ZoomInfo Technologies Inc. (NASDAQ:ZI) Q1 2024 Earnings Call Transcript

ZoomInfo Technologies Inc. (NASDAQ:ZI) Q1 2024 Earnings Call Transcript May 7, 2024

ZoomInfo Technologies Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.24. ZoomInfo Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the ZoomInfo First Quarter 2024 Financial Results Conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded. I would like to turn the call over to your speaker today. Jerry Sisitsky, please go ahead.

Jerry Sisitsky: Thanks, Kevin. Welcome to ZoomInfo’s financial results conference call for the first quarter of 2024. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo, and Cameron Hyzer, our CFO. After their remarks, we will open the call to Q&A. During this call, any forward-looking statements are made pursuant to the Safe Harbor provisions of U.S. securities laws, expressions of future goals, including business outlook, expectations for future financial performance, and similar items, including without limitation, expressions using the terminology may, will, expect, anticipate, and believe, and expressions which reflect something other than historical facts are intended to identify forward-looking statements.

Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the forward-looking statements in the slides posted to our investor relations website at ir.zoominfo.com. All metrics on this call are non-GAAP unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I’ll turn the call over to Henry.

Henry Schuck: Thank you, Jerry, and welcome, everyone. Revenue for the first quarter was $310 million, and adjusted operating income was $119 million, a margin of 39%. We delivered another quarter of better-than-expected profitability as we remain committed to profitable growth. Our board approved another $500 million share repurchase authorization, and we continue to aggressively buy back shares of ZoomInfo at attractive share prices. Our ZoomInfo Copilot development efforts are well underway, beta customers are seeing significant ROI, and the feedback has been extremely positive. We feel confident that we have a differentiated solution, and we look forward to releasing this new version of our platform shortly. We continue to navigate through a difficult operating environment, one that has not improved over the last few months.

We had expected that this quarter would be challenging, and it was, but we are starting to see signs of stabilization. As it relates to net revenue retention, in the quarter, our SMB business continued to be challenged and performed worse than prior periods, and while down in Q1, given the higher mix of those businesses coming up for renewal, company-wide NRR was better-than-expected at 85%. Mid-market retention was similar to Q4, and Q1 was the second quarter in a row of sequential renewal rate improvement, reflecting sustained stabilization. We saw enterprise retention stabilize, and we saw renewal rate there improve year-over-year for the first time since 2022. Software retention also stayed flat sequentially for the first time since Q1 of ’22.

These stabilization trends have continued into Q2, and are promising signs that suggest we have reached a bottom, which we view as a precursor to a potential inflection to growth. We also had another quarter of strong win-back performance. Customers continue to come back in record numbers after trying low-cost, low-quality providers. In Q1, we again saw hundreds of customers come back to ZoomInfo, maintaining the record levels from Q4 and Q3 2023. One software vendor who left ZoomInfo in December 2023 for a lower-cost competitor, on the promise of even better data for a fraction of the cost, has already returned to us. Their frustrated account executives and business development managers missed the man-gen and quota targets, and their leadership team was self-aware enough to correct the mistake.

Buy cheap, buy twice. In the quarter, we recorded our largest increase in the million-dollar customer cohort since Q1 of 2023, as we continue to drive traction in the enterprise. ACV from our million-dollar customer cohort is up 16% year-over-year. In our marketing solutions, we continue to see strength with improving retention and increasing ad spend on the platform. And operations was the fastest-growing area of the platform, up 18% year-over-year, as companies are increasingly using ZoomInfo to solve the data challenges within their CRM systems and using our data and insights to power their AI strategies. During the quarter, we closed transactions with companies of all sizes and in all industries, including Walgreens, Kirkland & Ellis, Marsh McLennan, Universal Robots, Spring Health, MSG Entertainment, Carrot Fertility, OW Logistics, and GoFreight.

A multinational staffing company ran an RFP for a vendor to clean up their CRM data to improve their modeling and predictive analytics on candidates. In a competitive deal where high-quality, accurate data was paramount, we fixed their existing data problems, future-proofed their data strategy, and provided a foundation for them to run predictive analytics and expand with their use of AI. This resulted in an upsell representing $925,000 in annual contract value, which over the life of the contract will be worth $2.7 million of total contract value. We also expanded with a mid-market data query and deep learning software company as they were looking to save money, reduce vendors, and consolidate on a single platform. Like many of our mid-market tech customers, they came into our renewal conversations with a mandate to reduce spend by 20% across all vendors.

We turned that initial mandate into a 60% increase in ACV by replacing multiple vendors and consolidating on ZoomInfo sales, operations, and marketing solutions, all while providing a better user experience at a better price point. We were also named a leader in Forrester’s Marketing and Sales Data Providers Wave and won two Google Cloud Technology Partner of the Year awards. As a Google Cloud partner that most effectively helps customers enhance their analytics and AI initiatives through pre-built data solutions and data sets. Last quarter, I introduced what we believe is one of the most impactful and innovative products for go-to-market teams, ZoomInfo Copilot. ZoomInfo Copilot is the first AI-powered go-to-market solution that uses a trusted data foundation to automatically prioritize who, when, and how to engage buyers from first signal to content creation and engagement.

Modern sales is becoming a science, and we built Copilot to enable our customers to make every seller their best seller. Today, sellers need to know which companies to contact, who the right person is at those companies, and exactly when to reach out to them. Critically, they must also know what problems those companies are facing and how they solve those problems today. Trying to gather and triangulate the data necessary to know these answers today is incredibly challenging. Surfacing these often buried insights is what we built ZoomInfo Copilot to do. And in doing that, Copilot turns ZoomInfo from a lookup tool to a platform that surfaces the key insights sellers need to take action against each day. A unique strategic advantage of our Copilot platform is that it’s built on top of our world-class proprietary data.

Our data covers the universe of companies that you may sell to, tens of thousands of attributes on those companies, hundreds of millions of people who work at those companies, and the most robust set of signals and insights that we constantly validate and update. What sets ZoomInfo’s Copilot apart from any other solution in the market is that it’s sitting on top of our AI-ready trusted data foundation that drives decisions, personalization, and confidence. For our users, Copilot surfaces diverse and differentiated signals, attributes, and activities that already exist in our proprietary data asset and our partner ecosystem, which we continue to expand with some of the most trusted vendors in the market, including most recently with TrustRadius and TechnologyAdvice.

Copilot takes signals like website visitors, spikes in job postings, earnings call transcripts, contract renewal dates, and expert calls that indicate spending or competitive threats, then uses advanced entity resolution and matching to combine them with customers’ first-party data. It then applies AI technology to model and inform users immediately about which companies are in the market for their products and how and why you should engage with them. You can think of this similarly to financial trading. Understanding a company’s sector and closing price doesn’t tell you much about what a stock will do tomorrow. You need indicators around trading volumes, technical indicators, investor sentiment, financial news, expert calls, and many other signals in order to create alpha.

Similarly, for our customers, understanding firmographics alone is not sufficient to understand whether or not your next buyer is about to be in market for your product. It’s only when you surround that core data with signals that you’re able to predict who your next customer should be. Other Gen-AI or Copilot products from classic software vendors face a significant problem. They are all layered on top of static CRM data. This data limits the value that can be gleaned from any AI tool for three reasons. First, it’s limited in scope to what salespeople have manually entered historically. Second, it’s outdated, stale, and likely inaccurate. And third, it lacks the outside signals and insights that drive modern go-to-market motions. ZoomInfo Copilot delivers the full picture built on the foundation of the world’s most accurate and up-to-date business data, publishes real-time insights, and turns that into personalized and relevant content.

More than 20,000 beta users have had access to our Copilot beta. Throughout the quarter, their results and feedback have been overwhelmingly positive. Highlights include that on average, Copilot beta users reduced their time spent on account research and manual tasks by 10 hours per week, giving them back almost a quarter of their time to spend on more value-added activities. Copilot beta users identified signals, I’m sorry, identified signals were responsible for 45% of total opportunities created, proving that Copilot helps sellers get to buyers faster. And Copilot users created nearly twice as many opportunities compared to non-users in the same roles at the same companies. I can confidently say that Copilot is one of the best pieces of software we’ve built at ZoomInfo across ease of use, end-to-end understanding of our customers’ pain points, and product market fit.

We have had leading AI models in production for years, but with Copilot, our product and engineering teams have shown how to put our data and AI differentiation into one of the first real go-to-market AI products that actually delivers value at scale. At the same time, our go-to-market team spent the last quarter using Copilot, dialing in talk tracks, sales collateral, testing, and more to be prepared to bring ZoomInfo Copilot to market. We expect a monetized Copilot and will roll it out in a thoughtful way, focusing first on the customers who are most likely to get significant value out of the advanced platform. Our go-to-market teams are excited to bring this to their customers, and I have a lot of conviction around the upgrade paths in our customer base.

I look forward to sharing more details about this motion and our learnings in the back half of the year. In conclusion, we continue to make progress toward re-accelerating our business. NRR was better than expected. We’re driving traction in the enterprise, and we’re seeing promising signs that suggest a stabilization in trends. We have a strong and differentiated data foundation, and we’re excited to bring ZoomInfo Copilot to market shortly. We are committed to profitable growth, and we continue to repurchase shares of ZoomInfo. With that, I’ll turn the call over to Cameron.

Cameron Hyzer: Thanks, Henry. In Q1, we delivered revenue of $310 million, up 3% year-over-year. Annualized revenue based on days of revenue recognition was $1.25 billion. Revenue came in slightly ahead of our guidance, and our focus on efficiency enabled us to deliver adjusted operating income of $119 million, representing a margin of 39%, which was above expectation. GAAP net income was $15 million, yielding $0.04 per share, and non-GAAP EPS was $0.26 per share. Retention among our enterprise and mid-market customers is stabilized, with signs of potential improvement as we look ahead to expirations in Q2 and Q3, while our small business customers were more challenged in Q1 than we anticipated. We continue to take a prudent view of the environment and trends among different customer cohorts as we consider the remainder of the year.

As a result, we are narrowing and adjusting our range of guidance for the full year. As we reduce shares outstanding through share repurchases, this results in increasing our guidance on a per-share basis. In Q1, net revenue retention was 85%. With an outsized small business renewal pool in the first quarter, we anticipated NRR to decrease and are pleased to see early signs of stabilization. As we move through 2024, we believe there are opportunities to drive improvements to net retention. And as a reminder, our guidance for 2024 assumes that net revenue retention does not improve. In the enterprise, we saw success with our largest clients. Million-dollar-plus clients now contribute more than 10% of overall ACV. Average revenue for 100K-plus customers continued to grow, largely offsetting the decline in the number of those customers, as smaller customers continued to experience downsell pressure with some falling below the 100K level.

Advanced functionality remained at approximately a third of our overall ACV, with operations and marketing continuing to gain traction with customers and both growing double digits, while some of our other functionality was more challenged. From an industry perspective, the fastest-growing industries this quarter were retail, manufacturing, and transportation logistics, while software and tech continued to experience downsell pressure, particularly for smaller customers. Write-offs were lower than we experienced during the past two quarters but continued to impact us in Q1. We are focused on reducing this headwind by being more selective in deals, leveraging our product-led growth motion at the lower end of the market. We are now requiring the majority of smaller and more risky clients to pay via credit card or ACH at checkout, which should help drive an improvement in write-offs and allow us to capture the low end of the market more effectively.

As we indicated in our 8K filing in February, we entered into a settlement agreement that addresses both existing and potential class-action lawsuits related to right-of-publicity statutes in four states. We accrued $30 million in the quarter related to these settlements, which is reflected in G&A expense. We expect to make cash outlays related to these settlements later this year. We are as committed as ever to driving growth and profitability, and as such, aim to maintain headcount at current levels while allocating more resources to support our AI and Copilot initiatives, as well as augment sales and marketing capacity. Based on these hiring needs, we are exploring options to optimize our real estate portfolio relative to a number of leases that we signed in 2021 and early 2022, and to which we will gain access in 2024.

We anticipate incurring restructuring charges related to potential negotiations and/or subleasing arrangements. Our focus remains on maximizing operational efficiency and driving profitable growth in the evolving market landscape. Operating cash flow in Q1 was $116 million, which included approximately $18 million of interest payments. Unleveraged free cash flow for the quarter was $123 million, representing a 103% conversion of adjusted operating income. We ended the quarter with $440 million in cash, cash equivalents, and short-term investments, and we carried approximately $1.24 billion in gross debt, the vast majority of which has fixed or hedged interest rates. During the quarter, we repurchased approximately 10 million shares of ZoomInfo stock for $153 million.

Over the past four quarters, we’ve retired more than 31 million shares of ZoomInfo, nearly 8% of total shares outstanding. We are confident that these repurchases will drive meaningful economic return for our shareholders, and we will continue to aggressively repurchase shares as we take advantage of disconnects between our share price and the intrinsic value of our growing cash flow generative business. Our net leverage ratio is 1.5x trailing 12 months adjusted EBITDA and 1.5x trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of Q1 was $444 million, and remaining performance obligations, or RPO, were $1.13 billion, of which 838 are expected to be delivered in the next 12 months.

With that, let me turn to guidance for Q2. We expect revenue in the range of $306 million to $309 million, adjusted operating income in the range of $114 million to $116 million, and non-GAAP net income in the range of $0.23 to $0.24 per share. For the full year 2024, we now expect revenue in the range of $1.255 billion to $1.27 billion, and adjusted operating income in the range of $488 million to $495 million. We expect non-GAAP net income in the range of $1 to $1.02 per share, based on 394 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $440 million to $455 million. Our full year guidance implies 2% revenue growth and 39% adjusted operating margin at the midpoint of our guidance range.

With that, let me turn it over to the operator to open the call for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Koji Ikeda with Bank of America. Your line is open.

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Q&A Session

Koji Ikeda: Couple from me here. On the revenue side, lots and lots of positive commentary on the prepared remarks, especially on net revenue retention, but you did lower the guide a bit, so something did get worse. I know you guys called out S&B weakness, but is there anything else in the guide that we should be thinking about?

Cameron Hyzer: So certainly, the S&B weakness is something that impacted us particularly in Q1 as we had a higher or larger pool of renewals coming in in Q1. We also saw new business a little behind where we wanted it to be, also based on there being a fair amount of S&B weakness, S&B concentration within new business, as well as our shift to be more selective in the deals that we’re pulling in. So expecting that that should help us remove some of the headwinds around write-offs as we get further into the second half of the year.

Koji Ikeda: Got it. Thanks, Cam. And I recall in prior calls you’ve talked about 10% of ACV that needs to renew still, and a lot of those were attached to some of the larger software vendors or tech vendors out there that had big contracts, three-year contracts that were renewing sometime in the second quarter. So is there any way you could provide an update there? Anything we should be thinking about within that cohort that still needs to renew? Thanks, guys.

Cameron Hyzer: Yes. So not all of that 10% will renew in the second quarter. I think it’s a few percentage points for a few quarters to come still, but certainly those larger clients that we’re seeing, we’re seeing solid utilization and feel good about the renewal rates and customers that are coming up in Q2 and Q3, particularly among larger customers.

Operator: One moment for our next question. Our next question comes from Elizabeth Porter with Morgan Stanley. Your line is open.

Elizabeth Porter: I wanted to ask on the Copilot product. Sounds like a lot of interesting features going on there. Just give us some more clarity on how you expect to monetize. Is this something that comes upon renewal and takes some time to get phased in, even though it’s going GA in the back half of the year? And, is this more of a seat-based model and kind of how do you look to kind of raise prices in a tougher environment there? Thank you.

Henry Schuck: I think first our plan, our go-to-market plan is to make sure we phase this out to the customers who we believe will see the highest value from Copilot first. And so we built a model that looks at usage, integration, their ICP. And so we’re going after first the customers who are most likely to see the highest value and most likely to upsell into Copilot. I think ultimately on monetization, it is around monetizing additional value per seat. And we think it’s going to be an upsell relative to where our customers would have ended up, whether that’s an increase in certain renewals or in certain renewals where they have fewer users, that might be a flat renewal where historically it would have been a downsell. And new business, we think that we’re going to increase win rates and conversion rates because of Copilot. But we think we have the biggest opportunity within the customer base to drive monetization.

Elizabeth Porter: Got it. Thank you.

Cameron Hyzer: Elizabeth, I was just going to say, we’ve typically run these migration motions over a couple of years in the past. So we don’t expect it to all come now. But as we get further on in the year, it’s still early now. It hasn’t even gone to GA, but we’ll have a better view on the potential uplift across our customer base. And we intend to host an Analyst Day in the fourth quarter to dig more into those metrics as well as provide a view into the longer-term model based on that.

Elizabeth Porter: Got it. Thank you very much. And as a quick follow-up, I believe last quarter you talked of some shortening sales cycles in Q4. Is that something that continued into Q1? You highlighted a lot of other green shoots and more of the mid-market enterprise. But just curious on an update for the sales cycle period. Thank you.

Henry Schuck: We didn’t have any change in sales cycle length in the quarter. It stayed consistent.

Operator: One moment for our next question. Our next question comes from DJ Hynes with Canada Core Genuity. Your line is open.

DJ Hynes: Cameron, maybe a couple for you. I want to focus on that ACV cohort. I mean, I appreciate your commentary on improving retention dynamics. I think you said it was the second straight quarter. I was a little surprised in light of that to see the absolute number of customers decline by as much as it did. So question one is, do you see that bottoming? I know it’s a hard question to answer. And then question two would be, it sounds like the ACV in that cohort grew nicely. I think you said 16%. Just talk a little bit about what’s driving that. Is it new personas? I know you said operation subs growing nicely. Is it advanced functionality? Any color with the puts and takes there would be super helpful.

Cameron Hyzer: Sure. So the ACV for the cohort that grew 16% were the larger customers, the million-dollar-plus customers. And obviously, that’s a subset of the 100K-plus. What we really see there is that, larger enterprises and customers that have really leaned into the system are growing and growing nicely. But there are a number of mid-market, in some cases, even smaller customers that are just over the 100K level and still experiencing downsell pressure, whether that’s they’ve laid people off over the last 12 or 18 months relative to their expiration or that they’re continuing to face serious budget pressure. And those are the customers that we continue to see falling out of that cohort. There are still a number of those, but we are to a large extent, we have lapsed what we think of as peak negativity with respect to layoffs and so forth. So we feel that that pressure going forward won’t be as significant as we’ve seen over the last, three or four quarters.

Operator: One moment for our next question. Our next question comes from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy: So, Henry, we’ve definitely been noticing for many months that software companies are simply not hiring like they see a real demand recovery out there. And so very commonly, the headcount growth now is way below the revenue growth in the software industry, and it’s extremely unusual. I’m just wondering, and I think we hear a lot of different conjecture on why that might be, but how would you explain that phenomenon? Because I would assume if reps are seeing, if they’re reaching [indiscernible] attainment, we think software companies would kind of lean in on the hiring. So I’m just wondering if you think it’s that simple or something else is going on and they have a quick follow-up.

Henry Schuck: I think the world out there and go-to-market is all about productivity today. And so people are looking across their account executive, account management teams, and instead of asking the question of, if I added 10 additional people, could I drive more revenue growth? They’re saying, can I do this with 10 less people? Are they at full capacity? Can I get them more leads and generate the same amount? Can I drive productivity within my team? And so there is just a fundamental shift in the way people are thinking about the unit economics of their businesses. And so they want to do more with less. And one of the things, and where that’s happening in our customer base, I mentioned this on the last question, where that’s happening in our customer base, we’re not going to expand by number of seats, but Copilot gives us a real opportunity to expand ACV through that functionality without having to expand through seat counts.

And so in organizations where it might’ve been flat, we think there’s an opportunity to expand ACV. In organizations where there would have been downsell because there are just less people to hold licenses, we think there are opportunities to keep that flat. And so we’re going to use that as a real opportunity in the customer base, but I think there is a focus on productivity.

Mark Murphy: Yes, okay. And then, Henry, this is very well said. Thank you for that. I did want to ask you because Copilot, we’ve heard very good feedback, and it’s intriguing to turn a weak seller into a strong seller. But then the flip side is we just haven’t seen much generative AI monetization at the application layer across all the software. I mean, it’s been very, very minimal. So I just want to understand, based on you gave a very compelling assessment of some differences, do you think that ZoomInfo is going to be an outlier? Because there’s a lot of companies, you feel like it’s going to take a while before their gen AI application is giving them like a 1% tailwind, for instance.

Henry Schuck: Look, I think that question has a time element baked into it. Do I think ZoomInfo will be an outlier in our ability to generate and monetize through our AI solutions? Yes. Do I think it’s going to be in the back half of 2024, where it shows up that way? No, I do think it’s going to take longer than that. I have a lot of confidence because I’ve personally pitched this product across dozens of our customers, across all segments and all industries. And this is exactly from a product market fit. I don’t think we’ve been ever so close to fit as we have been with Copilot outside of the core company and contact data. And so I have a tremendous amount of confidence that we’re going to be able to turn that enthusiasm into monetization, but I also expect it to happen over time.

Operator: One moment for our next question. Our next question comes from Jackson Ader with KeyBanc. Your line is open.

Jackson Ader: The first one is on the down-market cohort. I’m just curious, is the SMB weakness, does that have more to do maybe with macro environment pressures or is there something happening competitively down market where people think they can go somewhere else rather than stick with ZoomInfo?

Henry Schuck: Yes. Thank you for the question. It is fundamentally down market, we’re seeing much more of a macro effect than a competitive effect. Specifically, as it relates to competition, we’ve not seen a material change in the competitive landscape or an increased impact to our business from competitors. Our new business win rates haven’t seen any increased pressure, either overall or particularly in the SMB where our competition is most concentrated. And then we had another quarter of just about record win back performance. So we feel really good about how we line up competitively and we feel especially good about how we show up with Copilot as we roll it out this quarter.

Jackson Ader: Okay, great. And then just a quick follow-up either, I guess, for you, Henry, or for Cameron, can you give us a sense for how much of the revenue mix actually comes from what you would consider SMB today?

Cameron Hyzer: Yes. So our enterprise business is right at 40% of the business, SMB is still around a third and then mid-market is a little below 30% making up the rest of that.

Operator: One moment for our next question. Our next question comes from Alex Zukin with Wolfe Research. Your line is open.

Alex Zukin: I guess maybe just going on to the back of that question about the SMB versus the enterprise versus mid-market, can you maybe just walk through the difference in growth rates in those three businesses as they currently stand for the year and when does the kind of the negative anchor kind of fully roll through or is there a potential spiral where each renewal cohort, for instance, in the SMB get worse? And then just mechanically, I appreciate Henry’s comments on win rates and win backs, but what about pricing? Like specifically, are you having to discount more aggressively to either win new business or retain business? And that’s something you’re seeing in the marketplace.

Cameron Hyzer: So Alex, I’ll start with the growth rates between the different cohorts. Realistically, enterprise has been pretty solid. I’d say as we went through early on in 2023, as we’re going through the quarters, I think it was challenged, but it was the first group for us to kind of see stability with. We did see continued downsell pressure through ’23 in the mid-market world and that was particularly acute on the software side where we saw customers really taking out seats either due to layoffs that they’d done or overbuying that they’d done historically. As we came through the end of the year in Q4 and Q1, we have started to see that stabilize, but mid-market was certainly down on an absolute basis across that period.

SMB actually held in reasonably well as we went through 2023, but really in Q1, we’ve seen a change in that trend. It does feel like the SMB cohort is more sensitive to the higher rates for a longer discussion that we’ve seen over the last few months. I think a lot of those companies were kind of hoping for a light at the end of the tunnel, and as that’s changed, they’re more sensitive to the environment. We’ve seen real pressure, so I think that’s a change that we saw in Q1 more than anything else. I’ll let Henry address the pricing question.

Henry Schuck: Yes. One thing, Alex, that we have not seen from our competitors down-market, up-market, anywhere, is that they haven’t innovated on data and they haven’t innovated on product and they haven’t innovated on software. There’s been no innovation. It’s just lower cost, and the one place that they have innovated is around their go-to-market motion where they built PLG motions that can attract a large segment of low-end SMB buyers, and we were behind on that, and over the last year, we’ve spent a lot of time building up our PLG motion. Inevitably, what happens with the PLG motion is that we sell at a lower price point for much smaller customers, and then we look to grow them as they come into the customer base. And so where there has been a pricing difference this quarter versus historically has been in that PLG cohort that comes in at a lower price and then grows with us over time.

Operator: One moment for our next question. Our next question comes from Michael Turrin with Wells Fargo Securities. Your line is open.

Michael Berg: Hey, this is Michael Berg on from Michael Turrin. Thanks for taking the question. Really appreciate the color on NRR earlier in the call here, and I know there’s been a lot of questions asked on this, but I want to take a different step or a different angle on this. As you look towards the rest of the year, in particular the second half of the year, how can we think about the key drivers to potentially improve the NRR rate? Is it enterprise strength, SMB weakness rolling off, new products rolling on? Maybe help us understand what does improve NRR from here.

Henry Schuck: I think that there are a couple of things that improve NRR from here. I think one is we roll out — when you think about NRR, it’s about renewal rate, and then it’s about our ability to upsell products that we’re innovating or new users into the customer base. And so from a renewal rate perspective, we are seeing that stabilization in mid-market. We’re seeing an improvement in renewal rates in our enterprise cohort, so we feel like — we’ve seen those trends continue into Q2, so we think that that’s a trend that can continue through the back half of the year. And so if renewal rate continues to stay stable and continues to improve, that drives up NRR. We have the new product with Copilot that we’ll take into the customer base.

That should drive up NRR as well. I think between renewal rate and improved products that we can sell into the customer base, those two things make a big impact. We also, as Cameron mentioned, there’s an element of expirations coming up and multi-year contracts that increased last year that will be a tailwind to us this year as well.

Michael Berg: Got it. Helpful. And then, Cameron, one quick follow-up. As you talk about SMB cohort and be more selective there in terms of the deals you take on, can we think about it benefiting free cash flow conversion over time? Can we think about this going from low 90s to mid or even high 90s and back above 100 over time as the quality of the customer base improves? Thanks.

Cameron Hyzer: Certainly, our goal in taking more upfront payments for those lower quality or smaller customers is largely to lower the write-offs. So certainly, in a world where we have fewer write-offs, that should improve the cash flow and, frankly, help us be more efficient in terms of where we’re dedicating our time. But realistically, I think that that’s probably something that happens around the edges. The bigger driver of cash flow conversion will be ultimately us reaccelerating growth. And so where we’re able to reaccelerate growth and get growth back into a double-digit world, that would ultimately push that cash flow conversion higher into mid-90s or even higher just based on the fact that a bigger proportion of our revenue is coming in up front based on that.