Zeta Global Holdings Corp. (NYSE:ZETA) Q4 2022 Earnings Call Transcript

Zeta Global Holdings Corp. (NYSE:ZETA) Q4 2022 Earnings Call Transcript February 25, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Zeta Fourth Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Scott Schmitz, Senior Vice President, Investor Relations. Please go ahead.

Scott Schmitz: 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: 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 highlight 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 CDPs 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 database is to improve an enterprises’ 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 is 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 signal 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 initiate 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 pinch. 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, I guess, 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 CTV, 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 spend 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 CMO 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 the data was recently recognized as one of built-in-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 admissions. I would like to sincerely thank our Zeta team, our customers, our partners and our shareholders for their ongoing support of our vision, and 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: 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 bottomline growth rates pacing ahead of the Zeta 2025 model. Second, 2022’s results established yet another data point in a multiyear trend of accelerating revenue growth, sustained operating leverage and margin expansion. And third just like last year, our 2023 guidance is above the street 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.

Photo by Joshua Mayo on Unsplash

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 and what we see as 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 a way of evidence, scaled customer quarterly 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 cut-off point. You recall we increase ARPU from up-sell and cross-sell activity tied to adding channels and use cases. During the fourth quarter, we continued our strong trend on each dimension. From 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 customer is approaching three at 2.8. In terms of increasing multiple use cases, we continue to make exciting inroads.

All three of Zeta is 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 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-to-year. We realized strong cash generation and an increased conversion from adjusted EBITDA of 42% in 2022 versus 28% in 2021. And 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 is head count has only grown from 1,414 members to 1,604 ending 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 5 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 ending 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 G&A 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 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 hours 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, 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 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, 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 a 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 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, confidence we can execute on our pipelines, derisk for an uncertain macro and further expand our operating leverage characteristics. With that, let’s move to questions. Operator?

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Q&A Session

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

Brian Schwartz: 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: 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 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 do they 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 sort of how do we cut and then get more from that.

Brian Schwartz: 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 & Brand — 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: 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 sales people 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: Yeah.

David Steinberg: 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 sales people are. Chris?

Chris Greiner: Yeah. And Brian as you would expect, the extension of our partner networks and those the three the Amazon, Dun & Bradstreet and Snowflake, our expectation is, we will continue to grow those add leverage to the sales model and 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.