Q1 2024 Earnings Summary
- Strong Growth in Key Customer Metrics and Adoption: Zeta experienced a significant increase in super-scaled customers (those with over $1 million in trailing 12-month revenue), which grew 13% sequentially—the highest ever. Additionally, scaled customer ARPU grew 11%, accelerating from 7% , and the number of scaled customers using two or more channels increased over 30% year-over-year. This demonstrates strong customer adoption and effective cross-selling of additional channels.
- Competitive Advantage in AI and Data Integration: Zeta's unique approach of integrating data and artificial intelligence natively into their marketing cloud allows for better targeting, activation, and attribution, setting them apart from competitors. Their investments in AI over the past 7-8 years are paying off, making AI a major factor in winning enterprise customers. Their "test, land, and expand" strategy enables them to prove their product's superiority, leading to rapid scaling with agencies and enterprises.
- Positive Market Environment and Increased Guidance: The company is seeing an upswing in marketer spend, with the marketing environment being as bullish as it has been in the last few years. Half of their top 10 industry verticals grew over 30%. Zeta is confident in increasing their guidance for the year due to this robust environment , indicating strong future performance expectations.
- Growth may be constrained by sales capacity and challenges in hiring and retaining productive sales staff. Executives mentioned they have been hiring but also letting go of less productive earlier cohorts, indicating potential issues in scaling sales operations.
- Gross margins may remain under pressure due to revenue mix skewed towards lower-margin integrated revenue from new agency relationships. The company expects the direct revenue mix and cost of revenue percentage to remain similar to 2023 levels, suggesting limited margin expansion.
- Incremental revenue may not translate into proportional EBITDA growth due to increased investments and expenses. The adjusted EBITDA raise is less than the revenue raise, implying that higher expenses, such as marketing and R&D investments, may limit profitability gains.
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Guidance Increase Factors
Q: What drove the guidance raise for the full year?
A: The guidance increase is fully driven by the core business strength, including faster-than-expected growth in auto and insurance, more rapid agency expansions, and improved sales productivity on the enterprise side. Auto and insurance came back to growth faster than anticipated, contributing about a third of the beat. Another third came from more rapid agency expansions, and the final third from sales productivity improvements. -
Impact of AI on Sales
Q: How is AI influencing your sales and pipeline?
A: AI is the key focus in all client conversations today. Organizations are seeking partners to solve their AI challenges, and our years of investment in AI and data native to the application layer are paying off. Clients are rapidly adopting our intelligent agents, with over 300 agents representing thousands of use cases, driving revenue growth and increased platform utilization. AI is a major reason enterprises are choosing Zeta now. -
Agency Growth Impact
Q: How is agency growth affecting direct revenue mix and margins?
A: The direct revenue mix at 67% in Q1 is expected to be the low point, trending back to the low 70s% by year-end. Agency relationships are scaling faster due to our improved positioning and the efficiency of our on-platform solutions. As agencies migrate to our direct platform, we expect cost of revenue to decrease, improving margins. -
Super-Scaled Customers
Q: What drove the increase in super-scaled customers?
A: We saw a 13% sequential growth in super-scaled customers (those over $1 million in trailing 12 months). This is due to our land-expand-extend strategy working, with expansions driven by enterprise relationships across various industries. ARPU growth accelerated to 11%, and the number of scaled customers using two or more channels grew over 30% year-over-year. -
Insurance and Auto Recovery
Q: What's the outlook for insurance and automotive verticals?
A: Both industries are returning to growth faster than expected, contributing to our confidence in raising guidance. We've embedded double-digit growth for these combined industries in our outlook, and insurance may become a faster grower than automotive over the course of the year. -
Political Ad Spend Expectations
Q: How will political ad spend impact your business?
A: There will be more money spent on marketing in this election than any in U.S. history. While one candidate may be allocating funds to legal fees, overall spending will be substantial. Our current guidance doesn't factor in an increase in political ad spend, but we're well-positioned to benefit from it. -
Mobile Platform Outlook
Q: When will mobile contribute meaningfully to results?
A: We expect our mobile product to be in production and ready by mid-year, with meaningful revenue starting next year. The Zeta ID gives us an advantage in mobile due to not relying on Apple's IDFA. We believe mobile will be our next $100 million business as we continue to scale CTV. -
Investment and Spending Plans
Q: Will you need to increase internal spending as you accelerate?
A: We don't see a material step-up needed. We're investing more in innovation than in any prior year, but revenue and gross profit are outpacing these investments. We'll continue investing heavily in AI and innovation, already factored into our forecasts. -
Competition and Differentiation
Q: How does Zeta differentiate from other providers for agencies?
A: Many talk about what we do but can't deliver. Our data and AI are native to the marketing cloud, enabling better targeting, activation, and attribution at scale. Agencies are shifting budgets to us because we prove our product's superiority through results, not just promises. -
M&A Outlook
Q: Any updates on your thoughts around M&A?
A: We're focused on being a high-quality organic growth company but continue to look for accretive acquisitions with great human capital, technology, or data. It's a good environment for M&A from a buyer's perspective, but we haven't found the right fit yet. -
Sales Hiring and Productivity
Q: Could you grow faster with more sales capacity?
A: We've been hiring experienced sellers while also letting go of less productive ones. Sales productivity has improved, with recent cohorts closing their first deals in 4 months, 20% better than the three-year average. We're focusing on quality over quantity, targeting talent with domain and vertical expertise. -
2025 Outlook
Q: Any updates on your 2025 targets?
A: We're confident in our trajectory but don't want to get ahead of ourselves. As we're now projecting $900 million at the middle of the range for this year, we'll update our 2025 targets when it's logical. -
Marketing Environment
Q: Has there been a change in marketing spend priorities?
A: We're seeing an upswing in marketing, with clients prioritizing AI and data native to the application layer. Agencies and enterprises want the best solutions with the best technology to deliver results. The marketing environment is robust, supporting our confidence in raising guidance.