ZoomInfo Technologies - Q1 2023
May 1, 2023
Transcript
Operator (participant)
Good day, thank you for standing by. Welcome to ZoomInfo Q1 2023 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-one-one your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sisitsky, Investor Relations. Please go ahead.
Jerry Sisitsky (VP of Investor Relations)
Thanks, Amy. Welcome to ZoomInfo's Financial Results Conference Call for the Q1 2023. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo, and Cameron Hyzer, our CFO. After their remarks, we will 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 Factors 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 cautionary statement in the slides posted to our Investor Relations website at ir.zoominfo.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.
Henry Schuck (Founder and CEO)
Thank you, Jerry, and welcome everyone. In Q1, we delivered 24% revenue growth, better than expected profitability with an adjusted operating income margin of 40% and more than $121 million in unlevered free cash flow. While we can't control the macroeconomic environment, we can control how we manage the business, and we are executing efficiently. Even when facing continued scrutiny on deals against a macro backdrop that we have not seen improve, our financial results demonstrate the value that our platform delivers to customers everywhere. With that backdrop, we continue to drive a leading combination of growth and profitability, while approximately 40% of our revenue comes from software companies. When you incorporate financial services, venture-backed companies, and the broader technology space, the majority of our customers are being impacted by the current economic environment.
We are confident that when there is a more stable and certain economic outlook, we will see even higher levels of growth accompanied by even stronger profitability. Until we get there, we are executing against our plans for the year with confidence and reaffirming our full-year guidance, which calls for 17% revenue growth and more than half a billion dollars in unlevered free cash flow for the year. While we grew our million-dollar cohort of customers materially quarter-over-quarter, our 100K cohort lost logos in Q1 as software companies downsold. We ended the Q1 with 1,905 customers that have more than 100K in ACV, up approximately 17% year-over-year. Gross churn remains consistent, the total ACV for that cohort continues to grow.
We also continue to see bright spots in less effective end markets like manufacturing and transportation and logistics, where we are seeing accelerating demand on the new business side and strong seat growth on the customer side. Given the incredibly large and growing addressable market, quick time to value, and the strong ROI we deliver, we continue to invest in the business to drive future growth, widen our competitive moat, and be even better positioned when the economy improves. We are capitalizing on opportunities to evolve our go-to-market approach and improve our own internal seller efficiency. By further specializing the roles of our sales and support teams, building persona-based centers of excellence across all functions, and developing a more product-led motion for our downmarket customer segments, we're able to optimize our entire organization for greater effectiveness and efficiency.
We're continuing to invest behind our PLG motion to drive additional ways for customers to transact with us from first touch through renewal. Today, SalesOS customers can buy additional seats and credits via self-service, with hundreds of transactions per quarter leveraging our self-service store since its launch in Q3 of 2022. This easier pathway to purchase is driving more and more customers to leverage self-service, including enterprise customers looking to provision user trials and add seats. We expect to expand our product-led motion to be able to fully support acquisition, growth, and retention motion, allowing our go-to-market teams to focus on more complex, higher-value use cases. These levers are enabling us to invest behind our enterprise business while still maintaining our high velocity, high efficiency engine downmarket.
Examples of these investments, which we are already seeing gains from, include a more dynamic and rigorous pricing infrastructure, leveraging our platform and first-party data to synthesize critical signals and prescribe upsell, cross-sell, and pricing motions to the field. The rollout of a new sophisticated sales methodology to drive transparency and accountability upmarket, upleveling our sales talent, and an overall more strategic and high touch approach to our enterprise customers. That we can unlock their potential as customers, and that they can unlock their potential as world-class go-to-market leaders themselves. In product, we're investing our resources to create delightful customer experiences, extend our data leadership, and expand upmarket. Those investments are paying off with nearly every engagement metric increasing across our core SalesOS product and our Chrome extension ReachOut. We view increased engagement as a positive leading indicator for retention.
We are also laser-focused on driving seller productivity for our customers, something that chief revenue officers are especially attuned to today. Within SalesOS, we added native sales engagement capabilities, enabling sellers to ReachOut to prospects in seconds without ever leaving the platform. Users can simultaneously log their activities and launch multi-touch campaigns in real time. Over the quarter, users of this new experience have demonstrated a 22% higher likelihood to become daily active users as we expand our use case more centrally into their day-to-day workflows. With Chorus, we continue to push the frontier of conversation intelligence and AI to increase seller productivity across account executive, account management, and post-sales teams. Our new generative AI-powered meeting summaries automatically produce meeting notes and create action items to help sellers move deals forward, ensuring consistent follow-through and increased rep productivity.
To use the words of one of our customers, "Chorus' AI post-meeting summary is a feature that's completely changed my workflow. There is absolutely no reason to ever take notes during a call again. It captures every single relevant detail from a meeting along with key action items." We expect to continue investments in AI and workflow automation as we become an irreplaceable tool in every go-to-market tech stack. In MarketingOS, we introduced account deal stories, enabling sales and marketing teams to rally around the same deal and account insights by bringing all activities, engagements, intent signals, web forms, and email correspondence that influence a deal into a single place. Now, sales and marketing teams have access to complete information across the entire funnel, delivering a better customer experience and shortening time to close.
Our newly released spend reports complement this experience, allowing customers to monitor and optimize the impact of their multi-channel campaigns. On the partnership side, we're excited to announce a new partnership with Databricks, a leading data lakehouse provider, to deliver ZoomInfo's comprehensive B2B datasets directly to customers in the Databricks platform, creating a new channel for accessing and purchasing ZoomInfo through the Databricks Marketplace. Our customers will be able to seamlessly leverage our powerful go-to-market data to unlock the full potential of their data workflows, analytics, modeling, machine learning, and AI initiatives. During the quarter, we closed transactions with many of the world's strongest brands and leading enterprises, including Chevron, Choice Hotels, Dow Jones, J.P. Morgan, Juniper Networks, Panera Bread, Shaw Communications, UKG, U.S. Bank, and Wyndham Hotels.
These globally recognized brands turn to us not only because of our market-leading data and software, but also because of our industry-leading data privacy and notice practices. This advantage is especially powerful with our multinational clients who are looking to expand with a trusted partner in Europe and beyond. This drives our success internationally, where despite stronger economic headwinds, we continue to grow faster than our domestic business. In the quarter, we saw this come to fruition as we expanded our global data set to two of the world's largest cloud software companies who switched to ZoomInfo away from legacy providers because they couldn't trust their privacy and data compliance practices. Our industry-leading rigorous standards for privacy and compliance were aligned with their values of customer trust and integrity.
In addition to those, we also grew our customer footprint in EMEA with one of our largest global expansions with a UK-based multinational pest control enterprise. With dmg events, an international provider of exhibitions and media that brought on SalesOS to drive seller efficiency worldwide. We also continue to see strong enterprise demand for our TalentOS platform in a hiring market that remains very competitive for top talent. We brought on 2 Fortune 50 companies, one of the largest retail pharmacies, and a major life insurance provider for property, casualty, and life insurance, who are now leveraging our platform to quickly recruit candidates.
A number of businesses replaced their existing ABM providers and switched to MarketingOS, including a global technology company that wanted to target their entire addressable market more accurately, and a Texas-based higher education software provider that wanted to save money and go to market more efficiently. We also sold our largest-ever MarketingOS transaction to a food services company looking to target businesses more effectively as companies return to office. In closing, I've never been more confident in the ROI that our platform delivers and the innovation that we're delivering for our customers. The highly accurate data and insights powered by the triggers, automation, and workflows to activate that data drive tremendous value and engagement.
We remain early in the digital transformation of B2B sales as more and more businesses continue to discover the power that our data and insights provide. Despite the current economic environment and the business challenges our customers are facing, buyers continue to invest in modernizing their go-to-market. As a result, we are confident that as the economic outlook stabilizes, our growth will accelerate. With that, I'll hand it over to Cameron.
Cameron Hyzer (CFO)
Thanks, Henry. In Q1, we delivered revenue of $301 million, up 24% year-over-year, and up 1.9% sequentially on an annualized basis when factoring in the 2 fewer days of revenue recognition in the Q1. Excluding the impact of products acquired within the last 12 months, our organic revenue growth for the quarter was 23%. Given that we completed our most recent acquisitions at the beginning of Q2, 2022, we do not anticipate inorganic revenue contribution next quarter. Adjusted operating income in Q1 was $120 million, a margin of 40%. GAAP net income was $45 million, and GAAP EPS was $0.11 per share. Non-GAAP EPS was $0.24 per share. Overall, the environment degraded in the Q1, similar to the assumptions upon which we built the guidance.
The majority of our customers operate in industries meaningfully impacted by the current economic environment, including software, other technology, and financial services. All customers are scrutinizing spending across vendors. This backdrop makes the starting point for renewals and upsells more challenging, impacting overall sales efficiency and putting downward pressure on NRR. As contemplated in our guidance, net retention activity was incrementally worse than what we experienced in Q4, while new sales was roughly flat relative to Q1 2022, slightly better than what we contemplated in the guidance. This better sales performance was partially offset by increased revenue reserves related to write-offs among our SMB customers.
With this performance and more visibility into the remainder of the year, we are reaffirming our previously provided full year guidance, which calls for 17% revenue growth at the midpoint, and an implied adjusted operating margin of 41%. International revenue grew 32% relative to Q1 2022, and international customers contributed 13% of the revenue in the quarter. Turning to cash flow. Operating cash flow in Q1 was $109 million, which included approximately $19 million of interest payments. Unlevered free cash flow for the quarter was $121 million or 101% of adjusted operating income.
Cash flow conversion in Q1 exhibited lower than normal seasonality due to lower prior quarter billings relative to AOI, coupled with the banking crisis at the end of Q1 that delayed some payments to us and forced us to make certain benefits payments ahead of schedule. We expect these timing impacts to reverse in the coming quarters. As reflected in our guidance, we continue to expect unlevered free cash flow conversion in the range of 95%-100% for the full year. With respect to the balance sheet, we ended the Q1 with $616 million in cash equivalents, and short-term investments. At the end of Q1, we continued to carry $1.25 billion in gross debt, all of which is fixed or hedged in terms of interest rates.
During the quarter, we completed a repricing of our first lien credit agreement at par, which resulted in a four-year maturity extension to 2030 and a 25 basis point reduction in the interest rate. We again drove an improvement in our leverage ratios with a net leverage ratio of 1.3 times trailing 12 months adjusted EBITDA and 1.2 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA on our credit agreements. During the quarter, we repurchased approximately 1 million shares of ZoomInfo common stock at an average price of $23 per share. In aggregate, we deployed a total of $24 million of the $100 million share repurchase authorization that we announced on March 14, 2023. We remain in the market repurchasing shares, and we expect to continue to be opportunistic with respect to repurchases.
With respect to liabilities and future performance obligations, unearned revenue at the end of the quarter was $451 million, and remaining performance obligations or RPO were $1.1 billion, of which $839 million are expected to be delivered in the next 12 months. We believe that calculated billings, bookings, and RPO are imprecise metrics to assess in-period activity and forward momentum. Because of the inherent noise in, and sometimes conflicting signals across these metrics, we focus on sequential annualized revenue growth, which was 1.9% in the Q1. Furthermore, given that we are seeing sales efficiency begin to stabilize and April performance begin the quarter better than January did, we expect sequential annualized revenue growth to accelerate in the Q2, as is reflected in our guidance. For Q2, we are providing guidance as follows.
We expect revenue in the range of $310 million-$312 million, adjusted operating income in the range of $125 million-$127 million, and non-GAAP net income in the range of $0.22-$0.23 per share. Our Q2 guidance implies year-over-year growth, revenue growth of 16% and an adjusted operating margin of 41% at the midpoint of guidance. With another quarter of visibility, we have further confidence in our ability to achieve or exceed our full year guidance.
As a result, we are reaffirming our full year 2023 guidance, which calls for revenue in the range of $1.275 billion-$1.285 billion and adjusted operating income in the range of $523 million-$533 million. We expect non-GAAP net income in the range of $0.99-$1.01 per share, up from the prior range of $0.98-$1.00 per share, with non-GAAP net income per share based on 417 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $507 million-$517 million.
Our full year guidance implies 17% revenue growth at the midpoint and both adjusted operating margin and unlevered free cash flow margin at or above 40%. With that, let me turn it over to the operator to open the call for questions.
Operator (participant)
As a reminder, to ask a question, please press star-one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star-one-one again. Please be sure to limit to one question only. Please stand by while we compile the Q&A roster. Our first question is from Alex Zukin with Wolfe Research. Your line is open.
Alex Zukin (Managing Director and Senior Analyst)
Hey, guys. Thanks for taking the question, and appreciate a lot of the detail on the underlying business. I guess maybe start for Henry. It looks like kind of a tale of two businesses, right? You have the business that the underlying customers are impacted, and you're doing really well with the new business. Obviously some headwinds on retention and upsell. Just maybe if you split those two out and you looked at them separately, you know, what would the non-impacted business look like versus the impacted business? As you talk to customers, as you talk to other CEOs, kinda where are we on that timeline where we kinda start to rebase into a new normal sales cycle on the impacted side?
Henry Schuck (Founder and CEO)
I think the way to think about this, Alex, is it's a little bit less like there's a group of companies that are doing really, like, well, and then a group of companies that are more challenged. Even within the tech and software vertical, you know, a number of the companies that moved into our million-dollar cohort this quarter were from software or tech companies. What we've said in the past, which is still true, is that there is a lot of demand for our products and services, we continue to add headcount, quota-carrying headcount into our account management and account executive organization.
As we're out there trying to upsell in our customer base, trying to cross-sell in our customer base, we're also affected on the other side by renewals taking longer, general sales cycles elongating for those same deals. We're not able to get to as much of it that's out there. We're continuing to hire there, continuing to hire those quota-carrying reps, 'cause even in the industries that are impacted, we are seeing opportunity and demand. As far as the, you know, as far as the sales cycle coming back to a more normal state, what I'll say is I'll reiterate what Cameron said, which is April as compared to January, is off to a much better start than January was.
Alex Zukin (Managing Director and Senior Analyst)
Perfect. Then maybe just on the competitive environment. We, you know, we keep hearing anecdotes of there's kinda fierce price competition, a lot of overlapping offerings increasingly coming out of the space. Where... You know, as you look over the next 12 months and beyond, and you think about the incremental competitive differentiation of the offering, like, where are you seeing it show through right now?
Henry Schuck (Founder and CEO)
Yeah. So what I'd tell you first is the competitive landscape has not changed. Our win rates have not changed as they relate to our competitors. If anything, we feel ourselves moving further and further away from the competitors in our space. ACV per customer was roughly flat, and discounting was consistent to what we saw in Q4. We haven't been, you know, pressured in that way. I think when you think about differentiation in the space, I think there's two things. One, we're continuing to invest in our data and our data asset, so we're very obviously the leader when it comes to data coverage, breadth, and accuracy and wanna pull further and further ahead of anybody in the market there.
Second, as we bring everything together in an integrated experience, as you saw us really start doing this quarter by bringing in sales engagement into the core SalesOS platform, we think that interconnectivity between platforms and systems creates a long-term differentiation when put together with our best-in-class data assets.
Alex Zukin (Managing Director and Senior Analyst)
Perfect. Thank you, guys.
Operator (participant)
One moment for our next question. Our next question is from Elizabeth Porter with Morgan Stanley. Your line is open.
Elizabeth Porter (Equity Research Analyst)
Great. Thank you so much. You know, I just wanted to ask a bit on NRR first. Directionally, it sounds like NRR got a little bit worse in Q1 versus Q4, which is what you had expected in your guidance. You know, directionally, you know, what's the risk that we could see incremental weakness, you know, through the year in NRR from that Q1 rate as the macro gets a little bit more difficult? You know, and on the offset, you know, while it's still early and there's a lot of uncertainty, you know, is there an opportunity to improve upsell as we just lap some of the tough comps in the coming quarters? Thank you.
Cameron Hyzer (CFO)
Yeah. Thanks, Elizabeth. You know, we are starting to see upsell opportunities among many of our clients and, you know, even in Q1, but, you know, more so as we move into Q2. Yeah, I think there's a really significant opportunity for upsell, and gross retention continues to hang in pretty well. You know, that being saidYeah, there is the potential for downsell, and I think we're seeing a little bit more downsell as well, particularly in the software sector where we are, where there are a number of layoffs.
As we start to lap many of the, you know, harder renewals that, you know, when we really started to see pressure even in Q2 of last year, as we start to lap those renewals, we feel that, many of those renewals in the software space may actually start to go better as we get further and further into the year.
Elizabeth Porter (Equity Research Analyst)
Great. Just as a follow-up, given the recent leadership announcements, did you guys see any disruption from the changes in Q1? You know, if so, you know, was it any better or worse than what you had expected? How should we think about the impact for the remainder of the year?
Henry Schuck (Founder and CEO)
Yeah. Look, we've seen a real positive impact from Dave and Ali's entering the company. We didn't see any disruption in Q1 from them coming in. I think, if anything, we feel their impact was increasingly positive on the organization. They're both focused on improving productivity, and org design and, for Dave, upmarket execution. We feel really good about their contribution so far.
Elizabeth Porter (Equity Research Analyst)
Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Koji Ikeda with Bank of America. Your line is open.
Koji Ikeda (Managing Director)
Yeah. Hey, guys. thanks for taking my questions. I just wanted to ask a couple here. First one being about, you know, just kinda going back to the sales linearity, April being a better month than maybe, you know, the March and February, or even better than January, like you stated. Could you talk about that a little bit more? You know, what exactly does that mean? Does that mean that the pipeline generation is better? You know, I know there's more sales capacity in the sales department today versus the beginning of the year, so that kinda makes sense, if that's the case. Or is it sales productivity? I mean, I guess maybe a little bit more color on how April is being better than, you know, kind of the previous months.
Cameron Hyzer (CFO)
In terms of linearity, specifically April was better than January. You know, typically we do have some level of linearity within the months. You know, the first month is oftentimes a little less than the second month, which is then less than the third month. But we do feel that momentum and on a, you know, adjusted basis comparing it to January gives us, you know, good, you know, confidence in where Q2 is going. You know, certainly that's actual sales, closed sales. From a pipeline perspective, I think we're seeing a similar dynamic of improvement in Q2.
Koji Ikeda (Managing Director)
Got it. Got it. No, thanks for that, Cameron. I wanted to ask a follow-up question here on RPO. You know, just current RPO and RPO, the growth slowed in the Q1 to the high teens from the mid to high twenties last quarter. You know, even it was a bit down sequentially in the Q1. Could you walk us through maybe some of the underlying mechanics there? Anything that caused specifically maybe on duration or co-terming or anything that caught on the RPO to help us understand that metric a little bit better? Thanks, guys.
Cameron Hyzer (CFO)
Sure. Certainly, you know, we are seeing fewer long-term contracts, and that you can kind of see the difference in RPO versus current RPO when you're looking at that. The other, you know, thing that does impact, you know, RPO is, we mentioned that we had, you know, a greater number of write-offs in the quarter related to small business clients, and that flows through RPO, you know, more dramatically than some because those are often contracts that, you know, haven't been billed yet.
Koji Ikeda (Managing Director)
Got it. Thanks for taking my questions.
Operator (participant)
One moment for our next question. Our next question is from Mark Murphy with J.P. Morgan. Your line is open.
Mark Murphy (Managing Director)
Thank you very much. In the last week and a half, we've noticed some incremental layoff announcements. Cameron, I think you alluded to it, but we've seen it from Dropbox and Alteryx and Red Hat and Lenovo and F5. If you look at that trend, would you expect the over 100K customer cohort to continue contracting in the near term? Is it based on your kind of pipeline comments and how April started, is it possible that that was more of a one-time event?
Cameron Hyzer (CFO)
Yeah, I think our expectation is that we're gonna continue to focus on driving more value for our largest clients and as a result, focus on driving the 100K customer cohort higher. You know, that being said, most of the degradation or all of the degradation came from software companies, which, you know, still comprise a good portion of the 100K customers. You know, to the extent that those layoffs are largely concentrated in software companies, you know, particularly kind of the degradation for us is those companies that are close to that 100K, you know, number, so a small downsell ends up pushing them under. It's the kinda small and mid-size software companies that we actually have the most risk if you're purely focused on that $100 thousand dollar level.
Mark Murphy (Managing Director)
Okay, that makes sense. As a follow-up, Henry, you mentioned a couple of Fortune 50 companies selected TalentOS for recruiting, I think you said, that surprised me a little bit. Can you dimensionalize those transactions just in terms of either how many seats or just are they needle movers, if you compare it to some of the core marketing and sales products?
Henry Schuck (Founder and CEO)
Yeah. I mean these are You should think of them as sort of high five-figure transactions or mid five-figure transactions, they're not million-dollar transactions, they wouldn't enter the 100K cohort. you know, mainly because when you go into the talent acquisition team, they're often smaller, much smaller than a sales team at an organization. Those are also good starting points for us to continue to grow inside of those organizations. Those are contracts where you get the talent acquisition folks who are acquiring talent for IT or for pharmacists, we have an opportunity to spread out from there.
Mark Murphy (Managing Director)
Understood. Thank you very much.
Operator (participant)
One moment for our next question. Our next question comes from Kash Rangan with Goldman Sachs. Your line is open.
Kash Rangan (Managing Director)
Hey, thank you guys, for the color. Cameron, I think you talked about net new business, being flat in Q1. Can you compare that to how net new business was in Q4 of last year? I'm trying to understand the trajectory. Did it, was it negative going to flat or flat staying flat? Also, when I look at the numbers on a go-forward basis, the sequential amount of new dollars to be added, we need to see some sequential acceleration in Q2, Q3, and Q4 to hit your guidance.
What are the things that drive the numbers in such a way that we can get to that accelerating revenue growth in the second half versus the annualized growth rate that you put up based on the sequential subscription revenue growth rate in Q1? Thank you so much.
Cameron Hyzer (CFO)
Sure. Q4 new sales were, you know, modestly up in Q4 of 2022 relative to 2021. It's a kind of modest deceleration, you know, being flat. We are continuing to add sales capacity in both the new and the existing customer side in order to continue to drive that. As we look forward and we develop our, you know, guidance and assumptions, we are focusing on what does the, you know, shape of expirations and renewals look like as well as what our sales capacity, you know, looks like in terms of new sales and upsell possibilities.
With added sales capacity and the shape of expirations that, you know, start to get us a little bit more support as we're going forward, that gives us good confidence in our ability to see that accelerating sequential revenue growth in order to hit the guidance. Certainly, where we have, you know, obviously very good visibility into Q2, we're already seeing that in April compared to January as well.
Kash Rangan (Managing Director)
Would you say you have easier net new business comps in second half of this year relative to last year? It would seem like it is.
Cameron Hyzer (CFO)
Sorry, can you repeat that? I couldn't quite hear you.
Kash Rangan (Managing Director)
It would seem like you have, easier net new ACV comps in second half of this year versus last year.
Cameron Hyzer (CFO)
Yeah, absolutely. We started to see obviously pressure when we talked about, you know, net retention and so forth in Q2, but that got that pressure more materially impacted Q3 and Q4 last year, which obviously creates an easier comparable to achieve that.
Kash Rangan (Managing Director)
Brilliant. Thank you so much.
Cameron Hyzer (CFO)
Yep.
Operator (participant)
One moment for our next question. Our next question is from Taylor McGinnis with UBS. Your line is open.
Taylor McGinnis (Executive Director)
Yeah. Hi. Thanks so much for taking my question. Maybe just to piggyback off the last question with the guide implying your sequential growth to accelerate throughout the year, Cameron, can you break that down maybe a little bit further into new versus existing? You know, what gives you comfort on those two different variables? I guess, you know, more specifically, if NRR came down a little bit further in this last quarter, how does that compare to maybe what is embedded in the full year guide and if there's any risk there if the macro deteriorates further?
Cameron Hyzer (CFO)
Yeah. You know, we do expect that as we continue to grow the sales team throughout the course of the year, that'll support growth in terms of the new sales as well as, you know, potential upsells. We do actually also have, you know, some seasonality historically, which is based on that shape of renewals and expirations that are coming in that actually support, you know, higher net retention activity as you move through the year. You know, that'll help that as well.
Taylor McGinnis (Executive Director)
Great. Thank you so much.
Cameron Hyzer (CFO)
Yep.
Operator (participant)
One moment for our next question. Our next question is from Raimo Lenschow with Barclays. Your line is open.
Raimo Lenschow (Managing Director)
Thank you. Thanks for squeezing in. Can you talk a little bit about what you're seeing in terms of pipeline quality? What I'm referring to is, at the beginning of the crisis, people kind of downsell their seats, et cetera, but you have obviously like quite a few of extra offerings out there. Like, what do you see in terms of people's appetite to kind of go into kind of the higher value add solutions from you guys? I have one follow-on. Thank you.
Henry Schuck (Founder and CEO)
I mean, I think thanks, Raimo. I think where we're seeing really great results is in our mid-market and higher customers. Enterprise mid-market or strategic customers, they are coupling together numerous of our platforms and products. When I think about the big deals that closed in Q1, almost all of them were multi-platform deals. They brought our data as a service offering and our Ops OS offering together with our SalesOS offering. They added Talent OS and SalesOS. They leveraged our company and contact bulk data inside of Snowflake. When we saw the deals that we're seeing are combining multiple of our platforms together, and we think that is a strategy that we're executing against and employing throughout our account base.
I think as we continue to iterate on that strategy, we'll see more and more of that happen.
Raimo Lenschow (Managing Director)
Okay, perfect. Then, as we kind of think about second half easier comps, et cetera, Cameron, what is your thinking in terms of buyback and maybe remind us where the situation that you're in at the moment, because like, you know, obviously the share is under pressure or we're under pressure, but, you know, it looks like you're stabilizing. How are you thinking about buybacks at this level? Thank you.
Cameron Hyzer (CFO)
Sure. In mid-March, we authorized a $100 million buyback. Through the end of the quarter, we repurchased about $24 million, and we did continue to repurchase in April as well. You know, our expectation is to continue to be in market and opportunistically repurchase shares here in the Q2. You know, we have not agreed with the board or had kind of further conversations about additional buybacks after the $100 million.
Raimo Lenschow (Managing Director)
Okay, thank you.
Operator (participant)
One moment for our next question. Our next question is from Michael Turrin with Wells Fargo. Your line is open.
Michael Turrin (Managing Director and Senior Equity Research Analyst)
Hey, good afternoon. Thanks for taking the question just for all the detail in terms of what's assumed. Maybe one on margin, Cameron, if I may. Any update around how you're thinking through trade-offs there, given it sounds like some mixed signals between macro and what you're seeing in terms of ramping productivity on the sales side? How quickly are you able to dial up or dial down the need for sales capacity based on what you're seeing, and anything else we should be mindful of in thinking through margin and free cash flow impacts for the coming year? Thanks.
Cameron Hyzer (CFO)
Yeah. Our expectation is that we're gonna add, you know, roughly 50 basis points of margin in 2023 relative to where we were in 2022. Yeah, I think our ability to dial up and, you know, dial down, you know, sales capacity is, you know, slightly different. Dialing down is, you know, relatively easy. Dialing up, you know, we do need to go out and hire folks, and we're very focused on hiring the highest quality folks that we can or moving people up through our training programs and into, you know, high-quality sales folks. You know, I think we, this is something that we've done for a long time and are focused on being efficient, not just with the sales capacity, but also how we build those teams over time.
I think we feel very comfortable that we'll be able to continue to add capacity as we move through the year.
Michael Turrin (Managing Director and Senior Equity Research Analyst)
I'll leave it at one. Thanks, guys.
Cameron Hyzer (CFO)
Thank you.
Operator (participant)
One moment for our next question. Our next question is from Brad Zelnick with Deutsche Bank. Your line is open.
Brad Zelnick (Managing Director)
Great. Thank you very much for taking the question. Henry, you talked about generative AI capabilities related to Chorus. I was wondering if you could maybe speak about the broader opportunities across the portfolio and perhaps as well, you know, threats to ZoomInfo from generative AI and other perhaps, you know, new breed of competitors that are out there?
Henry Schuck (Founder and CEO)
Great. Thanks, Brad. Look, I think when we think about what ZoomInfo is doing, we are in the business of making go-to-market more productive, and we really do expect these large language models to accelerate our leadership in intelligence and automation in kinda two big ways: First, for our own products, we're gonna be able to automate manual and mundane steps for our users. For example, instead of finding the next best customer on your own, trying to triangulate signals to figure out who you should be engaging with and then what you should be saying to those companies, we're gonna be able to use AI to parse those signals, select the highest conversion opportunities, pick the best channel, and then actually create personalized content to engage because of all the context we know about companies and people.
We're already have multiple teams working on incorporating this technology into our platform. The other thing that I would tell you is, for our customers, what we've always been saying is that bad CRM data creates all sorts of downstream issues. Where we highlight those tend to be around territory planning, rep efficiency, segmentation, getting insights out of your CRM system. Generative AI coming to the market just shines a really big light on the problems that bad data creates inside of your CRM. The awareness of that issue is increasing exponentially as companies realize that they can't rely on their CRM data to put into these models and get the efficiencies and the upside that's you're expected to get from incorporating generative AI into your offering.
I'll share you a quote that I recently read in Forbes about generative AI coming to go to market. It says, quote, "It's coming. It's going to elevate the importance of your CRM system because for all of this to work, AI needs data." Companies that are expecting to get that data out of their CRM system are gonna need to have that data fully enriched, fully impended, constantly cleansed, and we are by far the leading provider to help them do that. Then by helping them do that, helping them see the benefits of generative AI in the future.
Brent Bracelin (Managing Director, Senior Research Analyst)
Really helpful color. Maybe just a quick housekeeping item for Cameron. Any changes this full year, headcount plans and where you're tracking year to date? Thanks.
Cameron Hyzer (CFO)
We're obviously focused on continuing to support all the investments that we're making. You know, at this point, we are still below where we had ended in September of 2022, but we're gonna tactically hire where we feel that it's most important, mostly in the sales and, you know, capacity areas within sales. We'll focus on, you know, efficiency throughout the rest of the organization and hiring where we think the investments are well warranted, but also looking for areas where we can drive efficiencies going forward.
Brent Bracelin (Managing Director, Senior Research Analyst)
All right. Thanks for taking the questions, Dan.
Operator (participant)
One moment for our next question. Our next question is from Brian Peterson with Raymond James. Your line is open.
Jonathan McCary (Equity Research Analyst)
Hey, thanks for taking the question. This is Jonathan McCary on for Brian. We'll just keep it to one. I know you guys mentioned the 40% exposure to software, but you've also seen some traction in some other verticals recently. Can you talk about how you think about potential go-to-market investments or new partnerships necessary to kind of further build on that expansion into newer verticals? Thanks.
Henry Schuck (Founder and CEO)
Yeah, sure. I think a couple of ways that we're looking to attack sort of these new verticals. One, we talked about new pricing calculators that we're putting out to the field so that they understand based on usage, based on usage and data consumption and the types of companies, industries, sizes, growth rates, where we have opportunities to upsell and cross-sell. That's gonna show up, you know, most of the time in these non-affected industries. We're prescribing plays, based on our own data, based on product data, based on the company's growth data to the field, to run cross-sell, upsell and pricing activities.
I think the second thing is we continue to invest in our product-led growth motion to be able to unlock efficiencies in the down market, to unlock efficiencies in industries that we don't historically sell to. We're building the ability for new customers to transact and become customers with us without ever having to interact with a direct seller. The ability for them to onboard in an efficient, in context, in platform way. Those are a couple of the initiatives we're using to sort of drive our growth in the other industries.
Jonathan McCary (Equity Research Analyst)
Great. Thanks.
Operator (participant)
One moment for our next question. Our next question is from Brent Bracelin with Piper Sandler. Your line is open.
Brian Peterson (Managing Director)
Good afternoon. Cameron, I wanted to go back to the discussion on renewals, particularly given the exposure to software. If we were to double-click into the seasonality of the software renewal expiry base, is there a big chunk that expires here in Q2 that you have visibility into? Is it still more second half of the year, Q4 weighted? Any color there? Then talk a little bit about the puts and takes. I clearly understand the risk to renewals, but you also talked a little bit about some upside to optimism that you could actually start to see some expansion upsell opportunities in the renewals as well too. Any more color there would be helpful. Thanks.
Cameron Hyzer (CFO)
Sure. With respect to the seasonality, you know, software is a little bit more heavily weighted towards Q4 than the rest of our business. Certainly, most of our business from a renewal perspective is, you know, weighted to Q4 relative to the other quarters. Q1 is another big quarter for, you know, software as well. When we think about having gone through the last two quarters, they were more materially impacted than, you know, perhaps Q2 or Q3 might be if you're focusing on software and the pressure that's that's placed upon the business as a result of, you know, software being more impacted by the macroeconomic environment.
Brian Peterson (Managing Director)
Just to clarify, the optimism on potential upsells getting better, is that more of a commentary for segments and renewals outside of software that you're a little more optimistic on upsells?
Cameron Hyzer (CFO)
You know, I think we definitely see it outside of software. I think what we're starting to see is even within software for larger customers that are focusing on where they can be more efficient and do more with less, we are starting to see, you know, more of a, more of a sales opportunity there, relative to, you know, in Q4, I think people were, you know, more running for cover and, you know, looking for ways to cut costs, where now I think people are focused a little bit more on where can they, you know, start to optimize their go-to-market infrastructure.
You know, as Henry mentioned, particularly in places where there are, you know, data opportunities, you know, so data as a service and OperationsOS as well as MarketingOS, we do see some bigger opportunities that are both in the pipeline and things that we're, you know, really starting to execute against.
Alex Zukin (Managing Director and Senior Analyst)
Very clear. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question is from Rishi Jaluria with RBC Capital Markets. Your line is open.
Rishi Jaluria (Managing Director)
Wonderful. Thanks so much for taking my questions. Appreciate the time. Just one question from me. Wanted to ask in terms of what are you seeing in terms of advanced functionality uptake? If I'm not mistaken, I don't think you disclosed it on the prepared remarks. Just wondering if you gave us some color in terms of what adoption there looks like and how we should be thinking about, you know, future adoption from here, just given the uncertainty in the macro and kind of additional scrutiny on budgets. Thanks?
Cameron Hyzer (CFO)
Yeah. The advanced functionality continues to be a bigger and bigger portion of the, you know, overall revenue stream. You know, it continues to grow faster than the overall business. That's an area where, you know, where we are seeing those upsells and upsell opportunities, but we're, you know, executing against those, and they're excited about the value that we're able to provide to customers in those scenarios.
Rishi Jaluria (Managing Director)
All right, perfect. Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Parker Lane with Stifel. Your line is open.
Parker Lane (Managing Director)
Hi, guys. Thanks for taking the questions. Henry, you called out a material improvement in the $1 million cohort of customers quarter-over-quarter. Wondering if you can give us a sense the composition of those customers from a vertical perspective, a product perspective. Just on average, how long have they been working with ZoomInfo? Are you starting to see more opportunities present themselves in that $1 million-plus range from the onset, or are these long-standing customers?
Henry Schuck (Founder and CEO)
Yeah. These are longer standing customers, and that is strategically, we wanna bring customers, we wanna bring prospects into being customers and then expand them from there. It's a pretty diverse group of companies that moved in. They are the textile rental company, a tech company, a number of financial services companies, a couple of fintech companies. That's kinda how to think about that cohort. Look, I think one of the things that we're really excited about is bringing Dave Justice in as chief revenue officer to help us really build the methodology, the process, to go up market, to go up market in a higher velocity, more predictable way. We expect that motion to continue to increase and that we'll continue to find companies to move into that cohort.
Parker Lane (Managing Director)
Got it. Cameron, one quick follow-up for you, just a housekeeping question here. In the context of your unlevered free cash flow guidance, any change to the underlying assumption of $450 million plus reported free cash flow?
Cameron Hyzer (CFO)
No, that remains unchanged.
Parker Lane (Managing Director)
Got it. Thank you.
Operator (participant)
One moment for our next question. Our next question comes from Siti Panigrahi with Mizuho. Your line is open.
Siti Panigrahi (Managing Director and Senior Equity Research Analyst)
Thanks for taking my question. I wanted to ask your confidence level in new business sales that you embedded in your 2023 guidance. What are your expectations in terms of sales efficiency and what sort of changes you are doing to improve your top-down setting motion?
Cameron Hyzer (CFO)
We continue to have, you know, good confidence in the new sales assumption. In fact, you know, given that we outperformed in Q1, I think that gives us even greater confidence with respect to that. You know, certainly we've always been very focused on ensuring high efficiency with respect to that team. You know, we're continuing to invest in more capacity. One of the things that, you know, I think is a really good underlying fact with respect to the new sales motion is that it is more of a diversified customer set that we can go after.
If you think about any business that sells to another business, we can really focus on those businesses that are investing in their go-to-market motions and where they can drive, you know, benefits for their company, which means that we're not really constrained by, you know, one industry or another being, you know, more impacted by the macroeconomic environment. We've seen that, you know, in different stages of, you know, the economic environment that's happening, we've seen that that's rotated around a little, and we've been able to take advantage of continued new sales activity in different industries.
Siti Panigrahi (Managing Director and Senior Equity Research Analyst)
Thanks, Cameron.
Cameron Hyzer (CFO)
Yep.
Operator (participant)
One moment for our next question. Our next question comes from DJ Hynes with Canaccord Genuity. Your line is open.
DJ Hynes (Managing Director and Senior Analyst)
Hey, guys. Cameron, can you talk about what you're seeing in terms of pricing on like-for-like renewals? I'm just curious if, you know, the threat of kind of lower price, lower quality alternatives is creating any pressure on the renewal cycle.
Cameron Hyzer (CFO)
We don't tend to see that in the renewal cycle except for at the very low end of customers. You know, small businesses that are cash-strapped or having issues or, you know, whatever else, you know, if they're willing to downgrade the quality of product that they're getting, you know, in some cases, they can go out and find another provider that could give them, you know, a lower price. For many of our customers, and particularly the larger customers, you know, they aren't willing to take that quality hit in order to pay less.
While there is, you know, some pressure, particularly at the lower end, most of the, call it change in renewal on the downside comes from people either taking out seats or taking out functionality or reducing, you know, the value that they're getting from us. Yeah, that tends to happen a little bit more today in kind of the software world where we're seeing layoffs. You know, we don't see a kind of typical downsell where people are just, you know, coming in and asking for more price because the alternative just isn't there from a quality perspective.
DJ Hynes (Managing Director and Senior Analyst)
Yep. Okay. That's good to hear. Henry, one for you. You talked a little bit about PLG in an answer to an earlier question. I saw ZoomInfo Lite in the earnings deck. Is that product intended to be kind of more of a foot in the door that leads to a more formal sales process, or is that a product that can kind of stand alone at the low end of the market? How are you thinking about it strategically?
Henry Schuck (Founder and CEO)
Yeah. Thanks for the question. I think we're thinking about it in both ways. There are, you know, small businesses that can come in and transact and get, you know, limited version of ZoomInfo Lite through the ZoomInfo Lite offering. We're also using it as an opportunity to see where, you know, multiple people at companies come in, sign up for ZoomInfo Lite at maybe a mid-market or an enterprise company that gives us an opportunity to get into a direct sales cycle with their leadership and then sell a broader agreement to the full ZoomInfo advanced or elite packages.
In addition to that, the underlying technology that we're building to be able to drive ZoomInfo Lite will also give us the ability to auto-provision enterprise users to be able to charge enterprise customers in a seamless way directly within the platform. We get multiple benefits from the technology that we're building. In the actual PLG motion, I think we're gonna capture both down-market customers that we wouldn't get to, international customers that we wouldn't get through to with our regular demand funnel, and then also mid-market and enterprise users that we can then leverage into larger agreements.
DJ Hynes (Managing Director and Senior Analyst)
Yep. Got it. Helpful call. Thank you, guys.
Operator (participant)
One moment for our next question. Our next question comes from Terry Tillman with Truist Securities. Your line is open.
Joe Meares (Equity Research Analyst)
Great. This is Joe Meares for Terry Tillman. I appreciate you taking the questions. You just mentioned that most of the change on the renewals and the downsize coming from customers taking out seats or removing functionality. I'm just curious if there are any pieces of functionality that are more resilient or ones that are more likely to be taken out.
Henry Schuck (Founder and CEO)
Well, I would say, look, in a time where customers are actually laying off members of their sales teams, then the user seats tend to be more in flux from a downsell perspective. If I let go of 10% of my go-to-market sales force, then that 10% I'm not gonna wanna pay licenses for going forward. You've seen that happen during the renewal cycles. I would say that, you know, where a customer is leveraging advanced functionality, where a customer is leveraging our workflow solution, using our DaaS solution, plugged into their systems of record, those are very, very difficult to unplug, and they're not user-based. So those two.
Joe Meares (Equity Research Analyst)
Super helpful answer. just as a follow-up, I think you recently introduced the ability to bring in outside intent sources, onto the platform from G2. Similarly, you've updated the platform's ability to engage customers' intent from websites. I'm just curious of any, you know, usage, data you may have seen or like early customer successes. Thanks so much.
Henry Schuck (Founder and CEO)
Yeah. I think the first integration with G2 was one of our fastest adopting integrations. Really it sets the stage for where we see the platform going, which is a platform that can plug in data source, unique data or niche data sources from anywhere, marry that with ZoomInfo's third-party data, allow you to marry that with your first-party data that we're pulling in through your CRM and marketing automation system. Then build workflow across the intersection of that data, which we think is really exciting. We think that that is the future of what modernized go-to-market will look like.
Joe Meares (Equity Research Analyst)
Thanks. Yeah.
Henry Schuck (Founder and CEO)
Great. Thank you, everyone, for joining us.
Operator (participant)
joining us-
Henry Schuck (Founder and CEO)
Sorry. Thank you, everyone, for joining us tonight. We look forward to seeing you at one of our many upcoming in-person or virtual investor events. Thank you.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.