Earnings Call Transcript - ZETA Q4 2022

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Zeta Fourth Quarter 2022 Earnings Conference Call. All participants are currently in listen-only mode, and the conference is being recorded. After the presentation, there will be a chance to ask questions. I will now hand the conference over to Scott Schmitz, Senior Vice President of Investor Relations. Please proceed.

Scott Schmitz, Senior Vice President, Investor Relations

Thank you, Operator. Hello, everyone. And thank you for joining us for Zeta’s fourth quarter 2022 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 the 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 our filings with the SEC. With that, I will now turn the call over to David.

David Steinberg, Co-Founder, Chairman, and CEO

Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. 2022 was a stellar year for Zeta, which we capped off with an incredible Q4 that once again exceeded our expectations. For the full year 2022, we delivered revenue of $591 million, up 29% year-over-year, with adjusted EBITDA of $92 million, up 46% year-over-year. The leverage in our model resulted in 180 basis points of adjusted EBITDA margin expansion to 15.6% in 2022. And importantly, we generated $78 million of cash from operations with free cash flow of $39 million, up 123% year-over-year. On the back of this momentum, we are providing initial 2023 revenue and adjusted EBITDA guidance above current consensus, which Chris will discuss in detail shortly. The strength of our results highlights the power of Zeta’s patented AI and proprietary data to help large enterprise brands improve their ability to acquire, grow and retain customers more efficiently and effectively than ever before. And evidenced by our 48 new scaled customer additions in 2022, it is clear that Chief Marketing Officers who are under pressure to do more with less are willing to make changes to improve the effectiveness of their marketing programs and lower their total cost of ownership. The Zeta Marketing Platform, or ZMP, was purpose-built to improve marketing efficiency and effectiveness by unifying identity, intelligence, and activation to create better experiences for our customers and deliver better outcomes for brands. As we look forward, we believe our competitive position has never been stronger. The market continues to move in our direction as foundational elements of the ZMP are now boardroom topics. Artificial intelligence has exploded and is now vital to setting corporate strategy. First-party data and Customer Data Platforms are essential for making mission-critical business decisions, and greater personalization and addressability are crucial to improving the efficacy of marketing campaigns. The underpinnings of our competitive position started 15 years ago with a focus on reducing complexity by making data actionable and eliminating multipoint solutions. We assembled one of the largest proprietary opt-in databases to improve an enterprise’s understanding of its customers, identify potential new customers, and grow existing customers. We made very early investments in machine learning and artificial intelligence, which are combined with our data cloud and are the foundation of the ZMP. AI is in our DNA. Our goal at Zeta is to create actionable intelligence. Our AI technology and deep learning capabilities have become progressively better at distinguishing signals from noise, making it easier for marketers to make smart decisions. As an example of our innovative approach, we recently introduced ChatBotZeta, which incorporates Zeta’s proprietary data cloud with ChatGPT’s generative AI capabilities to produce conversation attributes and descriptions of individuals. As we incorporate this functionality into the ZMP, it will allow Zeta to operate even more efficiently and become a more strategic partner to enterprises by replacing more of their existing tech stack. Most of the legacy marketing clouds we compete against are non-core assets buried within larger technology conglomerates. And as technology peers changed their investment priorities and initiated cutbacks, these non-core assets are likely to see deeper cuts, causing them to fall even further behind us. As it currently stands, legacy marketing clouds are no longer good enough, and as a result, point solutions that plug into traditional stacks are also feeling the pressure. We believe the opportunity to gain share has never been greater. In this uncertain macro environment, we are capitalizing on the replacement cycle of legacy solutions and point products within enterprise environments. Let me give you an example. We recently replaced the legacy marketing cloud at a leading specialty retailer. Not only did the ZMP deliver more personalized audiences with strong intent signals resulting in higher ROI, but we substantially lowered the total cost of ownership by consolidating four different point solutions. In a short amount of time, we have built a strong relationship with this retailer, who views Zeta as an extension of their marketing team, and have now signed a five-year agreement. In addition to being complex and expensive to integrate, the marketing clouds are also ill-suited for emerging marketing channels. At Zeta, orchestrating an omni-channel journey across all addressable channels is another area where we stand out. A good example is our continued rapid growth in connected TV, which grew over 300% again this quarter, accounting for a double-digit percentage of usage on our platform versus low-single digits last year. And when we combine more addressable channels with our always-on intelligence, the results are even better. For instance, we are currently helping one of the leading U.S. pharmaceutical companies reduce wasted spending from their linear TV budget by leveraging our data cloud and AI capabilities to better target in-market consumers that could benefit from their drugs and therapies. It is difficult to find another single company that could have solved this problem for them. Traditional solutions require a system integrator to stitch together multiple point solutions and expensive and error-prone approach that is no longer sustainable in today’s environment in which CMOs seek both greater efficiency and greater effectiveness. Our disruptive and differentiated approach is also creating the strongest hiring environment we have seen in years. We are attracting and retaining exceptional people, while many of our peers are undergoing workforce reductions. In summary, 2022 was a stellar year for Zeta, with results exceeding even our expectations. We have maintained a balanced growth and profitability profile while continuing to invest in our people, products, and go-to-market initiatives. This is resulting in better experiences for consumers and better outcomes for enterprises. In addition to creating a better place for people to work, we are extremely proud to share that Zeta was recently recognized as one of the best places to work in both New York and LA. We believe our One Zeta culture has been critical to our success and we continue to invest time and resources to build an inclusive, innovative, and collaborative environment for all employees. We also achieved our goal of carbon net neutrality in 2022, which is an incredibly important achievement to prospective and existing clients as well as our employees. We intend to be a leader in this critical area and we will continuously work to reduce our emissions. I would like to sincerely thank our Zeta team, our customers, our partners, and our shareholders for their ongoing support of our vision. While we have come a long way on our journey, as we like to say at Zeta, we are just getting started. Now let me turn it over to Chris to discuss our results in greater detail. Chris?

Chris Greiner, CFO

Thank you, David, and good afternoon, everyone. I will cover three topics on today’s call. First, we continue to be a business delivering beyond its commitments. Fourth-quarter results once again exceeded expectations, highlighted by top and bottom-line growth rates pacing ahead of the Zeta 2025 model. Second, 2022’s results established yet another data point in a multi-year trend of accelerating revenue growth, sustained operating leverage, and margin expansion. And third, just like last year, our 2023 guidance is above consensus and still set purposely conservative, intending to be the starting point for how we build throughout the year. Additionally, we are adding free cash flow as a component of our Zeta 2025 plan, so lots of great things to cover. So let’s dive in. Our credibility is our currency. Since going public, we have built a track record of beat and raise execution, with six straight quarters delivering above our guidance. This last quarter was no exception. In the fourth quarter, revenue was $175 million, up 30% year-to-year and 9 points above the midpoint of guidance. Upside in the quarter was broad-based and not attributable to any single factor. Our U.S. revenue grew 32% year-to-year. The third straight quarter growing over 30% and is 96% of total Zeta revenue. Large enterprises from diverse industries are choosing Zeta in what we see as the early innings of a replacement cycle. We ended the quarter with 403 scaled customers, up 14 from the third quarter and up 14% year-to-year, both pacing well ahead of our Zeta 2025 model. Filling this back a couple of more layers, six new scaled customers came from consumer and retail, two from financial services, two from advertising and marketing, and four from technology services and others. Out of the 14 new scaled customers, five were new to Zeta and nine were existing customers that became scaled, a consistent mix from prior periods. Scaled customers are adding more channels and more use cases as they achieve better return on investment outcomes from the Zeta Marketing Platform. By way of evidence, scaled customer quarterly average revenue per user (ARPU) of $424,000 grew 15% year-to-year, and while ahead of our Zeta 2025 model, what really stood out was ARPU growth within our superscaled cohort. Superscaled quarterly ARPU was $1.3 million, up 26% year-to-year. This drove 34% year-to-year revenue growth in our superscaled cohort despite a small decrease in superscaled customer count due to the oscillation around the 1 million scaled versus superscaled cutoff point. You recall we increase ARPU from upsell and cross-sell activity tied to adding channels and use cases. During the fourth quarter, we continued our strong trend on each dimension. From an adding channels perspective, scaled customers now average over two channels per customer. In fact, scaled customers using four or more channels grew over 50% from a year ago to 53%. And associated with the strong superscaled ARPU growth I just highlighted, the average channels used for superscaled customers is approaching three at 2.8. In terms of increasing multiple use cases, we continue to make exciting inroads. All three of Zeta's use cases, acquire, grow, and retain grew double-digits year-over-year, led by acquire and grow, and the number of new scaled customers using more than one use case increased to 46%, up from 33% a year ago or 39% year-to-year. Our diversification of customers was evident across verticals with six out of our top 10 growing over 25%. No vertical represents more than 30% of our revenue. And of note, fourth-quarter mid-term candidate revenue was $4.5 million, slightly better than our guidance of $4 million. On a GAAP basis, our net loss was $52 million, which includes $68 million of stock-based compensation. Excluding the accelerating expensing related to our IPO, stock-based compensation would have been $15 million. For the quarter, we delivered adjusted EBITDA of $32.4 million, up 42% year-over-year, with adjusted EBITDA margin of 18.5%, up 150 basis points year-over-year. Briefly switching to our full year 2022 results, revenue of $591 million was up 29% year-to-year, which exceeded even our internal plan for the year. Our direct platform revenue mix for the year increased to 77%, up from 76% in 2021. And for the year, direct revenue grew 32% versus 2021. Full-year GAAP cost of revenue ended at 36.5%, down from 38.1% in 2021, and like many of our Zeta 2025 revenue KPIs, this decrease of 170 basis points from 2022 to 2021 is well ahead of our model of 60 basis points of improvement. We continue to see healthy expansion of existing customers as demonstrated by a net revenue retention of 112% in 2022 consistent with our model of 110% to 215% and in line with last year. On a GAAP basis, our 2022 net loss was $279 million, which includes $299 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been $57 million and for the year we delivered adjusted EBITDA of $92.2 million, up 46% year-over-year, with adjusted EBITDA margin of 15.6%, up 180 basis points year-over-year. We realized strong cash generation and an increased conversion from adjusted EBITDA of 42% in 2022 versus 28% in 2021. More specifically, cash flow from operating activity was $78 million, up 77%, with free cash flow of $39 million, up 123%. This brings me to my second topic. Zeta has been delivering sustained operating leverage over a multiyear period, something we expect to continue as we drive towards Zeta 2025. In that setting, it’s valuable to take a step back at the trajectory we have established and expanding profitability while simultaneously accelerating revenue growth at scale. Since 2019, Zeta’s headcount has only grown from 1,414 members to 1,604 by the end of 2022, just a 5% compound annual growth rate over that period. Because of our globally distributed resource model, we can add teammates for impact and efficiency at the same time. For example, from 2019 to 2022, U.S. headcount grew nearly 2% annually, while global centers, primarily in India and Prague, have expanded 7% annually. Meanwhile, revenue growth accelerated each year from 2019 to 2022, with a three-year compound annual growth rate of 25% or five times the rate of headcount growth over the same period. That’s the recipe for sustained operating leverage. Altogether, our adjusted EBITDA margins have grown from 8% in 2019 to 15.6% in 2022, averaging 260 basis points of expansion per year, well ahead of our Zeta 2025 model of 160 basis points. What we have accomplished over this period is humbling. We have achieved product category leadership as recognized by multiple industry analysts while many competitors are pulling investment and going backwards. We transformed to a new go-to-market by shifting to a hunter-farmer model and greatly expanding our branding and demand generation capabilities. Total quota carriers have more than doubled from 2019 to 123 sales reps by the end of 2022. And of course, we established the back-office infrastructure to be a public company and we are emerging as a leading place to work, a key component that Zeta 2025 inside our company. In fact, we are not only attracting great talent with our culture, we are retaining teammates as well. We have a 95% leadership retention rate at the VP level and above, and we have accomplished all of this while reducing General & Administrative expenses, excluding stock-based compensation, as a percentage of revenue every year since 2019 going from 24% to now 17% in 2022. The use of our own AI in automation is aiding in the realization of operational efficiencies. Which brings me to my third topic, our initial 2023 guidance and Zeta 2025 updates. Clearly, the market backdrop is turbulent, but we are still seeing strong demand for platforms delivering a lower total cost of ownership, generating verifiable ROIs, and offering fast implementations. The ZMP delivers on each. As a point of reference, as Zeta CFO, I am replacing multiple legacy point solution vendors in our back office by implementing a single platform, allowing us to lower expense and simplify systems. CXOs are using the same period of opportunity to make similar decisions across their technology stacks. Our sales pipeline reflects this theme of consolidation and is currently at an all-time high. We have been speaking throughout 2022 about RFP volumes being up. What is also interesting is the dollar value of those deals is growing even faster. This is because brands need to consolidate multiple point solutions in their marketing stack, opening up bigger contract value opportunities for our ZMP to replace. And while we are optimistic about our win rates, sales capacity, and opportunity pipeline, we believe it remains prudent to set initial 2023 guidance purposely conservative. We want this to be clearly understood as a starting point for how we will build throughout the year, which is consistent with the approach we took at the same time last year. Even in doing so, our view of the full year 2023 is $20 million higher than consensus on the top line and greater than the $15 million of upside we delivered in the fourth quarter. Guidance figures are as follows as seen on slide 16 in our supplemental. With respect to full year 2023 revenue, we expect to generate $691 million or 17% year-to-year growth at the midpoint of our range. From a quarterly cadence perspective, we expect 2023 to follow our three-year average revenue linearity which we outlined on slide 17 of our earnings supplemental. The share of revenue delivered in each quarter as a percentage of the total has adhered to a very tight range that we expect to continue, and therefore, it is prudent to follow as you spread our full year guidance across the quarters. With that in mind, in the first quarter of 2023, we expect to generate revenue of $150 million, up 19% year-to-year at the midpoint of our range. In terms of adjusted EBITDA, for the full year of 2023, we expect to generate $117.4 million or 17% margin at the midpoint of our range. This represents 140 basis points of improvement from 2022 and is consistent with the expansion required to achieve Zeta 2025 of adjusted EBITDA margins of at least 20%. One point of note, last year’s adjusted EBITDA margin expansion was driven by a combination of a lower cost of revenue percentage, as well as leverage in G&A and R&D. As we think about 2023 adjusted EBITDA margin expansion, it’s our expectation that more leverage will come through each of our operating expense budgets rather than cost of revenue. For the first quarter, we expect to generate adjusted EBITDA of $22.6 million, representing a margin of 15% at the midpoint of our range. We are also introducing free cash flow as a target to Zeta 2025. In addition to generating at least $1 billion in revenue and at least $200 million in adjusted EBITDA, we also expect to yield at least $110 million of free cash flow. This implies 55% of our adjusted EBITDA will convert to free cash flow by 2025, up from 42% we achieved in 2022. It also factors in the adverse impact of higher interest expense. Finally, in terms of KPIs, we are increasing scaled customer count targets to more than 500 by 2025, up from our initial target of 450. To recap, our mantra as a public company is quite simple and continues to reflect three core principles: one, exceed expectations; two, guide conservatively; and three, drive revenue and margins higher. We believe this approach gives investors confidence that we can execute on our pipelines, derisk for an uncertain macro environment, and further expand our operating leverage characteristics. With that, let’s move to questions. Operator?

Operator, Operator

Thank you. Our first question comes from Brian Schwartz of Oppenheimer. Please go ahead.

Brian Schwartz, Analyst

Yeah. Hi. Congratulations on the quarter and thank you very much for taking my question. David, first thing I wanted to talk about was just, an overall view from what you are hearing from customers when they are talking about marketing budgets for this New Year in 2023. What are you hearing from them? Are they thinking about growing them? Are they resetting them lower? Does the budget growth seem to be more resilient from their point of view? Any color will be helpful. Thank you.

David Steinberg, Co-Founder, Chairman, and CEO

First of all, thank you, Brian. We appreciate your attending. The truth of the matter is, it’s like almost anything, I meet with a ton of CEOs and a ton of customers, everybody said that, we are dealing with, their businesses are doing well, but there is some trepidation because of what they are hearing in the wider marketplace. To date, we are not seeing any marketing contraction in any of our customer’s budgets; that could change later in the year, but right now we are seeing very, very solid numbers. In fact, I would say, more of them are talking about how they could grow the budget. But the topic in every boardroom and the topic with every CMO is efficiency, right? How do we take our existing budget and focus more on getting more with the exact same amount? It’s not that, how do we cut and then get more from that.

Brian Schwartz, Analyst

Thank you. And then the follow-up I had one for David and then I will layer in Chris too. David, can you talk at all about the momentum that you are seeing with some of the bigger new partners that you signed up over the last couple of years, something about Snowflake and Dun & Bradstreet, are you seeing meaningful interest and pipeline coming from them? And then for Chris, can you touch on how this can help the business and the sales and marketing leverage over the long-term? Thanks again for taking my questions.

David Steinberg, Co-Founder, Chairman, and CEO

Oh! No. Of course, Brian, I would say, first of all, as I think Chris said, our pipeline is at an all-time high. We have gone from 50 some odd salespeople to over 130 salespeople over the last few years and we are seeing incredible throughput from that. But at the same time, the marketing partnerships, I would say you mentioned Snowflake. Them in particular have been an incredible partner and have generated a tremendous amount of deal flow. Some of our other partners have done well, but Snowflake really stands out as the absolute best, which is not to say the others haven’t flowed deals. But we are really experiencing, quite frankly…

Brian Schwartz, Analyst

Yeah.

David Steinberg, Co-Founder, Chairman, and CEO

...as you saw, I think in the numbers, the growth rates are even surprising us a little bit coming out of how strong those partnerships have been and how strong our new salespeople are. Chris?

Chris Greiner, CFO

Yeah. And Brian, as you would expect, the extension of our partner networks and those three, Amazon, Dun & Bradstreet, and Snowflake, our expectation is we will continue to grow those and leverage to the sales model, and it would be incremental to Zeta 2025. We built Zeta 2025 on our own sales productivity. So the further lift we get from those partners and more partners down the road should be incremental.

Brian Schwartz, Analyst

Congratulations on the quarter.

David Steinberg, Co-Founder, Chairman, and CEO

Thanks, Brian. Operator, next question?

Chris Greiner, CFO

Thanks, again.

David Steinberg, Co-Founder, Chairman, and CEO

Thanks, Brian.

Operator, Operator

Our next question comes from Arjun Bhatia of William Blair. Please go ahead.

Arjun Bhatia, Analyst

Hey. Thanks, guys, and I will add my congrats on the quarter. David, you are obviously stressing that there is a need for efficiency with CMOs and the platform kind of plays into that perfectly. When you see the customers that are consolidating, is there a typical profile of customers that are looking to move off legacy platforms or point solutions? Maybe it’s the customers that have had a solution in place for 10 years, 15 years, that they haven’t modernized, like, what do you typically see out there and is there an opportunity to use that profile to go out and target customers that are ripe for consolidation?

David Steinberg, Co-Founder, Chairman, and CEO

Yeah. So, Arjun, first of all, thank you. Second, without question, what we are seeing is the vast majority of the customers that are looking for efficiency are currently using legacy and larger marketing clouds. And as I think I pointed out in my prepared remarks, most of these legacy marketing clouds, if not all of them, are subsidiaries of subsidiaries sitting inside of very large tech conglomerates. And the truth of the matter is, they have been under-investing in these assets for many years as a percentage of what they invest, because they are investing in their core products, and if I were them, I’d probably be doing the same thing. Our core product is us, right? We are bespoke to do this. So what we are seeing is contracts are coming up with the legacy marketing clouds. They are going out to bid at a much higher rate than we have ever seen before, and we are winning. At the same time, our ability to sit alongside them during the existing contract and help them with some of our functionality, meaning we can help with acquisition while they are using a legacy marketing cloud for CRM and we can move through different functions with them. That’s getting our nose under the tent and then when they go out to bid, we are generally in the catbird seat. So to answer your question simply, it is large marketers who are using legacy marketing clouds as they are coming up for contract; we are seeing them move at a much higher pace than in the past.

Arjun Bhatia, Analyst

That’s very helpful. I appreciate the Zeta 2025 free cash flow target. I noticed that the EBITDA conversion improves over the years. Can you give us an idea of the strategies you have to increase that conversion for free cash flow in the next couple of years?

Chris Greiner, CFO

Sure. First, we have come a long way in a short period of time. So if you just look back a couple of years, you would see that the cash flow conversion was in the mid-20s, call it, and then ticked up to 28 this year at 42. So the tools we have in our tool belt that we have been using over the last several years, we will continue to use. And I will stress that $110 million isn’t at least just like the profit number just like the revenue number is for Zeta 2025. But we feel like we have learned a lot over the years getting much more efficient in how much drops from EBITDA to cash flow and expect that efficiency to continue, and there’s a reason why there is an at least on it.

David Steinberg, Co-Founder, Chairman, and CEO

Thanks, Arjun. Operator, next question, please?

Operator, Operator

Our next question comes from Richard Baldry of ROTH Capital. Please go ahead.

Richard Baldry, Analyst

Thanks. So getting back to the partnership idea, as you are scaling up now and driving so much more revenue per client, how about the opportunities to partner with non-traditional players, like, the agencies themselves who, I think, they are battling for mindshare and the ability to do targeting versus the larger players like Google or Facebook? Is there a way for those to really expand into a deeper partnership to go-to-market with? Thanks.

David Steinberg, Co-Founder, Chairman, and CEO

First of all, thank you, Rich. Yeah. I mean, it was not a coincidence. We had the Presidents of the largest U.S. holding companies at Zeta Live this year. We see the agencies as our partners, and we have for quite some time. The difference is what’s changed is the elimination of Apple’s IDFA rippled through the efficacy and modeling of most of the agencies’ ability to focus on social media. And at the same time, I think you have got a big contingent in the agency world that are very nervous about pricing power from Google and they are looking for alternative partners to scale with as it relates to that. So we have made our living direct to enterprise; it’s still the vast majority of our revenue. Even when we partner with an agency, we have a deep and very meaningful relationship with the underlying client. It’s not like the agency just says here go forth and conquer. It’s we come in together as partners to that enterprise, and we work lockstep. It is a very exciting growth opportunity for Zeta. It’s something we are spending a tremendous amount of time on. And I would say that the time I have personally invested into this segment of our business has been bearing some fruit, which we think could bear additional fruit going forward. Also, I will point out, we did mention, we have 300% growth in our connected TV business. There’s a lot of linear TV that’s going to move from linear to connected TV over the next few years that today sits in the control of the agency holding corporations. So we feel we are very well positioned to partner with them and help them to do a better job for their clients in lockstep.

Richard Baldry, Analyst

And last one for me would be, you walk through how the headcount leverage has been pretty extraordinary over the past few years in terms of its slower pace of growth and revenue growth. Do you have any concern that if the topline keeps growing as fast that does that you could end up a little stressed on the service delivery side and maybe that’s a way to talk about how much of what you do is automated versus high touch? Thanks.

Chris Greiner, CFO

I think you hit on a really good point. I mean, our customers use and love our AI, and we are using the automation inside the company has become more efficient. So I think that’s part of why we feel comfortable with what we are adding in terms of capacity for the requirements we have for our customers. The second, though, is we have an impressive global footprint. So while total headcount over the last three years has only grown 5%, the U.S. grew too, our global centers primarily in India and Prague have grown 7%. That gives us not just tremendous operating leverage, but we have very skilled long-tenured leaders at those locations who have built an amazing culture, and we can very quickly ramp up resources. David, you and Steve ever built it, you should…

David Steinberg, Co-Founder, Chairman, and CEO

Yeah.

Chris Greiner, CFO

...well know that.

David Steinberg, Co-Founder, Chairman, and CEO

I mean, Steve really has spent a lot of time on the India and Czech Republic, or I should say, Prague operation and now we are standing up operations in the Philippines as well, which has been pretty exciting. I think it’s important to note that we onboarded 48 scaled customers last year. That is a big number for a company like us. We couldn’t have done that without automation, and we couldn’t have done it with our amazing global people. The other thing I would say is, we have over 100 patents either issued or close to being issued in artificial intelligence and machine learning. 15 years ago when we started out as a business, big data and AI were not even in the vernacular of what you would talk about as it relates to marketing or business intelligence; they were both things of science fiction. Today they are table stakes, right? But what we really focused on even from day one was owning a large pool of first-party permission-based data and, two, automation. And automation has sat at the core of what we are building. We originally thought of ourselves many years ago as a marketing automation platform. In fact, that was sort of our tagline for many years. Today, it’s AI at the core and is native to our platform. And what are the other things I’d like to point out is, when you look at some of those legacy marketing clouds, to use their artificial intelligence, you have to step out of their platform and do a data dip into a separate platform to get to AI. Same thing for their datasets when they are importing them, they sit outside of the core of the platform. The Zeta Marketing Platform has data and artificial intelligence as native to the application layer. It just makes things so much faster. It allows decision-making to move in a hundredth of one millisecond versus some much longer period of time. So I think we are very well positioned to continue this trend.

Chris Greiner, CFO

Thanks, Rich. Operator, next question?

Richard Baldry, Analyst

Thank you.

David Steinberg, Co-Founder, Chairman, and CEO

Thanks, Rich.

Operator, Operator

Our next question comes from Jason Kreyer of Craig-Hallum. Please go ahead.

Jason Kreyer, Analyst

Thank you, guys. Two from me, maybe I will start with David. Just on the connected TV side, I wanted to just dig into that increased contribution. I am curious if there are meaningful changes to your product set that you are going to market with or if this is just more awareness of the product and just organic improvement there? Second question for Chris, you mentioned bigger deals in the pipeline, just wondering if you can expand on that, like, are you talking about more use cases, more channels, or just more committed volumes or not?

David Steinberg, Co-Founder, Chairman, and CEO

So I will take the first part, second. Yeah. I think, first of all, we are sitting at the precipice of what is a new dawn of the way people consume video content, right? So when TV started out 100 years ago with the Milton Berle Texaco Show, you had one channel, two channels, then three channels, then as my children like to point out in my lifetime, I started with five channels. Now we are up to hundreds of channels. But at the end of the day, that’s not the way the younger generation is consuming their video content. They are consuming it through connected TV, online video, or over-the-top TV. You are beginning to see that in the results of the linear TV providers. So I believe we have the world’s best connected TV platform and because the Zeta data cloud is able to identify a unique individual online through either programmatic or online video and through social, mobile, and connected TV, the same individual, the same Zeta ID number can be identified across all of those channels. As marketers are looking to move from linear TV to connected TV, they want a platform that can help them focus on return on investment. The ability to do what we do with the direct target connected TV is game-changing and I am quite frankly not aware of anybody else out there that can do that. There are other platforms that can do connected TV campaigns, but they are doing it through probabilistic datasets, not deterministic datasets and they are going to have to catch a lot of dolphins in their net to get to that tuna. We are able to really get down and just catch that tuna in our net, which allows the client to spend the same amount of money but drive substantially more customers. Chris, for the second question?

Chris Greiner, CFO

Yeah. Thank you, Jason. It’s interesting. If you look at the number of deals in our pipeline a year ago, this is, as the end of the fourth quarter. It’s a similar number of deals. They are up a little bit year-over-year, but the dollar value is what’s so much greater. And I talked about it also through the lens of RFPs, which is obviously a subset of that pipeline, not only is the RFP volume up. David talked about getting more chances at that as these marketing clouds come up, but the value of those deals is getting bigger. And as you pointed out, yes, it’s more use cases, yes, it’s more channels, but it’s a bigger opportunity to take out parts of their marketing stack than we were getting before. That’s ultimately what’s driving it. And we are not obviously we are not shy about starting with pilots, but we equally love starting bigger and we continue to see the deal size is getting bigger. Sales productivity stats and our ability to execute on that pipeline is also meeting our expectations and in many areas exceeding it.

David Steinberg, Co-Founder, Chairman, and CEO

Thanks, Jason.

Chris Greiner, CFO

Thank you, Jason.

David Steinberg, Co-Founder, Chairman, and CEO

Operator, next question please?

Operator, Operator

Our next question comes from Zach Cummins of B. Riley Securities. Please go ahead.

Zach Cummins, Analyst

Hi. Good afternoon. Thanks for taking my questions. David, first question for me is just really around your CDP+ product. I mean, it seems like that’s really a great opportunity to drive momentum within that product line. So I am just curious of the go-to-market function and how you are looking to really drive adoption there?

David Steinberg, Co-Founder, Chairman, and CEO

Thank you, Zach. The CDP+ is central to every discussion we have with current and potential customers. It enables enterprises to consolidate various datasets into a unified data ecosystem and enrich this with numerous fields of incremental data from the Zeta data cloud, fundamentally changing how they differentiate between marketing signals and mere noise. Our artificial intelligence helps identify the most relevant signals related to their customer base, which is crucial for reducing churn and retaining customers. We also look at what additional products they could offer to their current customers while actively researching new opportunities. Additionally, we aim to leverage the over 240 million individuals in the United States who have opted into our data cloud to attract new customers. The CDP+ is at the heart of all these initiatives, and we successfully win more than half of the engagements we pursue in this area. When clients see what the CDP+ can do, they are often amazed. It's a key entry point for us into enterprises, as they uncover valuable insights about their consumers. Importantly, once they gain a comprehensive understanding of their customers, they can only activate these insights through the Zeta Marketing Cloud, as everything is linked to the Zeta ID, preventing identification outside the Zeta Marketing Platform. This is why we emphasize a sales strategy that Chris articulates so well, starting with a pilot and then expanding. For instance, of the 48 scaled customers we added this year, about two-thirds began small before growing, highlighting the crucial role of the CDP+ in this process.

Zach Cummins, Analyst

Great. That’s very helpful. And just one quick follow-up for Chris, really appreciate the free cash flow guidance that’s given for the Zeta 2025 target. When you are thinking about excess free cash flow, I mean, how are you thinking about allocating that to debt paydown versus stock buybacks versus maybe even incremental M&A?

Chris Greiner, CFO

Yeah. I mean the beauty of having a long-term plan in place is that not only do we have quarterly gates that each of our business units make their way through that kind of releases funds. The same applies for multi-years out. Debt is becoming much more expensive today obviously than was a year ago. So that’s, it’s very topical and on our brain. We will continue to do small tuck-in deals as kind of been our legacy history. But otherwise, we are going to continue to be very disciplined on investment rigor that we have had, David.

David Steinberg, Co-Founder, Chairman, and CEO

And by the way, you could see us as we do some of these tuck-ins use a higher percentage cash than we had in the past, where we feel like we are getting far more leverage in a business that we can tuck-in and grow dramatically. But we will make those decisions as we continue to go. And listen, the more cash we generate, the more flexibility we have as a company. Cash flow has been a key metric to us internally for many years, and as we look at the current market landscape, we thought adding an additional metric to Zeta 2025 made prudent sense where we believe at least 55% of our EBITDA by 2025 will convert to free cash flow. To put it in perspective, we could pay down 100% of our debt in 2025 and 2024 from the proposed cash flow we are currently forecasting. But our net debt continues to be pretty low as a company.

Scott Schmitz, Senior Vice President, Investor Relations

Thank you, Zach. Operator, next question please?

Operator, Operator

Our next question comes from Ryan MacWilliams of Barclays. Please go ahead.

Ryan MacWilliams, Analyst

Hey. Thanks for taking the question. Are you seeing any differences to start this year versus how Q4 ended and any changes in customer interest across your acquire, grow and retain use cases? Thanks.

David Steinberg, Co-Founder, Chairman, and CEO

Well, just to answer your first question, we traditionally see a seasonally slower quarter in the first quarter from the fourth quarter and that is reflected in our guidance, even though we feel very comfortable with the guidance we put out and like a lot of companies, we are trying to over-index on being conservative in the world today because there’s a lot of turbulence going on. But the truth of the matter is, if you look at the last number of years of this company, seasonally, Q4 is very, very strong, and then you come into Q1 where you are resetting a little bit that. But at the middle of our range, I believe we projected a 19% growth rate year-over-year for the first quarter and continue to feel like we have been conservative. Chris, do you want to answer the second question?

Chris Greiner, CFO

Yeah. In fact, on slide 17, on the earnings supplemental, you will see that we laid out the three-year average revenue linearity and guidance by quarters. But to David’s point, that’s also where you see the seasonality show up.

David Steinberg, Co-Founder, Chairman, and CEO

He asked about the use cases as well?

Chris Greiner, CFO

And use cases, I mean, we mentioned, all of our growing double-digits. Acquire and grow are growing the fastest, both at about equal rates above the company’s growth rate. What was interesting is, this is now the second quarter in a row where we have added many more scaled customers that are using more than one use case. We are now almost at 50, we are at 46, but that’s a 39% improvement year-over-year and that in the last quarter also grew in the 30s. So that’s a big incremental opportunity for us. It’s incremental Zeta 2025. All the ARPU expansion in Zeta 2025 is modeled off of channel expansion. So our continued inroads here is only incremental upside. Next question?

Ryan MacWilliams, Analyst

Yeah. With more channels, you guys got me interested in talking about the accelerating replacement opportunity for the legacy marketing cloud. I mean, this is a pretty big opportunity. Since you previously called out, there’s like 10,000 customers that could potentially be scaled data customers. Are these legacy marketing cloud customers typically on a contract length of like three years or five years? Just trying to get to what the yearly opportunity could be of US$36 billion then?

David Steinberg, Co-Founder, Chairman, and CEO

They are mostly on three-year contracts, with about a third of them expiring each year. The key challenge is how we can create more opportunities for ourselves. Last year, we focused on increasing our chances to engage. We have consistently closed a larger than average share of the RFPs we participate in, but the question was how to expand that opportunity at the beginning of the process. To address this, we developed a new sales strategy with a strong team dedicated to lead generation. We have been recognized as a leader in the Forester report for marketing automation companies and ranked among the top five globally for Customer Data Platforms by several sources. Our event, Zeta Live, was a tremendous success, attracting over 7,000 attendees both in person and online, and we are excited to welcome everyone back this year. We have already sent out a save-the-date notice. This has significantly boosted the number of RFPs we are receiving, giving us more opportunities to engage. Considering the three-year contracts, around 33% will come up for renewal each year.

Chris Greiner, CFO

Thanks, Ryan.

Ryan MacWilliams, Analyst

Thanks.

Chris Greiner, CFO

Operator, next question.

Operator, Operator

Our next question comes from Ryan MacDonald of Needham. Please go ahead.

Ryan MacDonald, Analyst

Hi. Thanks for taking my questions and congrats on an excellent quarter and fiscal year. David, first for you, you talked about in one of your earlier responses that two-thirds of the deals of the 48 new customers you added this year started small and grew. Given this larger opportunity for multi-product consolidation, do you feel like you need to change the way you go-to-market at all to win some of these larger deals on the initial land and have you started to see any potential gaps or natural adjacencies you can expand to with the product portfolio to maybe capture more share on these consolidations?

David Steinberg, Co-Founder, Chairman, and CEO

Ryan, that is not to suggest the other questions weren’t great. But that’s a really good question. And I think Chris even hinted at the size and scale of the deals we are seeing coming out of the gate are substantially larger than we have ever seen before. We are often now going to market with Fortune 1000 companies for the whole shoe bang, where they are moving massive dollars in one fell swoop. And I think I pointed out the one retailer who signed a five-year contract with us. That’s not something that would have happened a few years ago. So I think in order to go-to-market, what we have seen is with the turbulence that a number of the large legacy marketing clouds are having, we have been able to steal, I shouldn’t say that, a number of their very senior salespeople have left those organizations and then we have been able to hire them shortly thereafter. So we are not just bringing in more salespeople, we are bringing in senior salespeople coming out of these marketing clouds who have made these very large sales and they are building a go-to-market strategy that in many cases is sort of all of it versus a very small part.

Ryan MacDonald, Analyst

Thanks. Very helpful. Maybe as a follow-up for Chris. Chris, you mentioned in terms of the incremental leverage that you are going to see this year that it’s going to come more from the OpEx level than at the gross margin level. Is that being driven at all by sort of a continuation of maybe more of this mid-70% mix of direct platform? And if so, what’s driving, I guess, maybe that mix shift that’s going to remain in the mid-70% versus you put up a couple of, I think, high 70%, 80% quarters? Thanks.

Chris Greiner, CFO

Yeah. It’s not as much that, Ryan. It was more a reflection that we are significantly ahead in terms of what we should be reducing our cost of revenue by, our model says 60 basis points a year. Last year for the full year, we reduced it by 170 basis points. So we are ahead. I think the second part is, we wanted to add a layer of conservatism in the middle of the P&L, just like we have at the top part of the P&L. Not to say that, it just gives us flexibility, frankly. And then third, it’s really more a reflection of the investments we made, particularly in sales and marketing, adding multiple Chief Revenue Officers. David talked about adding mechanisms and infrastructure around marketing. We don’t need to make those same investments this year, so they are just going to be some natural, natural leverage as we wrap around those investments. But it’s more around conservatism and leaving ourselves flexibility.

Scott Schmitz, Senior Vice President, Investor Relations

Thank you, Ryan. Operator, next question please?

Ryan MacDonald, Analyst

Yeah. Thanks.

Chris Greiner, CFO

Thanks, Ryan.

Operator, Operator

Our next question comes from Elizabeth Porter of Morgan Stanley. Please go ahead.

Chris Quintero, Analyst

Hey, guys. This is Chris Quintero for Elizabeth. I wanted to better understand the reduction in the superscaled customers. It was primarily due to them falling below that spend threshold. But just curious kind of where that reduction was, it was more kind of on the activation media pass-through side or was it on the more kind of subscription side?

Chris Greiner, CFO

It was usage-driven and it was frustratingly, I say, because it literally fell right at that cutoff point. None of them left. They are all now hanging around the hoop at that high 900K level and wouldn’t be surprised if they jump back in. So it was more fourth-quarter usage driven. But I think the important point here is, if you look at the ARPU of those customers, superscaled ARPU grew 26%, superscaled revenue as a contributor to overall Zeta’s revenue grew 34%, and then even zooming out further, we have got a great slide in the supplemental that breaks out a cohort of those scaled customers and how long they have been with us. What really exciting to see is, those customers and the cohort of one year at Zeta to three years at Zeta, their average revenue went from 900K to 1.4 million in a year. So, to David’s point, we are not shy about getting in on pilots because we have proven over time, the longer they stay with us, the bigger they become. Thanks, Chris.

Operator, Operator

Our next question...

Scott Schmitz, Senior Vice President, Investor Relations

Thank you, Operator. We have time for one last question.

Operator, Operator

Our next question comes from Koji Ikeda of Bank of America. Please go ahead.

Natalie Howe, Analyst

Hey, this is Natalie Howe on for Koji. Thanks for squeezing me in. I wanted to ask for a bit more clarity on the impact from political customers, if you could help us understand the contribution there. We were hoping to get a bit more granular, in particular, what the impact on Q4? Thank you.

Chris Greiner, CFO

Yeah. So our guidance entering the quarter was for $4 million of mid-term candidate revenue, and it ended up being $4.5 million. So we did a little bit better, but that was right in line with our expectations.

Natalie Howe, Analyst

Okay. And then quick follow-up...

David Steinberg, Co-Founder, Chairman, and CEO

And we did disclose that. We think it’s an important metric. We agree with you. So, it was about $4.5 million of the $175 million.

Natalie Howe, Analyst

Okay. Thank you. And then quick follow-up. You guys mentioned you are investing more on brand recognition. Should we expect increased expenses there and is there any insight on the trajectory of that over this year and the next few years?

David Steinberg, Co-Founder, Chairman, and CEO

Yeah. Well, so we did say that we expected to get material leverage out of SG&A this year. So that would imply that we will not be increasing overall expense as it relates to our sales, marketing, and general and administrative expenses, which brand building fits into. We quite frankly have just shifted budget from other places and we have been very fortunate, right? Because over the last few years, we have materially lowered our cost of goods sold, which has given us more flexibility. I don’t see us spending more money this year. I mean, you might spend a little more on an absolute dollar perspective, but I don’t see the percentage going up on brand build. The big thing last year was Zeta Live. We expect to do it again this year. The funny thing is, Zeta Live was such an incredible success last year, a number of our partners have come to us and said, can we help sponsor this next year? Can we do a dinner? Can we host a session? So shockingly we are now potentially going to lower the cost of building the brand for the company while simultaneously hopefully growing Zeta Live even bigger than it’s ever been.

Scott Schmitz, Senior Vice President, Investor Relations

Thank you, Natalie. Operator, we have time for one more question, please?

Operator, Operator

Our next question comes from DJ Hynes of Canaccord Genuity. Please go ahead.

DJ Hynes, Analyst

Hey, guys. Congrats on all the momentum. It still sounds great. Chris, one for you, just given the growth you are talking about in connected TV, is there anything we should be aware of from a margin profile standpoint as that revenue layer is in?

Chris Greiner, CFO

Nothing in particular. In fact, we have seen over the last several years, the margin profile of that channel improve steadily.

David Steinberg, Co-Founder, Chairman, and CEO

And by the way, we have moved it, so the vast majority of that is on-platform, DJ. So we feel good about that, because it’s plugging into our device graph, which is now the largest device graph in the United States and gives us a lot of flexibility as it relates to targeting, which leads to higher margins. Did you have a follow-up, DJ?

Operator, Operator

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

David Steinberg, Co-Founder, Chairman, and CEO

Well, spectacular quarter. I mean, it’s hard to say anything other than that. We really delivered on every metric we expected to. We were able and feel like in an incredibly conservative way. We raised our guidance from where I think most people expected us to be. And we feel like we have got the right people, the right technology with our artificial intelligence and marketing platform and the right data set to continue to win in the marketplace and more than exceed on our 2025 plan. More than anything, I want to thank all of our Zeta people. They have just worked tirelessly to deliver on the metrics that we have put out and it is a team that really has come together and congealed in a way that makes me, as the Co-Founder and CEO, incredibly proud. Steve Gerber, Chris Greiner, Steve Vine and their respective teams are I could go on and on with Chris Monberg and Neej Gore and Will Margiloff and just everybody who’s really helping us to grow, build, and deliver on this business have just done an exceptional job. I hope everybody has a wonderful day and I look forward to seeing everybody in person sometime soon. Bye.

Operator, Operator

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