Q2 2024 Earnings Summary
- Zeta's competitive advantage is increasing due to their AI and data assets being native to the application layer, enabling faster real-time intelligence and better return on investment for customers, while competitors wind down competing assets.
- The vast majority of customers are actively using Zeta's Generative AI products, leading to 22% ARPU growth among existing customers and contributing directly to the company's 33% revenue growth rate. AI is now a component in almost all RFPs, increasing Zeta's win rate.
- The agency channel is driving strong ARPU expansion, with the average number of brands per agency increasing from 12 to 19, and agencies having hundreds of clients, indicating significant potential for future growth.
- Working Capital Challenges Due to Slower Payments from Agency Customers: Zeta experienced a $5 million headwind from working capital this quarter due to slower payment patterns from agency customers. While these customers are solid corporations, their slower payments could impact Zeta's cash flow and variability in free cash flow timing.
- Key Verticals Not Yet at Peak Levels: The automotive and insurance verticals, although returning to growth, have not yet reached their prior peak levels. This indicates potential vulnerability or a slower recovery in these segments, which could affect Zeta's overall growth if these key markets do not fully rebound.
- Dependence on a Few Large Agency Holdco Customers: Zeta's ARPU growth is significantly driven by expanding relationships with five agency holding company customers. This concentration could pose a risk if relationships with any of these major agencies weaken, potentially impacting Zeta's ability to sustain its growth trajectory.
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AI's Impact on Growth
Q: How is AI affecting your growth trajectory?
A: AI is significantly boosting our growth by helping us win more RFPs, scale new customers faster, and increase existing customers' spending. -
ARPU Growth Expectations
Q: Should we expect ARPU growth to continue at current rates?
A: While we aim to keep ARPU growth within our model of 8–12%, AI adoption has led to higher ARPU growth this quarter. However, we cannot guarantee it will continue at this exact pace. -
Agency Business & Margins
Q: How is the rapidly scaling agency business impacting gross margins?
A: The agency business initially lowers gross margins due to higher social channel usage, but it is accretive to our operating margin and leads to higher adjusted EBITDA margin expansion. -
Customer Behavior Across Channels
Q: Is AI changing customer behavior across different channels?
A: Yes, AI is informing channel selection, leading to balanced growth across connected TV, email, and display channels. -
Competitive Landscape
Q: How is the platform replacement cycle affecting competition?
A: As competitors wind down ad tech assets, our AI-native solutions are expanding our competitive advantage by offering faster and better ROI for clients. -
2025 Targets Update
Q: Why not update your 2025 targets now?
A: We prefer to update guidance in February, following our established pattern, but we're excited about our current momentum and business visibility. -
Mobile Product Launch
Q: What's the progress on your mobile product and its revenue impact?
A: We'll debut our mobile product at Zeta Live on September 26; it's in beta testing and could scale faster than connected TV did, though it's not included in this year's guidance. -
Advocacy Clients & Political Spend
Q: Will advocacy clients continue beyond the election, affecting spend?
A: Most advocacy work is always on; while we saw a step-up in political periods, advocacy was not a significant growth driver this quarter. -
Gross Margin Outlook
Q: How is agency growth influencing your gross margin outlook?
A: We expect to maintain gross margins around 60%, but political spend in the second half may introduce some variability. -
Free Cash Flow Confidence
Q: What supports your increased free cash flow guidance?
A: Despite a $5 million working capital headwind from agency customers, we're confident in collections and have accounted for variability in our guidance.