ZoomInfo Technologies Inc.

Good day and thank you for standing by. Welcome to the Zoom Info second 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. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message, advise your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sositsky, Investor Relations. Please go ahead.

Thanks, Amy. Welcome to Zoom Info's Financial Results Conference Call for the second quarter 2024. With me on the call today are Henry Shuck, founder and CEO of Zoom Info, Cameron Heiser, our CFO, and Graham O'Brien, who will become our interim CFO. After Henry and Cameron's remarks, we'll 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 factor sections 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.gminfo.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.

Thank you, Jerry, and welcome everyone. Let me start by discussing our financial results this quarter. In Q2, we saw a level of write-offs related to prior period sales that was higher than we had previously seen or had estimated for the quarter, particularly with SMBs. As a result, we conducted a comprehensive review culminating in a charge in Q2, and we accelerated operational changes around selling to small businesses, all of which we expect to reduce the volatility around future write-offs. We have revised our estimates for the collectability of a portion of previously recognized revenue, which has led us to take a $33 million charge in the quarter, and as a result, we are revising our four-year guidance. Excluding this charge, our results would have been more in line with our guidance for the second quarter. Inclusive of this charge, gap revenue for the second quarter was $292 million and adjusted operating income was $82 million, a margin of 28%. Our free cash flow was not impacted by this non-cash charge. The underlying driver for the high write-off rate is that in 2022 and 2023, we extended credit to a higher mix of SMB customers and the rate of non-payment by these customers increased throughout the past 24 months. Accordingly, we have made changes to the way we sell, renew, and service these clients. In April, we deployed a new business risk model to flag and require prepayment from prospects at the greatest risk of non-payment. This move mitigates the risk of future write-offs and represents an investment in the long-term health of our business, trading some new business ACV for higher quality bookings and focusing our efforts on customers more likely to pay, renew, and grow with us over time. We transacted $11 million of ACV in Q2 through upfront prepayments, and with our new model in place, we turned away a meaningful amount of new business from smaller, riskier organizations. I am disappointed that this charge has impacted our financial results. We believe this charge puts the long tail of these challenges behind us and lets us focus on the operational improvements we have been seeing in the business, which, as I will describe, has positioned the company for future success. There were a number of fundamental improvements we saw this quarter. As you know, our focus over the past year has been to move up market, stabilize and improve net revenue retention, and launch and monetize ZoomInfo Copilot. With our investment upmarket, Q2 was the best new business quarter in both the mid-market and enterprise ever. We meaningfully grew our $100,000 ACV customer cohort in both size and total ACV, the first time we've seen sequential growth in 100K customers since Q4 of 2022. This customer cohort now makes up 43% of our ACV. And we again grew our million dollar plus customer cohort on a sequential basis with the most new million dollar plus customers since Q4 of 2022. ACV growth from million dollar customers accelerated this quarter and is up 17% year over year. Reflecting these trends in aggregate, Enterprise ACV was up 9% year-over-year, and overall net new ARR was the best it has been in four quarters. This quarter was the first one since Q4 2021 where we saw net retention rates stabilize, which is an important milestone driven by stabilization of renewal rates and improvement on upsells. Over time, we expect to return to structurally higher levels of NRR through improving fundamentals and mix shifts as we grow our upmarket business. During the quarter, we closed transactions with leading organizations such as PwC, Deutsche Bank, Morningstar, and Manulife, and we also signed our largest ever new business transaction. This customer is one of the largest employers in the United States, and they saw our solution, rich in data, data compliance, and data integration capabilities, as mission critical to their B2B motion. With a solution that matched their exacting needs, we had what one of their employees described as the fastest moving contract in their history. This new business deal represents $1.4 million of ACV with a three-year commitment. Our operations and data as a service offerings, which are often used to help underpin a company's investment in AI, are also delivering results, up 23% year over year, and demonstrating strong 117% net retention rates, now representing 13% of our ACV. As companies look to invest in AI initiatives, they need a solid foundation of highly accurate data, and we are steadily becoming the source for that. Representative of that, we closed our first data as a service opportunity in EMEA to support a global network that allows financial institutions to send and receive secure messages and information about financial transactions. Leveraging ZoomInfo's data, the organization's operational and engineering teams are building an internal AI solution to identify fraudulent transactions. This is just one of the many ways that customers are able to use our data to continue to innovate their world-class business solution. In June, Google announced ZoomInfo as a key partner in its strategy to make generative AI more reliable and accurate for enterprise use. Google selected us because of our specific, trusted, and authoritative data sets. The end goal is to help enterprises integrate more accurate data into their AI models and give users more relevant responses and better experiences. The past 12 months have marked one of the most innovative periods in our company's history. As we successfully launched Zoom Info Copilot, our AI-powered offering that combines our best-in-class proprietary data set with first-party data from our customers' sales and marketing systems and digital buying signals to offer sales teams the best insight about their buyers. June was our first full month selling Copilot, and it performed solidly above our expectations. We now have more than $18 million of Copilot ACV across more than 1,000 logos, up from nothing just a few months ago. And we already see material improvements in engagement and utilization rates across Copilot users. Improvements in these rates have historically been closely correlated to renewal and retention rates. Early signs show that Copilot is expanding our value beyond top of funnel to support go-to-market teams along the entirety of the funnel. And by doing so, it expands our value proposition from sales development to account executives, account managers, customer success managers, and revenue leadership. Our commitment to unmatched proprietary third-party data and signals, a growing ecosystem, and continuous investments in AI continues to feed an aggressive copilot roadmap. That roadmap is driving excitement across our customer base and in new customer conversations. Over 75% of our copilot upsells were with mid-market or enterprise accounts. With the traction we're seeing on Copilot and our operations and data as a service products, we believe we'll be able to continue to win new customers and increase upsells to our existing base, a key driver of net retention. Today, we also announced several changes at the board level. We thank Todd Crockett for his many years of service representing TA associates on our board of directors, and we appreciate the positive impact he has had on the trajectory of the company. We welcome our newest board members, who we believe will be immediately additive in helping us execute our growth strategy. Dominic Mehta is a seasoned operating executive with experience leading scaled businesses and a very strong background in data and platforms. Dom spent 25 plus years at Bloomberg, where at different times he ran the terminal business, all of engineering, and was chief data officer. And we also welcome Owen Wertzbacher, the Chief Investment Officer of High Stage Ventures, who brings a strong public equity investor perspective and capital markets background to our board. Over the last several years, we have rebuilt our executive team, expanded our bench, built great products, leaned into AI, and diversified the leadership skills underpinning our board. We have focused on bringing in healthier new business relationships and doubled down on our enterprise relationships, where we know we have upside opportunities in the future. And over the past four quarters, we have retired more than 39 million shares of ZoomInfo, approximately 10% of total shares outstanding. We will continue to run this business efficiently while repurchasing shares. We have $400 million in an existing share repurchase authorization remaining as of June 30th, and we anticipate aggressively deploying that. When you combine our strong, our continued strong cash generation with ongoing share count reductions, we believe the company will do at least $1 of levered free cash flow per share this year and that we will grow that number meaningfully in 2025. I recognize that our positive operating momentum is overshadowed by the change in estimates we announced today and the increased conservatism around our guidance. Our intention is to fully put these challenges behind us and share the details that you need to understand our financial profile while also highlighting our commitment to growing free cash flow per share. To that end, I intend to be a meaningful personal buyer of ZoomInfo stock as well. Before I hand it over to Cameron to discuss the results in greater detail, I want to touch on the leadership news we announced this afternoon. As you saw from our announcement, Cameron will be transitioning from his role as Chief Financial Officer. He will stay with us over the next few months to help ensure a smooth transition. Cameron, you've been a great partner to me personally and the business over the last nearly six years. And on behalf of myself and the entire company, I want to thank you for your many contributions and to wish you all the best. We've initiated a search for a permanent successor and are fortunate to have a deep bench of talent throughout our finance organization during this transition period. Graham O'Brien, our VP of FP&A, will take on the interim CFO role. Graham is intimately familiar with our strategic and financial growth plans, and we are confident this will be a seamless handoff. With the charge booked, we now start with a clean slate. With that, I'll turn the call over to Cameron.

Thank you, Henry. Before turning to our results, I do want to say a few words about leaving ZoomInfo. First, I want to thank the entire ZoomInfo team and the board for their partnership throughout my tenure. Over the years, we've achieved impressive growth with strong margins and free cash flow generation. We've navigated numerous challenges together, and I'm proud of what we've accomplished. I have full confidence in the future of ZoomInfo, and I'm excited to see the company continue to innovate and lead in the market. Our financial health and strategic direction remains strong thanks to the collaborative efforts of our talented team and leadership. Thank you for the support and trust you've placed in me. I look forward to tracking ZoomInfo's continued success. Now, turning to our results. We have implemented a number of operational improvements to reduce the impact of RIDOS. In Q2, we continued this progress by requiring riskier and smaller customers to pay by credit card or ACH prior to gaining access to the platform, and segmenting our new sales team to drive more enterprise and mid-market business. As part of these improvements, we have increased our visibility and re-evaluated our accounting estimates. We were disappointed and surprised to determine that our prior estimates for non-payment from customers needed to be increased in order to account for escalating write-offs that we incurred in June. as well as additional write-offs that we now expect. This change in estimates, combined with other discrete charges, resulted in a total $33 million charge in Q2, of which $15 million reduced revenue, $14 million increased our bad debt expense, and $4 million increased other expenses. The change in estimates relates to previously recognized revenue, primarily from 2023, and includes sufficient reserves to cover potential nonpayment on our current receivables, and related revenue recognized to date. With these one-time charges, we delivered GAAP revenue of $292 million and adjusted operating income of $82 million, which represents a margin of 28%. The underlying performance of the business excluding these charges would have indicated revenue of $307 million and adjusted operating income of $114 million. This GAAP accounting charge impacts revenue and profitability, but does not impact cash flow. Unlevered free cash flow for the quarter was $120 million. While this charge reflects challenges associated with transactions we signed, primarily in 2023, changes in estimates are reflected under GAAP in the period when new information becomes available, which in this case is Q2 2024. We remain committed to driving high levels of profitability and growing free cash flow per share. And we are taking steps to adjust our level of expense commitments to reflect current levels of growth. As a result, we took impairment charges in the quarter related to a number of existing facilities, accounting for current market rates as we exit certain leases and consolidate our real estate footprint. In addition to the charges we are taking this quarter, In July, we restructured our Waltham lease agreement, where we paid a $59 million termination fee, and we expect to recognize that $59 million in accelerated rent expense reflected as restructuring costs over the next six months as we transition to a smaller footprint. In aggregate, we are eliminating 126,000 square feet of space and expect to sublease an additional 250,000-plus square feet. reducing our total overall facility footprint by approximately 40%. Additionally, in July, we funded the $30 million settlement amount related to the right of publicity lawsuits following preliminary approval in June. The final approval hearing is set for November, and we are looking forward to putting these lawsuits completely behind us. While we spent time in Q2 to address historical deals and right-size our facilities, We're also seeing improvements in the underlying operations of the business. In Q2, we stabilized net revenue retention at 85%, and as Henry indicated, this is the best performance with respect to change in NRR since Q4 2021. Retention in our software vertical, where we've seen the most material decline over the last two years, stabilized in Q1 and improved in Q2 for the first time since 2021. From a reporting perspective, we are including Copilot in advanced functionality. Advanced functionality had grown to a third of our overall ACV in 2023, and in Q2, it increased to 35% of overall ACV as we experienced early traction from Copilot and drove growth in our operations and marketing solutions. Operating cash flow in Q2 was $126 million, up from $116 million in Q1, and included approximately $3 million of interest payments. We completed a repricing of our first lien credit agreement to SOFR plus 175, which resulted in a 50 basis point reduction in interest and is expected to reduce our annual interest expense by approximately $3 million per year. Unlevered free cash flow for the quarter was $120 million. We ended the quarter with $399 million in cash, cash equivalents, and short-term investments, We carried $1.24 billion in gross debt, the vast majority of which has fixed or hedged interest rates through 2025. During the quarter, we repurchased 10.8 million shares of ZoomInfo stock for $147 million. And as Henry indicated, we had $400 million of existing capacity remaining as of June 30th that we anticipate aggressively deploying. Our net leverage ratio is 1.8 times trailing 12 months adjusted EBITDA and 1.8 times 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 Q2 was $440 million, and remaining performance obligations, or RPO, were $1.13 billion, of which $830 million are expected to be delivered in the next 12 months. There are obviously a number of moving pieces with respect to accounting this quarter. We took this action to create a fresh slate for the business and position the company for long-term growth and profitability with a focus on consistently growing free cash flow per share. Looking out to Q3 and the remainder of 2024, our guidance incorporates the impact from today's charge and increased conservatism related to our operating performance. With that, let me turn to guidance for Q3. We expect GAAP revenue in the range of $298 to $301 million, adjusted operating income in the range of $107 to $109 million, and non-GAAP net income in the range of 21 to 22 cents per share. For the full year 2024, we now expect GAAP revenue in the range of $1.19 to $1.205 billion, and adjusted operating income in the range of $412 to $418 million. We expect non-GAAP net income in the range of 86 to 88 cents per share based on 375 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of 420 to $430 million, which consistent with historical reporting excludes the impact of restructuring and settlement payments. Our full year guidance implies negative 3% revenue growth and 35% adjusted operating margin at the midpoint of our guidance range. inclusive of the second quarter charges. Whereas committed to ever to driving efficient operations and excluding the discrete items impacting this quarter, our guidance indicates adjusted operating margin of 37% for the year. We expect to grow annual margins from here, and as Henry noted, we view $1 per share of levered free cash flow as a floor on which we can build and compound growth into the future. We're also mindful of share count, and we've continued the shift to performance-based equity grants triggered on free cash flow per share growth, as we believe it is important to align the shares issued to executives with business performance and shareholder value creation. Finally, please note that in the top half of our guidance range, the sequential revenue growth implied in the fourth quarter is roughly flat to down 1%. We believe that this is the most indicative view of our trajectory as we exit. 2024. With that, let me turn it over to the operator to open the call for questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please be sure to limit to one question and one question only. Please stand by while we compile the Q&A roster. And our first question comes from the line of Elizabeth Porter of Morgan and Stanley. Your line is open.

Great. Thank you so much for the question. After Q2, the view was that 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. Are you assuming a second round of down sales or has new business outlook changed materially? So, if we could just get some color on kind of where the incremental pressure is coming from and the assumption on NRR in the back half of the earth, that'd be great. Thank you.

Sure. Thanks, Elizabeth. I think, you know, there are a variety of factors that go into the guidance as we think about it, and certainly, you know, we've elevated our assumptions with respect to continued write-off potential in in the thought that the operational improvements that we've implemented probably won't really take hold until the end of this year, more so the beginning of next year. Additionally, the operating environment under which we're operating continues to be pretty fluid. So we've inserted incremental conservatism with respect to the guidance. And I think that if you look out In the world as we see it, there's a lot of uncertainty, both for companies, but also for the people making decisions in terms of the growth of those companies.

And I would just add here, when we set the guidance here, what we wanted to make sure we did was to remove the volatility going forward in the business. And while we see a lot of operational improvements, I talked about growth in the 100K cohort, stabilization of net retention for the first time since in a number of years, improvement in our enterprise and upmarket business. We're not assuming any of that trend continues in the back half of the year. And we're assuming that even with the operational improvements that we've done around taking upfront prepayment from our customers and the move up market and new business, that those trends also don't make an impact to the write-off rates in the back half of the year as well.

Thank you.

Our next question comes from the line of Mark Murphy of JPMorgan. Your line is open.

Thank you. 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 OpenTAC, Salesforce and Intel and others since then. And so I'm just curious if something is causing you to sense a second wave of layoffs that might be affecting go-to-market headcounts In the last, you know, say, you know, five to eight weeks, a little more than you might have expected. And I have a quick follow-up.

I think the thing to remember about our business is, you know, two things. One, there is a meaningful portion of our business that's not seat-based, that is usage-based. We talked about the data as a service and operations OS business. which now makes up 13% of our ACV, that's not a seat or usage-based business. It's also growing 23% year over year. And then on the seat-based part of our business, we are not fully penetrated across any of our, really any of our enterprise or mid-market customers. And so we don't need the incremental seat from a hiring perspective to add to, for us to grow within our customer base. The other thing that I would add there is one of the places where we're bullish about Copilot is that it's expanding our use case beyond just top of the funnel prospecting to the full funnel. And so we're now seeing open opportunities where we're bringing in sets of users that were otherwise or in the past pre-Copilot were not customers of ours or were not users of ours. And so we have a lot of opportunity, both from a usage-based perspective and from a seat-based perspective, to grow despite layoffs in tech or shrinking go-to-market teams.

Okay. And then, Cameron, is it possible – can you remind us on the non-collectibility of receivables? How often is it stemming from business failures versus something like a contract dispute or You know, a customer claiming that services were not provided, and then you did allude to some incremental write-off potential. I think going forward, is it possible to put any bounds on that and just help us understand? Have you factored something in there as an ongoing type of revenue offset in the second half, as you just saw in Q2?

Yeah, so certainly we have factored in continued escalation in terms of write-off rates. The write-offs that we do see do stem from a number of different factors. Certainly, one of the larger ones is companies shutting down. And I think in a more challenging environment, in an environment where access to capital is harder to get to, that is driving some of that increase. There are also instances where, particularly in the small business, that when customers don't feel that they've achieved the value that they thought they were going to, that we end up in a level of dispute with them. And so I think in a world where it's harder to make sales, getting that tangible value is also sometimes harder for them and that escalation. So our view is that while we are making operational changes to impact this, largely requiring prepayment upfront from many of those smaller and riskier customers, as well as just generally shifting the business upmarket. We feel the prudent view is to assume that the write-off situation gets worse, particularly as there are questions about the strength of the economy over the next few quarters.

Mark, I'll add here too. We did assume that the write-off rates The escalated write-off rates continue through the back half of the year. I think the biggest, the big thing to remember here is we extended credit to SMBs that were not credit worthy. And we've changed our practices now to require upfront prepayments against our riskier customers. And in the quarter, we had $11 million of our ACB transacted through upfront prepayments. That was up from a million dollars in any of our previous quarters. And so we've made a commitment both operationally and in the way that we estimate for these collectibles to get rid of this type of volatility in our business.

Understood. Thank you.

Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open.

Great. Thanks so much for taking the question. Henry, it's no doubt a tough environment and Zoom info has outsized exposure. to some of the tougher segments of the market. But as we think about environment versus execution versus product market fit, how much of what we're seeing in the numbers do you feel is within your control? And maybe just a quick one for Cameron. Cam, can you comment on the pricing trends that you saw in the quarter? Thanks so much, guys.

I mean, I think that's actually the frustrating part about this quarter is that there's an incredible amount of operational improvement that we're seeing in the business. The 100K cohort growth, the first time we've seen that since Q4 of 2022. Stabilization in net retention rates, the first time we've seen that since Q4 of 21. Stabilization in our software vertical net retention rates. Our enterprise business grew 9% year over year. Operations OS and our DAS business grew 23% year over year with 117% net retention. Co-pilots sold solidly above our expectations in the customer base and we're monetizing ai now throughout our customers when we're monetizing that we're also seeing that happen 75 of the time in mid-market and enterprise customers and we continue to innovate there as well and so there's this tremendous amount of operational momentum and operational execution happening in the business where i actually believe our product market fit is getting stronger Our sales motion is getting better in the up market. We're monetizing co-pilot in the base, and you're seeing that operational performance come through in the business. Now, at the same time, the write-offs escalated. We had to increase that estimate. We had to take this accounting charge this quarter to put that all behind us, to move forward with a clean slate, and to take away this volatility from our business.

And Brad, I think with respect to the the pricing changes in Q2, we didn't proactively make any changes to pricing. And we do continue to see some downsell pressure, particularly at lower ends of the market. But we are starting to see some really good green shoots of pricing opportunity when people are taking Copilot. So Henry mentioned the monetization of Copilot. There are a number of opportunities where we're beginning to see pricing uplift from that, and that's something that we're focused on being able to continue as we move into Q3 and Q4.

Great, helpful color. Thanks so much, guys.

Our next question comes from the line of Ramo Linschow of Barclays. Your line is open.

Thank you, Cameron. If you think about the you know, ability to collect from clients, like how does this current environment kind of compare to what you've seen before? Because like, you know, we had like the COVID 2020 where it was tough, 2022. This seems to be either you changed how you kind of sold in 2023 or it's getting worse. Can you just compare and contrast like how this kind of feels compared to the time before? Because it is somewhat surprising given that you've been in tough markets before. Thank you.

Hey Mo, it's Henry. Look, I think there are two things that happened or one big thing. We did see these rates elevate against from the 2020 and 2021 rates. We saw this trend escalate and elevate in the 2022 and 2023 cohorts. They're riding off more, obviously more than what our historical rates were. That's why we've increased the estimates this year and we've taken this accounting charge, we've accounted for those collectability issues. The other thing that I would tell you is the way that you Solve this moving forward is what we did with these upfront prepayments. When a risky or small SMB customer comes through, they can achieve a lot of value from ZoomInfo, but we require upfront prepayment from them now and going forward. That's a fundamental change in the way that we operate. And so we're going to significantly make a dent in the collectability of our future contracts by doing that.

Okay, perfect. Thank you.

Our next question comes from the line of Parker Lane with Stiefel. Your line is open.

Hey, guys. Thanks for taking the question. Just to stick on the idea of the new business risk model, Henry, are the parameters there simply about the size of the customer that you're talking about, or is it also based on, you know, number of seats or products that they're adopting from you guys at the onset?

Yeah, the new business risk model takes into account a number of firmographic-related data points and then a model that looks back at the collectability of other accounts that look like those accounts. But you can think about it as size, industry, number of salespeople, and then a compare against lookalikes who paid or didn't pay us in the past. We're using a number of key data points to compare. to assess the risk of the clients who come through. Size is obviously one of them.

Understood. Thank you.

Our next question comes from the line of Alex Zukin of Wolf Research. Your line is open.

Hey, guys. I'm trying to swear. Henry, maybe your comments around improving retention rates in the quarter, particularly in the Southwest part, but then also increasing card drop rates, and maybe just comment on the linearity that you saw of these increases, because I would think that kind of non-retaining customers or customers are going to go out and do something different. So just help us understand, like, This leads me to my second question. Mechanistically, if you look at your bookings, which I think are reported based on CRPO bookings down to 11%, how much of this bad debt do we kind of take out of that booking to inform or something that can square up to that comment that Cameron made about the effectively low single-bid build? Once we start getting past some of this.

Hey, Alex, we had a lot of we had a hard time hearing you. So if you could if we could just take a second and see how much of that we could collect in the room.

All right. Thanks, Alex. I think that hopefully I'll be able to answer most of your question and we'll get through this. I think first off, in terms of the linearity, certainly as it relates to retention, we had been seeing a stabilization of retention and that continued throughout the quarter. I think something that we were happy with. And I think That's particularly true in the bid market and enterprise where we saw improvements in retention. I think as the quarter went on and we continue to see more pressure on SMBs and certainly with respect to the write-offs themselves, those did accelerate in June. And so the impact of those was really an end of quarter issue more than it was throughout the quarter. And then you had asked about the bookings. Certainly the bookings get impacted by the write-offs because we are basically impairing some of that remaining performance obligation. So when we're writing off a contract, obviously we're writing off the continued performance obligation of that as well as any of the existing revenue or receivable that's out there.

Alex, I'll just add, this guide does not assume that any of the improvement that we saw in the quarter, the stabilization of the net retention rates or the impact of the upfront prepayments, we haven't anticipated any improvement from either of those in this guide.

Thank you guys, and I apologize for the audio.

Our next question comes from a line of Cash Rangan of Goldman Sachs. Your line is open.

Hi, this is Gillian. Thanks for taking the question and all the color provided on the call. I have two quick ones for you. How does your sales cycle duration really compare this quarter versus prior periods? And second, what lessons do you take away from the large customer win and mid-market improvement? And it seems also enterprise that you saw this quarter to close remaining deals in your pipeline.

Great. Thanks for the question. Sales cycles have stayed largely the same. We segmented the sales force in new business. in the quarter. And so our enterprise deals obviously take longer than our SMB or mid-market deals, but they come in at, you know, two, three, four X, the value of those deals. And so nothing that we didn't expect in the new business base. And so sales cycles have stayed largely the same and across those different segments. I think the thing that we learned across the largest deal that we closed in our history and the continued improvement in mid-market and enterprise is that segmenting the new business sales reps and then allocating resources to the upmarket is turning into results for us. We have the highest mid-market and enterprise new business quarter on record. And that came from an increased focus and segmentation of the sales rep base against those different segments. And we think that that's going to, we believe that's going to continue throughout the year and set up a really strong foundation for us in the future as enterprise and mid-market customers grow more with us and retain at higher rates.

Our next question is, comes from the line of Brent Braceland of Piper Sandler. Your line is open.

Thank you. I wanted to go just back to kind of framing how much exposure you have to SMB. I think it looks like bad debt accruals were 33, 34 million last year. You're at that similar mark here at the first six months of this year. What portion of that SMB business would you frame as still kind of being at risk versus how much you're kind of pre-baking in as additional weakness. Just trying to think through at what point could we make a mark that kind of worse is behind you. I think we thought that a year ago, clearly not happening now, but maybe just frame overall that SMB exposure, I think would be helpful. Thanks.

So SMB continues to be around a third of our business. We've seen enterprise continue to grow in terms of mix, so that's up above 40% at this point. Our focus has really been not on just not serving SMB anymore, but really taking the credit risk out of SMB and forcing those customers that are smaller or riskier to prepay upfront. and ultimately do that. All of our product focus and really sales investment at this point is going up market. So that is a clear focus of ours, but we're not going to necessarily turn away smaller customers that continue to get real value out of the system and continue to use the system to drive their sales motions as well.

But Brent, I also think you should think about the actions we took today with the charge and the increase in estimates. as we fully intend on putting this volatility in our business behind us. And going forward, we don't anticipate after this charge and after the increased estimates towards the back half of the year that write-offs will create volatility in our guide going forward. Helpful color. Thank you.

Our next question comes from a line of Koji Aikida, with Bank of America. Your line is open.

Yeah. Hey, guys. Thanks for taking the questions. A couple from me here. Maybe the first one for Cam. Just wanted to understand a little bit more on the write-downs, headwind to the guidance for the full year. And I know you guys aren't guiding 2025, but just thinking about the write-downs and potential impacts heading into 2025. Is it a full year of impacts? Does it affect 1Q25 and does it potentially bleed into the second quarter of 2025 too?

So certainly the write-downs that we realize now were eliminating risk of non-payment on receivables that we have that we've already recognized revenue against. And then another big portion of the change in guidance was taking out the revenue that we would have earned from those receivables customers that we've written down or written off, you know, as we go through the remainder of the year. Our expectations at this point are the way we've defined guidance is to assume that those write-offs continue to escalate and that they, you know, would continue to have an impact on our results. But ultimately, the operational improvements that we've put in place requiring, you know, prepayment up front from smaller and more risky customers, as well as shifting the sales team to focus more on mid-market and enterprise customers, should eventually, and we're focused on ensuring that they eliminate a lot of the volatility related to those small businesses. And so if you think about the deals that we're selling today, that we would potentially write off in six to nine months. So at the end of the year, as we move into the beginning of next year, we're aiming to significantly reduce the risk of those write-offs in terms of growth.

I would add here, when we think about the rest of this year and 2025, what we'll tell you is We're going to finish this year with a dollar of free cash flow per share. And we expect to meaningfully grow that in 2025. And I'm confident in that. We, you know, based a lot around the fact that in the quarter, we had our best net new ARR ad in more than a year.

Got it. Thank you, Henry. And just one fall, if I may here, Henry, for you in prior quarters, you have talked about customers, you know, I'll call them boomerang customers that, left ZoomInfo that I've come back to you. I don't think you really talked about it much in your prepared commentary, so any sort of color on maybe some bigger customers that have returned to the ZoomInfo platform. Thank you.

Yep. This quarter was our best win-back quarter on record ever.

Our next question comes from a line of DJ Hines of Canaccord Genuity. Your line is open.

Hey, guys. Thanks for taking the question. Henry, one for you. So a lot of your data today is being piped into CRM systems. The CRM vendors are also trying to build co-pilots that help with activating intelligence, prompting next best action. What gives you confidence that the AI-driven functionality will live with Zoom Invo versus the system of record or the CRM vendors that you partner with?

Yeah, I would think about the data that gets piped into CRMs as sort of contact or company data. And the data that you actually need to win from a co-pilot perspective is a tremendous amount of signal data that you use to identify which customers to reach out to today, tomorrow, and the reasons why. And so you can think of that as intense signals, or new hire signals, or funding signals, or visiting your pricing page signals, or visiting a competitor's review page signal, or researching your competitor. And all of those signals, those are proprietary to Zoom Info, and they don't live in CRM. And that signal is necessary for you to engage with the right customers at the right time. And so co-pilots just built off of data that sit inside of a CRM will always be missing the necessary signal for co-pilots to actually work and be useful. And so we've invested a lot in making sure that we have the best signal around companies and people. But we've also gone out and started building a robust ecosystem of signal providers that we've built in to our co-pilot offering as well. And the sales of co-pilot, the monetization of co-pilot in our customer base was solidly above our expectations. It puts us far ahead of any competitor in the space. And we feel really good about the innovation we've been able to deliver there in the last year.

Yeah, great to hear. Thanks for the color.

Our next question comes from a line of Taylor McGinnis of UBS. Your line is open.

Yeah, hi. Thanks so much for taking my question. So if I look at the 3Q rev guide, it assumes a sequential increase, which is a reversal from some of the recent trends we've seen. I would imagine some of that might be due to the write-downs and softer new business changes that might be having an impact there. But, Cameron, can you help us bridge that gap? I think you mentioned adjusted revenue of $307 million in the quarter. So can you quantify the pieces that make up the difference between that and what was reported? And as we look into 3Q and 4Q, are you able to quantify the write-down and new business impact that's embedded? Thanks.

So, in the second quarter, we took a charge related to the change of estimates that we had, and those are estimates around the collectability of receivables from customers. So, with respect to revenue, that was $15 million of the charge, and that's revenue that we've effectively recognized historically, but due to the change in estimates, needed to run that through Q2. The revenue that we generated in Q2 from a gap perspective was $292 million, but that included $15 million of write-downs that shouldn't recur as we've really focused on identifying everything that we felt was at risk, changed our estimate around those, put it into Q2. And therefore, going forward, we want to start with a queen slate. So based on that, I think in Q3, while it will be growth compared to the $292 million, it would still be a decrease relative to the 307 if you were to back out that $15 million of write-down.

Great. Thanks so much. Our next question comes from the line of

Jackson utter with key bank capital markets your line is open Thanks for taking our questions guys really the one for me is is Henry on the the trends for the positive trends in the business that are not Expected to continue or are being kind of removed from guidance going forward. I'm just curious Are you already seeing?

of the enterprise momentum slow here as we like as we are here in early august or is this just true conservatism or is it actually happening and that's why you're taking it out of guidance thanks no we're not seeing the momentum in the business slow down the enterprise or up market momentum we feel really good about the operational improvements and the operational success that we've seen um and anticipate that we're going to continue to execute against that.

Got it. Thank you.

Our next question comes from the line of Michael Turin of Wells Fargo. Your line is open.

Hey, I've got Michael Berg on for Michael Turin. Thanks for taking the question. When I think about the margin impact of the write-offs, how can I think about how that flows through the rest of fiscal 24 on a margin percentage impact and then How can I think about that rolling through into fiscal 25? Then I got a quick follow-up.

Sure. So, you know, we did have a number of discrete events. Those are laid out in the press release as well as in the 10Q. You know, when you look past those specific charges, the margins would have been materially higher, almost 10 points higher. And I'd expect that we won't have you know, additional charges like that. So I think the, if you proform of those charges out, that would be the kind of underlying performance of the business that, you know, I'd start with from a modeling perspective.

Helpful. And then a quick follow-up for Henry here. You made a point on the call to mention you plan to be aggressively buying shares here. What would be your key things to point to as driving your confidence in, uh, scooping up more chairs moving forward. Thank you.

Look, I think that the tough part about this quarter is that we had a tremendous amount of operational improvements that we saw. We saw net revenue retention stabilize for the first time since Q4 21. We saw our DAS business growing, DAS and operations business growing 23%. year over year. We saw growth in our 100K cohort for the first time since Q4 of 22. We continue to grow our million-dollar cohort. We're addressing the write-off issue by taking a significant amount of our new business ACV through upfront prepayments. Copilot is solidly above our expectations from a sales perspective into the customer base. I think that we have tremendous product market fit there. And that's going to be really hard for a lot of investors to see because of this accounting charge and the way that we're thinking about guidance for the rest of the year. You know, that being said, I have tremendous confidence in Zoom Info, and I'm excited to be a buyer.

Our next question comes from the line of Surrender Thend of Jefferies. Your line is open.

Thank you. Just, Henry, any color on breaking down the NRR between SMBs and mid-market? And then maybe when you look at the new business that you're winning, so what is that mix between the SMBs and mid and enterprise? And maybe how does that compare to your current ARR mix?

Yeah, you can think about on the new business side. On the new business side, we hit high watermarks for enterprise and mid-market new business. And so those are significantly higher as a percentage in the quarter than we've seen historically. That was driven by segmenting the sales rep base into SMB, mid-market enterprise reps, and then allocating resources properly across that group. You know, Cameron said it in the customer base, you can think about The breakout is kind of 40% enterprise, a little under 30% mid-market, and the rest in SMB. And our intention is to move the business significantly up market in the mid-market and enterprise.

Got it. And just one quick clarification question on Copilot. The ARR figure you provided, I think it was $18 million. Was that as of quarter end or is that as of a difference? period of time. That was as of quarter end. Thank you.

Our next question comes from the line of Brian Peterson of Raymond James. Your line is open.

Thanks for taking the question. So, Cameron, just on the $33 million in charges you mentioned this quarter, just to clarify, how much of that is embedded in the 2Q NRR figure, or some of that would have been impacted prior periods or future periods? I just want to make sure I understand how the charges are impacting the NRR. Thanks.

Yeah, so most of the increase in write-offs and changes that have gone through the estimates really more to new business that we've brought on than they do to NRR. So the NRR is really not impacted by those charges.

Our next question comes from the line of Siddhi Pinagrahi with Muvio. Your line is open.

Thanks for taking my question. I just want to clarify, you talked about, you know, if you look at your guidance, second, you're taking down $50 million in revenues if I exclude that $15 million write-off. So how much of that, you know, the $50 million that you're taking out, how much of it is a write-off versus, you know, any kind of softer new sales or down sales or any kind of inflation you're going to see given that Q4 and other strong renewal quarter?

So the way I think about that, Siddhi, is that of the entire change in guidance. So the full $60 million, roughly half of that has to do with the write-offs that we've incurred. So part of that is the charge. Another part is the revenue that we would have recognized from those customers that we wrote off over the second half of the year. The other half of that is really an increase in conservatism in terms of the market overall. Part of that conservatism is an increase in the assumptions around ongoing write-offs, so seeing those write-off rates escalate going forward, as well as just conservatism around the sales and retention environment.

Thanks for that, Collin.

Our next question comes from the line of Joshua Riley with Needham. Your line is open.

Yeah, thanks for taking my question. Just one quick one for me. You mentioned at the end of the month of June is when you saw increased write-offs for SMBs. I guess maybe, you know, what do you think changed in that period of time relative to what we were seeing in the first quarter? Because it seemed like the renewals weren't great for SMBs in the first quarter. Was there some period where it was a little bit better for a what macro factor maybe came into play there or some other factor that we should be considering? Thanks, guys.

So certainly we did see an increase in the rates and an increase in the revenue associated with those write-offs. Part of that is the timing and catching up of write-offs. Write-offs don't happen immediately. We're obviously chasing payment for folks and you know, it does take us in the period of time before we, you know, fully get to the point where we're ready to write something off. We have also seen, you know, further stretching of small businesses in terms of their access to capital. So you see increases in, you know, companies shutting down. I think that's happened, you know, more as we've gotten into the summer. And so I'd say that those two factors certainly changed as we got into June. If we look back at the trend from Q3 to Q4 to Q1, we actually saw improvements in our write-off rates, and then we saw those reverse as we got through the end of the quarter.

Got it.

Thanks, guys.

Our next question comes from the line of Pat Walravens of Citizens JMP. Your line is open.

Great. This is Austin Cole on for Pat Walrus. And I appreciate you taking my question. I just wanted to ask about the, the DAS business, 13% of ACV. Can you just talk about what you're doing to drive success there and how big do you think it can get? Thanks.

Yeah. Thanks for the question. We, um, last year built a team of, uh, DAS specialists who are responsible for helping our customers. integrate our data within their workflows and get that behind workflows like territory planning or account scoring or new AI workflows that they're building. We anticipate this can continue to grow at the rates that it's growing and be a real meaningful part of our business going forward. Great, thanks.

And I am showing no further questions at this time. I would like to turn the call over to Henry for closer remarks.

Thank you, everyone, for joining us tonight. I'd just like to take a moment to reiterate what I think are the most important key takeaways from tonight's call. First, we've taken necessary and comprehensive accounting charges this quarter to address our write-offs. And while they fully flow through Q2 results and negatively impact the quarter and our full-year guidance, this action sets us up very well for the future. Additionally, we've made the necessary operational adjustments in the way that we extend credit to our customers to ensure that write-offs do not continue to be a headwind in our business. Second, we delivered strong operational performance. NRR stabilized. We have the best net new ARR quarter in a year. We're growing our 100K and $1 million customers. Co-pilot sales were solidly above our expectations. and we see data as a service growth opportunities driven by AI use cases. And we are committed to driving long-term value creation through consistently growing free cash flow per share. I look forward to speaking with you and seeing you in person as we participate in a number of investor events over the coming weeks. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.