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ZoomInfo Technologies (NASDAQ: ZI)
Q1 2024 Earnings Call
May 07, 2024, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and thank you for standing by. Welcome to the ZoomInfo first quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.
[Operator instructions] Please be advised that this conference is being recorded. I would now like to turn the call over to your speaker today, Jerry Sisitsky. Please go ahead.
Jerry Sisitsky — Investor Relations
Thanks, Kevin. Welcome to ZoomInfo’s financial results conference call for the first quarter of 2024. With me on the call today are Henry Schuck, founder and CEO of ZoomInfo; and Cameron Hyzer, our CFO. After their remarks, we will open the call to Q&A.
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 section of our SEC filings.
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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.
Henry Schuck — Founder and Chief Executive Officer
Thank you, Jerry, and welcome, everyone. Revenue for the first quarter was $310 million, and adjusted operating income was $119 million, a margin of 39%. We delivered another quarter of better-than-expected profitability as we remain committed to profitable growth. Our board approved another $500 million share repurchase authorization, and we continue to aggressively buy back shares of ZoomInfo at attractive share prices.
Our ZoomInfo Copilot development efforts are well underway. Beta customers are seeing significant ROI and the feedback has been extremely positive. We feel confident that we have a differentiated solution, and we look forward to releasing this new version of our platform shortly. We continue to navigate through a difficult operating environment, one that has not improved over the last few months.
We had expected that this quarter would be challenging, and it was, but we are starting to see signs of stabilization. As it relates to net revenue retention, in the quarter, our SMB business continued to be challenged and performed worse than prior periods. And while down in Q1, given a higher mix of those businesses coming up for renewal, companywide NRR was better than expected at 85%. Mid-market retention was similar to Q4, and Q1 was the second quarter in a row of sequential renewal rate improvement, reflecting sustained stabilization.
We saw enterprise retention stabilize, and we saw renewal rates there improve year over year for the first time since 2022. Software retention also stayed flat sequentially for the first time since Q1 of ’22. These stabilization trends have continued into Q2 and are promising signs that suggest we have reached a bottom, which we view as a precursor to a potential inflection to growth. We also had a number — we also had another quarter of strong win-back performance.
Customers continue to come back in record numbers after trying low-cost, low-quality providers. In Q1, we again saw hundreds of customers come back to ZoomInfo, maintaining the record levels from Q4 and Q3 2023. One software vendor who left ZoomInfo in December 2023 for a lower-cost competitor, on the promise of even better data for a fraction of the cost, has already returned to us. Their frustrated account executive and business development managers missed demand gen and quota targets, and their leadership team was self-aware enough to correct the mistake.
Buy cheap, buy twice. In the quarter, we recorded our largest increase in the $1 million customer cohort since Q1 of 2023 as we continue to drive traction in the enterprise. ACV from our $1 million customer cohort is up 16% year over year. In our marketing solutions, we continue to see strength with improving retention and increasing ad spend on the platform, and operations was the fastest-growing area of the platform, up 18% year over year as companies are increasingly using ZoomInfo to solve the data challenges within their CRM system and using our data and insights to power their AI strategies.
During the quarter, we closed transactions with companies of all sizes and in all industries, including Walgreens, Kirkland and Ellis, Marsh and McLennan, Universal Robots, Spring Health, MSG Entertainment, Carrot Fertility, OW Logistics, and GoFreight. A multinational staffing company ran an RFP for a vendor to clean up their CRM data to improve their modeling and predictive analytics on candidates. In a competitive deal where high-quality accurate data was paramount, we fixed their existing data problems, future-proofed their data strategy, and provided a foundation for them to run predictive analytics and expand with their use of AI. This resulted in an upsell representing $925,000 in annual contract value, which over the life of the contract, will be worth $2.7 million of total contract value.
We also expanded with a mid-market data query and deep learning software company as they were looking to save money, reduce vendors, and consolidate on a single platform. Like many of our mid-market tech customers, they came into our renewal conversations with a mandate to reduce spend by 20% across all vendors. We turned that initial mandate into a 60% increase in ACV by replacing multiple vendors and consolidating ZoomInfo sales, operations, and marketing solutions, all while providing a better user experience at a better price point. We were also named a leader in Forrester’s Marketing and Sales Data Providers Wave and won two Google Cloud Technology Partner of the Year Awards, as a Google Cloud Partner that most effectively helps customers enhance their analytics and AI initiatives through prebuilt data solutions and data sets.
Last quarter, I introduced what we believe is one of the most impactful and innovative products for go-to-market teams, ZoomInfo Copilot. ZoomInfo Copilot is the first AI-powered go-to-market solution that uses a trusted data foundation to automatically prioritize who, when, and how to engage buyers from first signal to content creation and engagement. Modern sales is becoming a science, and we built Copilot to enable our customers to make every seller their best seller. Today, sellers need to know which companies to contact, who the right person is at those companies, and exactly when to reach out to them.
Critically, they must also know what problems those companies are facing and how they solve those problems today. Trying to gather and triangulate the data necessary to know these answers today is incredibly challenging. Surfacing these often buried insights is what we built ZoomInfo Copilot to do. And in doing that, Copilot turns ZoomInfo from a lookup tool to a platform that surfaces the key insights sellers need to take action against each day.
A unique strategic advantage of our Copilot platform is that it’s built on top of our world-class proprietary data. Our data covers the universe of companies that you may sell to, tens of thousands of attributes on those companies, hundreds of millions of people who work at those companies, and the most robust set of signals and insights that we constantly validate and update. What sets ZoomInfo’s Copilot apart from any other solution in the market is that it’s sitting on top of our AI-ready trusted data foundation that drives decisions, personalization, and confidence. For our users, Copilot surfaces diverse and differentiated signals, attributes, and activities that already exist in our proprietary data asset and our partner ecosystem, which we continue to expand with some of the most trusted vendors in the market, including most recently with TrustRadius and TechnologyAdvice.
Copilot takes signals like website visitors, spikes in job postings,earnings calltranscripts, contract renewal dates, and expert calls that indicate spending or competitive threats, then uses advanced entity resolution and matching to combine them with customers’ first-party data. It then applies AI technology to model and inform users immediately about which companies are in the market for their product and how and why you should engage with them. You can think of this similarly to financial trading. Understanding the company’s sector and closing price doesn’t tell you much about what a stock will do tomorrow.
You need indicators around trading volumes, technical indicators, investor sentiment,financial news expert calls, and many other signals in order to create alpha. Similarly, for our customers, understanding firmographics alone is not sufficient to understand whether or not your next buyer is about to be in market for your product. It’s only when you surround that core data with signals that you’re able to predict who your next customer should be. Other GenAI or Copilot products from classic software vendors face a significant problem.
They are all layered on top of static CRM data. This data limits the value that can be gleaned from any AI tool for three reasons. First, it’s limited in scope to what salespeople have manually entered historically. Second, it’s outdated, stale, and likely inaccurate.
And third, it lacks the outside signals and insights that drive modern go-to-market motions. ZoomInfo Copilot delivers a full picture built on the foundation of the world’s most accurate and up-to-date business data, publishes real-time insights, and turns that into personalized and relevant content. More than 20,000 beta users have had access to our Copilot beta. Throughout the quarter, their results and feedback have been overwhelmingly positive.
Highlights include that on average, Copilot beta users reduced their time spent on account research and manual tasks by 10 hours per week, giving them back almost a quarter of their time to spend on more value-added activities. Copilot beta users identified signals — I’m sorry, identified signals were responsible for 45% of total opportunities created, proving that Copilot helps sellers get to buyers faster, and Copilot users created nearly twice as many opportunities compared to nonusers in the same roles at the same companies. I can confidently say that Copilot is one of the best pieces of software we built at ZoomInfo, across ease-of-use, end-to-end understanding of our customers’ pain points and product market fit. We have had leading AI models in production for years.
But with Copilot, our product and engineering teams have shown how to put our data and AI differentiation into one of the first real go-to-market AI products that actually deliver value at scale. At the same time, our go-to-market team spent the last quarter using Copilot, dialing in talk tracks, sales collateral testing, and more, to be prepared to bring ZoomInfo Copilot to market. We expect to monetize Copilot and we’ll roll it out in a thoughtful way, focusing first on the customers who are most likely to get significant value out of the advanced platform. Our go-to-market teams are excited to bring this to their customers, and I have a lot of conviction around the upgrade paths in our customer base.
I look forward to sharing more details about this motion and our learnings in the back half of the year. In conclusion, we continue to make progress toward reaccelerating our business. NRR was better than expected. We’re driving traction in the enterprise, and we’re seeing promising signs that suggest a stabilization in trends.
We have a strong and differentiated data foundation, and we’re excited to bring ZoomInfo Copilot to market shortly. We are committed to profitable growth, and we continue to repurchase shares of ZoomInfo. With that, I’ll turn the call over to Cameron.
Cameron Hyzer — Chief Financial Officer
Thanks, Henry. In Q1, we delivered revenue of $310 million, up 3% year over year. Annualized revenue based on days of revenue recognition was $1.25 billion. Revenue came in slightly ahead of our guidance, and our focus on efficiency enabled us to deliver adjusted operating income of $119 million, representing a margin of 39%, which was above expectations.
GAAP net income was $15 million, yielding $0.04 per share, and non-GAAP EPS was $0.26 per share. Retention among our enterprise and mid-market customers has stabilized with signs of potential improvement as we look ahead to expirations in Q2 and Q3, while our small business customers were more challenged in Q1 than we anticipated. We continue to take a prudent view of the environment and trends among different customer cohorts as we consider the remainder of the year. As a result, we are narrowing and adjusting our range of guidance for the full year.
As we reduce shares outstanding through share repurchases, this results in increasing our guidance on a per share basis. In Q1, net revenue retention was 85%. With an outsized small business renewal pool in the first quarter, we anticipated NRR to decrease and are pleased to see early signs of stabilization. As we move through 2024, we believe there are opportunities to drive improvements to net retention.
And as a reminder, our guidance for 2024 assumes that net revenue retention does not improve. In the enterprise, we saw success with our largest clients. Million-dollar-plus clients now contribute more than 10% of overall ACV. Average revenue for 100K-plus customers continued to grow, largely offsetting the decline in the number of those customers as smaller customers continued to experience down-sell pressure with some falling below the 100K level.
Advanced functionality remained at approximately a third of our overall ACV with operations and marketing continuing to gain traction with customers and both growing double digits, while some of our other functionality was more challenged. From an industry perspective, the fastest-growing industries this quarter were retail, manufacturing, and transportation logistics, while software and tech continued to experience down-sell pressure, particularly for smaller customers. Write-offs were lower than we experienced during the past two quarters but continued to impact us in Q1. We are focused on reducing this headwind by being more selective in deals, leveraging our product-led growth motion at the lower end of the market.
We are now requiring a majority of smaller and more risky clients to pay via credit card or ACH at checkout, which should help drive an improvement in write-offs and allow us to capture the low end of the market more effectively. As we indicated in our 8-K filing in February, we entered into a settlement agreement that addresses both existing and potential class action lawsuits related to right of publicity statutes in four states. We accrued $30 million in the quarter related to these settlements, which is reflected in G&A expense. We expect to make cash outlays related to the settlement later this year.
We are as committed as ever to driving growth and profitability, and as such, aim to maintain headcount at current levels while allocating more resources to support our AI and Copilot initiatives, as well as augment sales and marketing capacity. Based on these hiring needs, we are exploring options to optimize our real estate portfolio relative to a number of leases that we signed in 2021 and early 2022, into which we will gain access in 2024. We anticipate incurring restructuring charges related to potential negotiations and/or subleasing arrangements. Our focus remains on maximizing operational efficiency and driving profitable growth in the evolving market landscape.
Operating cash flow in Q1 was $116 million, which included approximately $18 million of interest payments. Unlevered free cash flow for the quarter was $123 million, representing 103% conversion of adjusted operating income. We ended the quarter with $440 million in cash, cash equivalents, and short-term investments, and we carried approximately $1.24 billion in gross debt, the vast majority of which has fixed or hedged interest rates. During the quarter, we repurchased approximately 10 million shares of ZoomInfo stock for $153 million.
Over the past four quarters, we’ve retired more than 31 million shares of ZoomInfo, nearly 8% of total shares outstanding. We are confident that these repurchases will drive meaningful economic return for our shareholders, and we will continue to aggressively repurchase shares as we take advantage of disconnects between our share price and the intrinsic value of our growing cash flow-generative business. Our net leverage ratio is one and a half times trailing 12 months adjusted EBITDA and one and a half times 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 Q1 was $444 million and remaining performance obligations or RPO were $1.13 billion, of which $838 are expected to be delivered in the next 12 months.
With that, let me turn to guidance for Q2. We expect revenue in the range of $306 million to $309 million, adjusted operating income in the range of $114 million to $116 million, and non-GAAP net income in the range of $0.23 to $0.24 per share. For the full year 2024, we now expect revenue in the range of $1.255 billion to $1.27 billion and adjusted operating income in the range of $488 million to $495 million. We expect non-GAAP net income in the range of $1 to $1.02 per share based on 394 million weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $440 million to $455 million.
Our full year guidance implies 2% revenue growth from 39% adjusted operating margin at the midpoint of our guidance range. With that, let me turn it over to the operator to open the call for questions.
Questions & Answers:
Operator
Thank you. [Operator instructions] Again, we will pause for a moment while we compile our Q&A roster. Our first question comes from Koji Ikeda with Bank of America. Your line is open.
Koji Ikeda — Bank of America Merrill Lynch — Analyst
Yeah. Hey, guys, thanks for taking the questions. A couple from me here. On the revenue side, lots of positive commentary in the prepared remarks, especially on net revenue retention.
But you did lower the guide a bit, so something did get worse. I know you guys called out SMB weakness, but is there anything else in the guide that we should be thinking about?
Cameron Hyzer — Chief Financial Officer
So, certainly, the SMB weakness is something that impacted us, particularly in Q1 as we had a higher or a larger pool of renewals coming in, in Q1. We also saw new business a little behind where we wanted it to be, also based on there being a fair amount of SMB weakness — SMB concentration within new business, as well as our shift to be more selective in the deals that we’re pulling in. So, expecting that, that should help us remove some of the headwinds around write-offs as we get further into the second half of the year.
Koji Ikeda — Bank of America Merrill Lynch — Analyst
Got it. Thanks, Cam. And I recall in prior calls, you’ve talked about 10% of ACV that needs to renew still. And a lot of those were attached to some of the larger software vendors or tech vendors out there that had big contracts, three-year contracts that were renewing sometime in the second quarter.
So, is there any way you could provide an update there? Anything we should be thinking about within that cohort that still needs to renew? Thanks, guys.
Cameron Hyzer — Chief Financial Officer
Yeah. So, not all of that 10% will renew in the second quarter. I think it’s a few percentage points for a few quarters to come still. But certainly, those larger clients that we’re seeing, we’re seeing solid utilization and feel good about the renewal rates and customers that are coming up in Q2 and Q3, particularly, among larger customers.
Koji Ikeda — Bank of America Merrill Lynch — Analyst
Thanks, guys.
Operator
Thank you. One moment for our next question. Our next question comes from Elizabeth Porter with Morgan Stanley. Your line is open.
Elizabeth Porter — Morgan Stanley — Analyst
Great. Thanks so much. I wanted to ask on the Copilot product. It sounds like a lot of interesting features going on there.
Just give us some more clarity on how you expect to monetize. Is this something that comes upon renewal and takes some time to get phased in, even though it’s going GA in the back half of the year? And is this more of a seat-based model? And kind of how do you look to kind of raise prices in a tougher environment there? Thank you.
Henry Schuck — Founder and Chief Executive Officer
I think the first — our plan — our go-to-market plan is to make sure we phase this out to the customers who we believe will see the highest value from Copilot first. And so, we built a model that looks at usage, integrations, their ICP. And so, we’re going after, first, the customers who are most likely to see the highest value and most likely to upsell into Copilot. I think ultimately, on monetization, it is around monetizing additional value per seat, and we think it’s going to be an upsell relative to where our customers would have ended up, whether that’s an increase in certain renewals or in certain renewals where they have fewer users, that might be a flat renewal where historically, it would have been a down-sell.
And new business, we think that we’re going to increase win rates and conversion rates because of Copilot, but we think we have the biggest opportunity within the customer base to drive monetization.
Elizabeth Porter — Morgan Stanley — Analyst
Got it.
Cameron Hyzer — Chief Financial Officer
And certainly, Elizabeth, I was just going to say, we’ve typically run these migration motions over a couple of years in the past. So, we don’t expect it to all come now. But as we get further on in the year, it’s still early now, it hasn’t even gone to GA, but we’ll have a better view of the potential uplift across our customer base. And we intend to host an Analyst Day in the fourth quarter to dig more into those metrics, as well as provide a view into the longer-term model based on them.
Elizabeth Porter — Morgan Stanley — Analyst
Got it. Thank you very much. And as a quick follow-up, I believe last quarter, you talked to some shortening sales cycles in Q4. Is that something that continued into Q1? You highlighted a lot of other green shoots in more of the mid-market enterprise.
But just curious on an update for the sales cycle period. Thank you.
Henry Schuck — Founder and Chief Executive Officer
We didn’t have any change in sales cycle length in the quarter. It stayed consistent.
Elizabeth Porter — Morgan Stanley — Analyst
Got it. Thank you.
Operator
One moment for our next question. Our next question comes from DJ Hynes with Canaccord Genuity. Your line is open.
DJ Hynes — Canaccord Genuity — Analyst
Hey, thanks, guys. Cameron, maybe a couple for you. I want to focus on that 100K-plus ACV cohort. I mean I appreciate your commentary on improving retention dynamics.
I think you said it was the second straight quarter. Was a little surprised in light of that to see the absolute number of customers decline by as much as it did. So, question one is, do you see that bottoming? I know it’s a hard question to answer. And then question two would be it sounds like the ACV in that cohort grew nicely.
I think you said 16%. Just talk a little bit about what’s driving that. Is it new personas? I know you said operations hubs growing nicely. Is it advanced functionality? Any color with the puts and takes there would be super helpful.
Cameron Hyzer — Chief Financial Officer
Sure. So, the ACV for the cohort that grew 16% were the larger customers, the $1 million-plus customers. And obviously, that’s a subset of the 100K plus. What we really see there is that larger enterprises and customers that have really leaned into the system are growing and growing nicely.
But there are a number of mid-market, in some cases, even smaller customers, that are just over the 100K level and still experiencing down-sell pressure, whether they’ve laid people off over the last 12 or 18 months relative to their expiration or that they’re continuing to face serious budget pressure. And those are the customers that we continue to see falling out of that cohort. There are still a number of those. To a large extent, we have lapped what we think of as peak negativity with respect to layoffs and so forth.
So, we feel that that pressure going forward won’t be as significant as we’ve seen over the last three or four quarters.
DJ Hynes — Canaccord Genuity — Analyst
Yeah. OK, got it. Thank you, guys.
Operator
One moment for our next question. Our next question comes from Mark Murphy with J.P. Morgan. Your line is open.
Mark Murphy — JPMorgan Chase and Company — Analyst
Thank you very much. So, Henry, we’ve definitely been noticing for many months that software companies are simply not hiring like they see a real demand recovery out there. And so, very commonly, the head count growth now is way below the revenue growth in the software industry, and it’s extremely unusual. I’m just wondering, and I think we hear a lot of different conjectures on why that might be, but how would you explain that phenomenon? Because I would assume if reps are seeing — if they’re reaching quota attainment, we think software companies would kind of lean in on the hiring.
So, I’m just wondering if you think it’s that simple or something else is going on. And then I have a quick follow-up.
Henry Schuck — Founder and Chief Executive Officer
I think the world out there in go-to-market is all about productivity today. And so, people are looking across their account executive, account management teams. And instead of asking the question of, if I added 10 additional people, could I drive more revenue growth, they’re saying, can I do this with 10 less people? Are they at full capacity? Can I get them more leads and generate the same amount? Can I drive productivity within my team? And so, there is just a fundamental shift in the way people are thinking about the unit economics of their businesses, and so they want to do more with less. And one of the things — and where that’s happening in our customer base, I mentioned this on the last question, where that’s happening in our customer base, we’re not going to expand by number of seats.
But Copilot gives us a real opportunity to expand ACV through that functionality without having to expand through seat count. And so, in organizations where it might have been flat, we think there’s an opportunity to expand ACV in organizations where there would have been down-sell because there are just less people to hold licenses. We think there are opportunities to keep that flat. And so, we’re going to use that as a real opportunity in the customer base, but I think there is a focus on productivity.
Mark Murphy — JPMorgan Chase and Company — Analyst
Yeah. OK. And then, Henry, this is very well said. Thank you for that.
I did want to ask you because Copilot, we’ve heard very good feedback and it’s intriguing to turn a weak seller into a strong seller. But then the flip side is we just haven’t seen much generative AI monetization at the application layer across all software. I mean it’s been very minimal. So, I just want to understand, based on — you gave a very compelling assessment of some differences.
Do you think that ZoomInfo is going to be an outlier? Because there’s a lot of companies, it feels like it’s going to take a while before their GenAI application is driving — is like giving them like a 1% tailwind, for instance.
Henry Schuck — Founder and Chief Executive Officer
Look, I think that question has a time element baked into it. Do I think ZoomInfo will be an outlier in our ability to generate and to monetize through our AI solutions? Yes. Do I think it’s going to be in the back half of 2024, where it shows up that way? No, I do think it’s going to take longer than that. I have a lot of confidence because I personally pitched this product across dozens of our customers, across all segments, and all industries.
And this is exactly — from a product market fit, I don’t think we’ve been ever so close to fit as we have been with Copilot, outside of the core company and contact data. And so, I have a tremendous amount of confidence that we’re going to be able to turn that enthusiasm into monetization, but I also expect it to happen over time.
Mark Murphy — JPMorgan Chase and Company — Analyst
Understood. Thank you very much.
Operator
One moment for our next question. Our next question comes from Jackson Ader with KeyBanc. Your line is open.
Jackson Ader — KeyBanc Capital Markets — Analyst
OK. Great. Thanks for taking our questions, guys. The first one is on the downmarket cohort.
I’m just curious, with the SMB weakness, does that have more to do maybe with macro environment pressures? Or is there something happening competitively downmarket where people think they can go somewhere else rather than picking ZoomInfo?
Henry Schuck — Founder and Chief Executive Officer
Yeah. Thank you for the question. It is fundamentally downmarket. We’re seeing much more of a macro effect than a competitive effect.
Specifically, as it relates to competition, we’ve not seen a material change in the competitive landscape or an increased impact to our business from competitors. Our new business win rates haven’t seen any increased pressure, either overall or particularly in the SMB where our competition is most concentrated. And then we had another quarter of just about record win-back performance, so we feel really good about how we line up competitively. And we feel especially good about how we show up with Copilot as we roll it out this quarter.
Jackson Ader — KeyBanc Capital Markets — Analyst
OK. Great. And then just a quick follow-up either, I guess, for you, Henry, or for Cameron. Can you give us a sense for how much of the revenue mix actually comes from what you would consider SMB today?
Cameron Hyzer — Chief Financial Officer
Yeah. So, our enterprise business is right at 40% of the business. SMB is still around a third. And then mid-market is a little below 30%, making up the rest of that.
Jackson Ader — KeyBanc Capital Markets — Analyst
Got it. All right, great. Thank you.
Operator
One moment for our next question. Next question comes from Alex Zukin with Wolfe Research. Your line is open.
Alex Zukin — Wolfe Research — Analyst
Yeah, hey, guys. Thanks for taking the question. I guess maybe just going on to the back of that question about the SMB versus the enterprise versus mid-market. Can you maybe just walk through the difference in growth rates in those three businesses as they currently stand for the year? And when does the kind of the negative anchor kind of fully roll through? Or is there a potential spiral where each renewal cohort, for instance in the SMB, could get worse? And then just mechanically, I appreciate, Henry, the comments on win rates and win-backs.
But what about pricing? Like specifically, are you having to discount more aggressively to either win new business or retain business? And that’s something you’re seeing in the marketplace?
Cameron Hyzer — Chief Financial Officer
So, Alex, I’ll start with the growth rates between the different cohorts. Realistically, enterprise has been pretty solid. I’d say as we went through early on in 2023, as we’re going through the quarters, I think it was challenged. But it was the first group for us to kind of see stability with.
We did see continued down-sell pressure through ’23 in the mid-market world, and that was particularly acute on the software side where we saw customers really taking out seats either due to layoffs that they’ve done or overbuying that they’ve done historically. As we came through the end of the year in Q4 and Q1, we have started to see that stabilize. But mid-market was certainly down on an absolute basis across that period. SMB actually held in reasonably well as we went through 2023.
But really in Q1, we’ve seen a change in that trend. It does feel like the SMB cohort is more sensitive to the higher-rates-for-longer discussion that we’ve seen over the last few months. I think a lot of those companies were kind of hoping for a light at the end of the tunnel. And if that’s changed, they’re more sensitive to the environment, and we’ve seen real pressure.
So, I think that’s a change that we saw in Q1 more than anything else. I’ll let Henry address the pricing question.
Henry Schuck — Founder and Chief Executive Officer
Yeah. One thing, Alex, that we have not seen from our competitors downmarket, upmarket, anywhere is that they haven’t innovated on data, and they haven’t innovated on product and they haven’t innovated on software. There’s been no innovation. It’s just lower cost.
And the one place that they have innovated is around their go-to-market motion, where they built PLG motions that can attract a large segment of low-end SMB buyers. And we were behind on that. And over the last year, we’ve spent a lot of time building up our PLG motion. Inevitably, what happens with the PLG motion is that we sell at a lower price point for much smaller customers, and then we look to grow them as they come into the customer base.
And so, where there has been a pricing difference this quarter versus historically has been in that PLG cohort that comes in at a lower price and then grows with us over time.
Alex Zukin — Wolfe Research — Analyst
OK, perfect. Thank you, guys.
Operator
One moment for our next question. Our next question comes from Michael Turrin with Wells Fargo Securities. Your line is open.
Michael Berg — Wells Fargo Securities — Analyst
Hey, this is Michael Berg on for Michael Turrin. Really appreciate the color on NRR earlier in the call here. And I know there’s been a lot of questions asked on this, but I want to take a different step or a different angle on this. As you look toward the rest of the year, in particular, the second half of the year, how can we think about the key drivers to potentially improve the NRR rate? Is it enterprise strength, SMB weakness rolling off, new products rolling out? Maybe help us understand, what does improve NRR from here?
Henry Schuck — Founder and Chief Executive Officer
I think that there are a couple of things that improve NRR from here. I think one is, we roll out — when you think about NRR, it’s about renewal rate and then it’s about our ability to upsell products that we’re innovating or new users into the customer base. And so, from a renewal rate perspective, we are seeing that stabilization in mid-market. We’re seeing an improvement in renewal rates in our enterprise cohort.
So, we feel like — we’ve seen those trends continue into Q2. So, we think that that’s a trend that can continue through the back half of the year. And so, if renewal rates continues to stay stable and continues to improve, that drives up NRR. We have the new product with Copilot that we’ll take into the customer base.
That should drive up NRR as well. I think between renewal rate and improved products that we can sell into the customer base, those two things make a big impact. We also, as Cameron mentioned, there’s an element of expirations coming up and multiyear contracts that increased last year that will be a tailwind to us this year as well.
Michael Berg — Wells Fargo Securities — Analyst
Got it. Helpful. And then Cameron, one quick follow-up. As you talk about SMB cohort and be more selective there in terms of the deals you take on, do you think about it benefiting free cash flow conversion over time? Like can we think about this going from low 90s to mid or even high 90s in the back, above 100 over time as the quality of the customer base improves? Thanks.
Cameron Hyzer — Chief Financial Officer
I mean, certainly, our goal in taking more up-front payments for those lower-quality or smaller customers is largely to lower the kind of write-offs. So, certainly, in a world where we have fewer write-offs, that should improve the cash flow and frankly help us be more efficient in terms of where we’re dedicating our time. But realistically, I think that that’s probably something that happens around the edges. The bigger driver of cash flow conversion will be ultimately us reaccelerating growth.
And so, where we’re able to reaccelerate growth and get growth back into double-digit world, that would ultimately push that cash flow conversion higher into mid-90s or even higher, just based on the fact that a bigger proportion of our revenue is coming in up front based on that.
Operator
Thank you. One moment for our next question. Our next question comes from Brad Zelnick with Deutsche Bank. Your line is open.
Brad Zelnick — Deutsche Bank — Analyst
Great, thanks so much for taking the questions. Cameron, I think through your prepared remarks and a lot of the questions that have already been asked, I feel like I have a pretty good sense of how to bridge the prior guidance for the full year and the updated guide. But maybe if you could, any help — because it sounds like the small business, it downticks. It sounds like there was some green shoot stabilization that you see ahead, perhaps even some upside in enterprise.
But when you actually unpacked and came up with the guide, can you give us any help with where to think about where it’s coming from specifically?
Cameron Hyzer — Chief Financial Officer
Yeah. And certainly, during Q1, we saw a continuation of trend in the enterprise and mid-market that was stabilizing. I think that was, in some ways, expected. But we are expecting that to stay on trend.
The real change in trend was in the small business cohort. And obviously, because that was a big cohort of expirations in Q1 and came in at a level that was much worse than we’ve seen historically, that obviously impacts just the run rate coming out of Q1. And then obviously, we’re adjusting our assumptions going forward. So, while it’s a big pool of expirations in Q1 for small businesses, that’s not the only expirations that we have during the course of the year.
So, as we adjust our assumptions in terms of small businesses going forward, we’re assuming that, that pressure continues through the year. And I think that the combination of the big cohort that underperformed in Q1, as well as the assumption of that going forward, certainly, reflects a tougher environment than what we had set our guidance at the beginning of the year.
Brad Zelnick — Deutsche Bank — Analyst
Thanks for confirming. That’s helpful color. And maybe just for you, Henry. As we think about that segment of the market, it’s obviously got different characteristics, higher churn for every software company that’s selling into the segment.
Is there anything that you could do — once we get past the cyclicality in the environment, anything that you can do to help offset what we naturally know about SMBs, whether it’s integrations, go-to-market partnerships? Like what can you do structurally to really help to ensure that you’re as high a priority for SMBs as you possibly can be and that you’re going to dominate competitively in that segment? Anything structurally that you could do to really improve your chances in that theater? Thanks.
Henry Schuck — Founder and Chief Executive Officer
Yeah. Look, I think, number one, we sell far more from a new business perspective and renew far more from a new business perspective than I’m pretty sure every competitor combined in the space. And so, we’re not losing share here. I think the thing that I think about from a churn perspective is ZoomInfo, as a platform, has largely been one that you go pull information out of.
And our SMB customers are busy, they’re running small businesses, they are tackling a number of initiatives. And a platform that’s not dead simple is hard to extract value out of. And so, one of the lenses that we built Copilot with was to make sure that we made — we moved ZoomInfo from a pull platform to a push platform, one that with AI understands the customer base, understands what they’ll care about in ZoomInfo, looks at their CRM data to understand the customers that they sell to, understands their ICP, and then starts delivering them their next best customers without them having to learn a complex system or integrate their software or define who their buyer committee is or choose the intent topics that they’d be most interested in. The system auto configures for them and then starts immediately delivering them value around their next best customers.
And so, we think that significantly improved. Actually, we’ve seen that significantly improve utilization and engagement for our customers who are Copilot beta customers. And as that utilization and engagement increases in the SMB, that’s directly correlative with our renewal rate.
Operator
Thank you. One moment for our next question. Our next question comes from Brent Bracelin with Piper Sandler. Your line is open.
Brent Bracelin — Piper Sandler — Analyst
Thank you. Cameron, I get SMB is weak. It’s been weak for a while, getting weaker. It seems like that seems to be a broader industry trend.
I wanted to go back to the enterprise business, which did actually grow double-digit year over year. Can you double-click into the durability essentially of that enterprise growth? I can’t imagine seats are expanding much in this environment. And so, was it just all mix shift to DaaS? Was it tied to vendor consolidation? Walk me through the enterprise ACV growth and the durability of that. Thanks.
Cameron Hyzer — Chief Financial Officer
Certainly, you mentioned DaaS as being a good fit there. DaaS is like largely an enterprise product or at least enterprise in the higher end of mid-market. That is a place where we are seeing real traction. And also, it’s becoming a more and more material mix of the business.
And certainly, I think to Henry’s point before of customers looking to optimize their spend, like DaaS is a big part of that. DaaS is people building tools to make their sales teams more efficient and building those tools based on high-quality data and insights about the customers that they’re going after. And so, I do think that this is a lot of enterprises that are either investing in AI or investing in automation and recognize that they need high-quality data as an input into those projects in order to make them successful. So, that’s certainly part of it.
The other part of it, frankly, is that in the enterprise, we’re still fairly underpenetrated in terms of the total seats available. So, there, I don’t think that there are a lot of enterprises that are piling on the number of seats. In fact, you see a lot of companies still laying people off. But in a place where we are helping to make teams more effective and efficient, when they’re getting rid of people in certain places, we’re still looking for other pockets within those enterprises in order to drive additional value and frankly drive additional efficiency for those teams.
Brent Bracelin — Piper Sandler — Analyst
Helpful color there. And then Henry, for you, I want to go back to this sales optimization narrative. It is a very different environment. We’ve had this kind of overhang on the business relative to tech layoffs and software layoffs for two years now.
I get Copilot could be a huge next-level productivity uplift. But why won’t we, a year from now, be in the same environment where Copilot indirectly drives more efficiency above what you can monetize? Is there a plan to move more away from seat-based pricing, move toward platform fees, drive higher DaaS attach rates and monetize Copilot on top of DaaS? Just trying to think through these changing environments and sentiment that you’re seeing out there, and it’s just not clear to me if Copilot actually can provide an uplift or not.
Henry Schuck — Founder and Chief Executive Officer
I think one really interesting thing that I’ve seen across the upper end of the mid-market and the enterprise is that when you show them Copilot, you start hearing things like, oh, we’ve been trying to build that here for the last five years. Oh, that would be exactly what we would need to build. Oh, we’ve been talking about wanting to build something like this. And so, we have a real opportunity to deliver what every upper mid-market and enterprise business would throw dozens of developers at for years to try to accomplish.
And so, I think we can monetize the value that we’re driving, both in terms of productivity uplift but also from the avoidance of having to build that type of software internally and probably build it pretty poorly.
Operator
Thank you. One moment for our next question. Our next question comes from Brian Peterson with Raymond James. Your line is open.
Johnathan McCary — Raymond James — Analyst
Hi. This is Johnathan McCary on for Brian. Thanks for taking the question. So, how would you characterize the demand environment in the non-software verticals? I know you guys have kind of spoken to that previously.
Maybe more specifically, do the NDR trends there sort of mirror what we’re seeing in the broader business? Or is there more strength on the net new side? Or how would you characterize that in the non-software verticals?
Cameron Hyzer — Chief Financial Officer
I mean, certainly, as we look at the last 12 months, software and technology have been under significant pressure. You see them down on an absolute dollar basis year over year and at a net retention level that’s well below the overall net retention that we have. Obviously, that means that those non-software businesses, non-technology businesses have grown more significantly. Most of the segments within that are growing kind of mid-teens or in some cases, even more than that, if you look at like retail or transportation and logistics.
And obviously, just the math would tell you that the net retention for those businesses is also well above the overall company average as well. So, I think that we’ve gone through a year, ending at the end of March here, where software businesses — our software customers have been digesting a lot of the, call it, replatforming or operating model changes that they put through throughout 2022 and the beginning of 2023. Our subscription model is now digesting all of that. And so, I do think that there’s the opportunity, particularly among those larger and mid-market software companies, to stabilize a little bit more.
But the rest of the business is effectively better because they didn’t have the same dynamics, particularly around driving more profitability that you see in the software businesses that have decelerated in a significant amount.
Johnathan McCary — Raymond James — Analyst
OK. Thank you.
Operator
One moment for our next question. Our next question comes from Tyler Radke with Citi. Your line is open.
Tyler Radke — Citi — Analyst
Hey, good afternoon. Thanks for taking the question. Cameron, as I look at the guidance for the full year, obviously, it’s come down a little bit. But it still implies that sequential growth has to pick up in the second half of the year.
Can you just remind us what’s driving that sequential acceleration? And I guess on the SMB environment, how have you seen the first month or so trend in the second quarter relative to what you saw in Q1?
Cameron Hyzer — Chief Financial Officer
Yeah. So, certainly, the acceleration in the second half of the year is largely based on the fact that our expirations that we’re going to see in Q2 and Q3 are much smaller than they were in Q1 and, frankly, Q4 before that. So, a lower number of expirations, obviously, provides less opportunity for down-sell among our customers. And therefore, the upsells in the new business that we’re continuing to drive will have a bigger impact on the revenue number as we go through.
And so, that’s kind of true across the board. And as we look at the retention mix, we see that, frankly, April, very much was on trend for those comments. So, we feel that the smaller expiration and the success that we continue to see with upselling and new sales is already on course for that.
Tyler Radke — Citi — Analyst
I was just going to sneak in a follow-up for you, Cameron. Thank you. As we look at the trajectory for the rest of the year, can you also just remind us how you’re thinking about the 100K customer add? Should that bottom and start to grow again at a certain point? And a similar question on NRR, when do we expect to see the bottom there?
Cameron Hyzer — Chief Financial Officer
Yeah. So, I think from the 100K perspective, the real pressure that we feel in terms of the number of customers are among smaller customers. So, mid-market customers and maybe even some small businesses that are spending just above the 100K level and have down-sell pressure, whether that’s internal budget pressure or layoffs or changes in their operating model. That continues to be there.
We haven’t fully gotten through all of those customers. But certainly, we’ve gotten through some very big cohorts that had peaked in terms of layoffs in, call it, early 2023. So, we do think that there’s the opportunity for that to eventually grow or at least not go down by as much. But certainly, overall in that cohort, we actually see the ACV levels being pretty stable because the larger customers continue to grow more significantly and make up for losing some of those smaller customers.
From a retention perspective, we very much see retention among the enterprise and mid-market stabilizing. And certainly, as we see a little bit of mix shift, that also helps the overall numbers. So, it does feel like that’s a place where we can build off of as we move forward into the second half of the year. And frankly, the multiyear customers also continue to grow, which is obviously helpful for retention as well, which is a reflection of the fact that we are shifting the mix toward larger customers.
And those larger customers do tend to be multiyear customers as well. So, our guidance assumes that retention does not improve, but we do see a number of trends underlying where we think that, that opportunity for improvement is there.
Operator
Thank you. One moment for our next question. Our next question comes from Josh Reilly with Needham and Company.
Josh Reilly — Needham and Company — Analyst
Yeah, thanks for sneaking in. I got two quick questions here. We talked about the PLG motion. I was curious, how broadly is this now rolled out to both new and existing customers? I know that was a point of discussion before.
And then just quick on sales and marketing, that was above my estimate by a healthy amount for the quarter here, while R&D was below. Curious how you’re thinking about sales and marketing spend for the balance of the year relative to the updated operating income guidance. Thanks, guys.
Henry Schuck — Founder and Chief Executive Officer
The PLG one, and then Cameron can take that second part. On PLG, it is — it depends on how you define PLG. If we think about PLG as purely self-service, I come in, I get a free trial, I turn into a customer, that part of PLG is limited to our cohort leads that come through our website, so it’s not open to any user. If we’re talking about it as the ability to manage your invoices, pay for upgraded users, add ad spend and marketing OS, pay for renewal, that capability is available to all of our customers.
Cameron Hyzer — Chief Financial Officer
And then from an operating expense perspective, sales and marketing, we are continuing to invest in sales and marketing. There are also some kind of one-off things around payroll taxes and how we pay taxes on stock comp that created a little bit of a blip in Q1 related to sales and marketing that won’t necessarily recur as we go forward. But certainly, we’re going to be really focused on marketing around and selling Copilot as we move into the second half of the year. So, that will be something that we want to continue to invest in.
R&D, we have been really focusing the R&D team on the Copilot initiative. And based on the new functionality that’s being developed, there’s a bit more capitalization that happens there. So, I think that capitalization probably may not have been incorporated in everyone’s model if you’re just looking at the prior trends.
Operator
Thank you. One moment for our next question. Our next question comes from Raimo Lenschow with Barclays. Your line is open.
Raimo Lenschow — Barclays — Analyst
Hey, thank you. Thanks for squeezing me in. Since I’m at the back of the call, maybe more like a high-level question. Henry, if you look, like obviously, what’s happening to you guys at the moment, with nothing ZoomInfo specific, it’s kind of like where the market is at the moment and where customers are.
So, that’s kind of impacting you, but it’s impacting the whole industry that you’re playing in. What do you see in terms of — how do you think that your industry will reemerge because a lot of your competitors are private? So, you’re kind of well-funded, very highly profitable. So, how do you think that’s playing out? And what do you see in competitive situations there already? Has that started already? Thank you.
Henry Schuck — Founder and Chief Executive Officer
Look, I think, first of all, we’re taking a very durable approach to our future. And the products that we’re building today and bringing to market, we believe, build a foundation on top of which we can continue to build on. Is Copilot going to be the last AI product we build? No. It’s going to be the first, and it’s going to build a great foundation for the future.
I think if I look around the space, it’s much easier to look at the core of our solution and understand why it’s important to every go-to-market team today and five years from now and 10 years from now. And it’s a lot easier to look at our solution and understand why, in a generative AI world, our data, our insights, our proprietary data asset becomes more and more valuable while application layer software becomes less and less important because it will be much easier to build with AI in the future. But then our data asset and what we’re building around it becomes core to every generative AI go-to-market use case in the future. And so, I think in that respect, I can see a universe where the software layer, the application providers are much more easily disrupted by AI than the core data providers who built flywheels and networks to gather the data and have incredibly high-quality data that every company can build a generative AI solution on top of.
And so, we have a lot of confidence around what we’re building and the future there and think the application layer is more disreputable.
Raimo Lenschow — Barclays — Analyst
OK, perfect. Thank you.
Operator
One moment for our next question. Our next question comes from Rishi Jaluria with RBC Capital Markets.
Rishi Jaluria — RBC Capital Markets — Analyst
Oh, wonderful. Good afternoon. Thanks so much for squeezing me in. I’ll keep it to one, just given that we’re past time.
Henry, I wanted to follow back on the conversation around the PLG motion. I guess, help us understand, number one, how is traction? And in this case, I’m talking purely the self-service customers where someone can become a paying customer of ZoomInfo without having to engage with a salesperson. I guess, help me understand, A, how is that motion kind of going? How is it being received? And I guess, B, why not go even deeper down that path, especially given that at least in a lot of conversations we’ve had, there is a certain amount of friction to adopting ZoomInfo that isn’t necessarily there at some of your competitors? And I’d have to imagine, without dedicated sales resources, it comes in a very, very high contribution margin. Maybe you could help us bridge that, that would be great.
Thank you.
Henry Schuck — Founder and Chief Executive Officer
The number of customers and accounts that have access that we bring in from a PLG motion, now we also believe that we’ve built an incredible sales-led motion at ZoomInfo that is far more efficient than just about anything you’d see out there in the broader software marketplace. And so, when there are leads that we think are most optimized to come through a sales-led motion, we’re going to push that to the sales-led motion. When we think there are leads that will be best served through the PLG motion, we’re going to push those leads through the PLG motion. And so, I think we’re always going to have two ways that we go to market from a new business perspective, and we’re going to leverage each where we think — where our internal models actually tell us that we’re going to get more if one goes to PLG or we’re going to be better optimized if a lead goes into our sales-led motion.
But over time, what we’ve seen internally and what we’ll continue to deliver on is more and more going into the PLG motion.
Rishi Jaluria — RBC Capital Markets — Analyst
Right. Thank you so much.
Operator
One moment for our next question. Our next question comes from Pat Walravens with Citizens JMP. Your line is open.
Pat Walravens — JMP Securities — Analyst
OK. Great. Thank you. Shifting to other notes in SMB.
So, Henry, I was delighted to see you settled the right of publicity class actions. Kudos to Anthony and your legal team. Two questions. So, it resolved the claims in four states.
Are there any others in other states? Or is that it? And then the second question is, are you making any changes to the Community edition or the directory pages as a result? And does any of that impact your plans for sort of new PLG motions for SMB?
Henry Schuck — Founder and Chief Executive Officer
Yes. Thank you, Pat. These will handle all of the states where there are claims, so we feel really good about putting that behind us. There are minor changes to our community pages in those states, but we don’t anticipate those causing any issues for us from a community perspective or from a PLG perspective either.
Pat Walravens — JMP Securities — Analyst
Thank you.
Operator
And I’m not showing any further questions at this time. [Operator signoff]
Duration: 0 minutes
Call participants:
Jerry Sisitsky — Investor Relations
Henry Schuck — Founder and Chief Executive Officer
Cameron Hyzer — Chief Financial Officer
Koji Ikeda — Bank of America Merrill Lynch — Analyst
Elizabeth Porter — Morgan Stanley — Analyst
DJ Hynes — Canaccord Genuity — Analyst
Mark Murphy — JPMorgan Chase and Company — Analyst
Jackson Ader — KeyBanc Capital Markets — Analyst
Alex Zukin — Wolfe Research — Analyst
Michael Berg — Wells Fargo Securities — Analyst
Brad Zelnick — Deutsche Bank — Analyst
Brent Bracelin — Piper Sandler — Analyst
Johnathan McCary — Raymond James — Analyst
Tyler Radke — Citi — Analyst
Josh Reilly — Needham and Company — Analyst
Raimo Lenschow — Barclays — Analyst
Rishi Jaluria — RBC Capital Markets — Analyst
Pat Walravens — JMP Securities — Analyst
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