Greetings. Welcome to the Zeta's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Scott Schmitz, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's fourth quarter and full year 2023 conference call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com where 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, 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 our 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. 2023 was a record year for Zeta that finished with a strong Q4, once again exceeding our expectations. For the full year of 2023, we delivered revenue of $729 million, up 23% year-over-year. This marks our fourth consecutive year exceeding 20% revenue growth, and we are guiding to a fifth year of 20% growth in 2024. Over the past four years, we have also expanded our adjusted EBITDA margins by 1,000 basis points, with over 200 basis points of expansion this past year alone to 17.8%, or $129 million in adjusted EBITDA. Today, the marketing ecosystem is in a state of change. AI has moved from theoretical to a boardroom conversation with Chief Marketing Officer's mandated to make AI more actionable, to deliver greater efficiency and better experiences for consumers. These CMOs are increasingly looking to Zeta as evidenced by the strong growth in our RFPs and our sales pipeline. Because AI has been at the core of the ZMP for many years, as opposed to many months, we believe that we are at the forefront of a wave that is driving a replacement cycle. We currently have more than 125 patents issued and/or pending around AI, machine learning, and other advanced technologies. Marketing has not been able to capitalize on the AI revolution because of an enduring problem. In most enterprises, data is abundant, but intelligence is scarce. The Zeta Marketing Platform is closing this intelligence gap by allowing customers to use our generative AI with their data and not share it back to the collective. Our investments in 2024 are about making AI more actionable, delivering better experiences for consumers, and widening Zeta's moat. These investments include strengthening our agile intelligence offering, expanding our mobile…

Thank you, David. I'm excited for all that we're covering today, but let me start with the punch line. First, we're taking share while growing efficiently. I'll cover what is contributing to another quarter and year of exceeding guidance, being above the rule of 40, and growing faster than the market. Second, we're leveraging our flywheel. I'll share the financial profile and the flywheel effect of our direct and integrated revenue streams and how we're expanding and cross-selling our new large agency customers to Zeta-owned channels. And third, we're guiding ahead of the street, while remaining prudently conservative. I'll wrap up by outlining how 2023's headwinds shift to become 2024 tailwinds. Altogether, we're executing on our plan, capitalizing on our competitive advantages, and guiding 2024 from a position of strength. Now, let's dive into each of these with more color. Starting with the fourth quarter and full year 2023 results. In 4Q, we delivered revenue of $210 million, up 20% year-to-year, or 22%, excluding M&A and the prior year's political revenue. The full year's revenue was $729 million, up 23% year-to-year, or 24%, excluding M&A and the prior year's political revenue. This exceeded our initial 2023 guide of $691 million by $38 million, or 5.5%, and also includes a seven-point growth headwind from our two challenged verticals of automotive and insurance. Combined, these two verticals accounted for approximately 10% of revenue in 2023, meaning 90% of Zeta grew over 30% in 2023. Our ability to consistently exceed guidance and drive 20% plus revenue growth over the past four years comes from strong visibility into our Zeta 2025 KPIs. Let's dive into those now. We ended the year with 452 scaled customers, who, as a reminder, account for 97% of total Zeta revenue and spend at least $100,000 on a trailing…

Thank you. [Operator Instructions] Our first question is from Ryan MacDonald with Needham & Company. Please proceed.

Hi. Thanks for taking my questions and congrats on an excellent quarter. David, as we think about in 2024, you talked about some interesting sort of priorities around the strategy and some really interesting product investments. As we think about sort of Intelligent Agent Composer, I mean and mobile -- the mobile strategy, how do you look at the magnitude of impact, or maybe how you're building any impact in terms of expectations into sort of 2024 outlook from contributions from these newer offerings?

First of all. Thank you, Ryan. We appreciate it. We obviously were incredibly proud of the quarter. When we look at and talk about new development, I think philosophically, you should always think that we don't need that to get to the guidance that we're giving. So as we look at the investment into the intelligent agent, we look into the investment of mobile, it's already fully baked in to our investment into the company and how we think about it from a guidance perspective. But we also are not including it in what we expect to deliver from a revenue perspective. Now, obviously, we believe the intelligent agent is a massive revenue opportunity where for the first time, we will begin to sell our artificial intelligence products instead of just using them for efficiency. And mobile is one of -- I joke that, post the elimination of the IDFA, it's become almost like the Wild West where most organizations are taking a very small sample, call it 8%, which is the one that's most talked about. And they're extrapolating that, whereas we can go into the mobile ecosystem, and really focus on deterministic attribution using the Zeta ID. If either of those were to really hit, I think that would give us upside to the estimates that we put out there. And I think Chris said it best when he said, not only are we starting the year at 20%, I think, if I remember correctly, last year, we started the year at 17% from a guidance perspective and finished at 23%. This year, we're starting at 20%. We feel those numbers are already consistent. This would be a part of what would be additional upside.

Really helpful. Maybe as a follow up, Chris, for you. So maybe two topics to talk about with the guidance as well. So obviously, auto insurance industries challenged last year, can you just talk about what you're seeing in terms of sightlines or pipeline building that gives you confidence and maybe a stabilization or recovery there this year? And then just curious on the conservatism that you're building in from the political contributions this year, maybe what you're seeing in the market, why you felt that $15 million was the right starting point and maybe potential for upside from there? Thanks.

Thanks, Ryan. On the first question around the two challenged verticals, the automotive vertical and the insurance vertical, the short answer is very good visibility into the sales pipeline. Much of that, frankly, already starting late 4Q. So it will already start to feather in beginning in the first quarter. So, feeling really good about the return of those industries back to growth in 2024, probably even starting to see some in the latter part of the first half of this year. As it relates to your other question, which was around our political assumptions, you'll recall that in 2020, we did $15 million of political revenue, and we did about half of that, $7.5 million in 2022. We wanted to just start with the baseline of what 2020 was knowing that it was likely conservative. What's also good to recall, though, is that advocacy tends to draft off of political. So the combination of candidate revenue and the work we do with advocacy groups, both are probably conservative in our outlook and would have upside throughout the year, and we'll continue to provide visibility as to what we're assuming for political candidate revenue as well.

Excellent. Congrats again.

Our next question is from Elizabeth Porter with Morgan Stanley. Please proceed.

Hi. Thank you so much. I wanted to go back to the example that you provided in mobile. You talked about getting the technology in the hands of salespeople, which I thought was interesting, and it sounds like you may be getting into a new end user there outside of the traditional marketing department. So if so, kind of would love to hear who you might expect to compete within the segment. Should we do this as a TAM expander? And how you plan on addressing a potentially new buyer segment with an additional wallet opportunity? Thank you.

Great question, as usual, Elizabeth, we appreciate it. The answer is yes to both. So we see an opportunity to add mobile as a channel to our existing scaled and super scaled customers, which today would increase our TAM pretty dramatically when you think about it, because we've never really played in that mobile ecosystem, because, quite frankly, while the IDFA was around, there was a lot of efficacy there, and there were a lot of players running around there. With the elimination of the IDFA, the efficacy of that channel has dissipated radically. So it puts us in a very unique position where we can take assets that we already own, which is the $240 million plus opted-in individuals, which we can tie back to the Zeta ID number, which we can identify in the mobile ecosystem. So it gives us an advantage that nobody else in the mobile ecosystem has outside of the walled gardens. So it's a very unique opportunity to do that. At the same time, what we're finding is CIOs want to buy our technology as well. So there's the opportunity to expand from just focusing on the marketing to also selling the technology directly to the CIOs. And I think you're going to see some very big developments out of Zeta this year as it relates to the sale of our technology to CIOs to power other functions of their businesses in addition to the marketing function.

Great. And just as a follow-up, I wanted to ask about the sales cycles that you have with working with agencies versus directly with enterprises. On one hand, you might have more decision-makers sitting at the table, but on the other hand, you have that trusted agency partner. Is there any opportunity for accelerated sales cycles or lengthening sales cycles as you're working with more agencies?

Yes. So it's another great question. I think when you work with agencies, you work with them in one of two ways. It's very interesting. You go in as a master relationship to the agency, and then you go from enterprise to enterprise, which is dramatically faster than when we go directly to an enterprise ourselves. Put in perspective, some Fortune 500 companies can take up to six months to move from contract through procurement, through data security, through legal, whereas when you're doing it in partnership with the HoldCo, it's turning it on. So it moves very, very quickly. The other thing is there are some agencies that literally manage the marketing on behalf of the enterprise themselves. And what we're starting to do is, as we've expanded from one to now what are three agency HoldCo clients, where they're able to just say, let's do this. And we're seeing that side of the business scaling quickly, but massively shortening the sales slot.

Elizabeth, first, welcome back. On Slide 13, because this is a topic we spend a lot of time with investors on recently, is understanding the relationship between direct revenue and integrated revenue and the role that our new agency HoldCos are playing in that. And what we've shown on Slide 13 is the journey of our first HoldCo from now several years ago to recent HoldCos. And what you'll note is that those recent HoldCos are starting significantly bigger initial investments with Zeta, with the same opportunity to expand, but also evolve and shift to their mix over time. So it's laid out, I think, well on Slide 13. Thanks for your question.

Okay. Thank you. Our next question is from Jason Kreyer with Craig-Hallum. Please proceed.

Great. Thank you. David, I just wanted to ask if you can maybe summarize how your conversations with customers have evolved around AI over the last couple of quarters, and then maybe how you see Zeta's opportunity evolving with that?

As I think I said in my sort of scripted notes, and it's something I say a lot, AI has moved from theoretical to really starting in the boardroom. And what I'm seeing is the Board is saying to the CEO, what's your AI strategy? And then they're saying, and make sure that our data stays secure inside of that strategy. They then go down and they sort of yell at the CMO, what's our AI strategy and how do we keep our data protected and safe? And those CMOs are often calling me and saying, what do we do here, right? So when you look at our ability to put a CDP in place, which creates a closed ecosystem for the client's data, you're then able to append our data in. You're adding, in many cases, billions and in some cases, even trillions of data points to their data. And the algorithm can operate inside of their. So by way of example, you've got a lot of people talking about large language models. You've got some people talking about small language models. I like to joke, we're a midsize language model. We have the benefits of the large language models with the security, safety, and privacy of the small language models for our data. And every CMO that I'm talking to is asking for products, around efficiency for their business. And once again, you look at our new agent product, that is going to disintermediate very highly paid data scientists inside of our clients' ecosystems. And in some cases, it's not disintermediating anybody. They just can't even get enough bodies to do the work. So our ability to automate all of that and now sell it to them. And the way we look at it is, listen, if they're paying a data scientist $250,000 a year. Why not pay us $50,000 a year per instance? And you're talking $4,000, $5,000 a month on a subscription basis as you roll that out. And you just have to do that thousands of times, which is actually not as hard to do with the number of scaled and superscaled clients we have. So I would tell you, Jason, that this is becoming day-to-day conversation. But the solution that Zeta has by putting the CDP in place, allowing the algorithms to operate with their data in conjunction with our data, without ever risking their data going out into the environment or out into the ether, has been a game-changer in our conversations. And by the way, I think it's one of the reasons you're seeing that ripple through our numbers and ripple through our projections.

Thank you. I wanted to squeeze in one for Chris. Just on the gross margins, and I know you just talked about agency influence and direct and indirect. I think you've appropriately telegraphed kind of the trajectory of gross margins. I just want to ask on -- we saw that slide a little bit from Q3 to Q4. As we look into 2024, do you think we've hit a bottom in gross margins? Or do you have an idea of when that bottoms out before you kind of get the reacceleration of the direct mix?

Jason, thanks for the question. So here is where our head is at on gross margins, and it's -- I think you articulated it really well, is that, I think 4Q, it bottoms out, or did bottom out. With the upside now in 2024, so kind of setting the base at that 60% level, the upside beyond there is tied to how quickly we move those new large agency customers from integrated to direct channels. That's lever number one. Lever number two is how quickly we see our automotive and our insurance customers start to grow again, who happen to be at the higher end of our gross margin mix in terms of channel usage on the direct platform. And then third, where political and advocacy also comes in. So those three should begin to work our way up throughout the year, starting at that base point of around 60%.

Perfect. Thanks guys.

Our next question is from Koji Ikeda with Bank of America. Please proceed.

Hey, guys. Thanks so much for taking the questions. A couple from me here. First one, I wanted to ask a question about boomerang customers with you. You guys have been in the market for over a decade now, and I'm sure over the past 10 years plus, many customers have tried out the Zeta platform before, but my gosh, the Zeta platform has changed quite a bit since the early days. And so just wanted to hear a little bit about commentary about how customers have come back to Zeta after trying the Zeta before? What are some of the most common reasons why you've seen customers come back?

Koji, so it's actually really, we're laughing here because it's been a big thing lately where we've been sort of like using the term back to the future, where, I mean, one of the world's largest fashion houses very recently came back to us at scale after leaving us for three years because they felt like they needed to use one global platform for everything. Think one of the large marketing clouds, which might be owned by a large technology holding corporation. And what they found was their marketing clouds couldn't deliver what the Zeta marketing platform could. And it's funny, we talk a lot about disintermediating point solutions, but there was a big move a few years ago that you had to move everything. You're publishing all of your sales force management to one company globally, and you saw some companies over the years leave us to go to those bigger platforms. We are, quite frankly, even surprised by how many of them are coming back because those guys just can't deliver on what they talk about in the marketing cloud. Now, they might be really good at sales force automation. They might be really good at publishing, right? They might be great on financial services packages and databases, but they're not great marketing clouds, and they're really not able to deliver the data with the artificial intelligence is native to the application layer, which is becoming a bigger and bigger problem. So it's funny you ask it, and it's been a trend that has been something that's literally been to the point that we have been focusing on revisiting with companies that we lost a few years ago and winning them back at a higher rate than even our traditional RFP win rate.

Got it. Now, that's super helpful. And a follow-up here, maybe for Chris. As I look at the deck for the fourth quarter and compare it against the deck for the third quarter, a question here really on stock-based compensation. It looks like it ended up this year about $10 million and the $12 million higher than were on the non-IPO side than when it was originally guided to last quarter, and it looks like it's about $10 million higher for 2024. So I just really wanted to understand the dynamics there? Thanks.

On the stock-based compensation side, much of that was the awards that happened in the first half of 2023. There were some compensation-related end-of-year grants that were made. But I think more importantly, kind of zooming out to the prepared remarks, we are very focused, and we're really acting on three primary areas from being on the road extensively in 2023, feedback-specific items from investors. The first is taking dilution down tied to incentive compensation. So, going from 5% in 2023 dilution to now guiding to a pretty substantial reduction year-over-year to a dilution rate of 3.5% to 3.75% enroute to 3% over time. The second area of feedback was around our guidance approach and wanting to just continue to be more predictable and tighter in guidance rather than have these wild swings and beats. We're going to continue to be a beat and raise company, but tightening that up a little bit. And then, David, you can talk to the third area.

The big thing in Koji, as you know I've been personally out there with Chris and Scott over the last couple of quarters, and that's a trend that will continue. As I begin to spend more time with investors. Case studies, right? One of the things we hear a lot is, gosh, what you're doing is so cool, but it's so confusing to Wall Street. How do you simplify it and how do you get case studies? So today, for the first time in Zeta's history, we are putting forth multiple named client case studies, and we expect that to be a trend that will continue. Our goal is to continue to work with our enterprise clients to add more case studies. Chris is now writing on a piece of paper that I should say this is Slides 27, 28, and 29. I don't think anybody would believe I actually remembered that, so I'll give you full credit for that, Chris. But at the end of the day, what we're doing makes a massive difference to our enterprise and agency clients and putting forth what those case studies are, we think will help us as we grow as a company. So I know that was a very long answer to a very short question around comp -- stock-based comp. But I will point out, not only are we moving from what has traditionally been 5% plus to 3.5% to 3.75% on the road to 3% solution, which is what we think is the right goal. We are also making a decision as a senior management team to take no restricted shares this year. So I'm taking only performance stock units, as is Chris Greiner, as is Steve Gerber, and as is Steve Vine. And we will be more aligned with shareholders as they will require increases in stock price for us to get those to vest, not just time. Because we want to make sure that all of our existing shareholders know that they're being heard. And we're making the decisions to do a better job in the things that they want us to do.

Got it. Thank you so much guys. Appreciate it.

Our next question is from DJ Hynes with Canaccord Genuity. Please proceed.

This is Luke on for DJ. Thanks for taking the question. So I was wondering if you could flesh out your comments a bit on the intelligent agent and mobile opportunity. I recognize it's still early days there, but any early thoughts on sort of penetration potential across your existing customer base? And then also on how that rollout could impact margins over time?

Yes. Listen, we're really excited about this intelligent agent product. Because to me, and I don't want to get too ahead of ourselves here, but not only does this begin to help our enterprise clients to do a better job running their business. But it gets into what I really, really am excited about long-term, which is business intelligence. We talk about intelligence at the core of our product today. How do we extrapolate that down the road into true business intelligence products? And I believe this is the first jump into that. We have almost 500, I think, I can say that, scaled clients. And the goal is to get a disproportionate percentage of them to adapt these products or adopt these products in the coming months, quarters, and years. And once again, I want to reiterate, they're not baked into what we think are conservative projections around 20%. But they're upside to that. And I think that, they carry traditional software margins. So you're talking, I don't know if that's mid-80s or high 80s. But you're talking about a high margin product, but it's coming into a pretty sizable base company, meaning we'll have to get a bunch of clients on board to move the needle from a margin perspective. What I can tell you is, we believe our clients are going to adopt them. We believe they're going to adopt them at scale. And we do believe that in the long run, these products will help us continue to move our gross margins up.

That's great to hear. And just a follow-up. A lot of streaming companies are rolling out ad tiers nowadays. And we think that probably notionally increases the size of the CTV market opportunity for you guys. Do you have a similar perspective there? And, any impacts on your business as you've seen that roll out?

Yeah. So it's interesting. Yes, so to answer your question. Unequivocally, the more of these streaming platforms that insert ads, I call it pre-roll, but it's -- it's not always accurate, but sort of pre the beginning of the content, the middle of the content, the end of the content, all of the above. Every one of those units is a massive opportunity for us. And to be totally transparent, we are already plugged into all of them. So we see this as a unique opportunity to expand out. Now, the largest platform sort of started off trying to get these massive minimums out of enterprises to partner with them. And it didn't work quite the way they had originally planned, to say the least. They've now come back. And we're seeing what we think are very unique opportunities to scale that business with all of the streaming platforms, including the largest one.

We had a neat growth quarter, actually, in the fourth quarter, Luke, on CTV. It grew 30% quarter-to-quarter. And if you follow the pattern of CTV's usage around advocacy and political, one word for shadow would be a nice year in 2024 as well.

Chris beat me to the punch as usual. I shudder to use the term political. I generally call it all advocacy for a host of reasons. But obviously, our advocacy business does encapsulate political. Very CTV-centric, very focused on hyper-targeting, nowadays. And the way to really do that is CTV, not linear. So we see this as a big opportunity, to your point, Luke.

Awesome. Thank you.

Our next question is from Zach Cummins with B. Riley Securities. Please proceed.

Hi. Good afternoon, David and Chris, congrats on the strong 4Q, and thanks for taking my questions. Chris, my first one is more of just a clarifying question. I believe there's a year-over-year decline in your super-scaled customer ARPU here in Q4. I'm assuming most of that's related to headwinds with auto and insurance, but just wanted to get some clarity around that and expectations for growth in that metric moving forward?

Yes. No, I think that is the driver. What's interesting on the scaled customer count side, we've got 131 now, which is up seven quarter-to-quarter, but on a year-over-year basis, was up 27% in count with the revenue associated with super-scaled customers up 25%. There's a good slide that we update annually in the slide deck that demonstrates the progression of scaled customers in their tenure, which I think is a really good kind of progression, if you will, on how they spend with us, where those year-one scaled customers, which was around 10% of this year's revenue, their average revenue spend is around 600K. If you go to that next tier of one to three-year scaled customers, they spend more than two times that on average, at $1.3 million. And then you go to that next cohort of now more than three-year tenured scaled customers, they're spending 3.5 times as much as the year one at over $2 million. So it's a nice way to demonstrate the stickiness of the platform. As we talked about, the net revenue retention for the year was right in our model of 110% to 115% at 111%. But if you exclude automotive and insurance to your question, that net revenue retention was 118%. And as I said, as part of the prepared remarks, we think we will be at the high-end of that 110% to 115% range just as we sit here today in 2024.

Understood. And my one follow-up question is, most of your growth over the past couple of years has really just been driven by your direct go-to-market motion and investing in that. But it seems you're starting to get more opportunities on the partnership side, especially the system integrators. So just curious of how you're thinking about investments in the direct channel versus maybe leaning into some of these channel partnership opportunities?

It's a great question, Zach. Obviously, we've added channel partners in Snowflake, AWS. We've added the agency channel, which is sometimes directly with the agency, sometimes partnering with them to go to other enterprises. We are going live with our first two SI integrations, probably be done with them this quarter, perhaps early second quarter. So this has also gone from sort of what we want to do to what we're doing. We're very excited about the SI environment. And what we're seeing is enterprises are going to their SI vendors and asking them to work with us in addition to us going to the SIs and saying we'd like to partner with you. I want to reiterate again, and I'm sure I'll sound like a broken record, but if I don't, Scott will kick me under the table, our currently conservative projections do not include meaningful revenue in the SI channel for this year, which is not to say we don't think it could be meaningful this year, and which is not to say that we don't expect it to be meaningful in the years to come. But to have gone from talking about this to we're knee deep in two integrations with them now, which will launch two separate systems integrators with two separate enterprises. We're very excited about those prospects.

Great. Well, thanks for taking my questions and best of luck in the coming quarter.

Of course. Thank you.

Our next question is from Arjun Bhatia with William Blair. Please proceed.

Hey, guys. Thank you and nice job on a strong Q4 here. When we kind of talk to customers and agencies throughout the ecosystem, it seems like the CDP layer certainly is an important differentiator to drive more personalization. I know, you guys have a pretty strong CDP layer yourself. But can you maybe just talk about when you're going up against or going to customers in RFPs, like how much of a factor is that in deciding to choose data versus some of the other players? And maybe if you could compare, contrast the CDP layer relative to your data capabilities, where customers are placing more emphasis in recent RFPs?

It's a great question, Arjun. Listen, I would say that our CDP technology is as good, if not better, than any other CDP technology in the world. And I will also tell you that the vast majority of the large HoldCos, as it relates to technology holding corporations, that say they have CDPs are really DMPs that they've sort of rebranded. So when we go up against a lot of those big guys, we're really able to talk about what a CDP is, right? What does that stand for? It's a Consumer Data Platform. And what does that mean? It means you can see to the absolute individual level of your customers by record. It doesn't mean you're building cohorts. It doesn't mean you're putting together large sort of segments. It means you can see an individual. Most of these other large companies can't do that, right? It's just not there. And most of the smaller guys who are coming up, they either run it as a standalone product, which is quite hard, or it's part of another, perhaps roll up or something that it's sitting inside of there. So when we look at our technology, we think it's best to breathe. Now, it's hard to bifurcate that from our data and data quality, because it's such an important component of how we sell the product, right, the ability to import all of your data to the CDP, the ability to match on average greater than 80% of that data to the Zeta data cloud, the ability to append into your data, hundreds if not thousands of incremental data elements, the ability to seamlessly integrate our algorithms around natural language processing and now Generative AI, into that CDP, while keeping all of their data safe, while simultaneously importing the data…

Yes, that's clear, super helpful. And if I can maybe follow-up again on some of the agency traction that you're seeing in the mix between direct and indirect, do you have a sense for some of these newer agencies that have come on since you started this initiative, how their mix is either shifting or how they're kind of indicating to you that they may shift the mix in 2024? Like, are we getting signs that they're shifting more to direct, or is it a little bit too early to tell at this point?

Yes. So, it is early to tell. But I think as Chris eloquently pointed out, we think that gross margins sort of hit bottom in Q4. And one of the big opportunities is migrating those large agency holding corporations the exact way we've migrated the first one that we worked with, where I know there's a great slide on that in our deck, because they showed it to me earlier today, but we went, Slide 13. Chris is writing it down for me again. So on Slide 13 of our supplemental investor deck, you can see how that client started at sub-10% and grew to greater than 70%, right, over the years. We believe that our other two scaled agency hold corps are going to follow a very similar pattern. Now, the one caveat is we're drinking out of the fire hose with some of these guys. I mean, it's growing rapidly. And as those divisions are growing rapidly, are you able to migrate the other guys fast enough for the third or new guys coming in? What I really care about, and this might be an unpopular thing to say, but to me, I've always aspired to run a company that was at the rule of 40. And that's sort of what I've looked at, right? Not only did we deliver our seventh quarter in a row above the rule of 40, we have guided this year to the rule of 40. And a lot of that is because even if the gross margins stay in the low 60s. The gross margin on the agency hold companies is, substantially higher than our operating margins. It's higher than our long-term operating margin goals, and they take on very limited incremental overhead. So, most of that money drops to the EBITDA line at a substantially higher percentage than the actual current operating margins, even in the fourth quarter. So, yes, we think they'll come back. Yes, we think we'll migrate them. But to me, what matters is, are we going to grow the business greater than 20%? We believe we will. And are we going to see greater than a 20% operating margin? We believe we will. So I think we're in good shape for this year.

Appreciate that. Thank you.

Our final question is from Richard Baldry with ROTH Capital Partners. Please proceed.

Thanks. First one may or may not even be a question, but I think in the past I've heard that the average number of people in each RFP was higher. I have a number of 17 in my head. If I'm wrong, then just disregard. But if it is higher, who would you be seeing sort of fading out of the competition, sort of smaller, midsize, or larger? And then the second question would be around free cash flow. And I came on later, so I'm not sure if this has been addressed, but you know, over this year's guidance and then, the 2025 guide that you're ahead of, you generate something close to $200 million in free cash flow. Could you talk maybe about where your priorities are to deploy that, either, more aggressive buybacks, offensively on acquisitions, pay down of debt, just so we have some idea where that's going to get deployed. Thanks.

Rich, so no, thank you for joining. We know you're on vacation. I didn't even know you took vacation. So I appreciate your joining us from it. Yes, it used to be a larger number showing up to the RFPs. And what we're seeing is the point solutions are just not being invited the way they used to be, right? So you've got, especially around CDPs, where you have a lot of small independent CDPs that are really having a tough time as standalone businesses, and quite frankly, we're not seeing some of the former European players who were talking a big game a couple of years ago. We're just not seeing them anymore. So it is down. And I have said 17 in the past, and now I would say 12. I had a funny joke to make around the $200 million in free cash flow, which Chris told me not to tell. But I will let Chris talk to what we're going to do with the next 2-years, just to quantify for anybody else listening that would be about $200 million between '24 and '25 combined.

I think we'll continue to be opportunistic on share buyback. We'll continue to be opportunistic on M&A. And I think, you know, Steve Vine and David did a really neat job laying out what is opportunistic mean for M&A at our Investor Day. But we were very focused on increasing free cash flow conversion, you'll see that the guidde, this is the first time we've put out an in-year guide on free cash flow. We've obviously had a long-term model, but at $80 million in free cash flow at the end of 2024, that represents 48% conversion up from 42% the last two years. So continuing to get up to that 55% level. I think it's interesting, we talked about in the prepared remarks, Rich, we had a $25 million working capital headwind from the agencies and just their difference in payment cycles than our enterprise customers. If not for that headwind, if it just would have been neutral, conversion would have been in the 60%s. So we see a nice clear path as we get through the years of continuing to increase that percentage. David, anything you'd want to close with?

Yes, just, and to that point, we knew that was going to happen and we said it was going to happen at Analyst Day, right? So when we did our Investor Day, we were clear about that. One of the things you do when you work with these very large agency hold companies is you understand that you're going to be paid a little bit slower than you're normally paid. The good news is we've collected 99.999% of the revenue. I'm not allowed to say 100%. I can't think of ever writing any of it off, but I'm sure somebody slow paid or didn't pay us on a dollar at some point. I'm being facetious, so I shouldn't do that on this call. But we collect it all. And it's put us in a very unique position that we have the balance sheet to be able to do that, where a number of the smaller competitors do not have the balance sheet to partner with those large agency hold companies, which is giving us yet another competitive advantage as we move into the marketplace. And by the way, Rich, as we put more cash on the balance sheet, it puts us in a position to, more M&A, more buybacks, but it also puts us in a position to do more deals like this, where we're able to expand and scale even faster as a company.

Great. Thanks for the commentary and congrats on a great quarter.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to David Steinberg for closing remarks.

Well, I will close it as I think I've closed the last few, which is, thank you. I really appreciate all of the different constituencies that are involved in our organization. First and foremost, our Zeta people, I do believe -- we have built one of the best teams in the world. It was funny because we had had some meetings recently with an organization that was trying to get to know us for a whole host of reasons, and they called me and said, you have one of the best management teams I have ever experienced, and I believe you could run a company 10 times bigger than the current loop, current one you're running. And I very quickly said, I look forward to doing that in the next 5 to 10 years. But the reality is, we have an incredible team. We have incredible people who really work their butts off to deliver for our clients, keep us on the cutting edge innovationally, and focusing on doing the absolute best job we can, while simultaneously creating one of the best places to work. I also deeply appreciate the analysts who follow us. I know there's a lot of time and a lot of companies you can follow. I deeply appreciate our shareholders who have stuck with us and believed in us, and our goal is to make you look really smart over the next year or two as we continue to execute. As I like to say internally, this was our 10th consecutive quarter of beating and raising. I look forward to next December when I can say, or next, February, whenever, when I can say this is our 14th consecutive quarter of beating and raising. And I want to thank our customers who have really banked their relationship with their end users and their enterprises on the Zeta people and the Zeta platform. Thank you very much, and I hope everybody has a wonderful day. Bye.

Thank you. This does conclude our conference. Thank you for your participation. You may now disconnect.