ZoomInfo Technologies Inc.

Good day, and thank you for standing by. Welcome to the Zoom Info Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you need to press Star 1-1 on your telephone. You then hear an automated message advising 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 want to hand the conference over to your first speaker today, Jerry Suzitsky, Vice President of Investor Relations. Please go ahead.

Thanks, Victor. Welcome to ZoomInfo's Financial Results Conference call for the third quarter of 2024. With me on the call today are Henry Shuck, founder and CEO of ZoomInfo, and Graham O'Brien, our interim CFO. Hello. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance, and similar items, including without limitation, expressions using the terminology may, will, expect, anticipate, and believe, and expressions which reflect something other than historical facts, are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the forward-looking statements in the slides posted to our investor relations website at ir.zoominfo.com. All metrics on this call are non-GAAP unless otherwise noted. Reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, let me turn the call over to Henry.

Thank you, Jerry, and welcome, everyone. We continue to see stabilization and improvement in our net retention rates and believe that we're moving forward with a clean slate while delivering improved financial results. Q2 was about implementing new initiatives to position the company for long-term success, and Q3 was about executing on these initiatives and moving the business forward. In Q2, we successfully deployed a new business risk model, which has successfully reduced the volatility around future write-offs. In the third quarter, we applied this model more broadly and transacted more than 55% of our new business opportunities through upfront prepayments, up from 33% in Q2. In doing so, we also disqualified more risky small businesses than ever before. While this is absolutely the right thing to do for the long-term health and durability of our business, it will remain a headwind to the optics of our growth in the coming quarters. In the quarter, ZoomInfo Copilot performed better than expected. Our NRR stabilized at 85% for the third consecutive quarter, And we accelerated our shift up market by delivering strong enterprise growth and growing both our $100K and million-dollar-plus customer cohorts sequentially. As a result, gap revenue for the third quarter was $304 million, and adjusted operating income was $112 million, a margin of 37%, both above the high end of our previously provided guidance. We remain committed to efficiency with a focus on growing levered free cash flow per share. To that end, unlevered free cash flow for the quarter was $111 million, up 17% year over year. In Q3, we also retired 24 million shares, approximately 7% of our total shares outstanding. Since March of last year, when we announced our first share repurchase authorization, we have retired 68 million shares or approximately 17% of total shares outstanding. We believe in a long-term opportunity to drive shareholder value through compounding growth and levered free cashflow per share. When you combine our strong cash generation with the ongoing share count reductions, we expect the company will do at least $1 of levered free cashflow per share this year. And we plan to grow that number meaningfully in 2020-25 in 2025 and expect to continue to grow it over the long term. In a seasonally slower quarter for our upmarket business, we were able to deliver another strong enterprise quarter. Our 100K customer cohort grew by 12, the second consecutive quarter of sequential growth, ending the quarter with 1,809 greater than $100,000 customers. Revenue from this cohort now makes up 44% of our ACV. We had one of our best year-over-year increases in million-dollar-plus customers and drove accelerating sequential ACV growth from that cohort. And enterprise ACV, which now represents approximately 41% of the business, grew 1% sequentially. More customers are turning to ZoomInfo because we're driving demonstrable results with strong ROI that helps customers increase their revenue and reduce their costs. During the quarter, we closed transactions with leading organizations of all sizes, such as Commerce Bank, Samsung, Bamboo HR, Sonesta Hotels, Bentley, Clary, and Premise Health. At Amplitude, we consolidated a number of existing data vendors deployed Zoom Info Copilot across 150 sales reps, added operations for their RevOps team, and continued to support their marketing and audience building and execution efforts with Zoom Info marketing. Recently, The Economist entered our $100,000 customer cohort through an investment in Copilot licenses as part of a multi-year agreement designed to drive efficiency in their sales and marketing operations. Facing challenges with data accuracy, CRMDK, and process automation, they chose our AI-driven solutions to consolidate intelligence providers and streamline workflows. This strategic decision aims to double their sales opportunities, bolster ABM strategies, and gain efficient access to global business intelligence. And a Fortune 50 customer successfully replaced a legacy firmographic provider with our operations and data as a service products and grew into our million dollar customer cohort. They will leverage ZoomInfo to better understand and expand their total addressable market in their SMB and mid-market segments, to identify high propensity to buy accounts, and to build dynamic audiences for digital activation. They will also rely on ZoomInfo to help create a new, more efficient outbound sales motion. In Q3, ZoomInfo Copilot showed strong performance, delivering results that exceeded our expectations, especially in our mid-market and enterprise segments. The driving force behind Copilot's adoption is the measurable return on investment it offers. Our customers report 25% of their total pipeline directly attributed to opportunities identified by Copilot. A 58% increase in prospect engagement rates a 62% improvement in email response rates, and productivity gains of eight hours per week per user. The foundation for Copilot's success is a combination of relevant customer context with best-in-class activation for go-to-market teams. Customer context comes from the strength of our data asset, unified with the customer's business context from systems like CRM or data warehouses. We're known for our leading contact and company data, which provide actionable insights against hundreds of millions of contacts and companies. Now our new sets of products expand into processing billions of data points daily to prioritize and personalize engagement at scale. During the quarter, our product innovation focused on increasing co-pilot opportunities and strengthening product market fit. First, we expanded our signal ecosystem to capture additional mission-critical go-to-market insights that neither exist nor are actionable in legacy CRM. We now process over 300 million daily signals to help every member of the go-to-market team win faster. For enterprise sellers, we added buying group and executive tracking signals, including hiring trends, expanded person moves, or updates to previously engaged contacts. For transactional and SMB sellers, we added SMB signals like business origination or lean data. For value selling, we added key unstructured data assets like earnings transcripts, financial filings, analyst research, or podcast transcripts that deliver relevant context, pain points, and growth expectations. And for competitive intelligence, we added competitive intent signals, social proof, and insight into customer satisfaction to increase retention, including integrations with competitive intelligence platforms like G2, TrustRadius, and TechnologyAdvice. Co-pilot in the signal ecosystem can now be activated by a larger share of our customer base thanks to new integrations with Microsoft Teams for Enterprise, HubSpot for downmarket customers and Outreach, SalesLoft and Groove for technology companies. In addition to existing integrations with Salesforce, Gong and Slack. Going forward, we will expand Copilot's use beyond prospecting to support key use cases for account executives and account management teams. Early results show Copilot is reactivating dormant seats and driving demand for expansion particularly in the mid-market and enterprise segments. Examples include account executives using AI-powered account planning, customer success teams managing renewal risk through signal monitoring, and marketing teams driving sales execution through co-pilot. This comes on the heels of recently being named a leader this year in the 2024 Gartner Magic Quadrant for account-based marketing platform. We believe this is a serious nod to the speed of innovation coming from our product and engineering teams and the market demand coming from the marketing departments of our customers. The demand for Copilot shows that successful automation and AI and go-to-market strategies require high-quality, reliable data. Our customers have realized that running large language models on their CRM data falls short. Zoom Info Copilot goes beyond the CRM to create a complete picture of the addressable market, every account, every buyer, what they care about, and how to engage them most effectively. What sets Zoom Info apart is our ability to unify contextual data across the entire customer journey with a multi-channel activation layer across sales and marketing. This combination of context and activation drives successful AI and go-to-market, and we're best positioned to capitalize on this platform shift. Before turning it over to Graham, I want to acknowledge and thank the team. Across the organization, we're doing great things, from the work in finance and accounting, to the innovation we're driving in product, to the sales team and beyond. We are focused, we are aligned, and we are operating with a sense of urgency. In Q2, we took the necessary steps to ensure that we will that we were very well set up for the future. And I'm pleased that our positive operating momentum translated into strong financial performance this quarter. We continue to focus on enterprise growth, driving customer outcomes with Copilot, and we're committed to driving long-term value creation through consistently growing levered free cashflow per share. While we are not guiding to 2025 today, I would call out that you should expect a very conservative approach to our guidance communications going forward in general, but particularly as we navigate this SMB transition. With that, I'll turn the call over to Graham.

Thanks, Henry. In Q3, we delivered $304 million in revenue and adjusted operating income of $112 million, both better than the top end of the guidance we provided. When adjusting for the charge we took in Q2 and its impact on the second quarter, as well as the additional day in Q3, sequential revenue growth for Q3 was negative 2%. As expected, write-offs continued at elevated levels in Q3, but showed signs of abating as we exited the quarter. The operational improvements we implemented are delivering results as our business risk model disqualified a record number of high-risk small business transactions in the quarter. As we exit Q3, that refined SMB sales motion is disqualifying more than $2 million, of higher risk new sales per month, which we anticipate will improve the quality of revenue and reduce write-offs over time, a near-term trade-off that benefits us over the long term. We believe the challenges that led to the accounting charge in Q2 are behind us, and we are seeing stabilization and early signs of growth in a number of different areas of the business. As Henry indicated, net revenue retention was stable at 85% for the third consecutive quarter. We are growing the enterprise business. We added to our 100K customer cohort. We added to our million dollar customer cohort. We drove an acceleration in ACV growth for million dollar plus customers, and we are seeing strong early traction with Copilot. In short, we are controlling what we can control, and we are executing very well against our key priorities. Enterprise ACV, which now represents approximately 41% of the business, sequentially grew 1% in the quarter. With continued stabilization in mid-market and enterprise strength, approximately two-thirds of our business is on a path back to growing mid-single digits or better. As we grow in the enterprise, turn around mid-market, and more aggressively disqualify smaller and riskier businesses from the platform, we expect SMB to become a smaller and smaller percentage of our overall business. As that happens, we have a more favorable mix of revenue, and the business is set up for more durable and higher levels of growth. Our operations business increased 22% year over year as we saw continued momentum helping companies with their data foundation as they look to leverage AI. Taken together with our success-driving co-pilot, advanced functionality increased to 38% of the overall business in Q3, up from 35% in Q2. Co-pilot surpassed $60 million of ACV in the quarter, exceeding our expectations. In addition to the rapid innovation on the platform, we continue to successfully drive new-to-the-platform sales, off-cycle upsells, and co-pilot migrations on renewal. We continue to see meaningful uplift on accounts as we transition them into a co-pilot experience, with the majority of these migrations coming in mid-market and enterprise accounts. Utilization is up and customer satisfaction is trending higher, which we believe is a leading indicator of improving renewal trends and higher net revenue retention. In Q3, we took advantage of the dislocation in share price and retired more than twice as many shares in a quarter than ever before, repurchasing 24 million shares of ZoomInfo stock for $242 million, in part through an accelerated share repurchase program. These repurchases reduced total shares outstanding by approximately 7%. As of the end of Q3, we had 343 million shares outstanding with $157 million in remaining repurchase authorizations. We will continue to be enthusiastic and opportunistic buyers of the stock based on the wide gap we see between the intrinsic value of ZoomInfo and our current market value, and because it is one of the best and highest returns on our capital. Operating cash flow was $18 million in Q3, and as we indicated on our last financial results conference call, we restructured our wallpan lease agreement early in Q3 and paid a $59 million termination fee as we continue to right-size our real estate footprint. We estimate that this will save us more than $100 million going forward. Additionally, in Q3, we funded a $30 million settlement related to right of publicity lawsuits, providing avoidance of future litigation costs and liabilities. Unlevered free cash flow for the quarter was $111 million, a margin of 36%. And relative to levered free cash flow, we incurred cash interest of $19 million in the quarter. We ended the quarter with $148 million in cash and cash equivalents, and we carried $1.24 billion in gross debt. The $650 million in 3.875% senior notes have a maturity date of February, 2029, and the remaining balance of $590 million in first lien term loans has a maturity date of February, 2030. Our net leverage ratio is 2.3 times trailing 12 months adjusted EBITDA and 2.2 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 Q3 was $419 million and remaining performance obligations, or RPO, were $1.05 billion. of which $780 million are expected to be delivered in the next 12 months. While sequential growth remains the best metric to evaluate the business, we know some of you look to other metrics. For those looking at billings, the mix of our balance sheet reserves and the changes in practices that we made relative to higher risk businesses requiring prepayment in advance drove higher than normalized growth in billings this quarter, and I would caution you from extrapolating too much from the billings growth trajectory. With that, let me turn to guidance for Q4. We expect GAAP revenue in the range of $296 to $299 million, adjusted operating income in the range of $103 to $105 million, and non-GAAP net income in the range of 22 to 23 cents per share. As a result, we expect for the full year 2024 GAAP revenue in the range of 1.201 to 1.204 billion dollars and adjusted operating income in the range of 416 to 418 million dollars. We expect non-GAAP net income in the range of 92 to 93 cents per share based on 378 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of 420 to 430 million dollars which, consistent with historical reporting, excludes the impact of the restructuring and settlement payments in the quarter. Our four-year guidance implies negative 3% revenue growth and a 35% adjusted operating margin at the midpoint of our guidance range. Now, I will turn it over to the operator to open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for a name to be announced to withdraw your question. Please press star 11 again. Please limit yourself to one question. Please stand by. We'll compile the Q&A roster. One moment for our first question. Our first question will come from the line of Alec Zukin from Wolf Research. Your line is open.

Hey, guys. Thanks for taking the time. I apologize for the background noise. Maybe just the first one. Can you comment on just the demand environment, what you're seeing kind of exiting the quarter into Q4, how it's changed? I noticed a couple of new customers were kind of in, I would say, sectors very adjacent to your core. So that was kind of interesting. And then maybe as a follow-up on retention, you talked about gross retention getting better. Is that gross? Is that expansion? Is it boasts? and kind of how you see those trending over the course of the next three quarters.

Yeah, thanks, Alex. I think on demand environment, it's relatively unchanged from Q2. We're seeing really strong demand in the up market, particularly in the mid-market and the enterprise segments. In mid-market, we're seeing strong demand for co-pilot in our enterprise and strategic segments. We're seeing co-pilot in the enterprise and a lot of DAS and operations OS in the strategic segment of our business. The SMB segment, particularly the lowest end of the SMB, continues to be challenged, particularly from a net retention perspective. And so that commentary is unchanged from Q2.

Yeah, and I'll just add on top of that, net revenue retention was 85% for the third quarter in a row, so reflecting stabilization there. We are seeing less downsell pressure, specifically in mid-market, where we experienced a lot of that over the past two years. But we're also, we have much more expansion and upsell opportunity from co-pilot and then operations up in the enterprise.

Thank you. One moment for our next question.

And our next question comes from the line of DJ Hines from Canaccord Genuity. Your line is open.

Hey, thanks. So, Henry, you have this dollar per share in leveraged free cash flow target out there for 24. You also said that you expect to meaningfully grow that in 25. How much of that free cash flow per share growth in 25 is predicated on a recovery in revenue growth? I mean, can you get there without a bounce back in the top line?

Yeah, this is Graham. The way I think about this is there's a few levers to drive that meaningful growth and lever-free cash flow per share. And the lever that we're going to prioritize is growing the top line. We're resourced for that. If we aren't achieving that, then it becomes a margin expansion lever and then continuing to retire shares, which we'll continue to consider. Okay.

And then, Graham, while I have you, so sequential growth normalizes minus two in Q3, you're guiding to minus two in Q4. Is that a good way to think about the early part of next year, given the new conservative guidance posture, and do you expect to return to positive sequential growth at any point next year?

Yeah, you know, we're going to be very conservative when we... in our guidance period, and we again had positive momentum exiting the quarter in Q3 from an operational perspective, but we're going to be really conservative about the in-period assumptions in Q4. That's our largest expiring quarter, and with that level of activity, we're going to, you know, continue to be conservative from a guidance approach.

Yeah, I think that makes sense. Okay, thank you, guys.

One moment for our next question. Our next question will come from Brad Zelnick from Deutsche Bank. Your line is open. Great.

Thank you so much. And thanks for all the disclosure. But I'm hoping, guys, you can just help clarify the SMB dynamics. Because, Graham, you say that the SMB changes are largely behind you. But, Henry, you're also talking about a more conservative approach into your guidance methodology next year. So I guess two questions. I had thought in Q2 you cleared the deck, so to speak, as it related to charge-offs for your smallest customer segment. And that hit revenue in Q3 and it was a bit of a cleanup. Are we still seeing perhaps upon renewal customers in that segment that are not paying as expected? And are there additional charge-offs that are hitting Q3 and expected forward? And then related to that, as we think about the impact of the stricter credit that you're applying and credit practices in that segment, Is that having a more pronounced effect than you would have thought when you came out of Q2 or is what you thought consistent as you saw it perform in Q3? Thank you.

Yeah, thanks. I'll start. You know, the charge in Q2 did clear the deck there. Like that is not something that persisted in Q3. There's no real P&L volatility or continued impact from the change in estimate in Q2. What is happening is as we do, you know, disqualify high risk new SMB new sales transactions at a higher rate, it does create a growth headwind until we lap that in Q2 of next year. So, you know, the way that we're thinking about this is that that disqualification was up to $2 million plus per month in Q3, up from a million dollars per month in Q2. And as we think about SMB, we expect SMB to decrease as a percentage of the business and actually potentially decline in ACV for a period of time until we lap the introduction of that new business risk model from last year. So, you know, our focus is on prescriptively and efficiently capturing SMB business and continue to believe that there's a high level of quality demand in the segment that we can grow with. And then, you know, the write-offs, again, we reserved against the P&L impact We still had an elevated level of processing write-offs in Q3, but we saw that level abate as we exited Q3. And as we get further away from Q2 when we implemented the new business risk model, call it six months, maybe nine months down the road, that's where we'd expect to start to see that benefit from higher quality SMB new sales and lower write-offs. Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Your line is open.

Great. Thank you so much for the question. I wanted to first announce some of the cost reductions that you guys have talked about, including some of the real estate changes that you've made. Anyway, we should think about some of the early guide rails on operational margin improvements as we look into 2025.

Yeah, we were at 37% in Q3. The guide for Q4 is 35%. There is some just timing between those two quarters rather than trajectory. But we think about this in the framework of levered free cash flow per share and growing that next year. And one of the ways to grow that, if not the way to grow that, is to expand margin.

Got it. And then just as a follow-up, On the copilot side, so it's good to see that adoption there. I just want to understand, just given some of the headwinds that kind of we're seeing still across the macro, is copilot adoption driving up, you know, average deal sizes across most of those customers that are taking it? Or is it viewed right now as an opportunity to keep renewals flat despite some of just the broader headwinds?

Today we are seeing double-digit growth on migration, to co-pilot when we're migrating our customers, we are seeing that grow ASP when we do those migrations.

Thank you.

Thank you. One moment for our next question. Our next question comes line of Ramo Linshow from Barclays. Your line is open.

Hey, thanks for taking the question. This is Frank Onforimo. Following up on that last one, with another quarter in the market for Copilot, what's been the incremental feedback from customers around that, and what's the best way to think about that contributing to net retention in Q3?

We've seen really positive sentiment from our customers on Copilot. Our customers are telling us that 25% of their their pipeline is attributed to opportunities that were flagged to them through copilot 58 more meetings more engagement from the emails that are being generated through our ai emailer and so and we're seeing higher engagement and utilization rates of customers on copilot versus our legacy solutions and so we feel really good about the product that we're building uh we continue to add a tremendous amount of functionality to the product as well and so additional integrations, additional signals that will all drive additional engagement by our customers and take away go-to-market friction up front. And so we continue through Q4 to see really good momentum from Copilot.

Thank you.

One moment for our next question. Our next question will come from Parker Land from Stifel.

Your line is open. Hey guys, thanks for taking the question this afternoon. Henry, look at the NRR stabilization, you see growth in the enterprise segments, maybe less of an emphasis on SMB long term. Wondering if you could talk about any further sales changes or just the absolute number of sales resources you have as you approach year end and start thinking about how 2025 can be best set up for the business.

Yeah, I think we've been on a phased journey to continue to move resources up market into our mid-market and enterprise segments. We think we have a continued opportunity in Q4 and into 2025 to move resources from the lowest SMB segments up into our mid-market and enterprise segments and then drive a more digital self-serve in the lowest segments of our SMB business and manage that business much more efficiently with our PLG motion and free up resources to go into our upmarket segments where we're seeing meaningful growth and success and we want to capitalize on.

Understood. Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Brent Braslin from Piper Sandler. Your line is open.

This is Hannah Rudolph on for Brent today. Thanks for taking my question. Just one for me. I want to talk about the data as a service business. It sounds like you're seeing really solid momentum with your co-pilot product. Just wondering if you're seeing equally strong momentum with the data as a service product.

Yeah, we continue to see really strong momentum in our data as a service business. And that business is growing 22% year over year. We feel really good about that. the adoption is really strong in our enterprise and strategic segments where they're leveraging that asset to build AI solutions, to cleanse data in their CRMs and their data warehouses and their marketing automation systems. And we think that that's a business that will continue its momentum going into 2025.

One moment for our next question. Our next question comes from Koji Ikeda from Bank of America. Your line is open.

Yeah, thanks, guys, for taking my question. I wanted to follow up on a previous question about the exit growth rate for 4Q and thinking about 2025. And so when we do look at the exit growth rate in 4Q, it's a little bit lower than it was during the prior guide. And I get the really conservative part of that. But maybe help us understand a little bit more what we could underwrite in the business momentum, maybe one, two, or three positive drivers here that could give us confidence that 2025 revenue growth would not be flat to even negative next year. Thank you.

Yeah, you know what? The positive drivers that we're really focused on are upmarket right now. So, you know, we're growing the enterprise business. and you know we continue to have an opportunity to re-accelerate that further in mid-market specifically in our software vertical we saw retention improve sequentially for the second quarter in a row after multiple quarters of decline that's really where we had the the most downsell pressure over the last two plus years so we're really just balancing that with you know being selective in the smb and finding the right um growth balance between the three segments

And while we're seeing good momentum continue in October and into November, we're going to continue to be conservative with our guidance.

Thank you.

Thank you. One moment for our next question. Our next question comes from Taylor McGinnis from UBS. Your line is open.

Yeah, hi, thanks so much for taking my question. Maybe on the SMB side, so I know you mentioned disqualifying more than 2 million of higher risk new sales per month versus 1 million prior, but just to clarify, is that on existing customer renewals or is that new logos? Because I'm just curious how we should think about the growth algorithm, I guess, in the near term being maybe more weighted towards existing expansions versus new logo sales And then just quickly as a follow-up, in terms of the guide, was there any changes that were embedded in the 4Q guide in terms of how you're thinking about the headwind from SMB and what that might have been? Thanks.

Yeah, thanks for the question. The disqualification numbers, those are new business, new logo driven. So, you know, a million dollars in Q2 per month of new business ACV that we're disqualifying. And then that, you know, that number's increased to 2 million with our updated model in Q3. And then on the guide, yeah, the, you know, that disqualification is a near-term headwind to new sales ACV. But at the same time, these are high-risk customers that were, you know, very unlikely to pay. And that will quickly turn into a, you know, mid-term tailwind. as we have a higher quality of revenue in 2025.

Great. Thank you so much.

One moment for our next question. Our next question will come from the line of R.T. Vula from JP Morgan. Your line is open.

Hey, thanks for taking the question. This is already on for Mark Murphy. My question was, you know, I know there's kind of a lot of moving pieces in terms of hiring in the stall base, but For some of these companies that are really investing in kind of agentic solutions and hiring behind that, are you seeing any of that benefit across from Solbase, maybe across the larger customers? Thanks.

Sorry, I just want to make sure I understand that question. Is this companies that are building agentic solutions for the broader market or who are building it for their own use cases?

Yeah, that's correct. Building it for the broader market and kind of hiring sales reps to go out there and sell that.

Got it. For the broader market, we're not seeing those types of customers come in. I think where we are seeing that benefit is where internal large customers are building their own AI solutions for internal usage, for their own sellers to use. where they're leveraging our DAS solutions to be the foundational data component to those solutions.

Thank you.

One moment for our next question. Our next question comes from Jackson Ader from KeyBank Capital Markets. Your line is open.

Great. Thanks for taking our questions, guys. I just had a question about kind of the difference between SMBs and the mid-market. So I'm just curious, like, what is it that SMBs are – why aren't the SMBs seeing the value that a mid-market customer would that's kind of keeping them from staying on the platform and expanding with Zoom Info at the moment?

I think a big portion of our SMB base is seeing the value, and we can grow with those customers. This is really a lower end of SMB cash question where we want to make sure that we are not extending credit to high-risk customers. So there is a broad swath of SMB where we want to go and sell to those customers and grow with those customers.

Okay. And then I guess for a quick follow-up, I mean, if we think about

You know, take all the noise from the last few years, right, the pandemic noise kind of out of our, you know, think to a pre-pandemic life versus today. How should we be thinking about the data moat, right, today relative to your competition? Is it wider? Is it narrower? Or is it about the same?

We feel really good about our data moat. We continue to grow our contributory network. We continue to grow our community network. We're now expanding that data moat with a variety of new signals that we're ingesting and integrating into our platform. And so from a data perspective, there are more contributors, there are more community members, there's more signal data that we're licensing and integrating into our co-pilot product. And so that ecosystem is getting larger. And so I feel really good about the data moat continuing to expand.

Got it. Okay, thank you.

One moment for our next question. Our next question comes from Michael Turin from Wells Fargo. Your line is open.

Hi, you got Michael Berg on from Michael Turin here. Thanks for the question. Congrats on the quarter. I wanted to get a better sense of maybe a better characterization of what the incremental conservatism is including here. You talked a lot about, about the, the write downs and the ongoing macro, but maybe some incremental color there. And then I got a quick follow up.

Sure. You know, we value consistency with the guide and we're going to craft guidance with an expectation that we can meet or exceed the ranges provided. As Henry indicated, we intend to take a conservative approach to our guidance communications going forward. And part of that is discounting positive operating momentum from recent quarters. The general philosophy is that we model and consider a wide range of outcomes based on all the information we have at hand at the time.

Got it. Helpful. And then in terms of the co-pilot, you mentioned $60 million in ACV. Is that incremental to the $18 million in Q2 you saw, or is it $60 million total since launch?

That's an exiting total, so that includes the $18 million.

Got it. Helpful. Thank you. One moment for our next question. Our next question will come from the line of Brian Peterson from Raymond James. Your line is open.

Hey, thank you. This is Jonathan McCary on for Brian. Just one from us here. Is there any update you can share on the call about ARR split by vertical and how that's performing? Graham, you answered this in part in the software ARR stabilizing or software NRR stabilizing. Curious to hear about how the traction is building outside of the software and tech exposure more broadly, if you can get anything there. Thanks.

Sure, yeah. You know, we had software retention improve sequentially for the second quarter in a row after declining back through, you know, I think the end of 2021. You know, the other verticals, at least what we're continuing to see, you know, across some of them, double-digit growth, if not high single-digit growth. You know, one... A couple of them that we wanted to highlight were manufacturing has strong growth in Q3, as did finance, transportation, and logistics.

Great. Thank you.

One moment for our next question. Our next question will come from the line of Tyler Radke from Citi. Your line is open.

Yeah, thanks for taking the question. If you look out at NRR, can you just walk us through the puts and takes there? It sounds like you are seeing some positive momentum on the enterprise business, and presumably the focus on higher quality customers should provide a benefit to that. So when do you think that starts to improve? And then secondly, if you think about the initiative to reduce the lower quality customers, I believe you talked about of extending um you know the the restrictions uh for pre-payment uh to 55 of the customer base is that is that kind of as high as you think you'll go or do you think that there's further uh enforcements and um you know room to take that higher thank you sure on the um on the puts and takes into retention you know enterprise certainly getting that

maintaining and getting that above 100% and then getting mid-market back closer to 100%. Those are the big drivers of improving retention over time. One of the things we want to call out in retention is that this is a trailing 12-month or year-over-year view. So the in-period activity effectively takes a little bit longer to show up in that year-over-year view. And we're optimistic about the trajectory there. And then on the disqualification side, I guess that's a clip that we have right now coming out of Q3. I would characterize it as this is the level that 2 million plus we would expect to continue at a minimum at that level moving forward and continuing to run the greater portion of our new sales pipeline through this new business risk model.

Thank you. I think just if I just added on there, I think if you're thinking about where I'm thinking about where I see the opportunity from an NRR perspective, I think first in the mid-market and enterprise segments of our business, we have this real opportunity with Copilot where we're gaining momentum and our ability to take that to the customer base. It helps us when we attach from an upsell perspective or on a renewal perspective. There are also places where it's helping us mitigate downsells. And I think we're seeing that with the improvement in mid-market, particularly in the software sector, where we're able to leverage co-pilot to get that segment back to growth. And then in our way up market segment, our strategic segment, I think what we're seeing there is much more interest in our DAS solutions as they continue to build AI internally and they need cleansed and accurate and complete data assets to be able to do that. And so we're pushing on Copilot and mid-market and enterprise. We continue to see great growth from a DAS and operations perspective in the strategic segment. And then in the SMB segment, we're bringing on much healthier customers today who are paying us up front. And so we get a dual benefit of that once we lap that, the moment in time where we started doing that in Q2 of this year. We'll see that in Q2 of next year where we have this healthier customer base who paid us up front, and so we won't have the headwind of write-off. And then we have a, and we've disqualified the riskiest, highest churn customers out of that cohort anyways. And so we end up with a healthier group of customers. And in new business, we're selling more mid-market and enterprise customers up front. And so the install base is much healthier when you lap Q2 of next year.

Thank you. And our next question will come from the line of Rishi Jaluria from RBC Capital Markets. Your line is open.

Oh, wonderful. Thanks so much for taking my questions and I apologize for any background noise. I'm in transit right now. Just really quickly, I want to hit again on Copilot. Maybe help us understand how do you feel about your right to win in Copilot, especially versus, you know, maybe more neutral platforms that can integrate their data. And if you think about maybe the whole kind of argument of co-pilot versus agentic AI. Can you talk about some of the potential agentic capabilities that you are or intend to build out? Thank you so much.

Yeah, look, I think a couple of things. First of all, we really believe that if you're trying to build any go-to-market AI on top of just your internal data or potentially data that lives in your CRM or your data warehouse, If you're trying to build go to market AI on top of those data assets, and we're hearing this from our customers, they just can't build solid AI solutions with that data. Not only do you need data that's cleansed and accurate, but the information that lives inside of your systems of record, they don't give you a complete picture of the market in front of you. It's not your total addressable market. It's not dynamic data that's constantly changing with news releases and job postings and earnings calls. and interviews and expert calls, all of that information is constantly changing and that's not appearing in a dynamic way inside of your CRM or your data warehouse. And so when you go try to build go-to-market AI on top of static, stale, and almost always outdated data, you're going to get a pretty bad AI solution on the other side of it. And so we have a lot of confidence that the foundation that we start with are the best B2B data asset in the world. is the foundation that you need in order to build AI for go-to-market and that anybody else who starts with a foundation that's any different than that just ends up at roadblock after roadblock after roadblock. And so we absolutely believe that the B2B data asset that we've put together over the last 20 years, in addition to all of the new signals that we're adding on top of that data asset, gives us the right to win for go-to-market AI and to be the go-to-market AI platform of the future. When we think about agentic additions to the platform, the way we think about it is you first, you have this data foundation that gives you a full view of any company's total addressable market, including the companies, the people at those companies, the signals that they're demonstrating that would tell you whether they're in market or not. And then we use that foundation to start building out the different tasks that an account executive and account manager and SDR is doing every day. We start with prospect research. We move to account planning. We move from there to flagging risk in the customer base, to building the communications to reach out to customers, to building the follow-ups to reach out to customers. And so we're taking every slice of what an account executive, an account manager, an SDR, a rev ops, and a sales ops professional does, and we're using the AI capabilities to automate those tasks out of their day-to-day. And we're building that on the only data foundation you can actually build go-to-market AI on top of. All right, wonderful. Thank you.

Thank you. One moment for our next question. Our next question will come from Patrick Walravens from Citizens JMP. Your line is open.

Oh, great. Thank you. Henry, how do you see this space changing? consolidating over the next few years. If I step back and look at it, I feel like there's five segments. There's data, there's revenue enablement like seismic, there's engagement like sales loft and outreach, there's conversational intelligence like Gong, there's revenue forecasting like Clary. You guys have a lot of, a little bit of these categories already. Where does this all go?

Listen, I'm of the fundamental belief that when generative AI came to the market, a gun went off to a new race and a lot of competitors or people in this space laid back and said, oh, you know, we're going to see how this plays out. And we leaned in and we put a bunch of investment between product and engineering and our teams behind Copilot. We enabled our go-to-market teams. We re-architected our platform to be AI first, and we leaned into this opportunity. And so I think like all of the segments that you see today will be fundamentally changed over the next two to three years. But the constant, the constant in all of that is that every one of those solutions is going to need the highest quality data as its foundation to build AI for the future. And so I think we're fundamentally benefited from the fact that in this space with a lot of different players doing a lot of different things, We start with the foundational asset that you need to build AI. We have the scale in the space. We leaned in at the right time, and we're going to continue to build AI around the only data foundation you can build go-to-market AI around.

Awesome. If I could ask a follow-up, you made an interesting comment in your remarks about reactivating dormant seats with Copilot. Can you explain that a little more?

Sure. I think across any user base, there are users who are leveraging the platform in a day-to-day or a week-to-week motion, and then there are users who are not. And what Copilot has done for us is it's reactivated a number of seats that were historically being unused as frequently as we would like to have seen them used. And we're doing that because now day-to-day, we are sending or every day we are sending our users and our customers key signals on their target accounts. And so we're able to understand who their target accounts are. We're able through our AI to understand what would be happening within those target accounts that they would care about. And then we're using all of that data, that intent data, those earnings call transcripts, podcast interviews, job posting, to identify key moments at those target accounts. and then deliver that to our customers through email, through Slack and Teams messages, through notifications on mobile. And so we're putting the key moments happening at their customers right in front of them and then giving them one click to engage with the right buyers at those companies.

Great, thank you.

Thank you. Now I'll turn it back over to Henry for any closing remarks.

Great. Thank you, everyone, for joining us tonight. We realize that one or two quarters do not make a trend line, but we are excited about the operating momentum in the business and the number of green shoots we are seeing. We continue to believe that the best path for long-term shareholder value creation is to delight our customers, and by doing so, grow levered free cash flow per share, and we continue to expect to do that. Thank you, and good night.