ZoomInfo Technologies Inc. (GTM) Q3 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the ZoomInfo Third Quarter 2024 Financial Results Conference Call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jerry Sisitsky, Vice President, Investor Relations. Please go ahead.

Thanks Richard. Welcome to ZoomInfo's financial results conference call for the third quarter 2024. With me on the call today are Henry Schuck, Founder, and CEO of ZoomInfo and Graham O'Brien, our Interim CFO. 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 forward-looking statements in the slides posted to our investor relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. 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.

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

Thanks, Henry. In Q3, we delivered $304 million in revenue and adjusted operating income of $112 million, both better than the top end of the guidance we provided. When adjusting for the charge we took in Q2 and its impact on the second quarter, as well as the additional day in Q3, sequential revenue growth for Q3 was negative 2%. As expected, write-offs continued at elevated levels in Q3, but showed signs of abating as we exited the quarter. The operational improvements we implemented are delivering results as our business risk model disqualified a record number of high-risk small business transactions in the quarter. As we exit Q3, that refined SMB sales motion is disqualifying more than $2 million of higher-risk new sales per month, which we anticipate will improve the quality of revenue and reduce write-offs over time, a near-term trade-off that benefits us over the long term. We believe the challenges that led to the accounting charge in Q2 are behind us, and we are seeing stabilization and early signs of growth in a number of different areas of the business. As Henry indicated, net revenue retention was stable at 85% for the third consecutive quarter. We are growing the enterprise business. We added to our $100,000 customer cohort. We added to our $1 million customer cohort. We drove an acceleration in ACV growth for million dollar plus customers. And we are seeing strong early traction with Copilot. In short, we are controlling what we can control and we are executing very well against our key priorities. Enterprise ACV, which now represents approximately 41% of the business, sequentially grew 1% in the quarter. With continued stabilization in mid-market and enterprise strength, approximately two thirds of our business is on a path back to growing mid-single digits or better. As we grow in the enterprise, turn around mid-market, and more aggressively disqualify smaller and riskier businesses from the platform, we expect SMB to become a smaller and smaller percentage of our overall business. As that happens, we have a more favorable mix of revenue and the business is set up for more durable and higher levels of growth. Our operations business increased 22% year-over-year as we saw continued momentum helping companies with their data foundation as they looked to leverage AI. Taken together with our success driving Copilot, advanced functionality increased to 38% of the overall business in Q3, up from 35% in Q2. Copilot surpassed $60 million of ACV in the quarter, exceeding our expectations. In addition to the rapid innovation on the platform, we continue to successfully drive new to the platform sales, off-cycle upsells, and Copilot migrations on renewal. We continue to see meaningful uplift on accounts as we transition them into a Copilot experience with the majority of these migrations coming in mid-market and enterprise accounts. Utilization is up and customer satisfaction is trending higher, which we believe is a leading indicator improving renewal trends and higher net revenue retention. In Q3, we took advantage of the dislocation and share price and retired more than twice as many shares in a quarter than ever before, repurchasing 24 million shares of ZoomInfo stock for $242 million, in part through an accelerated share repurchase program. These repurchases reduced total shares outstanding by approximately 7%. As of the end of Q3, we had 343 million shares outstanding, with $157 million in remaining repurchase authorizations. We will continue to be enthusiastic and opportunistic buyers of the stock, based on the wide gap we see between the intrinsic value of ZoomInfo and our current market value, and because it is one of the best and highest returns on our capital. Operating cash flow was $18 million in Q3, and as we indicated on our last financial results conference call, we restructured our Waltham Lease agreement early in Q3 and paid a $59 million termination fee as we continued to right size our real estate footprint. We estimate that this will save us more than $100 million going forward. Additionally, in Q3 we funded a $30 million settlement related to right of publicity lawsuits providing avoidance of future litigation costs and liabilities. Unlevered free cash flow for the quarter was $111 million, a margin of 36%. And relative to levered free cash flow, we incurred cash interest of $19 million in the quarter. We ended the quarter with $148 million in cash and cash equivalents and we carried $1.24 billion in gross debt. The $650 million in 3.875% senior notes have a maturity date of February 2029 and the remaining balance of $590 million in first lien term loans has a maturity date of February 2030. Our net leverage ratio is 2.3x trailing 12 months adjusted EBITDA and 2.2x trailing 12 months cash EBITDA which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of Q3 was $419 million and remaining performance obligations or RPO were $1.05 billion of which $780 million are expected to be delivered in the next 12 months. While sequential growth remains the best metric to evaluate the business, we know some of you look to other metrics. For those looking at billings, the mix of our balance sheet reserves and the changes in practices that we made relative to higher risk businesses requiring prepayment in advance drove higher than normalized growth in billings this quarter. And I would caution you from extrapolating too much from the billing's growth trajectory. With that, let me turn to guidance for Q4. We expect GAAP revenue in the range of $296 million to $299 million, adjusted operating income in the range of $103 million to $105 million, and non-GAAP net income in the range of $0.22 to $0.23 per share. As a result, we expect for the full year 2024, GAAP revenue in the range of $1.201 billion to $1.204 billion, and adjusted operating income in the range of $416 million to $418 million. We expect non-GAAP net income in the range of $0.92 to $0.93 per share, based on 378 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $420 million to $430 million, which, consistent with historical reporting, excludes the impact of the restructuring and settlement payments in the quarter. Our full year guidance implies negative 3% revenue growth and a 35% adjusted operating margin at the midpoint of our guidance range. Now I will turn it over to the operator to open the call for questions.

[Operator Instructions] Our first question will come from the line of Alex Zukin from Wolfe Research.

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

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

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

And our next question comes from the line of D.J. Hynes from Canaccord Genuity.

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

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

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

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

Our next question will come from Brad Zelnick from Deutsche Bank.

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

Yes, thanks. I'll start. The charge in Q2 did clear the deck there. Like, that is not something that persisted in Q3. There's no real P&L volatility or continued impact from the change in estimate in Q2. What is happening is as we do, disqualify high risk new, SMB new sales transactions at a higher rate, it does create a growth headwind until we lap that in Q2 of next year. So, the way that we're thinking about this is that disqualification was up to $2 million plus per month in Q3 up from $1 million per month in Q2. And as we think about SMB, we expect SMB to decrease as a percentage of the business and actually potentially decline in ACV for a period of time until we lap the introduction of that new business risk model from last year. So, our focus is on prescriptively and efficiently capturing SMB business and continue to believe that there's a high level of quality demand in the segment that we can grow with. And then, the write-offs, again, we reserved against the P&L impact. We still had an elevated level of processing write-offs in Q3, but we saw that level abate as we exit Q3. And as we get further away from Q2 when we implemented the new business risk model, call it six months, maybe nine months down the road, that's where we'd expect to start to see that benefit from higher quality SMB new sales and lower write-offs.

Our next question comes from the line of Elizabeth Porter from Morgan Stanley.

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

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

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

Well, today we are seeing double digit growth on migration to Copilot when we're migrating our customers. We are seeing that grow ASP when we do those migrations.

Our next question comes from Raimo Lenschow from Barclays.

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

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

Our next question will come from the line of Parker Lane from Stifel.

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

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

Our next question will come from the line of Brent Bracelin from Piper Sandler.

Yes, this is Hannah Rudolph Hannah Rudolph on for Brent today. Thanks for taking my question. Just one for me. I wanted to ask about the data as a service business. It sounds like you're seeing really solid momentum with your Copilot product. Just wondering if you're seeing equally strong momentum with the data as a service product.

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

Our next question comes from the line with Koji Ikeda from Bank of America.

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

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

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

Our next question comes from Taylor McGinnis from UBS

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

Yes, thanks for the question. The disqualification numbers, those are new business, new logo driven. So a $1 million in Q2 per month of new business ACV that we're disqualifying, and then that number has increased to $2 million with our updated model in Q3. And then on the guide, yes, that disqualification is a near term headwind to new sales ACV, but at the same time, either high risk customers that were very unlikely to pay, and that will quickly turn into a mid-term tailwind as we have a higher quality of revenue in 2025.

Our next question will come from the line of R.T. Lula from JP Morgan.

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

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

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

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

Our next question comes from the line of Jackson Ader from KeyBanc Capital Markets.

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

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

Okay, and then I guess for a quick follow-up, I mean, if we think about, take all the noise from the last few years, right, the pandemic noise kind of out of our every, think to a pre-pandemic life versus today, how should we be thinking about the data moat, right, today relative to your competition? Is it wider, is it narrower, or is it about the same?

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

Our next question comes from Michael Turin from Wells Fargo.

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

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

Got it. Helpful. And then in terms of the Copilot, you mentioned $60 million in ACV. Is that incremental to the $80 million in Q2 you saw, or is it $60 million in total since launch?

That's an existing total, so that includes the $80 million.

Our next question will come from Brian Peterson from Raymond James.

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

Sure. Yes, we had software retention improved sequentially for the second quarter in a row after declining back through, I think the end of 2021. The other verticals, at least we're continuing to see, across some of them, double digit growth, if not high single digit growth. One, a couple of them that we wanted to highlight were, manufacturing has strong growth in Q3 after finance, transportation and logistics.

Our next question will come from the line of Tyler Radke from Citi.

Yes, thanks for taking the question. If you look out at NRR, can you just walk us through the puts and takes there? It sounds like you are seeing some positive momentum on the enterprise business and presumably the focus on higher quality customers should provide a benefit to that. So when do you think that starts to improve? And then secondly, as you think about the initiative to reduce the lower quality customers, I believe you talked about kind of extending the restrictions for prepayment to 55% of the customer base. Is that kind of as high as you think you'll go or do you think that there's further enforcement and room to take that higher? Thank you.

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

Thank you.

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

And our next question comes from the line of Rishi Jaluria from RBC Capital Markets.

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

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

Our next question will come from Patrick Walravens from Citizens JMP.

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

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

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

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

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

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