Q4 2023 Zeta Global Holdings Corp Earnings Call

Participants

Scott Schmitz; IR; Zeta Global Holdings Corp

David Steinberg; Chairman of the Board, Chief Executive Officer, Co-Founder; Zeta Global Holdings Corp

Christopher Greiner; Chief Financial Officer; Zeta Global Holdings Corp

Ryan MacDonald; Analyst; Needham & Company, LLC

Elizabeth Porter; Analyst; Morgan Stanley & Co. LLC

Jason Kreyer; Analyst; Craig-Hallum Capital Group LLC

Koji Ikeda; Analyst; BofA Securities, Inc.

Zach Cummins; Analyst; B. Riley Securities, Inc.

Arjun Bhatia; Analyst; William Blair & Company, L.L.C.

Richard Baldry; Analyst; Roth Capital Partners, LLC

Presentation

Operator

Greetings, welcome to Zeta fourth quarter '23 earnings conference call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to Scott Schrier Senior Vice President of Investor Relations. Thank you. You may begin.

Scott Schmitz

Thank you, operator. Hello, everyone, and thank you for joining us for Zoetis Fourth Quarter and Full Year 2023 conference call. Today's presentation and earnings release are available on data's Investor Relations website at investors dot sabre global.com, where you will also find links to our SEC filings along with other information about data. Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer, and Chris Greiner, Zeta's Chief Financial Officer.
Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition, revenues of our products and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the Company's earnings release and other filings with the SEC and speak only as of today's date.
In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures were appropriate, can be found in the earnings presentation available on our website as well as our earnings release and other filings with the SEC.
I will now turn the call over to David.

David Steinberg

Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. 2023 was a record year for Zeta that finished with a strong Q4 once again exceeding our expectations. For the full year of 2023, we delivered revenue of $729 million, up 23% year over year. This marks our fourth consecutive year exceeding 20% revenue growth, and we are guiding to a fifth year of 20% growth in 2024.
Over the past four years, we have also expanded our adjusted EBITDA margins by 1,000 basis points with over 200 basis points of expansion this past year alone to 17.8% or $129 million in adjusted EBITDA today. The marketing ecosystem is in a state of change and has moved from theoretical through a boardroom conversation with chief marketing officers mandated to make AI more actionable to deliver greater efficiency and better experiences for consumers.
These CMOs are increasingly looking to data as evidenced by the strong growth in our RFPs and our sales pipeline because AI has been at the core of the ZMP for many years as opposed to many months, we believe that we are at the forefront of a wave that is driving a replacement cycle. We currently have more than 125 patents issued and or pending around AI, machine learning and other advanced technologies. Marketing has not been able to capitalize on the AI revolution because of an enduring problem in most enterprises, data is abundant, but intelligence is scarce.
The Zeta marketing platform is closing this intelligence gap by allowing customers to use our generative AR with their data and not share it back to the collective. Our investments in 2024 are about making a eye more action, delivering better experiences for consumers and widening Vitas moat. These investments include strengthening our agile intelligence offering, expanding our mobile capabilities and extending JNI into new and additional use cases.
One of the most exciting developments is the rollout of a new product initially called intelligent agent Composer. This creates gen AI agents that provide dozens of intelligent and automated tools that make our customers more efficient and more Factive customers will be empowered to build their own intelligent agents with in our platform, allowing them to power workflows and customer experiences specific to their brand and their needs in this model, it becomes even more essential and a more sticky partner to our client. Early gen AI products have unlocked creativity and personal productivity, but they have yet to realize their transformative potential for enterprise marketing ecosystem.
Our intelligent agent Composer has the power to change that we expect to monetize this new product and additional gen AI. functionality multiple ways creating new billable modules, generating higher consumption and lowering the burden of marketing resources in enterprises and agency.
Going deeper into our mobile strategy for 2024.
Today, mobile engagement largely operates as a point solution within enterprise environments, we see a dual opportunity first integrate mobile into a more comprehensive platform, and second, deliver conversational experiences using Gen AI., we believe our intelligent platform provides a competitive advantage for marketers looking to deliver real-time personalized experiences for consumers and as a natural fit for mobile environments. For example, we are currently working with a large national retailer to develop a mobile solution to enhance the in-store selling experience by putting Zeta Data Cloud and the ZMP. in the hands of salespeople to deliver real-time customer engagement at the point of sale.
This simplifies the complex task of logging into multiple systems for answers on the status of an order inventory or personalized client data ZMP. connects to all subsystems and provide information via a simple conversational interface on a mobile device. Today, mobile accounts for less than 2% of revenue through our platform, but we believe it has the potential to be our next $100 million-plus business similar to house CTD. It's scaling our unique position in the market and continued investment in a high-powered marketing technology is also creating interest across the ecosystem as we expand our relationships with system integrators. We are in advanced discussions with an array of SIs, including an exciting joint implementation at a large enterprise where solutions spanning data management as well as customer acquisition growth in retention will be replaced by the ZMP overall RSI implementation is a multiyear rollout, and we expect it to have a larger impact into 2025 and beyond.
Zooming back out, I also wanted to spend a minute on recent industry headlines related to cookie deprivation and email deliverability. These changes only elevate the importance of Zeta's proprietary first-party data as opposed to relying on third party cookie data to identify individuals in terms of email, the new requirements from Google and Yahoo are in line with what we have already incorporated into our infrastructure. Our observations pre and post their rollout show equal to and in some cases, even better deliverability and higher open rates.
In short, we believe these changes enhance our competitive position by elevating the value of our Identity Graph and further improvement effectiveness and return on investment for the ZMP for engagement. Building upon what we discussed at our September 2023 Investor Day, we are taking action on investor feedback related to dilution and stock-based compensation. First, we are guiding to bring dilution from incentive-based compensation down from 5% in 2023 to 3.5% to 3.75% in 2024.
In terms of stock-based compensation, we're also planning to evolve how we incentivize senior management by way, of example, Chris Greiner and I along with others are planning not to receive any restricted shares this year. Instead, equity incentive compensation would be based on performance stock units, which are tied to the appreciation of Zoetis share price and will more closely align us with shareholder value creation. These changes, in addition to continuing to benefit from a lower level of pre IPO stock based compensation flowing through our P&L places data on a trajectory to achieve GAAP based profitability in the fourth quarter of 2024.
At the same time, our goal is to continue to invest in innovation and build a strong culture with the foundation of corporate responsibility. In fact, for the second year in a row, I'm proud to share that data was recognized as one of built in best places to work.
I'm also pleased to announce that for the second year in a row, we achieved carbon net neutrality, which is an important accomplishment for prospective and existing customers as well as our employees.
In closing, 2023 was an incredible year for Zeta for we believe 2024 will be even better. As always, I would like to sincerely thank our customers, partners, teams, data and all of our shareholders for their ongoing support of our vision.
Now let me turn it over to Chris to discuss our results in greater detail. Chris?

Christopher Greiner

Thank you, David. I'm excited for all that we're covering today but let me start with the punchline first for taking share while growing efficiently. I'll cover what is contributing to another quarter and year. It is exceeding guidance being above the Rule of 40 and growing faster than the market.
Second, we're leveraging our flywheel. I'll share the financial profile and the flywheel effect of our direct and integrated revenue streams and how we're expanding and cross-selling our new large agency customers to see their own channels.
And third, we're guiding ahead of the Street while remaining prudently conservative.
I'll wrap up by outlining how 2023's headwinds shift to become 2024's tailwinds. All together, we're executing on our plan, capitalizing on our competitive advantages in guiding 2024 from a position of strength.
Now let's dive into each of these with more color, starting with the fourth quarter and full year 2023 results. In 4Q, we delivered revenue of $210 million, up 20% year to year or 22%, excluding M&A and the prior year's political revenue. The full year's revenue was $729 million, up 23% year to year or 24%, excluding M&A and the prior year's political revenue. This exceeded our initial 2023 guide of $691 million by $38 million or 5.5%.
It also includes a seven-point growth headwind from our two challenged verticals of automotive and insurance. Combined, these two verticals accounted for approximately 10% of revenue in 2023, meaning 90% of data grew over 30% in 2023. Our ability to consistently exceed guidance and drive 20% plus revenue growth over the past four years comes from strong visibility into our data 2025 KPIs. Let's dive into those now.
We ended the year with 452 skilled customers. So as a reminder, account for 97% of total data revenue and spend at least [$100,000] on a trailing 12-month basis. This was up [12] from 3Q and [49] or 12% from a year ago. At the high end of our 8% to 12% model. We saw accelerated growth in our $1 million-plus super scaled customers, which increased by seven quarter to quarter to 131 and up 27% year to year. The addition of scaled customers are coming from an array of industries, most notably consumer retail, education, tech and media and travel and hospitality, in addition to others, demonstrating the wide application of our platform and continued healthy diversification of customers. To that end, 6 of our 10 largest verticals, once again grew more than 25% year to year.
In terms of scaled customer ARPU, 4Q grew 7% with the full year, up 10% to $1.57 million coming in at the midpoint of our 8% to 12% growth model. This was driven by customers using two or more channels, which increased 27% year to year. Our scaled customer cohort trends slide number 12 in the supplemental deck shows how ARPU reliably increases the longer our customers are on the platform. It really illustrates the drivers of high net revenue retention for example, scaled customers less than a year on the platform spend an average of $600,000 with many starting a smaller pilot.
This group accounted for less than 10% of 2023 revenue. Scaled customers with one to three years on the platform spend an average of $1.3 million or 2.3 times more than those with less than a year on the platform and scaled customers with three or more years tenure spend an average of $2.1 million or 3.6 times more than those with less than a year on the platform.
But progression of these cohorts is important for a couple of reasons. Of the 49 scaled customers added in the last 12 months 27 are in the $100,000 to $600,000 band. Meaning this cohort has the potential to more than double in the next 12 months and with 90% of data revenue generated from customers with us more than a year. We have strong forecasts and visibility. This is a good lead-in to net revenue retention, which is 111% for the year. Excluding the impact of the automotive and insurance industry's net revenue, retention would have finished the year at 118%. Our model net revenue retention is 110% to 115%. And as we sit here today, I would expect us to be towards the high end of that range in 2024.
Switching to another one of our data 2025 KPIs direct revenue mix, which is an area I want to help investors understand definitionally direct platform revenue is generated when customers use latest data analytics and both channels to perform their marketing activities. Under the VMP, we've integrated revenues generated from non-data owned channels, principally social networks like Meta, TikTok and others.
In terms of the financial attributes of direct revenue, direct mix is consistently greater than 70% of total data as a 70% to 75% margin profile with approximately two thirds of direct revenue being recurring.
From a growth perspective, direct revenue grew 15% year to year or 23%, excluding the two challenged industries of automotive and insurance. If we simply assume the percentage of 2024 direct revenue is consistent with 2023, which I see is a balanced assumption. You have a $600 million direct business, growing approximately 20% with margins and recurring revenue mix about 10 points above the corporate average. Where the flywheel comes into play is the customer journey from social to data own channel. This is most relevant with our new large agency customers as illustrated on slide 13, in our supplemental deck, agencies utilize data Data Cloud and intelligence products to identify individuals who work in markets and reachable inside the walled garden.
It's powerful proof point of data intelligence and seamless connection points into the walled gardens forms the foundation for building omnichannel journeys on Baidu's own channel. This is a new and compelling way to think about the profile of the direct business, along with the long-term value large agency holdcos bring to data. This dynamic of direct and integrated revenue was the primary driver of changes in GAAP cost of revenue throughout 2023, cost of revenue in the quarter was 40.2%, up 260 basis points year to year and 130 basis points quarter to quarter, driven primarily by the growth in integrated revenue from newly added agency customers starting their journey on social channels.
Our fourth quarter GAAP net loss was $35 million, which includes $63 million of stock-based compensation, full year 2023 GAAP net loss was $187 million, which includes $243 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been $102 million. 4Q total operating expense growth slowed to 3% year to year, excluding stock-based compensation and is down 640 basis points as a percentage of revenue. The same leverage was visible over the full year, down 410 basis points as a percentage of revenue.
Our disciplined expense management and better sales productivity resulted in continued adjusted EBITDA margin expansion. In the quarter, we generated $44.8 million in adjusted EBITDA, up 38% year to year with 280 basis points of margin expansion to 21.3%. On a run rate basis, we're two years ahead of the 20% implied margin target as part of data 2025 and 4Q was the 12th straight quarter. We've expanded adjusted EBITDA margins year to year full year 2023.
We delivered adjusted EBITDA of $129.4 million, up 40% year to year, with adjusted EBITDA margins of 17.8%, up 220 basis points year to year. Cash flow from 4Q operating activities was $27 million, up 17% year to year, with free cash flow of $18 million, up 32% year to year. For the full year, cash flow from operating activities was $91 million, up 15% year to year, with free cash flow of $55 million, up 39% year this despite a $25 million working capital headwind primarily from the expansion of our agency base.
Now I'll wrap with guidance. First, handful of points to communicate our approach to guidance and slide, you can reference in our supplemental deck one, even by starting ahead of the Street, we see our full year guide in revenue and adjusted EBITDA as prudently conservative which is outlined on slide 17 in the supplemental to like last year, we're providing guidance for each quarter of the year on Slide 18, which is based upon the skew of 2022 to take into consideration political cyclicalities, three along those lines, as seen on slide 19, we're showing how much of each quarter's revenues associated with clinical candidates. We see this as simply a starting point. Four, we're guiding to the full year 2020 for free cash flow, showing an increase in cash conversion as we wrap on working capital headwinds from newly added AGENCY holdco customers and five, as David mentioned, we're targeting a decrease in dilution from incentive-based stock compensation of 5%, 3.5% to 3.75% on route to GAAP profitability by the fourth quarter of 2024.
As for the details, we're guiding the midpoint of full year 2024 revenue to $875 million, up 20% year to year, and the first quarter revenue at $187 million, up 19% year to year at the midpoint of our range. We have a starting placeholder political candidate revenue in 2020 for $15 million with $2 million in 2Q, $5 million in 3Q and $8 million in 4Q for guiding adjusted EBITDA at the midpoint of full year guidance of $166 million or 19% margin with first quarter adjusted EBITDA of $29.1 million, representing a margin of 15.5% at the midpoint of our range. We're guiding full year free cash flow in the range of $75 million to $85 million, translating to 48% conversion of adjusted EBITDA at the midpoint, up from 42% in 2023.
In summary, we see our 2024 guidance which already exceeds the Street's growth rate by 300 basis points and adjusted EBITDA by $8 million as a good starting point with high visibility to tailwinds that layer throughout the year.
With that, let me hand the call back to the operator for David and I need to take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Ryan MacDonald, Needham & Company.

Ryan MacDonald

Thanks for taking my question questions and congrats on an excellent quarter. David, as we think about in 2024, you talked about some interesting sort of priorities around the strategy and some some really interesting product investments as we think about sort of intelligent agent Composer and mobile, the mobile strategy, how do you look at the magnitude of impact or maybe how you're building any impact in terms of expectations into sort of 2024 outlook from contributions from these newer offerings?

David Steinberg

Well, first of all, thank you, Ryan, we appreciate it. We are we obviously, we're incredibly proud on the quarter. When we look at and talk about new development, I think philosophically, you should always think that we don't need that to get to the guidance that we're giving.
So as we look at the investment into the intelligent agent, we look into the investment of mobile. It's already fully baked in to our investment into the company and how we think about it from a guidance perspective. But we also were not including it in what we expect to deliver from a revenue perspective.
Now, obviously, we believe the intelligent agent is a massive revenue opportunity where for the first time, we will begin to sell our artificial intelligence products instead of just using them for efficiency. And mobile is one of I joked that post the elimination of the IDFA, it's become almost like the wild west where most organizations are taking a very small sample of, call it 8%, which is the one that's most talked about. And they're extrapolating that whereas we can go into the mobile ecosystem and really focus on deterministic attribution using the ZID., if either of those were to really hit, I think that would give us upside to the estimates that we put out there. And I think Chris said it best when he said not only are we starting the year at 20%. I think if I remember correctly, last year, we started the year at 17% from a guidance perspective and finished to '23. This year, we're starting at 20%. We feel those numbers already conservative. This would be a part of what would be additional upside.

Ryan MacDonald

Really helpful on maybe as a follow-up, Chris, for you. So maybe two topics to talk about with the guidance as well on. So obviously, auto insurance industry's challenge last year. Can you just talk about what you're seeing in terms of sight lines or pipeline building that gives you confidence in maybe stabilization or recovery there this year? And then just curious on the on the conservatism you're building in from the political contributions this year, maybe what you're seeing in the market. Why you felt that $15 million would be the right starting point and maybe potential for upside from that?

Christopher Greiner

Thanks, Ryan. On the first question around the two challenged verticals, the automotive vertical and the insurance vertical, the short answer is very good visibility into the sales pipeline, much of that, frankly, already starting late 4Q. So it will already start to feather in beginning in the first quarter. So feeling really good about the return of those industries back to growth in 2024, probably even starting to see some in the latter part of the first half of this year.
Yes, as it relates to your other question, which was around our political assumptions. You'll recall that in 2020, we did $15 million in political revenue and we did about half of that $7.5 million in 2022. We wanted to just start with a baseline of what 2020 was knowing that it was likely conservative. What's also good to recall though, is that advocacy tends to draft off of political. So the combination of candidate revenue and the work we do with advocacy groups both are probably conservative in our outlook and would have upside throughout the year, and we'll continue to provide visibility as to what we're assuming for political candidate revenue as well.

Operator

Elizabeth Porter, Morgan Stanley.

Elizabeth Porter

Hi, thank you so much. I wanted to go back to the example that you provided in mobile. You talked about getting in the technology enhancement salespeople noted that was interesting and it sounds like you may be getting into a new end user there outside of the traditional marketing department. So if so, kind of would love to hear who you might expect to compete within the segment? Should we view this as a TAM expander and how you plan on addressing a potentially new buyer segment with an additional wallet opportunity? Thank you.

David Steinberg

As usual, Elizabeth, we appreciate it. The answer is yes to both. So we see an opportunity to add mobile as a channel to our existing scaled and super scaled customers, which today wouldn't increase our TAM pretty dramatically when you think about it, because we've never really played in that mobile ecosystem because quite frankly, while the IDFA was around, there was a lot of efficacy there and there were a lot of players running around there with the elimination of the IDFA, the efficacy of that channel has dissipated rapidly.
So it puts us in a very unique position where we can take assets that we already own, which is the $240 million plus opted in individuals of which we can tie back to the ZID. number, which we can identify in the mobile ecosystem. So it gives us an advantage that nobody else in the mobile ecosystem has outside of the walled garden. So it's a very unique opportunity to do that.
At the same time, what we're finding is CIO.s want to buy our technology as well. So there's the opportunity to expand from just focusing on the marketing to also selling the technology directly to the CEOs. And I think you're going to see some very big developments out of Zeta this year as it relates to the sale of our technology to CIO.s to power other functions of their businesses. In addition to the marketing function.

Elizabeth Porter

And just as a follow-up, you I wanted to ask about the sales cycles that you have with working with agencies versus directly with enterprises on one hand, you might have more decision makers sitting at the table. But on the other hand, you have that trusted agency partner. Is there any opportunities for accelerated sales cycles are lengthening sales cycles you as you're working with more agencies?

David Steinberg

Yes. So the another great question. I think when you work with agencies, you work with them in one of two ways. It's very interesting you go in as a master relationship to the agency and then you go from enterprise to enterprise, which is dramatically faster than when we go directly to an enterprise ourselves put in perspective, some Fortune 500 companies can take up to six months to move from contract through procurement through data security through legal. Whereas when you're doing it in partnership with the holdco, it's turning it on. So it moves very, very quickly. The other thing is there are some agencies that literally manage the marketing on behalf of the enterprise themselves. And what we're starting to do is, as we've expanded from one to now, what are three agency holdco clients where they're able to just say, let's do this, and we're seeing that side of the business scaling quickly, but massively shortening the sales slots.

Christopher Greiner

Elizabeth, welcome back. I'm on slide 13 because this is a topic we spend a lot of time with investors on recently is understanding the relationship between direct revenue and integrated revenue and the role that our new agency holdcos are playing in that and what we've shown on slide 13 is the journey of our first holdco from now several years ago, two recent holdcos. And what you'll note is that those recent holdcos are starting significantly bigger initial investments with Zeta with the same opportunity to expand, but also evolve and shift their mix over time. So it's laid out, I think, well on Slide 13. Thanks for your questions.

Operator

Jason Kreyer, Craig-Hallum.

Jason Kreyer

Great, thank you. And David, I just wanted to ask if you can maybe summarize how the your conversations with customers have evolved around AI. over the last couple of quarters and then maybe how you see Vitas opportunity evolving with that?

David Steinberg

Well, thank you, Jason. As I think I said in my sort of scripted notes, it's something I say a lot AI. has moved from theoretical to really starting in the boardroom. And what I'm seeing is the Board is saying that the CEO, what's your AI strategy and then they're saying and make sure that our data stays secure inside of that strategy, they then go down and they sort of yell at the CMO, what's our AI strategy and how do we keep our data protected and safe. And those CMOs are often calling me and saying, What do we do here, right?
So when you look at our ability to put a CDP. in place, which creates a closed ecosystem for the client's data, you're then able to append our data in, you're adding, in many cases, billions and in some cases, even trillions of data points to their data and the algorithm can operate inside of there. So by way, of example, you've got a lot of people talking about large language models. You've got some people talking about small language models. I like to joke. We're a midsized language model. We have the benefits of the large language models with the security, safety and privacy of the small language models for our data and every CMO that I'm talking to is asking for products around efficiency for their business.
And once again, you look at our new agent product that is going to disintermediate very highly paid data scientist inside of our clients' ecosystems in some cases, it's not disintermediating anybody. They just can't even get enough bodies to do the work. So our ability to automate all of that and now sell it to them and the way we look at it is listen, if they're paying a data scientist, $250,000 a year, why not pay us $50,000 a year per instance, and you're talking $4,000, $5,000 a month on a subscription basis as you roll that out and you just have to do that thousands of times, which is actually not as hard to do with the number of scaled and super scaled clients we have.
So I would tell you, Jason, that this is becoming a day-to-day conversation, but the solution that Zeta has by putting the CDP. in place, allowing the algorithms to operate with their data in conjunction with our data without ever risking their data going out into the environment or out into the ether has been a game changer in our conversations. And by the way, I think it's one of the reasons you're seeing that ripple through our numbers and ripple through our projections.

Jason Kreyer

Thank you. I wanted to squeeze in one for Chris. Just on the gross margins, and I know you just talked about agency influence in direct and indirect channel. I think you've appropriately telegraphed kind of the trajectory of gross margins. I just wanted to ask on that is we saw that slide a little bit from Q3 to Q4 as we look into 2024, do you think we've hit a bottom in gross margins? Or do you have an idea will that bottoms out before you kind of get the reacceleration of the direct mix?

Christopher Greiner

Jason, thanks for the question. So here's where our head is at on gross margins and is particularly that really well, is that I think 4Q, it bottoms out or did bottom out with the upside now in 2024. So kind of setting the base at that 60% level, the upside beyond there. It's tied to how quickly we move those new large agency customers from integrated to direct channels. That's lever number one, lever number two is how quickly we see our automotive and our insurance customers start to grow again, who happen to be at the higher end of our gross margin mix in terms of channel usage on the direct platform. And then third, where political and advocacy also comes into those three should begin to work our way up throughout the year, starting at that base point of around 60.

Operator

Koji Ikeda, Bank of America.

Koji Ikeda

Hey, guys, thanks so much for taking the questions. A couple for me here. First one, I wanted to ask a question about Boomerang customers with you. You guys have been in the market for over a decade now. And I'm sure over those past 10 years plus many customers have tried out the data platform before. But my gosh, this data platform has changed quite a bit since the early days. And so just wanted to hear a little bit about commentary about how customers have come back to date after trying to data before? And what are some of the most common reasons why you seen customers come back?

David Steinberg

Could you sort of it's actually, really we're laughing here because it's been a big thing lately where we've been sort of like using the term back to the future where I mean one of the world's largest fashion houses very recently came back to us at scale after leaving us for three years because they felt like they needed to use one global platform for everything I think one of the large marketing clouds, which might be owned by a large technology Holding Corp.
And what they found was their marketing clouds couldn't deliver what the data marketing platform could and it's funny. We talked a lot about disintermediating point solutions, but there was a big move a few years ago that you had to move everything. You're publishing all of your sales force management to one company globally and you saw some companies over the years leave us to go to those bigger platforms. We are quite frankly, even surprised by how many of them are coming back because those guys just can't deliver on what they do talk about in the Marketing Cloud now they might be really good at Salesforce automation.
They might be really good at publishing, right? They might be weighed on financial services packages and databases, but they're not great marketing clouds, and they're really not able to deliver the data with the artificial intelligence is native to the application layer, which is becoming a bigger and bigger problem. So I it's funny you ask it, and it's been a trend that has been something that's literally been of the point that we have been focusing on revisiting with customers that we lost a few years ago and winning them back at a higher rate than even our traditional RFP win rates.

Koji Ikeda

That's super helpful. And a follow-up here, maybe for Chris. As I look at the deck for the fourth quarter and compare against the deck for the third quarter question here, really on stock-based compensation, it looks like it ended up this year about $10 million and the $12 million higher than were on the non IPO side than when it was originally guided to last quarter, and it looks like it's about $10 million higher for 2024. So just really wanted to understand the dynamic.

Christopher Greiner

Thanks, Koji. On the stock-based compensation side, while much of that was due awards that happen in the first half of 2023, there were some compensation related end of year of grants that were made. But I think more importantly, kind of zooming out to the prepared remarks, we are very focused and we're really acting on three primary areas from being on the road extensively in 2023 feedback on specific items from investors. The first is taking dilution down tied to incentive compensation.
So going from 5% in 2023 dilution to now guiding to a pretty substantial reduction year over year to a dilution rate of 3.5% to 3.75% in route to 3% over time. And the second area of feedback was around our guidance approach and wanting to just continue to be more predictable and tighter in guidance rather than have these, you know, wild swings and beats were continue to be beat, raise company, but you're tightening that up a little bit.
And then you, David, you could talk to the third area --

David Steinberg

The big thing -- and Koji, as you know, I've been personally out there with Chris and Scott and over the last couple of quarters, and that's that's a trend that will continue as I begin to spend more time with investors or case studies, right? One of the things we hear a lot is, gosh, what you're doing is so cool, but it's so confusing to Wall Street. How do you simplify it and how do you get case studies?
So today, for the first time in Zebra's history, we are putting forth multiple named client case studies, and we expect that to be a trend that will continue. Our goal is to continue to work with our enterprise clients to add more case studies as Chris is now writing on a piece paper that I should say this is Slides 27, 28 and 29. I don't think anybody would believe I actually remember that. So I'll give you full credit for that, Chris. But at the end of the day, what we're doing makes a massive difference to our enterprise and agency clients and putting forth what those case studies are we think will help us as we grow as a company.
So I know that was a very long answer to a very short question around comp stock-based comp but I will point out not only are we moving from what has traditionally been 5%-plus to 3.5% to 3.75%on the road to 3% dilution, which is what we think is the right goal. We are also making a decision as a senior management team to take no restricted shares this year.
So I'm taking only performance stock units, as is Chris Greiner as Steve Gerber and as is the vine up. And we will be more aligned with shareholders as they will require increases in stock price for us to get those to vest, not just time because we want to make sure that all of our existing shareholders know that they're being heard and we're making the decisions to do a better job and the things that they want us to do at it.

Operator

David Hynes, Canaccord Genuity.

Hey, guys, this is Luke on for DJ. Thanks for taking the question. So I was wondering if you can flesh out your comments a bit on the intelligent agent and mobile opportunity. I recognize it's still early days there, but but any early thoughts on sort of penetration potential across your existing customer base? And then also on how that rollout could impact margins over time?

David Steinberg

Thank you, Luke. Listen, we're really excited about this intelligent agent product because to me and I don't want to get too ahead of ourselves here, but not only does this begin to help our enterprise clients to do a better job running their business. But it gets into what I really really am excited about long term, which is business intelligence. We talk about intelligence at the core of our product today, how if we extrapolate that down the road into true business intelligence products and I believe this is the first jump into that. We have almost 500.
I think I can say that scaled clients up and the goal is to get a disproportionate percentage of them to adapt these products or adopt these products and in the coming months, quarters and years. And I once again, I want to reiterate, they're not baked into what we think are conservative projections around 20%, but there are upside to that. And I think that they carry traditional software margins. So you're talking I don't know if that's mid 80s or high 80s, but you're talking about a high margin product, but it's coming into a pretty sizable base company, meaning we'll have to get a bunch of clients on board to move the needle from a margin perspective, what I can tell you is we believe our clients are going to adopt them. We believe they're going to adopt them at scale, and we do believe that in the long run, these products will help us continue to move our gross margins up.

And just a follow-up from a lot of streaming companies are rolling out AdCare's nowadays, and we think that probably notionally increases the size of the CTV. market opportunity for you guys. You have a similar perspective there and any any impacts on your business as you've seen that rollout?

David Steinberg

Yes. So it's interesting. Yes. So to answer your question, unequivocally, the more of these streaming platforms that insert ads pre I call it pre roll, but it's not it's always accurate, but sort of pre the beginning of the content, the middle of the content, the end of the content, all of the above every one of those units is a massive opportunity for us and to be totally transparent, we are already plugged into all of them. So we see this as a unique opportunity to expand out.
Now the largest platform sort of started off trying to get these massive minimums out of enterprises to partner with them. And it didn't work quite the way they had originally planned to say the least, they've now come back and we're seeing what we think are very unique opportunities to scale that business with all of the streaming platforms, including the largest one.

Christopher Greiner

Nice growth quarter actually in the fourth quarter, Luke, on CTVI. grew 30% quarter to quarter. And if you follow the pattern of CTV.s usage around advocacy and political, one were for shadow would be a nice year in 2024 as well.

David Steinberg

I mean, it's up I Chris beat me to the punch as usual, you buy I shudder to use the term political. I generally call it all advocacy for a host of reasons. But obviously, our advocacy business does encapsulate political up, very see TV centric, very focused on hyper targeting now a days. And the way to really do that is CTV., not linear. So we see this as a big opportunity to your point, Luke, some.

Operator

Zach Cummins, B. Riley Securities.

Zach Cummins

Hi, good afternoon, David and Chris. Congrats on the strong 4Q and thanks for taking my questions.
Chris. My first one is more of just a clarifying question. I believe there is a year-over-year decline in your scale of Superscape customer aRPU here in Q4. I'm assuming most of that's related to headwinds with auto and insurance, but just wanted to get some clarity around that and expectations for growth in that metric moving forward.

Christopher Greiner

No, I think that is the driver of what's interesting on the scaled customer count side of it. We've got 131 now, which is up seven quarter to quarter, but on a year over year basis was up 27% in count with the revenue associated with suite super scaled customers up 25% there's a good slide that we update annually in the slide deck that demonstrates the progression of scaled customers and their tenure, which I think is a really good kind of progression if you will, on how they spend with us were those year one scaled customers, which was around 10% of this year's revenue. Their average revenue spend is around $600,000. If you go to that next tier of one to three year scaled customers, they spend more than two times that on average at $1.3 million. And then you go to that next cohort of now more than three year tenured scaled customers, they're spending 3.5 times as much as a year one at over $2 million.
So it's a nice way to demonstrate the stickiness of the platform. As we talked about, the net revenue retention for the year was right in our model of 110% to 115% at 111%. But if you exclude automotive and insurance to the to your question, that net revenue retention was 118%. And as I said as part of the prepared remarks, we think we'll be at the high end of that 110% to 115% range. Just as we sit here today in 2024 Understood.

Zach Cummins

And my one follow-up question is, most of your growth over the past couple of years has really just been driven by your direct go-to-market motion and investing in that, but it seems you're starting to get more opportunities on the partnership side, especially the system integrators. So just curious of how you're thinking about investments in the direct channel versus maybe leaning into some of these channel partnership opportunities?

David Steinberg

It's a great question, Zach. Obviously, we've added channel partners in Snowflake, AWS. We've added the agency channel, which which is sometimes directly with the agency sometimes is partnering with them to go to other enterprises. We are going live with our first two SI integrations up probably be done with them this quarter, perhaps early second quarter. So this is also gone from sort of what we want to do to what we're doing. We're very excited about the SI. environment.
And what we're seeing is enterprises are going to their SI client vendors and asking them to work with us in addition to us going to the SIs and saying we'd like to partner with you. I want to reiterate again, and I'm sure I'll sound like a broken record, but if I don't, Scott will kick me under the table.
Our currently conservative projections do not include meaningful revenue in the SI channel for this year, which is not to say we don't think it could be meaningful this year and which is not to say that we don't expect it to be meaningful in the years to come, but to have gone from talking about this to we're knee-deep into integrations with them now, which will launch our two separate systems integrators with two separate enterprises. We're very excited about those prospects.

Operator

Arjun Bhatia, William Blair.

Arjun Bhatia

Yes, and thank you and nice job on a strong Q4 here. And when when we kind of talk to customers and agencies throughout the ecosystem. It seems like this CDP. layer certainly is an important differentiator to drive more personalization. I know you guys have a pretty strong CP like yourself, but can you maybe just talk about when you're going up against are going to customers and our peers, like how much of a a factor is that in deciding to choose data versus some of the other players? And maybe if you could compare and contrast the CPR relative to your data capabilities and where customers are placing more emphasis in recent RFPs?

David Steinberg

It's a great question, George and I listen, I would say that our CDP. technology is as good if not better than any other CDP. technology in the world. And I will also tell you that the vast majority of the large holdcos as it relates to technology holding corporations that say they have CDP.s or really DMPs that they've sort of rebranded. And so when we go up against a lot of those big guys, we're really able to talk about what a CDP. is, right. What does that stand for it's a consumer data platform. And what does that mean?
It means you can see to the APSolute individual level of your customers by record. It doesn't mean you're building cohorts It doesn't mean you're putting together large sort of segment means you can see in individual most of these other large companies can't do that, right? That's just not there. And most of the smaller guys who are coming up, they either run it as a standalone product, which is quite hard or it's part of another, perhaps rollup or something that is sitting inside of there.
So when we look at our technology, we think it's best to breed. Now it's hard to bifurcate that from our data and data quality because it's such an important component of how we sell the product, right? The ability to import all of your data to the CDP, the ability to match on average greater than 80% of that data to the, say, the data cloud, the ability to append Intier data hundreds, if not thousands of incremental data elements, the ability to seamlessly integrate our algorithms around natural language processing and now generative AI. into that CDP, while keeping all of their data safe while simultaneously importing the data from the data data cloud, there's just nobody else out there that can do those things.
So I don't know why people choose us as it relates to is our technology Superior is our data Superior is our AI. superior. What I know is we're winning greater than 50% of the RFPs and engagements we get invited to participate in and there's an average of 12 enterprises that show up to compete in each one of those RFPs. So I think that the collective is really important.
And just final put a final sort of footnote on that. I can't think of anybody who's bought a CDP. from us that didn't integrate our data, right? There's no reason not to like it extra data that imports that you can't get from any other source in the world because we don't sell our data to anybody at any time at any price. So I do think it's pretty interconnected up. If a client came to us and said, We'd like to buy your CDP. and we don't want to integrate your data cloud. We're more than happy to do that. And I think we would win that as well, If that makes sense.

Arjun Bhatia

Super helpful. And if I can maybe follow up again on the some of the agency traction that you're seeing and the mix between direct and indirect. Do you have a sense for some of these newer agencies that have come on? And since you started this initiative, what how their mix is shifting or how they are kind of indicating to you that they may shift the mix in 2024 or are we getting signs that they're shifting more to direct? Or is that a little bit too early to tell at this point?

David Steinberg

Yes. So it is early to tell, but I think as Chris eloquently pointed out, we think that gross margin sort of hit bottom in Q4. And one of the big opportunities is migrating those our large agency holding corporations the exact way we've migrated the first one that we worked with, where I know there's a great slide on that in our deck because they showed it to me earlier today, but we went from Slide 30. Chris is writing it down from me again. So on Slide 13 of our supplemental investor deck, you can see how that client started at sub-10% and grew to greater than 70% right over the years. We believe that our other two scaled agency hold Corp's are going to follow a very similar pattern.
Now the one caveat is we're drinking out of the fire hose with some of these guys I mean it's growing rapidly. And as those divisions are growing rapidly, you know, are you able to migrate the other guys fast enough for the third or new guys coming and what I really care about and this might be might be an unpopular thing to say.
But to me, I've always aspired to run a company that was at the Rule of 40, and that's sort of what I've looked at, right, not only did we deliver seven our seventh quarter in a row above the rule of 40. We have guided this year to the Rule of 40. And a lot of that is because even if the gross margins stay in the low 60s, the gross margin on the agency hold companies is substantially higher than our operating margins. It's higher than our long-term operating margin goals, and they take on very limited incremental overhead.
So most of that money dropped to the EBITDA line at a substantially higher percentage than the actual current operating margins even in the fourth quarter. So yes, we think they'll come back. Yes, we think we'll migrate them. But to me, what matters is are we going to grow the business greater than 20%? We believe we will. And are we going to see greater than a 20% operating margin? We believe we will. So I think we're in good shape for this year.

Operator

Richard Baldry, ROTH Capital Partners.

Richard Baldry

Thanks. And first, one may or may not even be a question, but I think in the past, I've heard that the average number of people in each RFP was higher. I have a number 17 in my head and if I'm wrong and just disregard, but if it is higher, who would you be seeing sort of fading out of the competition sort of smaller and midsized or larger.
And then the second question be around free cash flow. And I came on later. So I'm not sure if this has been addressed, but you know, over this year's guidance and then a 2025 guide that you're ahead of, it generates something close to $200 million in free cash flow. Could you talk maybe about where your priorities are to deploy that either more aggressive buybacks or offensively on acquisitions, pay down debt and just so you have some idea where that's going to get deployed.

David Steinberg

Thank you for joining. We know you're on vacation. I didn't even know you took vacation. So I appreciate you're joining us from it. Yes, it used to be a larger number showing up to the RFPs. And what we're seeing is the point solutions are just not being invited the way they used to be, right. So you've got specialty around CDP.s where you have a lot of small independent CDP.s that are really having a tough time as standalone businesses.
And quite frankly, we're not seeing some of the former European players who were talking a big game a couple of years ago, we're just not seeing them anymore. So up, it is down and I have said 17 in the past. And now I would say 12, I had a funny joke to make around the $200 million in free cash flow, which Chris told me not to tell but I will let Chris talk to what to what we're going to do with the next two years.
Just to quantify for anybody else listening, that would be about $200 million between '24 and '25 combined.

Christopher Greiner

I think we'll continue to be opportunistic on share buybacks will continue to be opportunistic on M&A. And I think you'll see mine and David did a really nice job laying out what does opportunistic mean for M&A at our Investor Day. But we're very focused on increasing free cash flow conversion. You'll see that the guide. This is the first time we've put out in your guide on free cash flow. We've obviously had long-term model, but at $80 million in free cash flow at the end of 2024.
That represents 48% conversion, up from 42% the last two years. So continuing to get up to that 55% level. I think it's interesting. We talked about in the prepared remarks, Rich, we had a $25 million working capital headwind from the agencies and just their difference in payment cycles than our enterprise customers, if not for that headwind, if you just would have been neutral conversion would have been in the 60 centers?
Yes, we see a nice clear path as we get through the years of continuing to increase that percentage. David, that you'd want to close it?

David Steinberg

Yes, just to that point, we knew that was going to happen and we said it was going to happen at Analyst Day, right? So when we did our Investor Day, we were clear about that. You know, one of the things you do when when you work with these very large agency holding companies? Is you understand that you're going to be paid a little bit slower than you're normally paid?
The good news is we've collected 99.999% of the revenue. I'm not allowed say 100%. I can't think of ever writing any of it off, but I'm sure somebody slow paid out or didn't pay us on a dollar at some point, I'm being facetious. So I shouldn't do that on this call, but we collect it all and it's put us in a very unique position that we have the balance sheet to be able to do that, where a number of the smaller competitors do not and the balance sheet to partner with those large agency holding companies, which is giving us yet another competitive advantage as we move into the marketplace. And by the way, Rich, as we put more cash on the balance sheet. It puts us in a position to do more M&A, more buybacks, but it also puts us in a position to do more deals like this, where we're able to expand and scale even faster as a company.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to David Steinberg for closing remarks.

David Steinberg

Well, I will close it as I think I've closed the last few, which is thank you.
But I really appreciate all of the different constituencies that are involved in our organization. First and foremost, our state of people, I do believe we have built one of the best teams in the world. I was funny because we had had some meetings recently with an organization that was trying to get to know us for a whole host of reasons, and they called me and said, you have one of the best management teams I have ever experienced, and I believe you could run a company 10 times bigger than the current loop. Current one you're running. And I very quickly said, I look forward to doing that in the next 5 to 10 years. But the reality is we have an incredible team. We have incredible people who really work their butts off to deliver for our clients, keep us on the cutting edge innovation only and focusing on doing the absolute best job we can while simultaneously creating one of the best places to work.
I also deeply appreciate the analysts who follow us. I know there's a lot of time and a lot of companies you can follow I deeply appreciate our shareholders who have stuck with us and believed in us. And our goal is to make you look really smart over the next year or two as we continue to execute. As I like to say internally, this was our 10th consecutive quarter of beating and raising. I look forward to next December when I can say our next February whenever when I can say this is our 14th consecutive quarter of beating and raising. And I want to thank our customers who have really banked their relationship with their end users and their enterprises on the data people and the data platform. Thank you very much, and I hope everybody has a wonderful day. Bye.

Operator

Thank you. This does conclude our conference. Thank you for your participation. You may now disconnect.