Zeta Global Holdings Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; comparison is with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Zeta operates a marketing technology platform using proprietary data, AI and software to help enterprise customers acquire, retain and grow customer relationships across digital channels. It reports as one operating segment. During the quarter, scaled customers rose 12% year over year to 389, and quarterly average revenue per scaled customer increased 19% to $381,734.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $152.3 | $115.1 | $415.8 | $323.5 |
| Operating loss | $(66.2) | $(66.9) | $(211.3) | $(187.3) |
| Net loss | $(69.4) | $(69.1) | $(227.5) | $(188.4) |
| Net loss per share | $(0.49) | $(0.53) | $(1.66) | $(2.60) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $55.4 | $23.4 |
| Adjusted EBITDA and margin | $22.4; 14.7% | $16.0; 13.9% | $59.8; 14.4% | $40.4; 12.5% |
- Q3 revenue increased 32.2%; management attributed $17.9 million of the increase to existing customers and $19.4 million to new customers. Nine-month revenue grew 28.5%.
- Q3 cost of revenue, excluding depreciation and amortization, was 37.8% of revenue, implying a 62.2% gross margin on that basis, compared with 38.7% and 61.3%, respectively, in Q3 2021.
- Q3 operating loss narrowed modestly, while net loss was roughly flat. Selling and marketing expense increased 27.2% in Q3 and 36.0% year to date; management cited employee, stock-compensation and marketing costs.
- Stock-based compensation was $75.2 million in Q3 and $231.3 million for the nine months, materially affecting GAAP expenses. Adjusted EBITDA is a company-defined non-GAAP measure and excludes this and other items.
- Nine-month cash from operations was $55.4 million; investing used $39.2 million and financing used $5.1 million. Cash increased $10.9 million to $114.8 million.
Financial position and material changes
- At September 30, 2022, cash and cash equivalents were $114.8 million, current assets $215.7 million, current liabilities $123.5 million, and working capital $92.2 million. Accumulated deficit was $719.3 million.
- Gross borrowings were $185.0 million, with a net carrying value of $183.9 million. The senior secured facility matures February 2026, has variable-rate pricing, and had $31.9 million undrawn; a $1.2 million letter of credit was also outstanding. The company reported compliance with financial covenants.
- ArcaMax was acquired in March 2022 for total estimated consideration of $26.9 million, including cash, shares and contingent consideration. Goodwill increased to $133.0 million, including $18.5 million attributed to ArcaMax.
- Acquisition-related liabilities rose to $39.3 million. The company recorded $12.2 million of fair-value increases in contingent acquisition liabilities during the first nine months, contributing to higher other expense.
- The board authorized up to $50 million for share repurchases and executive tax-withholding transactions through December 31, 2024. The company repurchased 569,953 shares for $4.3 million in Q3; approximately $45.7 million remained available at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said cash, expected operating cash flow and available facility borrowings should meet working-capital needs for at least 12 months, but cautioned that weaker-than-expected operating performance could impair liquidity.
- Management expects continued investment in selling and marketing and research and development; it also expects general and administrative expense to increase in absolute dollars. The company’s preliminary estimate for adopting lease accounting was $12–$14 million of right-of-use assets and liabilities.
- Variable-rate debt creates exposure to rising interest rates: a one-percentage-point rate change would change annual interest expense by approximately $1.9 million. The filing also identifies inflation, data collection and privacy regulation, cybersecurity, third-party infrastructure, customer retention and operating-result variability as risks.
- An $8.0 million liability related to a contested eBay CRM acquisition matter remained accrued. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Approximately $396.4 million of unrecognized stock-based compensation remained, expected to be recognized over a weighted-average 1.11 years, subject to forfeitures. Outstanding unvested awards may affect future expense and dilution.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and customer expansion continue, and whether improved adjusted EBITDA margin converts into durable GAAP profitability.
- How much of operating cash flow reflects sustainable operations versus noncash add-backs and working-capital movements.
- The scale, timing and potential dilution of stock-based compensation and outstanding equity awards.
- Interest-rate sensitivity, covenant headroom and access to undrawn credit; verify the stated availability and facility terms.
- Final acquisition purchase-price allocations, earn-out assumptions and resolution of the contested eBay CRM liability.