Yahoo Finance Zeta Global Holdings Corp. (NYSE:ZETA) Q4 2023 Earnings Call Transcript
Zeta Global Holdings Corp. (NYSE:ZETA) Q4 2023 Earnings Call Transcript February 28, 2024
Zeta Global Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Zeta's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Scott Schmitz, 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 Zeta's fourth quarter and full year 2023 conference call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com where you will also find links to our SEC filings, along with other information about Zeta. Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer; and Chris Greiner, Zeta's Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition and revenues of our products and our goals and strategies.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website as well as our earnings release and other filings with the SEC.
With that, I will now turn the call over to David.
David Steinberg: Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. 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. AI has moved from theoretical to a boardroom conversation with Chief Marketing Officer's mandated to make AI more actionable, to deliver greater efficiency and better experiences for consumers.
These CMOs are increasingly looking to Zeta 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 AI with their data and not share it back to the collective. Our investments in 2024 are about making AI more actionable, delivering better experiences for consumers, and widening Zeta's moat.
These investments include strengthening our agile intelligence offering, expanding our mobile capabilities, and extending Gen AI 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 effective. Customers will be empowered to build their own intelligent agents within our platform, allowing them to power workflows and customer experiences specific to their brand and their needs. In this model, Zeta becomes even more essential and a more sticky partner to our clients. Early Gen AI products have unlocked creativity and personal productivity, but they have yet to realize their transformative potential for enterprise marketing ecosystems.
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 within enterprises and agencies. 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's 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. The ZMP connects to all subsystems and provides 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 how CTV is scaling. Our unique position in the market and continued investment in AI-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, and retention will be replaced by the ZMP. Overall, our SI implementation is a multi-year 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 ranks. In short, we believe these changes enhance our competitive position by elevating the value of our identity graph and further improving the 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 Zeta's 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 Zeta 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 the Zeta was recognized as one of built-ins 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, but we believe 2024 will be even better. As always, I would like to sincerely thank our customers, our partners, team Zeta, 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 punch line. First, we're taking share while growing efficiently. I'll cover what is contributing to another quarter and year of 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 Zeta-owned 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 tailwinds. Altogether, we're executing on our plan, capitalizing on our competitive advantages, and 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%, and 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 Zeta 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 Zeta 2025 KPIs. Let's dive into those now.
We ended the year with 452 scaled customers, who, as a reminder, account for 97% of total Zeta 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 superscaled customers, which increased by 7% 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, six 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 trend slide on number 12 in the supplemental deck shows how ARPU reliably increases the longer our customers are on the platform and 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 at smaller pilots. 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. The 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 100K to 600K band, meaning this cohort has the potential to more than double in the next 12 months. And with 90% of Zeta's revenue generated from customers with us more than a year, we have strong forecasting 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, 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 Zeta 2025 KPIs, direct revenue mix, which is an area you want to help investors understand. Definitionally, direct platform revenue is generated when customers use Zeta's data, analytics, and owned channels to perform their marketing activities on the ZMP, whereas integrated revenue is generated from non-Zeta-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 Zeta, 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 as 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 Zeta-owned channels. This is most relevant with our new large agency customers, as illustrated on Slide 13 in our supplemental deck. Agencies utilize Zeta's data cloud and intelligence products to identify individuals who are in-market and reachable inside the walled garden. This powerful proof point of Zeta's intelligence and seamless connection points into the walled gardens forms the foundation for building omni-channel journeys on Zeta's owned channels.
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 Zeta. This dynamic of direct and integrated revenue mix 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. This 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 Zeta 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-to-year. This, despite a $25 million working capital headwind, primarily from the expansion of our agency business. Now I'll wrap with guidance. First, a handful of points to communicate our approach to guidance and slides 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. Two, 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 cyclicality.
Three, along those lines, as seen on Slide 19, we're showing how much of each quarter's revenues associated with political candidates. We see this as simply a starting point. Four, we're guiding to the full year 2024 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 at 5% to 3.5% to 3.75% enroute 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 of political candidate revenue in 2024 of $15 million, with $2 million in 2Q, $5 million in 3Q, and $8 million in 4Q. We're 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 me to take your questions. Operator?
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