ZoomInfo Technologies Inc. Q2 FY2024 earnings call

Key Points

• Implemented comprehensive changes in selling to SMBs, including a new business risk model requiring prepayment from risky prospects to mitigate write-off volatility.
• Stabilization of net revenue retention for the first time since Q4 2021, with improvements in renewal rates and upsells.
• Significant growth in enterprise and mid-market new business, with the $100,000 and $1 million+ customer cohorts showing positive trends.
• Operations and Data-as-a-Service business growing strongly at 23% year-over-year with 117% net retention.
• Copilot sales exceeding expectations, with over $18 million ACV across over 1,000 logos.
• Board changes with new members Dominic Meda and Owen Wurtzbacher, and ongoing efforts to repurchase shares with $400 million remaining authorization.

In Q2, Enterprise ACV was up 9% year-over-year, with the $100,000 ACV customer cohort growing and the $1 million+ customer cohort seeing sequential growth. Mid-market and Enterprise had the best new business quarter ever. SMB had higher write-offs leading to a $33 million charge, with changes implemented to require prepayment from risky SMBs. Operations and Data-as-a-Service offerings were up 23% year-over-year with an 117% net retention rate, representing 13% of ACV. Copilot had over $18 million ACV across more than 1,000 logos, performing solidly above expectations.

Q2 Results

• GAAP revenue $292 million, adjusted operating income $82 million (28% margin).

Q3 Guidance

• GAAP revenue range: $298 million - $301 million; adjusted operating income range: $107 million - $109 million; non-GAAP net income range: $0.21 - $0.22 per share.

Full Year 2024 Guidance

• GAAP revenue range: $1.19 billion - $1.205 billion; adjusted operating income range: $412 million - $418 million; unlevered free cash flow range: $420 million - $430 million. Excluding discrete charges, adjusted operating margin expected to be 37% for the year. Aim for $1 per share of levered free cash flow this year and growth in 2025.

• Escalating write-offs from SMBs due to higher non-payment rates from customers extended credit in 2022-2023.
• Uncertain operating environment impacting sales and retention, leading to incremental conservatism in guidance.
• Continued risk of write-offs despite operational changes, requiring conservative assumptions for the back half of the year.

Q: After Q2, the EBITDA, we should largely be through the renewal risk, which has pressured the business for a while now. So I'm just hoping to get a better understanding of the decline for the back half of the year. Or are you assuming a second round of down-sells or has new business outlook changed materially?

A: Cameron Hyzer mentioned factors like continued write-off potential and fluid operating environment, inserting incremental conservatism in guidance. Henry Schuck added that operational improvements won't take hold until end of year or early next year, and no assumption of continued Q2 improvements in back half.

Q: I'm curious if the volume of newly announced layoffs in the technology industry since June and July might have surprised you at all because Henry, I think you just said that you're not assuming that any of these improvements that you did see in Q2 are going to continue in the second half. So we had these announcements from UIPath and Intuit and OpenText Salesforce and Intel and others since then. And so I'm just curious if you -- if something is causing you to sense a second wave of layoffs that might be affecting go-to-market head count in the last say, 5 to 8 weeks a little more than you might have expected?

A: Henry Schuck stated that a meaningful portion of the business is usage-based (Operations OS and DaaS), not seat-based, and there's still opportunity in seat-based growth with Copilot expanding use cases beyond top of funnel.

Q: Like -- if you think about the ability to collect from clients, like how does this current environment kind of compare to what you've seen before? Because like we had like the -- in the COVID 2020, where it was half 2022, this seems to be either you changed how you kind of [Indiscernible] in 2023 or it's getting worse?

A: Henry Schuck said write-off rates elevated from historical levels, especially in 2022-2023 cohorts, and the solution is requiring upfront prepayment from risky SMB customers to address collectibility.