Zeta Global (ZETA) Q1 2024 Earnings Call Transcript

adminMay 7, 2024

ZETA earnings call for the period ending March 31, 2024.

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Zeta Global (ZETA 1.40%)
Q1 2024 Earnings Call
May 06, 2024, 4:30 p.m. ET

Prepared Remarks:

Operator

Greetings, and welcome to the Zeta first quarter 2024 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) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Scott Schmitz, senior vice president of investor relations. Thank you. You may begin.

Scott Schmitz — Senior Vice President of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta’s first quarter 2024 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, 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.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Thank you, Scott. Good afternoon, everyone, and thank you for joining us today. 2024 is off to a great start. In the first quarter of 2024, we delivered revenue of $195 million, up 24% year over year, with adjusted EBITDA of $30.5 million, up 27% year over year.

Our adjusted EBITDA margin of 15.6% expanded 40 basis points year over year. Our strong competitive position combined with the structural forces propelling our momentum give us the confidence to raise our 2024 full-year guidance by $25 million to $900 million at the midpoint. This translates into 24% year-over-year revenue growth, an acceleration from the 23% growth we achieved last year. This accelerated full-year growth rate is the result of strong visibility into key revenue drivers, including the marketing cloud replacement cycle, the rebound of automotive and insurance sectors, the ramp of our agency business, and the hyper growth of our artificial intelligence platform.

Behind each of these drivers is the need to make AI more actionable with more relevant personalization, more impactful marketing programs and more measurable return on investment. Our AI-powered marketing cloud, the Zeta Marketing Platform, or ZMP, delivers actionable intelligence by seamlessly integrating Zeta’s proprietary data cloud with an enterprise’s first-party data to uncover consumer attitudes and activities to determine intent and unlock better consumer experiences and, therefore, better results. More importantly, enterprises can transform their data assets into a competitive advantage while protecting their customers’ privacy and the integrity of their ecosystems. Our value proposition is resonating with chief marketing officers as they seek new tools to capitalize on the power of AI and replace legacy marketing clouds with first-generation CDPs that are not delivering on their promises.

Marketers are looking for modern marketing technology platforms like the ZMP that leverage gen AI to drive top-line growth and improve operational efficiency without sharing their data back to the collective. We are also seeing accelerated growth as we gain greater traction in the broader ecosystem, including our expansion with agencies, systems integrators, and technology alliances. Each of these provides an incremental source of high-quality demand generation with deals that enter the pipeline pre-qualified and closer to the decision stage. For example, we recently won a seven-figure partner-sourced platform deal with a large financial services company that closed in only four months.

We were quickly able to prove that the ZMP will modernize their marketing technology stack, unifying their customer data and enabling rich segmentation and engagement in one single platform. Whether a deal is sourced through a partner or directly by our sellers, we are winning because the ZMP delivers marketers more predictable, profitable, and measurable growth. For instance, last year, we implemented a pilot program at a large specialty retailer of high-quality products for the home to help them acquire new customers. We delivered performance 20% above the required KPIs, driven by actionable intelligence in the ZMP, which helped identify new customers with in-market intent signals.

Our performance was validated by the brand’s internal analytics team, which in turn should open additional budget for 2024 with expansion across multiple channels. Let me transition to product updates from our last call. In Q1, we launched our generative Intelligent Agent Composer store. This allows customers to easily build and share agents within the platform across a variety of use cases.

In a short amount of time, over 300 virtual agents have already been built and created. In Q2, we’re adding more advanced automation, making agents configurable with clear and actionable outcomes. This automation translates agent conversations to platform actions like onboarding data, building audiences, campaigns, reports, and more. One early example is an agent created by an internal team that reduced the campaign workload by 70%, saving our team 400 hours of work per month.

Our intelligent agents are becoming an enterprise’s virtual data scientist, providing better information and driving a better ROI. Security and governance are at the core of these agents, ensuring that customer data is never shared outside of Zeta. Switching to mobile, where our vision is to connect the mobile channel to intelligence within our CDP and data cloud. This is where the Zeta ID gives us a strong competitive advantage by allowing us to identify people across the ecosystems.

In the near term, we are working to deliver native push and SMS capabilities with a longer-term goal of creating conversational capabilities powered by our gen AI engine, ZOE. We believe our mobile capabilities will allow enterprises to take advantage of our master orchestration to enhance their omni-channel strategies. We are continuously working to strengthen our competitive position through internal development and remain opportunistic regarding accretive transactions that can enhance our platform or accelerate our time to market. We look forward to showcasing all our AI and mobile capabilities at our Zeta Live conference scheduled to be held on September 26 later this year.

In Q1, I was also incredibly proud that Zeta was certified as a great place to work in both the United States and India. This is the highest form of recognition an employer can achieve globally, and it demonstrates the impact that our investment in our people and our culture has made over the past several years. In summary, we are off to a very strong start in 2024 as we continue to capitalize on the need for more efficient and effective marketing programs and more modern marketing technology that empowers enterprises to capitalize on the transformative power of AI. As always, I would sincerely like to thank our customers, our partners, Team Zeta, and all our shareholders for the ongoing support of our vision.

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

Chris Greine — Chief Financial Officer

Thank you, David. As you said, it was a strong start to the year indeed, highlighted by an increase in visibility from new customer wins and rapid expansion of existing customers, which is leading to a big step-up in revenue and adjusted EBITDA guidance. To that end, my remarks today will focus on two key topics. First, a run-through of the results with an update on the green shoots we’re seeing from several of 2024’s growth catalysts, namely outlining the automotive and insurance verticals return to growth, discussing our progress scaling recently signed large agency HoldCos, providing an update on political candidate spending, and sharing sales productivity and pipeline conversion metrics with large enterprise customers.

And then I’ll close by detailing the increase in our second-quarter and full-year guidance, along with how our growth drivers are incorporated into the outlook. All right. Let’s dive in by starting with the results. In the first quarter, we delivered $195 million in revenue, up 24% year to year.

The 8 million of upside versus the midpoint of guidance was broad-based. We ended the quarter with 460 scaled customers, which, as a reminder, account for 98% of total Zeta revenue and spend at least $100,000 on a trailing 12-month basis. This was up eight from 4Q and 49 or 12% from a year ago, at the high end of our 8% to 12% growth model. Taking into consideration typical 4Q to 1Q seasonality, this was consistent with what we added sequentially last year, but what really stood out was the rate at which customers scaled up.

The growth rate of our 1 million-plus super scaled cohort accelerated 31% year to year, an increase from 131 in 4Q ’23 to 144 in 1Q ’24. To put this into perspective, the sequential jump of 13 is the highest increase we’ve ever seen. A couple of data points worth noting on the super scaled increase. First, all 13 customers scaled up from the 100K to 1 million cohort, a strong demonstration of our land, expand, extend sales model and a good illustration why over 90% of our revenues generated from customers with us over a year.

And second, while a few of those were agencies, most were large enterprise expansions across the breadth of industries, ranging from technology, consumer and retail, and travel and hospitality. Growth in super scaled customer count led to double-digit ARPU growth. Scaled customer ARPU in the first quarter grew 11%, an increase from the 7% year-to-year growth in 4Q ’23 and at the high end of our 8% to 12% growth model. This was driven by customers using two or more channels, which increased over 30% year to year.

We also grew our quota-carrier count, going from 136 at the end of 2023 to 142 at the end of the first quarter, with a solid pipeline of candidates entering the second quarter as well. Our established practice of hiring experienced sellers with marketing domain and industry vertical expertise, along with providing comprehensive training curriculum, is leading to increasing sales productivity metrics. Comparing today’s group of less than 12-month tenured sellers to the average of the prior three cohorts, so going all the way back to 2021, the most recent class’s average time to close improved by almost a month or 20% to four months. At the same time, our greater-than-12-month tenured sellers win rates, signings, and pipeline stats all increase as their tenure gets longer on the platform.

Increasing sales productivity is translating to progress on our 2024 growth catalyst. First, we saw both the automotive and insurance verticals return to growth in the first quarter, 90 days sooner than we expected. Their combined growth still trailed total Zeta, but we have good visibility to the remainder of the year by virtue of having recently signed contracts and, in other cases, progressing new sales opportunities forward in the pipeline. Our outlook assumes the two combined industries growing double digits year over year in 2024.

Second, we’re starting to see the sales pipeline build for political candidate revenue and would anticipate activity picking up later this summer. As we sit here today, we’re not making any changes to our political candidate revenue guidance assumptions of 15 million in 2024 with $2 million in 2Q, $5 million in 3Q, and $8 million in 4Q. This is detailed on Slide 18 in the earnings supplemental presentation. So, all of the guidance increases I’ll discuss later exclude incremental political candidate revenue.

Third, while we’ve talked a lot recently about our expansion with agencies, and I’ll do so more in a moment, our first quarter’s expansion of ARPU and super scaled customers was also driven by large enterprise customers. And fourth, our advancement with large agency HoldCos is still in its early stages but expanding rapidly. We are now working with the five largest agency HoldCos. What’s so compelling about the opportunity is that this represents dozens of agencies and hundreds to thousands of brands that account for a large portion of enterprise marketing budgets.

Agencies are pivoting to Zeta’s platform for several reasons. First, we help them win new business. Zeta’s insights and data intelligence identifies new audiences and personas for the agency’s clients to target, and Zeta’s artificial intelligence recommends intent-driven omni-channel activation strategies, resulting in more efficient and higher-ROI campaigns. Second, we help them offer incremental products like client data enrichment.

This enables new cross-selling opportunities for the agency and makes them stickier. And third, we provide deterministic people-based measurement attribution as opposed to cookie-based. This allows agencies to drive better outcomes and the ability to prove their ROI attribution to clients. Each of our agency HoldCo relationships are at different stages, ranging from four years on the platform at a larger scale to those just beginning to ramp.

We have good visibility into this dynamic going into 2024, which is why, on our last earnings call, we said it was prudent to assume a similar revenue mix and percentage of cost of revenue profile in 2024 as we saw exiting 2023. I think that continues to be a good assumption. This is because new HoldCos on the platform often start with integrated channels, primarily social networks like Facebook, YouTube, and others, which have a lower margin profile in the mid-30s. These newer HoldCos are also using direct channels, and our plan is to grow their direct channel mix, meaning use of Zeta’s CDP, email, demand-side platform, and CTV as their spend increases with Zeta.

We’re simply early in our partnership selling cycle today, as Slide 12 in our earnings supplemental illustrates. With this dynamic in mind, our direct revenue mix in 1Q was 67%. Importantly, the margin profile of our direct revenue continues to hold firm in the mid-70s range. Overall, Zeta’s cost of revenue in the quarter was 39.4%, up 490 basis points year to year but an improvement of 80 basis points quarter to quarter, which was slightly better than our expectation of 40%.

Staying on some of our other profit metrics, our first-quarter GAAP net loss was 40 million, which includes 53 million of stock-based compensation. Excluding the accelerated expensing related to our IPO, stock-based compensation would have been 30 million. In 1Q, total opex grew only 10% year over year, excluding stock-based compensation, and is down 570 basis points as a percentage of revenue. Our disciplined expense management and better sales productivity resulted in continued year-over-year adjusted EBITDA margin expansion, our 13th straight quarter of doing so.

In the quarter, we generated 30.5 million of adjusted EBITDA, up 27% year to year, with 40 basis points of margin expansion to 15.6%. Cash flow from 1Q operating activities was $25 million, up 23% year to year, with free cash flow of $15 million, up 51% year to year. This brings me to my final topic, our increased 2024 revenue and profit guidance. With structural forces driving our momentum, expansion and visibility we have into the sales pipeline, and strong productivity of our sellers, we’re increasing our revenue and adjusted EBITDA outlook for each quarter in 2024.

Details can be found on Slide 17 in our earnings supplemental. For the full year of 2024, we’re increasing the midpoint of revenue guidance to $900 million, representing 24% growth year over year. This is a $25 million increase from our prior guidance, well above the $8 million upside we achieved in Q1 and represents an acceleration of full-year growth through 2023. As mentioned earlier, none of the increase is attributable to higher political candidate revenue assumptions.

Those remain constant from our prior guidance at $15 million for the full year. For the second quarter of 2024, we’re increasing the midpoint of revenue guidance by $8 million to $212 million, up 23% year to year. In terms of adjusted EBITDA, we’re increasing the midpoint of 2024 guidance to 171 million, representing a year-over-year increase of 32% or 19% margin. For the second quarter of 2024, we’re increasing the midpoint of adjusted EBITDA guidance by $1.3 million to $35.5 million, up 32% year to year or 16.8% margin.

We continue to expect full-year free cash flow in the range of $75 million to $85 million. We started the year with a wide free cash flow range, and with these increases, we can see scenarios where we start to gravitate to the higher end of the range. The gating factor here is simply the timing of collections from newer agency customers, who we’ve discussed previously have longer payment cycles than our enterprise customers. In summary, there’s obviously a lot we’re happy about, and with the increased visibility, we feel very good about the increased guidance.

Our growth catalysts are showing green shoots. We’re seeing encouraging returns on investments across product development, sales, and marketing. And we’re creating deeper and stickier relationships with our enterprise and new agency customers. It’s good when all those vectors are pointing up.

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

Questions & Answers:

Operator

Thank you. (Operator instructions) Our first question comes from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your question.

Elizabeth Porter — Morgan Stanley — Analyst

Hi. Thank you so much. I wanted to ask about the agency side of the business. Looking at your Slide 12, it looks like it took with the first relationship about three years to get to 10 brands, but now, you’re scaling with 10-plus brands already within the first year of some of the newer relationships.

So, I just wanted to ask, what are some of the factors that you think are helping you now land larger with some of those more brands just off of Year 1? And then second, any go-to-market motions that you’re running in terms of helping shift that direct versus integrated mix faster than what you’ve seen previously? Thank you.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Thank you, Elizabeth. Appreciate the question. First, as it relates to starting bigger, we’re just better-known. It used to be we would go into an agency HoldCo, and we would have to spend a tremendous amount of time educating them on who we are.

Now, what we’re finding is when we go in, and I think as Chris mentioned in his prepared remarks, we’re up to five global agency HoldCos, we’re seeing them land faster, which, by the way, leads to your second question, right? Because when you get to your second question, it’s how do we migrate them over. And the efficacy and efficiency of using our on-platform versus integrated platform is substantially higher. So, we are making sure that we’re getting in front of the decision-makers faster as it relates to that. And I would say that we believe that the current mix of on-platform versus integrated platform is at its low point, and we will begin to see it come up in the next few quarters to where it would traditionally be.

Chris?

Chris Greine — Chief Financial Officer

Elizabeth, it took us — in that first large agency HoldCo, that first year’s direct revenue mix is around 7%. And as you noted, in Year 3, it was around north of 70%. Year 2 was like 40%. So, it’s not as if it’s like a hockey stick.

We don’t expect — we expect the more recent signings to have that same nice kind of linear pacing to it. Back to what David said, we help them win new business. We help them with cross-sells. We’re providing now client data enrichment opportunities.

And because we’re people-based in our attribution as opposed to cookie-based, they can use Zeta’s data to drive a verifiable ROI. In terms of the go-to-market motion, we don’t have just social sellers, we don’t have just CTV sellers, we don’t have just email sellers. Our sellers are selling the platform, right? They’re selling the intelligence and the insights and an omnichannel activation strategy. It just so happens that these agencies, as David said in the beginning, are starting with social, but it’s in their clients’ best interest to leverage Zeta’s data cloud and Zeta’s intelligence on our direct channels.

And we expect the similar sales motion that that first agency HoldCo went through over time to be mimicked by those now that were these new four that are starting the ramping process with us.

Elizabeth Porter — Morgan Stanley — Analyst

Great. Thank you so much. And just as a follow-up, I wanted to ask on some of the intelligent agent side. Really impressive to hear about the 300 agents.

Just curious how you view some of the engagement there. Is a lot of this still kind of in testing and pilot phases? Or is it being adopted kind of more wide-spread? And what are some of the factors that you think customers need to see in order to drive the more meaningful adoption?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Yes. So first of all, we think we are the first marketing cloud to market with build your own agent. And quite frankly, we were even surprised with the level of uptake from our clients and internally. These 300 agents represent, I don’t know, thousands of potential use cases.

And what we’re seeing, I think like a lot of people, we’re seeing a lot of focus on efficiency to start with the intelligent agencies. So, how do they build virtual data scientists using their own data for the first time using our generative AI platform in the form of the intelligent agent? And obviously, that’s driving revenue growth for us, as you saw the results and the raise of guidance. So, we’re seeing that uptake. We’re seeing the adoption.

We think that’s going to continue, but I’m very, very excited about the level of uptake and the level of utilization. We’re seeing clients, Elizabeth, who are using this really using it. They’re not setting it up and using it once. We’re seeing it being really used, and we’re seeing a meaningful increase in platform utilization from clients who have done that.

Elizabeth Porter — Morgan Stanley — Analyst

Great. Thank you so much. Congrats on the quarter.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Clark Wright with D.A. Davidson. Please proceed with your question.

Clark Wright — D.A. Davidson — Analyst

Hi there. Great quarter. Just wanted to maybe start off and if you could possibly just quantify how growth in the agency business has impacted the direct revenue mix since it was down six points in 4Q and where you see this trending over the course of the year.

Chris Greine — Chief Financial Officer

I think the direct revenue mix in the first quarter at 67% is going to be the low point that we see. It’s our expectation that the direct revenue mix will look a heck of a lot like how it ended in 2023 and that the percentage cost of revenue profile would also follow how we ended the fourth quarter of 2023, which was around 40% on a cost of revenue basis. Our plan is, and this is to Elizabeth’s point, if you follow the trajectory of the first large agency HoldCo we started to work with now four-plus years ago, in their early time frame, they were around 7% mix, and they expanded that to 76%, in that range. So, we think the same agencies that have now signed with us these recently, new four, would follow a similar pattern over time.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

And we see indication of that already. And quite frankly, even though we saw a slight drop in direct versus integrated, you saw that our cost of revenue went down from Q4 into Q1. I think that’s because the integrated platform — I’m sorry, that’s because the direct platform continues to be very, very solid. And we expect both of those trends to continue as we then move the agencies to on-platform versus integrated.

Clark Wright — D.A. Davidson — Analyst

Got it. Appreciate that color. And then if I could hear the second one, could you also talk about the company’s initiatives to drive increased channel usage and any trends you were seeing in terms of the way the brands are engaging with prospective and current customers?

Chris Greine — Chief Financial Officer

You can actually see it in a couple of places this quarter really meaningfully. The first is the significant increase quarter over quarter in super scaled customers. So, those are customers that do over $1 million with us on a trailing 12-month basis. That grew 13.

That’s the highest we’ve ever seen on sequential basis since we’ve been tracking the metric now over a number of years. And then if you look at the same time, the double-digit strong 11% scaled customer ARPU growth, that’s an acceleration from the 7%. And now, you look at the channel usage part, the number of our scaled customers that are using two or more channels grew over 30% year over year. We had good growth across the channel base.

CTV was in the low 40s. Rest of the channels were in strong double digits. So, we’re seeing good adoption across the different channel mix that we offer our customers.

Clark Wright — D.A. Davidson — Analyst

Appreciate it. Thank you.

Operator

Our next question comes from the line of Richard Baldry with Roth. Please proceed with your question.

Richard Baldry — ROTH MKM — Analyst

Thanks, and congrats again on the quarter. Could you talk about under what acceleration scenario might you have to increase your rate of internal spending? And it’s a broader question about how much automation and leverage you have sort of in your fixed versus variable as the top line is picking up beyond what we’d expected. Thanks.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Rich, first of all, thank you. It’s interesting because if you look at a lot of the companies that are putting results out, obviously, they’ve massively increased their investment into AI. I think the difference is we started doing this seven or eight years ago. So, we don’t see a material step-up needed, but it is interesting, in our budget for this year, we will invest more money into innovation than in any prior year.

So, we are increasing the investment in innovation, but we’re doing it in an environment where our revenue and our gross profit dollars are growing dramatically faster than we’re making those investments. And as I think I’ve said before, it really appears as if the bets we made years ago on putting data and artificial intelligence is native to the application layer were not just where the puck was going, so to speak. They are really where the puck is today. And I don’t see a material step-up as a percentage of revenue, but we are investing heavily, and that’s already in what we’re forecasting for this year.

Richard Baldry — ROTH MKM — Analyst

And for those who don’t sort of live in the agency ad world, can you talk a little about sort of the scale of number of customers that those would represent and sort of contrast that with, obviously, your penetration rate and then maybe think about the budget per customer how far along that curve you think you are with maybe your most mature agency customer?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Just to put it in perspective, the five agency HoldCos we work with spend over $100 billion a year in marketing. So, even with our mature partner, we are just scratching the surface. Now, I think back to Elizabeth’s original question. We are focusing on migrating those clients, those agencies, onto being direct versus indirect.

But I think that we are just scratching the surface. I mean, to put it in perspective, with our largest client in this ecosystem, I don’t think we are 1% of their business. So, I think we have a lot of headroom. I think we have meaningful relationships with these agency HoldCos.

And by the way, they see us as part of their solution set. As Chris has said, they’re winning clients with us. Our entire strategy is to make our clients the hero of their stories. And when you look at the agency HoldCos, we are here to support them and help them do a better job with their enterprise clients, and it really appears to be resonating.

Richard Baldry — ROTH MKM — Analyst

Thanks. Congrats on the momentum.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Thank you, Rich.

Operator

Our next question comes from the line of Ryan MacDonald with Needham. Please proceed with your question.

Ryan MacDonald — Needham and Company — Analyst

Hi. Thanks for taking my questions, and congrats on a great quarter. I wanted to focus on the large seven-figure financial services win and sort of the interesting aspect of that being partner-driven deal and sort of quick time to close. As you think about the pipeline, where it stands today maybe versus six to 12 months ago, what’s the mix of pipeline that’s coming sort of direct versus partner-driven? And are the initiatives that you have to sort of build out relationships with SIs sort of accelerating that mix shift at all? How should we think about that?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

So, thank you, Ryan. Appreciate it. Today, 100% of our sales effectively are direct, I mean, whether we’re selling direct to the agency HoldCo or we’re selling direct to the enterprise. We are in integration with, quite frankly, more than one SI at this point.

We believe that will be a big driver of the business but in the out years. It is not contemplated in our current guidance. We continue to focus on building our sales force, and as Chris has said and I think he should touch on again, the productivity of our sales force just continues to climb as we hire more and more senior people.

Chris Greine — Chief Financial Officer

Yeah. Ryan, I would say, I don’t have the exact numbers, but greater than 90% of the sales pipeline today, which is growing very nicely, is generated directly from our sellers. We are, though, starting to see, as the benefit of working with more and more in the partner ecosystem, starting to see deals enter our sales pipeline that were created by those sellers that then will ultimately take on and help (Inaudible) to close. As David mentioned, what’s really exciting and if you think about what helped deliver the upside in the quarter, you can almost think about it as a third, a third, a third.

Auto and insurance coming back to growth was great, came in faster than we thought. We flowed that through the outlook and the guide, as you can see. But another third was from more rapid agency expansions than we were counting on our guidance. We’ve now flowed some of that through.

And then sales productivity we’re seeing on the enterprise side from our direct sellers. And I think the best evidence point that we continue to talk about in these calls is what is this most recent cohort of sellers, those that are still in their first year with Zeta, and how does their sales productivity compare to the classes before them, before them, before them. So, now going back three-plus years, there’s some pretty good data points there. Those sellers’ time to close in the most recent class we’ve hired is now at four months’ time to close their first deal.

So, 20% better than what the average three years have been. And then as they get more tenure, I would say, they’re more experienced and more deals under their belt, their number of deals they carry at the same time, the average value of the deals go up, their win rates go up, and their pipelines expand. So, we’re seeing really nice sales productivity. It’s an enormous credit to the biggest unit sales leaders and our training and development team.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

And by the way, it might be 20% above the three-year running average. It’s 100% above where we were three years ago. So, we’re really seeing that. And of course, going from Zeta who to Zeta why, bringing the right people in, having made the investments seven to eight years ago into data and AI as native to the application layer, it’s funny because you look at the sort of AI landscape today, there are a lot of organizations talking about it, but there are not a lot of organizations that are utilizing it to drive meaningful revenue growth.

It is a direct contributor in the results that we just put up for the first quarter and the way we are reforecasting our raised guidance for this year.

Ryan MacDonald — Needham and Company — Analyst

Yes, super helpful color there. Maybe as a follow-up, great to see sort of the guidance increase for the full year being sort of fully driven by the core business and the strength there. But I did want to ask about political and expectations there. I think as we are getting closer and closer to election, we’re hearing more conversations about perhaps funding going more toward legal fees from one party than the other, which is forcing sort of the Biden administration to maybe not spend as aggressively, or maybe they don’t need to.

How are those factoring in, if at all, into your expectations for political ad spend as we look into the second half of the year?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

So, let me be totally clear. There will be more money spent on marketing in this election than any election in the history of the United States of America. And that will be, I believe, a statistical fact when people look back on this cycle. What I can tell you is, yes, there is a percentage of revenue for one of the candidates that is currently being utilized for legal fees, but the candidates are raising very large amounts of money, and they’re going to spend it.

As Chris said, our current guidance, I think, does not include an increase in what we believe to be political. And if you look at our historical levels, we feel that we put a good placeholder in for where we think it’s going to be, but I would not expect it to be down from there.

Ryan MacDonald — Needham and Company — Analyst

Thanks again. Congrats on a great quarter.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Jason Kreyer with Craig-Hallum. Please proceed with your question.

Jason Kreyer — Craig-Hallum Capital Group — Analyst

Great. Thank you, guys, and congrats from me as well. Great quarter. David, just wondering if you can maybe frame the importance of AI in your pipeline conversations.

Like it seems like you’ve always won more than your fair share, but maybe now that you’re winning even more than your fair share because of AI, curious if you can kind of parse that out.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Well, first of all, thank you, Jason. I appreciate it. It’s funny. Before I got here today, we’re out on the West Coast, I literally moderated the artificial intelligence panel for the Milken Global Conference from 11:50 to 12:45, and then we put out our results at 1:05, and then I sort of rushed over here to do this with Chris and the team.

I’m telling you, there is not an organization out there today that is not looking at how to solve their AI problem. And one of the panelists was really interesting. He said, you’ve got the Fortune 5,000. They are not going to be able to do this on their own.

They are going to need vendors and partners who bring artificial intelligence to the table for them. And one of the big consensuses of the panel, not sure I said that right, but one of the big consensuses of the panel was if you are not focused on AI right now, they’re going to find partners who are. And I can tell you that from all of our conversations, this is the issue. It’s what people are focused on, and it’s starting with efficiency, which is very logical.

And if you look at how technologies have evolved through the ages, so to speak, they start with efficiency, and then they move to meaningful revenue generation. It just so happens that our AI platform can do both. It can help enterprises to more efficiently run their platforms by better utilizing their existing data, expanding out, building agents internally, so they can build their own virtual data scientist using our agent building program, which, by the way, then generates meaningful revenue increment to us, which once again is why I think we posted the first quarter we did and why we feel so comfortable raising our guidance for the year. But it is, Jason, the conversation that starts every conversation that we have today.

Jason Kreyer — Craig-Hallum Capital Group — Analyst

Thank you. Just one more. I wanted to pivot over to the build-out of this mobile platform. Just maybe if you can give us kind of an idea on the progression there because we’ve seen products like CTV that has kicked in and become a growth accelerant for Zeta.

And so, I’m curious at what point mobile could achieve that critical mass and contribute more to results.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Yes. So, I mean, listen, we believe that the Zeta ID gives us an unfair advantage in the mobile ecosystem because, much like we don’t use a third-party cookie to identify people and build attribution models, we never used Apple’s IDFA. So, when they eliminated it, it sort of created a bit of a Wild West out there. Some organizations like Meta have been able to get enough of a percentage of their user base to opt in to be receiving the tracking pixel that they’re able to build very comprehensive models and go from there.

We’ve been able to identify many multiples as a percentage of what Meta has opting in, in the mobile ecosystem already. So, we feel like we’re in a very good place to expand into that. I believe we’ll have our product into production and ready to roll by mid this year, and we expect to start driving meaningful revenue next year. I will reiterate again, we don’t have mobile as a meaningful component of the increased guidance we’re putting out this year, but it’s upside.

And I think it really is going to kick in for next year. I have publicly said, Jason, and I believe that mobile will be our next $100 million business as we continue to scale CTV, and I think that’ll be next.

Jason Kreyer — Craig-Hallum Capital Group — Analyst

Great. Thank you.

Operator

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

Koji Ikeda — Bank of America Merrill Lynch — Analyst

Yeah. Hey, guys. Thanks for taking the questions here. I wanted to ask about the super scaled customer strength, the net new addition strength there.

And thanks for all the color in the prepared remarks and to a couple of questions that were asked prior. But I did want to focus again on the agency customer strength. So, the question is around, how is Zeta really gaining mind share within the agencies? Does Zeta need like an internal champion within these agencies for each client relationship, so really focused on targeting these relationship owners? Or is the adoption of Zeta within these agencies being more top-down driven?

Chris Greine — Chief Financial Officer

Koji, it’s Chris. I’ll go first on the couple of super scale data points, and I’ll pass it over to David. Yes, as you mentioned, the up 13 record for us, all 13, by the way, scaled up from that 100K to $1 million cohort. So, really good demonstration of the land, expand, extend strategy working and then the benefit of now of having over 90% of our revenue with customers with us beyond a year.

What was also great about those expansions is they were primarily driven by enterprise relationships rather than just agencies. And it came from various industries, ranging from technology to consumer retail, even through travel and hospitality. And as you saw on the ARPU side, use of more than two channels up 30% is also a very strong data point for us. David?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

And Koji, thank you again. What I would tell you as it relates to the agency relationships, you asked, is it top down or bottoms up? The answer is yes, it’s both. We’re coming in, in many cases, at the CEO or global chairman of the holding corporation, and we’re simultaneously working from the ground up. We have a team now that is fully integrated into the five agencies we work with.

Quite frankly, over the last three years, we’ve invested very heavily in that team. The other thing is we’re going where the agencies are, right? So, we had a presence at the Consumer Electronics Show this year. We had a presence at the POSSIBLE Conference, and we’ll have a meaningful presence at Cannes Lion this year. And as we think about the relationships with these agencies, it’s mission-critical that you work both sides.

But more than anything, you have to make them the hero. You have to be able to come in and make sure that the client knows that the agency is the hero, and we are servicing them, and that’s mission-critical to how we make this work long term. So, I will tell you I feel very good about the relationships we have at the absolute top. And as you can imagine, I spend a lot of personal time on that.

And we have an incredible team that’s integrated, and then we have another team that’s farming that’s in there working with them on a day-to-day basis.

Koji Ikeda — Bank of America Merrill Lynch — Analyst

Got it. No, thank you for that. And just a follow-up here. I wanted to ask a question on the guidance.

Appreciate the raise in the revenue and also the raise in the EBITDA. But when I look at the flow-through from revenue to EBITDA, it looks a little bit less on the EBITDA raise versus the revenue raise. So, I just wanted to understand some of the puts and takes there. And then also just on the free cash flow, it looks like that wasn’t raised at all on the guidance.

Just wondering, help us bridge from revenue to EBITDA and then free cash flow. Thank you.

Chris Greine — Chief Financial Officer

Yeah. So, free cash flow, in the prepared remarks, we had a pretty wide range entering the year to begin with at 75 to 85. And one of the comments I made in the prepared remarks was there’s definitely a scenario where we’re at the higher end of that range now after this raise, but it was more a reflection of kind of how wide that range was at the start of the year. The only gating factor there is just the timing with these new agencies that we’ve been signing with in the collections.

There isn’t really anything fundamentally beyond that that would drive the conversion ratio to be lower. In terms of the leverage in the model, I appreciate the point. If you look at the amount that we raised, grew our revenue — full-year revenue year over year in the updated guide in relation to EBITDA’s growth from the prior guide to the current guide, I think it drops at like a 24% EBITDA margin. On just a pure guidance increase basis, you’re right, it drops at around 20%.

I think that’s a reflection of David talked about. You’re going to see us this year — look, we’re running ahead of our plan. We want to make continued investments in marketing. Just last week, we held a regional-based Zeta Live in Dallas.

We can anticipate doing more of those given the success that we saw from that program, so marketing getting more incremental dollars. And then R&D, I mean, the progress we’ve made in just 90 days with the launch of these hundreds of intelligent agents, the progress we’re making on mobile, and the progress we’re making in building out our partnership ecosystem. In fact, just today, we made a very exciting new sales leader hire in the partner network for Zeta. So, putting some more investment in the business, we will continue to get adjusted EBITDA margin expansion.

This is our 13th straight quarter of doing that. We don’t anticipate that changing, so I don’t want that message to be taken away either.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

And Koji, I also want to point out, we are now guiding to the rule of 43% at the end of the first quarter of the year. So, I think if you take our 19% operating margin plus our projected 24% growth rate, we feel like we’re doing a pretty good job of sort of projecting forward as an organization.

Chris Greine — Chief Financial Officer

Thanks, Koji.

Operator

Our next question comes from the line of Zach Cummins with B. Riley. Please proceed with your question.

Zach Cummins — B. Riley Securities — Analyst

Hi. Good afternoon, David and Chris. Congrats on the strong results. I’m not sure if somebody already asked.

I apologize. I had to hop from another call. But can you give us a little more sense of the recovery in the insurance vertical specifically? I mean, we’ve seen many of the lead gen players really see a big recovery in demand in the first half this year. So, just curious what you’re seeing on that side and what’s really being built into your guidance for the rest of the year within that vertical.

Chris Greine — Chief Financial Officer

Thanks, Zach. We anticipated going into 2024 that we would see insurance and automotive, so two distinct industries, both return to growth closer to the second quarter. So, both of them growing, albeit combined not at the rate of Zeta’s total growth but kind of getting to growth faster we were pleasantly surprised by. Also, it wouldn’t surprise us that, over the course of the year, insurance becomes a faster grower than automotive, but we think both are going to grow.

We’ve embedded double-digit growth for those combined industries in our growth outlook. But by virtue of having signed contracts in hand and very late-stage deals in each of those industries in our pipeline gave us the confidence to roll through what was about a third of our first quarter’s beat through the rest of the outlook and feeling still very comfortable with that number.

Zach Cummins — B. Riley Securities — Analyst

Understood. And I apologize if maybe you addressed it in the script, but any sort of update to how you’re thinking about your 2025 targets? Or is that fair to think about that as a future date potentially?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

I’ll point out again, everything we say about 2025, Zach, is at least. So, I do think, at some point, we’ll have to update it as we’re now at a projected $900 million at the middle of the range for this year. But we don’t want to get ahead of ourselves. We’re feeling very good about the business.

We want to continue to execute. We believe we’ve got the right products, the right people in the right place at the right time. And when it’s logically time, we’ll start to give thoughts about 2025.

Chris Greine — Chief Financial Officer

I was getting ready to kick you because I thought you’re going to go somewhere different.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

So, you thought I was going to say $2 billion in 2025? That’s a joke. I was kidding.

Chris Greine — Chief Financial Officer

Thank you, Zach.

Operator

Our next question comes from the line of Ryan MacWilliams with Barclays. Please proceed with your question.

Ryan MacWilliams — Barclays — Analyst

David, that would be great, but I totally get it.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

I was kidding, Ryan.

Ryan MacWilliams — Barclays — Analyst

I don’t want to hold you to that. No worries. So, good to see the improvement in ARPU growth from scaled customers in the quarter. Now that we’re further along into the year, do your larger customers feel better about where they stand compared to where they started the year in terms of their marketing spend just from the macro side, or are they just waiting to kind of see the outcome of the election and interest rates before getting more involved here?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

No. We’re seeing marketer spend, I mean, up. I would say that this is as bullish a marketing environment as I have seen in the last few years, and I’m not seeing people affected by interest rates as it relates to marketing, and I have not seen — and when I say people, I mean organizations. And I’ve not seen organizations worried about the election as it relates to spending.

Now, what will happen as you get into the election cycle is this massive flood of dollars will begin to come in, and you’ll see marketing get more expensive in some of the channels. But quite frankly, we are a big beneficiary of that on our political business. So, I’m not seeing any issues there right now.

Chris Greine — Chief Financial Officer

And even if you look at it, Ryan, from an industry vertical perspective, like I think it was half of our top 10 verticals grew over 30%. So, it really seems to be very healthy out there.

Ryan MacWilliams — Barclays — Analyst

Appreciate it. And a two-part question, maybe one for David, one for Chris. David, you guys have booked liability since IPO with your organic results, but any updates here on your thoughts around M&A and maybe how they could provide additional sell into some of your scaled customers? And then for Chris, just like a quick housekeeping item, any update on how we could think about modeling gross margins for this year? Thanks, guys.

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Ryan, we continue to focus on being a high-quality organic growth company. But at the same time, we’re always looking for organizations we could merge in that have incredible human capital, great technology, great data and/or great people, and we continue to look. Until we find something that we think could be incredibly accretive, we will continue to look and not pull the trigger. But it is a good environment for M&A from the purchase side perspective, which is the side we’re on and we look at a lot.

We just haven’t pulled the trigger because we haven’t seen anything we thought could be accretive with all of the things we really need in an acquisition.

Chris Greine — Chief Financial Officer

And just hitting quickly the second question, Ryan, I think it’s same as what we said back in February. I would assume a similar direct revenue mix profile that we saw exiting 2023, so call it low 70s, and a similar percentage cost of revenue on a GAAP basis that we saw exiting 2023, which was around 40%. We did a little bit better this quarter, about 60 bps, but I think that’s a good operating assumption for the rest year. That’s where our heads are at anyway just given where our large agency HoldCos are in their early ramping process.

Operator

Our next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Unknown speaker — William Blair — Analyst

Hi. This is Chris on for Arjun. I’ll extend my congrats on a great quarter. First question for me, what are some of the main factors behind the success that you’re seeing with enterprise customers, in particular? Is this primarily channel expansion that’s driving the accelerated scaling you’ve seen? Or are there other levers that customers are using to grow their spend as well?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Well, thank you, Chris. I think AI is a major one, and I don’t want to downplay what an important component of why enterprises are choosing Zeta at this point it is. Once again, a lot of organizations have been talking about AI for a number of months. We’ve been building it for now seven or eight years.

And we continue to see enterprises looking for that from an adoption perspective, Chris.

Unknown speaker — William Blair — Analyst

Great. Thank you. And then the second one for me was — so you’ve rolled out a number of new products over the past year. So, how are you seeing these products play out in terms of go-to-market? Is this having a role in some of the success you’ve seen in terms of seller productivity?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Yeah. I mean, listen, it’s always good when there’s another quiver in the arsenal of the salespeople to be able to get out there and sell. And we continue to focus on additional channels and additional use cases. Chris?

Chris Greine — Chief Financial Officer

Yeah. And Chris, I think our customers appreciate in the early sales meetings that we have, we’re not pitching PowerPoints. We’re literally going to them with the data cloud, telling them oftentimes more than they know certainly about their prospects, but even sometimes about their existing customers. So, it’s a very much — very real sale from meeting number one, and it’s highly visualized, which I think also helps sales productivity.

Thanks, Chris.

Operator

Our next question comes from the line of Dan Reagan with Canaccord. Please proceed with your question.

Dan Reagan — Canaccord Genuity — Analyst

This is Dan Reagan on for DJ Hynes. I just wanted to say congrats to another solid quarter of consistent execution. Love to see the guidance raised, too. So, you guys touched on this a little bit, but revenue growth has been pretty materially outpacing sales head count growth for several quarters.

That productivity gain is great to see, but I want to play devil’s advocate with two questions. First, do you know or do you think you could grow faster with more sales capacity? And then secondly, what signals would inform you that it’s time to step up the pace of hiring? Or is it more dependent on the availability of experienced sellers that you’re looking for?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Yeah. It’s interesting. There’s a lot — it’s like a little bit of a duck below the surface. We’ve hired a lot of people.

We’ve just also let go some of the earlier cohorts who are not as productive. I think we’ve gone through the vast majority of that cycle, and you’ll now see head count begin to grow again as it relates to salespeople. But we continue to really win a disproportionate percentage greater than 50% of the RFPs and engagements we get invited to participate in, and I think that will continue.

Chris Greine — Chief Financial Officer

Yeah. We made a nice step-up coming out of the fourth quarter. We had 136, got to 142. I think we’ll be at 150 range in the third quarter.

Sales per activity plays into it. Quality over quantity is big. The gates that we use to evaluate talent, marketing domain expertise, specific vertical expertise, many years of experience. So, it kind of narrows the pool down to a high-quality number of people that we’re going after.

So, really like the sales productivity we’re seeing. I appreciate the point, but right now, we feel like we’ve got the right balance.

Dan Reagan — Canaccord Genuity — Analyst

Awesome. And then many agencies have existing relationships with data and platform providers. And also, this question is also for the HoldCos. What makes Zeta’s approach unique enough to incentivize these agencies to shift significant portions of their budgets over to you? And how is your approach different than what other guys in the space are doing?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Well, truthfully, a lot of people talk about doing what we do, but they can’t really do it. They come in with PowerPoint presentations, and they’re taking a third-party data set, a third-party AI algorithm, different attribute — I’m sorry, different activation methodologies, and building attribution and building targeting is almost impossible at scale in that world. So, yes, obviously, the agency HoldCos have other partners that they are moving meaningful dollars from them to us, but it’s because by putting data and artificial intelligence as native to the application layer, meaning it’s native to the marketing cloud itself, we’re able to better target, better attribute — I’m sorry, better target, better activate, and better build attribution models to prove it. And like Chris has said multiple times, they’re not waking up and saying, let’s move $50 million or $100 million to you.

They’re starting with a test and then expand. Now, what we’ve seen is the testing that we’ve been doing over the last year where we said we went from one to three, now we’ve gone to five holding companies, what’s happened is the two that went from one to three are scaling very, very rapidly because our product — we don’t say that our product is superior. We prove that our product is superior, which is why they start on the test, and then they move meaningful additional budget to us. Thank you very much.

Chris Greine — Chief Financial Officer

Thanks, Dan.

Operator

Our last question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Ari Friedman — Oppenheimer and Company — Analyst

Hey, this is Ari Friedman sitting in for Brian Schwartz. Thanks for taking my question. I wanted to double-click on like the marketing, buying environment. And I was wondering kind of, has there been a reprioritization since last year of — like this time last year of what marketers want to buy in terms of like their marketing stack and marketing solutions and what they’re prioritizing? Or is it kind of the same? And then same with like the scrutiny under budget, is it the same as last year, or is it better?

David Steinberg — Co-Founder, Chairman, and Chief Executive Officer

Yes. So, Ari, first of all, the answer is we’re seeing an upswing in marketing itself. So, you’ve got a rising tide there. Second, we really are seeing marketers want artificial intelligence and data, data as native to the application layer.

So, when we start the conversations, the interesting thing is we go into a lot of presentations where other people have promised them the same thing. One of the things Chris talks about that I think is so important is our test, land, and expand strategy because our entire strategy is other people will tell you they can do this, we will prove it. And we come in, and we prove it again and again. So, as it relates to that, we’re not seeing any sort of shift in strategy as it relates to market purchasing.

We’re seeing agencies and enterprises want the best possible solution with the best technology, the best data to deliver the best results to either their enterprise or their clients. And so far, Zeta is proving that we are the case. As per your second question, I feel like we’re seeing a very robust marketing environment, and it’s one of the reasons we feel so comfortable increasing our guidance for this year. So, I’ve been told to wrap up.

I appreciate everybody attending. What I can tell you is I could not be more proud of the Zeta team. The team is executing, and the decisions that we have made over the last seven or eight years as it related to investment into artificial intelligence, into data, into our marketing platform, into bringing in some of the world’s greatest people to Zeta is really paying off, and we expect it to continue to pay off. We are incredibly bullish about our business, about our market, and about where we sit in it.

As I’ve said before, we don’t believe we’re just where the puck is going. We believe where the puck is today and where it’s going is perfectly positioned for Zeta. I hope you have a wonderful day, and I appreciate your attending. Bye.

Operator

(Operator signoff)

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