generally have smaller ARPUs to begin with. Overall, I couldn't be happier with how the skilled customer count has started the year.

And by the way, they didn't have many large customers, Zach. So even in the case where somebody might have been attributed to them, we would have had to grow them in many cases to that rate to get them to there.

Incidentally, we talked about earlier, but it just came to mind. One of the verticals that contributed the most scaled customers quarter-over-quarter was actually consumer retail.

Got it. That's great to hear. And my one follow up question, maybe geared towards David. I know most of the major holding companies, at least on their commentary in May-April. With the macro uncertainty, we're talking about leaning into their more durable businesses, which tend to be these data-driven marketing initiatives. So just curious if that's potentially accelerating any opportunity that you see with these agencies or just any sort of update around trends in those conversations with major holding companies?

No, it's meaningfully accelerating there. We've worked with one agency holding company for a long time, and it continues to grow nicely. We have another agency holding company that is scaling at rates we've not seen before, and now we have a third that is scaling at the same rates as the second. A lot of this is due to our ability to provide data-driven marketing. It's also important to note that among the five of the eight large agency holding companies, we're starting to see the second, third, and fourth scale significantly right now. This is partly because we are often their most profitable partner, and as they face uncertainty, they are looking to drive greater margins by using the Zeta marketing platform and our data cloud. Additionally, they need to show a true return on investment to their clients.

Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter.

Thanks.

Thanks, Zach.

Our next question comes from Gabriela Borges with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. Thank you. David, I wanted to ask you a little bit about what you're seeing with replacement cycles for some of the marketing cloud competitors that have talked about having their own agent strategies. Just curious if you're seeing a continuation in the acceleration trend that you've talked about previously, and if there's any other color you would add here.

Yes, thank you, Gabriela. That is a great question. And the answer is yes. We continue to see the replacement cycle, which we believe is still in early innings, accelerating. And it's interesting, because when you think about our platform, because we re-architected and relaunched in 2021 by putting AI agents and data as native to the application layer, there's no latency in the processing inside of our marketing cloud. Whereas all of our competitors currently are operating with AI outside of the core cloud. So you leave the cloud to the algorithm to do a query. The algorithm then has to do a data dip to go back to the algorithm to make an answer and then go back and tell the marketing cloud what to do. That tech debt is destroying return on investment for enterprises. And we are seeing as a part of that marketing cloud replacement cycles are continuing to grow and we expect that trend to continue.

Our next question comes from Clark Wright with D.A. Davidson. Please proceed with your question.

Awesome. Thank you. There's been some recent events within the walled gardens, and I was wondering if you could talk about maybe the opportunity that a fragmented ecosystem might have for data, especially with global agencies since they typically start with social media as their first use case.

Yes, I think there's still discussion about the possibility of Microsoft being broken up. However, I want to emphasize that if there is a significant breakup within the large walled gardens, it would create a major opportunity for Zeta to engage with those new assets, acquire some interesting ones, or form partnerships. We are already evaluating what that scenario might entail. That said, I don't want to get ahead of myself. I'm not confident that any changes will happen in the near term, but if they do, it could significantly boost our business.

Got it. And then as a follow-up here, you talked about multiple-year deals. Can you talk about maybe the change in duration of contracts that you've seen over the last few years and kind of what you expect, which is implied by the guide?

Okay. So interestingly enough, I would say most of our early agency holdco deals had no contract. It was a monthly agreement that we would just agree to operate together and go from there. And we now have multi-year deals on the three largest and scaling the fastest, and at least one year deals with everybody else. So it's really giving us a lot of long-term visibility. Our largest agency holdco client, we're quite frankly, we're working across dozens of brands and we're working across multiple agencies that are a subset of it, that rolls up to one enterprise. But in that case, they just signed a meaningful multi-year deal, which we were very pleased about.

We have reached the end of our question-and-answer session, which concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.