Zeta Global Holdings Corp (ZETA) 2023 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Zeta's Second Quarter of 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is my pleasure to introduce your host, Scott Schmitz, Senior Vice President of Investor Relations. You may begin, sir.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's second quarter 2023 conference call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com or you will also find links to our SEC filings, along with other information about Zeta.

Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer; and Chris Greiner, Zeta's Chief Financial Officer.

Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition and revenues of our products and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date.

In addition, we have received subpoenas from the SEC as part of an investigation into a company we worked with prior to our IPO. The amount of business we conducted with this company was quantitatively insignificant, and we have not worked with them since 2020.

Finally, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for our GAAP results. We use these non-GAAP measures in managing the business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website, as well as our earnings release and other filings with the SEC.

With that, I will now turn the call over to David.

Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. The second quarter of 2023 marked our 2-year anniversary, as a public company, and I'm extremely proud to announce we have exceeded consensus estimates and raised our outlook every quarter since we've gone public with Q2 continuing this pattern.

In the quarter, we delivered revenue of $172 million, up 25% year-over-year, with adjusted EBITDA of $27 million, up 45% year-over-year. This translates into an adjusted EBITDA margin of 16%, up 210 basis points year-over-year. We generated $21 million of cash from operating activities, up 41% on with free cash flow of $13 million, up 110% year-over-year. We have generated positive free cash flow in each of the 8 quarters since our IPO.

Driving this level of consistent growth and profitability is only possible if you're developing exceptional products that deliver exceptional value to your customers. At Zeta, our goal is to make marketers the heroes of their stories by helping them to acquire, grow and retain customers, substantially more efficiently and effectively than ever before by leveraging our data, implementing our software and utilizing the superpower of our AI.

By creating heroes, we also create advocates, which is reflected in our Net Promoter Score, or NPS. In our recent survey, we scored greater than 90% for product quality, customer support and ease of doing business. And it's no coincidence that companies with the highest NPS also have the highest employee Net Promoter Score or eNPS. Once again, Zeta ranks highly in this area, including a score of 4.4 out of 5, as a great place to work and over 50% overall increase from 2022 to 2023. NPS and eNPS are key elements of our Zeta 2025 company leadership goals, and we remain well on track to exceed our targets.

Marketing is currently at a crossroads, as the ability to connect with consumers and execute sophisticated marketing strategies across channels is harder now than ever. Zeta recently commissioned a study with Forrester Consulting that reveal almost half of marketers do not trust the reliability of their data due to fragmented tools and technologies. Addressing this deficiency requires enterprises to invest in higher cost and higher complexity integrated platforms to realize the digital promise of superior consumer experiences and higher returns.

The study validated what we already know. The Zeta Marketing Platform or ZMP, is purpose built for the digital transformation enterprises [seat]. The ZMP solves these challenges by unifying identity, intelligence and activation into a single platform, delivering better experiences for consumers and better results for brands. The ZMP was designed on a simple, powerful premise, while data is abundant, actionable intelligence and capabilities are scarce. The ZMP takes complex disparate data and unifies it together to create a complete picture of the consumer. Our proprietary AI synthesizes data into the highest possible intent-based score and then activates across every channel to create one-to-one marketing experiences at scale.

Let me give you an example. In the second quarter, we signed a multiyear $7.5 million contract with one of the largest automotive service companies in North America, replacing their legacy marketing cloud. With identity and intelligence at its core, the ZMP enabled their marketing team to become the hero by consolidating multiple customer views across their 5 different brands into a single profile.

We call this the golden record, which has been elusive for multi-brand marketers to realize quickly and consistently. And with activation in the same platform, the marketing team is now easily able to target with greater efficiency, deliver more personalized experiences across channels and measure impact with greater precision, all resulting in higher return on investment.

Having an AI-powered marketing cloud that delivers actionable intelligence like the ZMP is critical to engage with customers in today's complex and rapidly changing marketing ecosystem. Consumers are harder to find and exposed to more marketing messages, making connecting to the right consumer more difficult than ever. This makes Zeta's Data Cloud even more vital, as it has grown to represent over 90% of the U.S. adult population. And as we become more embedded with our customers and capture even more signals, our AI becomes even smarter, making our platform stickier, and our competitive differentiation even greater.

The addition of our proprietary generative AI models further increases the utility and stickiness of the ZMP. We see this in the automation of manual tasks driving greater efficiency. We also see this in the elevation of intelligence, which is the electricity of our AI-powered Marketing Cloud and our competitive advantage. This is evident to our reported results, as well as our leading indicators such as our pipeline and our RFPs, which continued to hit record highs.

A key driver to this growth has been Zeta Live, which has built tremendous brand awareness and business impact over the last 2 years. That is why I'm extremely excited to announce our third annual Zeta Live event will be September 28th at the Time Center in New York City. This larger venue will further elevate Zeta's brand through a day of insightful thought leadership and world-class speakers, including writers, producers, directors, entrepreneurs and actor, Seth Rogen and Evan Goldberg, who will speak about their journey and success across industries from Hollywood through house plan, and how they have achieved success through innovation, passion and persistence. Additionally, we will have CMOs from many Fortune 500 companies. In total, there will be over $100 billion in annual marketing spend controlled by the people in the room.

The day before Zeta Live will also be filled with a series of meetings, including a discussion with our Customer Advisory Board and a group investor meeting and more. We continue to focus on the advancement of the Zeta brand and could not be more pleased with the progress we have been making, which has rippled through our industry recognition and our financial results.

In summary, we continue to be incredibly well positioned to capitalize on the need for enterprises to do more with less and simplify their marketing stacks. And while we have come a long way on our journey over the last 2 years, as a public company, we truly believe we are just getting started. As always, I would like to sincerely thank our customers, our partners, team Zeta, and all of our shareholders for the ongoing support of our vision.

Now let me turn it over to Chris to discuss our results in greater details. Chris?

Thank you, David, and good afternoon, everyone. I'll cover 3 themes highlighting another very strong set of results. First, we extended our track record to 8 straight beat and raise quarters and once again exceeded the top and bottom line compound annual growth rates required to achieve our Zeta 2025 plan.

As seen on Slide 7 in our earnings supplemental, our trailing 12-month growth rates for revenue and adjusted EBITDA are pacing 6 points ahead of the original Zeta 2025 compound annual growth rate established in February 2022. This trajectory of pacing ahead of $1 billion in revenue and $200 million in adjusted EBITDA by 2025 is certainly not captured in Zeta's valuation today.

Second, we delivered another quarter, where profit grew even faster than revenue, generating 210 basis points of adjusted EBITDA margin expansion, cash flow from operating activities of $21 million, up 41% year-to-year and free cash flow of $13 million, up 110% year-to-year. We're doing what we said we would do, grow our universe of new buyers, drive our Zeta 2025 KPIs and extract significant operating leverage from our expense structure.

And third, we're raising guidance. We are increasing guidance for the contribution of last quarter's M&A plus flowing through and raising the organic overachievement for the full year in revenue and profit. I'll discuss this in detail on today's call and can also be found on Slide 14 in our supplemental earnings material for additional clarity.

Now let's dive into each of these results for more detail. Starting with our results. Total revenue of $172 million grew 25% year-to-year or 24% on an organic basis. We exceeded the midpoint of revenue guidance and consensus by $9.8 million with $1.8 million of the upside coming from the March 2023 acquisition of WhatCounts.

The strength of our quarter was once again highlighted by the addition of scaled and superscaled customers at a pace that continues to be firmly ahead of our Zeta 2025 model. We ended 2Q with 425 scaled customers, up 14% from last quarter and up 14%, which translates to 52 net new scaled customers over the last year. This is a nice acceleration from the 30 added for the prior 4 quarter period and double the growth rate required for Zeta 2025.

We added new scaled customers in each month of the quarter, with most new additions coming from industries such as consumer retail, travel and hospitality, education and technology and media. Out of the 14 scaled customers added quarter-to-quarter, 9 were new to Zeta and 5 were existing customers that became scaled. Out of the 1 million superscaled customers, we were up 8 quarter-to-quarter to 118 and up 18% year-to-year. 6 out of our 10 largest industry verticals grew over 25% again this quarter.

As you've heard me say for many quarters now, while Zeta has been executing very well and growing profitably through a choppy macro backdrop, we're not immune from its challenges. We continue to see pressure in the insurance vertical, as the industry works through elevated loss ratios and premium increases. Our view is this is an industry-specific dynamic and nearing the bottom of the spending cycle. Nevertheless, it's another example, illustrating the industry diversification of the portfolio, how resilient the balance of the customer set has been and how our value proposition of the platform is resonating with buyers.

Total scaled customer ARPU was $392,000, up 10% year-to-year and the 12th straight quarter of double-digit growth. It's worth noting since announcing Zeta 2025 6 quarters ago, we have exceeded our scaled customer count growth target every quarter. Not surprisingly, with the adoption and scaling of pilots, more customers are entering at lower band, which is a factor driving overall ARPU growth. We view pilots as core to our land, expand, extend strategy and a healthy indicator, as these are the pipeline for future superscaled customers.

A good example of the land, expand, extend strategy is the progression scaled customers make in adding channels throughout their platform journey with Zeta. As seen on Slide 10 in our supplemental earnings presentation, there is a 70% increase in channel adoption between our 100,000 to 1 million scaled customers and our 1 million-plus superscaled customers. This translates to a 10x ARPU differential between the 2 cohorts, a massive opportunity with the enterprises already spending hundreds of millions to billions in marketing, a large percentage of which we can address.

Direct mix of 75% improved 4 points from 71% last quarter. Furthermore, direct revenue growth accelerated from 10% year-to-year in the first quarter of 2023 to 15% year-to-year in 2Q '23. In 2023, direct mix continues to be influenced by the addition of new agency customers. who have started their journey leveraging Zeta's data and measurement and started their activation on social channels like Meta or TikTok. As a reminder, we anticipated this. And as we communicated last quarter, it is common for agency platform usage to start with integrated channels and extend and grow over time to Zeta owned and operated channels.

We have good visibility into their progression to our channels based upon our history with other agencies and how our sellers are incentivized. The advantage customers have with using Zeta's data and owned channels is the ability to maintain a single threat of identity throughout their omnichannel strategy. Additionally, by relying on Zeta's data and having access to our data cloud, we also create a wedge to bridge from marketing activities to also become their enterprise intelligence layer. In fact, we've already started executing on this enterprise layer strategy by integrating with agencies through a co-branded intelligent solution.

In this model, Zeta provides the tech stack, data and future innovation, which powers an agency branded solution. This model is highly scalable, provides Zeta with incremental high-margin revenue and represents a contracting change from consumption to subscription recurring revenue streams. We're very excited about this as it can transform our customer relationships, while also serving as a catalyst for future growth in recurring revenue mix.

For the remainder of 2023, we expect direct revenue mix to be in the range of 70% to 75%, which is consistent with the mix we assumed in our guidance at the beginning of the year and consistent with the expectations we outlined last quarter for GAAP cost of revenue percentage being equal to the average of second half 2022 or 38%.

Sales productivity metrics remain strong, and because of that, we do not believe we need to add as many new quota carriers, as previously thought. One of the many benefits we're seeing from our best-of-breed sales management system is to use predictive metrics that enable us to [fail] fast and hire smarter. Along those lines, in conjunction with our April annual revenue performance review cycle and this quarter's M&A-related restructuring activity, we reduced redundant roles and unproductive sellers. At the same time, we maintained our historical hiring cadence, resulting in no net change in quota carriers quarter-to-quarter, but still up 13% year-over-year at 130.

In addition to our pipeline growth from our demand generation engine, sales development reps and quota carriers, we are also seeing strong contribution from our Snowflake partnership. In fact, this past quarter, we were honored to be named powered by Snowflake's Go-to-Market Partner of the Year, which brings me to the topic of accelerating profitability.

In the second quarter, we delivered our 10th straight quarter of expanding adjusted EBITDA margins year-to-year. Adjusted EBITDA in the quarter was $27 million, up 45% year-to-year with adjusted EBITDA margins of 15.6%, up 210 basis points year-to-year. It's worth noting that in the second quarter, it was the first time we've seen adjusted EBITDA margins increase over the first quarter, going from 15.3% in the first quarter of 2023 to 15.6% in the second quarter of 2023.

Driving operating leverage is productivity and sales and marketing, which, excluding stock-based compensation, fell 120 basis points year-to-year to 24.4%, as a percentage of revenue. R&D expense to revenue, excluding stock-based compensation, fell 70 points year-to-year to 6.9%, as we continue to benefit from our global engineering and data science workforce. And G&A expense to revenue, excluding stock-based compensation, fell 60 basis points year-to-year to 17.4%. GAAP cost of revenue came in at 36.1%, down 50 basis points year-to-year and was up 160 basis points quarter-to-quarter due to the impact of agency customers, which I discussed earlier. Importantly, we continue to see low cost of revenue within our direct channels.

On a GAAP basis, our 2Q '23 net loss was $52 million, which includes $58 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been $21 million.

In the quarter, we also incurred a $2.8 million restructuring expense following the rapid integration of WhatCounts and the broader synergies we are realizing across the business, as we look to drive towards Zeta 2025 long-term model of at least 20% adjusted EBITDA margin. With this focus on efficiency and expertise in driving M&A synergies, we are delivering strong cash generation. Cash flow from operating activities was $21 million, up 41% year-to-year with free cash flow of $13 million, up 110% year-to-year. This equates to 48% of adjusted EBITDA, up from 42% last quarter and 33% last year, which brings me to my third topic, our increased third quarter and full year guidance.

For grounding purposes, as outlined in the guidance table on Slide 14 of our earnings supplemental material, we are clearly delineating increases in guidance related to last quarter's M&A from increases related to the company's organic overachievement. For the third quarter, we are increasing the midpoint of revenue guidance by $3 million to $179 million, up 18% year-to-year. Out of this increase, $1.5 million is attributable to the acquisition of WhatCounts and $1.5 million is organic upside. Excluding last year's political candidate revenue of $3 million, the midpoint of organic revenue growth is 19%.

In terms of adjusted EBITDA, we're guiding to a midpoint of $32 million or 17.9% margin. This represents dollar-based growth of 43% year-to-year, 320 basis points of margin expansion, which is a 90 basis point improvement versus our previous guidance. For the full year of 2023, we're guiding to the midpoint of revenue of $715 million, up 21% year-to-year and $14 million more than previous guidance. Our guidance includes $5.6 million for the acquisition of WhatCounts and the additional $8.7 million is organic upside. On an organic basis, our 2023 revenue guidance implies 20% growth and excluding last year's political candidate revenue of $7.5 million, the midpoint of organic revenue growth is 22%.

In terms of adjusted EBITDA, we're guiding to a full year midpoint of $124.5 million or 17.4% margin. This represents dollar-based growth of 35% year-to-year and 180 points of adjusted EBITDA margin expansion, which is 30 basis points better than our previous guidance.

As a reminder, during the third quarter and fourth quarter of 2022, Zeta had a total of $7.5 million of political candidate revenue that we do not anticipate repeating in 2023. This results in a full year 2023 organic growth headwind of 160 basis points, including a headwind to 3Q of 230 basis points or $3 million and a headwind to Q4 of 310 basis points or $4.5 million. Slide 16 in our earnings supplemental material outlines this in detail.

Before turning to Q&A, let me quickly close with a couple of final thoughts. First, we continue to demonstrate the ability to execute with short-term precision, while also investing to maintain a trajectory to beat our long-term Zeta 2025 model of at least $1 billion in revenue, at least $200 million in adjusted EBITDA and at least $110 million in free cash flow. And second, we continue to accelerate profit and cash generation to increase leverage against our disciplined cost structure. For 10 consecutive quarters, we have expanded adjusted EBITDA margins year-to-year, while continuing to deliver consistent 20% plus revenue growth.

Now, let me hand the call back to the operator for David and me to take your questions. Operator?

(Operator Instructions) Our first question comes from Arjun Bhatia of William Blair.

Hi. This is Chris on for Arjun. Congrats on the quarter. First, I wanted to touch on what the customer response has been so far to some of the newer AI offerings that launched just before the end of last quarter. And if you had plans to directly monetize those products? Or is they're primarily a lever for customer acquisition or lower cost to serve?

Well, thank you, Chris. We appreciate you being on. When we rolled out the new generative AI tools, which really help all of our clients to add additional horsepower to their own team. It's effectively virtual data scientists living inside of the platform that give additional capabilities in real-world simplistic answers. We rolled it out to everybody at once. And I don't think we've ever rolled out a product that I've personally gotten more people saying, they love and we're excited about. It's still early days, and we'll continue to fine-tune it, and we'll continue to make it better.

But as you know, we've always been on the cutting edge of artificial intelligence. We started [patenting] machine learning algorithms, as much as 7 years to 10 years ago, and we have a meaningful patent portfolio around machine learning and artificial intelligence. So as we made sort of the leap to go from using AI to help our clients get to the highest level of intent-based score, as to whether somebody would want to purchase a product and have the not just intent to buying it, but because the data is all deterministic, would have the ability to know what the person could be approved for it to taking that to building tools that allow CMOs to make questions like what is my most valuable audience or which of my customers are buying additional products from my competitors, and how do I capture that? By adding those types of tools, we're starting to see clients getting even stickier, and we think that will add to the stickiness of the platform in the years to come.

Great. That's very helpful color. And then, another thing, I want to touch on was the acquisition of WhatCounts. Just kind of where this fits in with Zeta overall in terms of product and talent? And then, what potential you see to grow that business going forward?

So I think thematically, we're always looking for great teams, great data and great technology when we look at M&A. We've never bought a company focused on the revenue growth associated with it. It's just not been our ammo. In this case, WhatCounts is a very unique boutique e-mail service provisioning business. It allowed us to integrate their technology into our tech stack and bring some incredible human capital into our business. And obviously, we felt like it had created a little bit of confusion around our first quarter, which is why we've gone so much further in breaking it out and really showing how small an acquisition it is.

The other thing, I think has really been important about our M&A strategy has been the level of accelerated profitability we've been able to drive through M&A by taking out expenses on both sides. In this case, we picked up some incredible people around sales and engineering. And as we looked at cutting team members on our own team, we were able to take certain headcount out here, which resulted in greater profitability than you would see for the revenue that this particular business brought in. So great people, great tech and additional profit acceleration all came out of this very small acquisition.

Thank you, operator. Next question, please.

The next question comes from Richard Baldry of Roth MKM.

Wondering if you could talk about the competitive win rates. You noted that you're still seeing record pipeline, record RFPs. So wondering if that's moving at all, maybe with respect to pricing environment you're seeing people like Salesforce openly talk about 10% price increases. So do you think that impacts win rates? Or is it something that you could also follow suit with some sort of pricing power of your own?

Yes. Thanks, Rich. So we continue -- so I always sort of said as the pipeline grew and as Zeta's brand sort of went from Zeta who to a more recognized brand name, which is really, where I feel we are today, I wouldn't say we're a household name, but we've definitely really evolved the brand that we're seeing record RFP. So we -- I think 3 quarters in a row, we've said we've now hit new RFP records. That is -- we're at another record RFP level at the end of Q2 going into Q3.

I always felt that, gosh, if you could increase that funnel enough, you would just naturally start closing a smaller percentage of the RFPs, we're not seeing that. We're still closing greater than 50% of the RFPs and proposals we're being invited to participate in, which, quite frankly, even surprises us at this point, as it relates to our competitors raising price or lowering price, I think that as we look at our business, we see an opportunity to continue to accelerate our growth.

And if you look at the way the business has been operating now where over the last few quarters, I don't know the exact number, I'm sure, Chris could tell me. But over the last few quarters, we've added at least 300 basis points in operating margin, you're starting to see incremental margin drop at a disproportionate rate from revenue to gross margin to operating margin, we think that's a trend that's going to continue. So as we look at our win rate -- we are seeing opportunities to do more with customers. I don't think at this point, we're sort of looking at raising price, so to speak.

But I would say we are winning greater than 50% of the engagements that in RFPs we get invited to. And I will remind you, which I'm sure you know, greater than 17 companies, on average, are invited to the average RFP we are invited to. And in 100% of the wins we had in the second quarter, we beat either Salesforce, Oracle or Adobe in 100% of them. We beat at least one of them and most of them, all 3 were invited. So we feel like our technology and our people are exceptional.

But when you add in the proprietary data that nobody else has that really fuels, as the electricity to powering the platform and then you ingest the superpower of our AI, you're really putting together a solution and a software stack that really can't be paralleled even if our competitors were lowering their price, let alone raising their price.

Congrats on a great quarter.

Thank you, Rich. Next question, please, operator?

The next question comes from Zach Cummins of B. Riley Securities.

Thanks, David and Chris, and then, congrats again on another strong quarter. I just really wanted to ask about sales productivity. I mean, with headcount being flat quarter-over-quarter, but really having no impact to what you're seeing on the sales execution side. So can you just talk to your approach to sales productivity? And what's really driving the success that you're seeing with your reps?

Thanks, Zach. 2 really interesting data points for you. First, and this is our guiding principle is it will always be quality over quantity. Second to that is, we want to be guided by the data and by the productivity metrics. I think there's a real set -- really interesting set of data points for you to illustrate the productivity we're seeing and how that is guiding our hiring decisions.

If you look back at the last 12 months, we've added 52 scaled customers. Over that same 12-month period, we've added 15 quota carriers. If you go back to the prior trailing 12-month period, we added 30 scaled customers and 35 quota carriers. So we're going from less than a 1:1 ratio to today, adding 3.5 new scaled customers per quota carrier. That's obviously translated in back-to-back quarters, where sales and marketing, as a percentage of revenue has gone down year-over-year, but it's also evidential of the type of productivity that we're seeing and what guides our hiring decisions. So I think we have a great sales and management system. We have an exceptional training and learning and development team. And as David mentioned, we have a product that we believe is best in market.

Understood. And just one follow-up question for me is really just around the feedback you've been hearing from customers. So great to see the upside here in Q2 and that flow through into your guidance for the second half of this year. But David, I was just curious, in terms of conversations you're having with customers, is there still challenges around what budget they have allocated for marketing initiatives? Or what's kind of the overall sentiment you're hearing from customers?

We have not seen that, Zach. We just -- we're talking to clients and everybody, who's looking at our platform and using our platform is certainly saying to us, how do we do more with the existing budget, right? But we've been taking so much market share, as a percentage of our business, right, not -- I mean, you're still talking about an industry that's got a $1 trillion TAM. So when we look at our projections at $750 million this year, we're still just getting started. But...

$715 million, don't get ahead of us.

I'm sorry. $715 million, I apologize. Don't kill me that later. Sorry. Thank you, Chris. To reiterate $715 million in the middle of the range. But the reality is that what we're seeing is that marketers are being smarter, they're focused on efficiency, but we're not seeing a cutting back. Now I do think, as we go into some of the upfront cycle buying for linear TV over the next few months, I think you're going to see people migrating away from upfront linear purchasing to keeping more dry powder on hand and focusing more on digital, which I think will be a nice tailwind for us. But as we talk to clients, we have not seen a cutback quite frankly, and we continue to see clients saying how do we spend more.

Best of luck in the coming quarter.

The next question comes from Ryan MacDonald of Needham & Company.

Congrats on another great quarter. I wanted to ask about ARPU trends with scaled customers. I noticed on the slide deck, obviously, the Zeta 2025 forecast is assuming about a 14% CAGR last 2 quarters now around the 10% growth range. Just wondering if you're seeing anything in terms of changing patterns in terms of expansion activity with your customers that might be sort of slowing that pace of expansion versus your expectations?

Hey, Ryan, and thank you for the congrats on the quarter. I'm glad you asked the question because I could see how that could be a path that would be followed. But I think it's a different case. First, every quarter since we announced Zeta 2025, we beat the model growth rate for how many scaled customers we should be adding. And I think when you think about our model of getting to at least $1 billion. at least [$200] million in profit, you really need to think about scaled customer count and ARPU in conjunction. So we continue to run at about twice the rate of the amount of new scaled customers that was in our model.

In terms of ARPU, so specific to your question, what's really interesting is that our pilot program, our land, expand, extend strategy is working exactly, as we would want it to. So for example, over the last trailing 12 months, we've added 52 new scaled customers. What's interesting about that, if you look at the breakdown, 32 of those fall into the revenue band of less than $500,000, so $100,000 to $500,000. That is, I think, a very good illustration and demonstration of landing pilots and beginning to scale them. That's an important pipeline for us because those are our future million-plus superscaled customers.

And what we're seeing in the behavior of those scaling pilots and early-stage scaling scaled customers is they continue to rapidly add channels. So if you look at the average channels used per [100,000 to 1 million], it's about [1.7], whereas the average channels used by a superscaled customer is [2.8]. That's a 70% difference in the number of channels. And more importantly, that drives a 10x differential in the ARPU between those 2 cohorts. So the difference between around the [100,000 and a little over 1 million]. So in summary, we think it's really healthy because we see the pilots a, being closed and b, beginning to scale, and it's our future pipeline of superscaled customers.

And of course, collectively, between the massive overproduction of large new customers, even with the ARPU being different, we're still mathematically far ahead against our 2025 plan.

I appreciate all the color there. Maybe just as a quick follow-up on the QCRs. Obviously, great to hear you focused on sort of making sure you're driving sales productivity and sort of cutting underperformers. But given the commentary around record -- continued record levels of RFPs, strong deal environment, should we expect Zeta to continue to add quota carrying reps, as we get into the back half of this year and into '24?

Yes. I also want to point out because I think Chris speaks to this better than I do. But the ducks' feet are moving very rapidly under the water here. We added 11 new reps in the quarter. We just took out 11 reps that weren't hitting the productivity levels that we would have wanted. So I wouldn't be that focused on the 130 versus 132. I think what you've got to focus on is by keeping the people, who are really doing well, while continuing to add new people, who can evolve and grow with us, the trick is not just adding people or keeping people. I mean, we could have kept people and the number could have been much higher, but our percentage of SG&A would have been higher than. So we feel very, very good about what we've been doing inside of the sales force. And if you look at the win rates, we are well ahead of where we expected to be at this point. Chris?

That's great color, David. You're right, Ryan. Over the last 2 years, we've added between 20% and 25% more sellers. I do not anticipate that we need to add as many in the second half of this year, but we will add. And what we're watching very closely is what is the number of opportunities that each hunter is pursuing and what are the number of accounts that each farmer is managing in our scaled universe and making sure we keep a smart balance, but as David said, continuing to be guided by quality and our sales productivity metrics.

The next question comes from Jason Kreyer of Craig-Hallum.

I wanted to ask about market share trends on the activation side. There's a little bit of a Zeta ad tech stigma, and the ad tech market, it's been a little bit more volatile this year. So curious how you think you're shaping up on the market share side?

Yes. So I mean, I know people like to break this into 2 parts. It's obviously not how we think about it because we're really looking at how our data and our AI drive enterprises clients ability to create, maintain and monetize customers, right? So across the board, sometimes that's through CRM and sometimes that's through activation and different methodologies.

Our businesses that you would associate with advertising technology are growing substantially faster than the market is itself substantially faster. And I know we don't break that out separately. But the reason I think they're growing substantially faster is because when you take our data and you're using our artificial intelligence to build the highest quality deterministic audiences across the platform, you're able to effectively eliminate 50% of what the marketing would have cost before the enterprise goes into market. So you can say these people are interested. These people will be credit approved. These people are not interested. These people will not be credit approved, do not run marketing to them, right?

So in an environment like we're currently in, where you're seeing marketers, who are looking at the most complex marketing ecosystem that's ever existed in an environment, where they're under more pressure than ever to do more with less. When they look at the Zeta Marketing Platform, our ability to seamlessly create customers at a substantially lower cost than you can without our platform is driving that growth rate in that particular line of our business, which is, once again, substantially higher than the growth rate of you would associate with that particular segment.

And let me just jump in, Jason, because I think it opens up an opportunity to make sure that we emphasize something that I covered in my prepared remarks around how we're evolving, how buyers, who traditionally use Zeta's consumption or a marketing activation or you would kind of further bridge to ad tech and changing that entire contracting and solution model, and I talked about this in the prepared remarks, but an example of how we're already executing and closing on contracts is we're now creating relationships, in particular with agencies. So you think about that, where Zeta is the tech stack. Zeta's data is used in their platform. Zeta is the future innovation platform. And by doing that, we're now creating a bridge from being their marketing activation partner to their enterprise intelligence layer.

Why that's important to investors and why that's responsive to analysts and feedback we received is that allows us to go after a very different relationship with that customer, very, very different. And from a margin perspective, it's much higher margin scope, and it shifts us from consumption-based to where they're subscribing to the platform. And all that obviously goes on the direct channel.

Great color there, guys. Chris, one follow-up for you. Appreciate all the detail you gave on Slide 14, breaking out the guide. What stands out to me there is the EBITDA guide for Q3, you're seeing a lot more leverage in Q3 with over 300 basis point improvement than I can remember seeing in the last few years. Is there anything specific to call out on why the ramp in profitability in Q3 or Q4?

It's a good call out. So you're right. In the second quarter, our adjusted EBITDA margins expanded year-over-year by 210 basis points. By the way, it was the 10th straight quarter in which they've grown year-over-year. And you're right, it accelerates over 300 basis points of adjusted EBITDA margin expansion. I think what's impressive about that is, it's been done up to this point in the absence of getting leverage out of our cost of revenue, which, by the way, I think that eases in the second half of the year, that headwind. What's been driving it is a really balanced OpEx cost discipline that we have within the company.

Getting good leverage, as I mentioned, on sales and marketing. I talked about how the number of quota carriers we've added compared to a number of scaled customers we've added over the last 12 months and 24 months, there's a substantial step-up in sales productivity. At the same time, we utilized our global capabilities across our engineers and data scientists to get scale and efficiency out of our R&D line. And we firmly believe that we're going to create value for shareholders and customers by investing in sellers and product.

What's in the middle of G&A, and we're going to keep being very efficient on that front. I'm excited about going forward. We have a unique headwind this year with the new agencies we brought on in terms of gross margin. I wouldn't be surprised if that headwind eases and it becomes even more leverageable going forward.

Yes. I mean, we're just -- we're seeing the market come to us, right? And as a part of that, we've been disciplined about sales, marketing and all of our operating expenses. And as a part of that discipline, you're just naturally seeing a greater incremental margin drop to the bottom line.

And the other thing I want to point out here is we have beat and raised 8 quarters in a row. So you can assume we have a high degree of confidence in our ability to deliver on that increase in operating margin or we wouldn't be putting it out there.

The next question comes from Ryan MacWilliams of Barclays.

David, how do you see the macro outlook impacting Zeta's results in the second half? Like did you see any improving signs from customers at the end of the second quarter or since? And maybe any themes to call out like maybe deal cycles getting shorter.

Yes. We are definitely seeing a lot of what we saw last year around nervousness dissipating, and we are seeing -- we're closing bigger deals than we've ever closed before in the corporate history. And we're seeing bigger deals come in than we've ever seen before. The other thing we're starting to see is we're starting to see the sales cycle is shortening a bit. A lot of that is around the nervousness that I think had been going around was starting to dissipate.

Now obviously, there was a little bit of news in the global markets today. But the truth of the matter is, for us, we're seeing marketers be more aggressive and looking to do more in the back half of this year than obviously we originally expected. And obviously, that is showing up in our increased projections for Q3 and rippling in through the entire year.

I appreciate the color. And also, just a follow-up on that. Are you seeing like the emergence of generative AI put more onus on heads of marketing or Chief Marketing Officers to make the decision to upgrade their platform? Like they feel like, okay, now is the time. This is the killer app that is getting these large enterprises like more comfortable with making the big switch here.

Yes. I mean, listen, there's no question, that generative AI has created a buzz that I have not seen around the technology in quite some time. So this is -- and unlike some of the last few technologies, we saw a lot of buzz, and yes, I'm looking at the Metaverse, we're seeing real business tools and real business capabilities come out of this one, which is not to say Metaverse won't, but that was -- I was trying to be a little tongue in cheek.

But the reality is that I think what you're seeing now is it's being discussed everywhere. I don't think it's being implemented everywhere yet. And I think it's just starting to drive a sales cycle. And as we look across the landscape, we believe over the next year, we're going to see one of the largest replacement cycles in the history of the marketing cloud because you've got all these marketing clouds that are coming up for renewal that have been in place for 2, 3, 4 years coming up.

And when we lead with generative AI, which we do, and we lead with not just large language models, which quite frankly, make a lot of enterprises nervous because they [want] their data to share back. We're really focused on what we call small language models, which allow the algorithm to live inside of the CDP and see just their data and the Zeta data cloud and get really, really smart on their products without ever allowing their data to leave the ecosystem, that is resonating like nothing I've ever seen before. So we're seeing big, big, big movement there. It's just not closing this week. I think we're going to start seeing it close over the next couple of quarters on that narrative.

Great to hear. It should be so next year.

The next question comes from [Matt Saltzman] of Morgan Stanley.

This is Matt on for Elizabeth Porter. So CDP has been an area of focus you just mentioned it, and it's a relatively new offering. So it would be great to just get some color around what mix of customers are using your CDP today, kind of how it's progressed. And then just when you think about the CDP opportunity, is it largely greenfield? Or are you actually seeing displacement of other vendors?

So thank you. I will answer your second question first. It is almost all greenfield. I mean, there are so few companies out there that have implemented the technology over the last year or 2 that are changing it out. So most of what we're seeing is greenfield opportunity. What I would tell you is the vast majority of our enterprise clients are using our CDP in some component of the tech stack that we have delivered to them. It's really becoming table stakes inside of the Zeta Marketing Platform. And I believe we're the only company that can deliver a CDP plus, which brings the full integration of the data cloud and a full AI implementation that allows for seamless activation in one centralized CDP.

Got it. That's helpful. And then just as a quick follow-up. You mentioned that in the quarter, you won 100% of the RFPs, where either Salesforce, Oracle or Adobe were also involved. I'm curious like what the typical customer size looks like there, if there's kind of any indication you can give for us or if it was very -- if it was [varied] across customer size?

Yes. I just want to quantify what I said, and you're very close. But what I said was in 100% of the RFPs, we beat one of those guys. It's -- I don't want it to sound like we displaced them in all of them. In some cases, there was another legacy solution in there, and they competed against us, and then we won. I can't give the exact (inaudible) against those particular players. I just -- we don't give guidance to that, and we don't get down to that micro level.

What I can tell you is the deals that we're seeing today are the biggest deal opportunities we have ever seen as a company. And we continue to be incredibly and honored to get invited into these RFP processes for Fortune 500, Fortune 1000 companies that we are incredibly excited to not just be involved, but to be winning on a consistent basis, greater than 50% of the time against competitors like we compete with.

The next question comes from Koji Ikeda of Bank of America.

Thanks so much for taking the question and squeezing me in here. A couple from me. Just thinking about the superscaled customer cohort increasing by 8%. So that's, I think, one of the best you've ever done there from a quarterly perspective. But also the scaled customers were also up a bunch too, plus 14% in the quarter. So I would think with such a nice superscaled ad, maybe the scaled would be a bit softer, which wasn't the case this quarter. So what's going on with that 100,000-plus number strength? Is that due to customers quickly scaling into that cohort? Or you did mention customers signing bigger now. I mean, is that a bigger driver of that number for the scaled customers?

Yes. The first part, yes, that is the short answer. The medium answer is, I think the best insights come from zooming out on this metric. And as I mentioned earlier, we added over the last 12 months, 52 scaled customers. What's interesting to us is it's also a case of the pilots, so our Agile Intelligence solution really resonating. It's the hook, right? The hook gets set as a wedge, then that leads to the first, second, third channel utilization of the data cloud, which then drives them to move up in revenue bands. So out of that 52 million that we've added over the last year, 32 were still in that less than [500,000 -- 100,000 to 500,000] cohort, which is a really exciting future pipeline, and they're not far off from getting to that the [1 million] plus. So we're really pleased with what we saw, and I think it's even more evident when you even zoom out.

Yes. I do think that it's a credit to our team that we are seeing bigger deals, and we are closing a greater percentage of them. So you're seeing these bigger companies that scale faster, and you really as usually nailed -- usual nailed it because we really were proud of that superscaled number going up simultaneously the scaled customer number going up. So we're feeling like we're delivering on all metrics here as a company.

Got it. That's super helpful. And just a follow-up here and kind of a hypothetical question, but just thinking about your 2025 targets and you're outpacing both revenue and EBITDA, it seems like. But what happens if demand continues to increase, just like -- let's just say it goes off the charts for Zeta. How do we think about EBITDA margins in that scenario? If it -- if the growth needs to come at a higher investment, would you be willing to take down or maybe stall EBITDA margin expansion in the future to deliver growth? Or would you even be able to deliver the same type of margin [expenses so far]?

Koji, I think it's -- it's one of the biggest misnomers. Growth does not have to be sacrificed for operating leverage. And you're right. I mean, on Slide 7, we actually brought in a new slide into the earnings supplemental, and I think it's -- look, we have a chip on our shoulder. We put it in the script. I do not believe it is fully appreciated just how firmly we're tracking ahead of plan.

When we established the Zeta 2025 model back in February of 2022, and you look at where our growth rates are to-date, we're 6 points ahead, 6 points faster than what the model presumed on the top line and 6 points faster on the bottom line. We get really interesting, exciting leverage out of our OpEx structure. We anticipated this year with new buyers being added like agencies that we would have a bit of a temporary headwind on cost of revenue. We factored that into our guidance. as that eases, as we wrap on that, that should be additive. We'll talk at Zeta Live and at the Investor Day, the day before on September 27th, we'll make sure everybody gets an invitation too. We'll give some insight, as to where things could go. I don't want to get there yet, but we're really excited about the leverage of the business and the performance of our overall Zeta team.

And quite frankly, for a number of years now, we've been able to grow revenue at a substantially faster pace than our competitors and people expected us to while simultaneously consistently adding meaningfully to our operating margin. The big question here, and I probably shouldn't even throw this out yet is when do we -- when do we throw out the Zeta 2030 plan, but we've got to first get everybody 100% comfortable with Zeta 2025, which, quite frankly, continues to dumbfound us that people at this point are not looking at this and saying, this is going to happen.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to David Steinberg for closing remarks.

Not 100% sure, she introduced me, but I'll assume it was me.

So listen, in summary, we continue to accelerate profit growth, while driving the business. I am incredibly proud of this team. And while we're growing the business, we're also seeing incremental margin dropping at a disproportionate pace. I want to say again, we beat and raised 8 quarters in a row, we, at this point, would not be putting out projections that we didn't have a high degree of confidence in.

We're ahead of our Zeta 2025 plan, and we are incredibly excited about the Zeta Live event coming on September 27th and September 28th. Truly, I could not be more thankful for our Zeta team, our Zeta constituencies, our clients and the shareholders, who have supported us through all of the turbulence of the current markets, our goal is to continue to reward those, who bet on us by continuing to beat, raise and rise. Thank you all for your time today.

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.