Zeta Global Holdings Corp. quarterly report, Q2 FY2023

Zeta Global Holdings Corp. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Unaudited; financial amounts below are in millions of dollars unless stated otherwise. Zeta operates a marketing technology platform using data, AI and software to support customer acquisition, retention and engagement across digital channels.

Key financial results

MetricQ2 2023Q2 2022Six months 2023Six months 2022
Revenue$171.8$137.3$329.4$263.6
Revenue growth25.1%—25.0%—
Operating loss$(46.2)$(77.1)$(98.7)$(145.2)
Net loss$(52.2)$(86.0)$(109.1)$(158.0)
Basic and diluted loss per share$(0.34)$(0.63)$(0.72)$(1.17)
Adjusted EBITDA (non-GAAP)$26.8$18.6$50.9$37.3
Adjusted EBITDA margin (non-GAAP)15.6%13.5%15.4%14.2%

Margins: Calculated gross margin, using revenue less cost of revenues excluding depreciation and amortization, was approximately 63.9% in Q2 2023 versus 63.4% in Q2 2022. Operating-loss margin improved to approximately 26.9% from 56.2%; net-loss margin improved to 30.4% from 62.6%. These remain loss margins, notwithstanding the improvement.

  • Q2 revenue growth included $30.4 million from new customers and $4.1 million from existing customers. For the first half, the respective contributions were $41.2 million and $24.6 million.
  • Scaled customers rose 14% to 425 year over year; 118 were super-scaled customers, compared with 100. Q2 scaled-customer ARPU increased 10% to $391,740.
  • Direct-platform revenue represented 75% of Q2 revenue, down from 81%; integrated-platform revenue rose to 25% from 19%.
  • First-half operating cash flow was $40.7 million, versus $35.9 million. Investing activities used $36.1 million, versus $29.3 million; financing activities used $8.8 million, versus providing $0.2 million. Cash declined $4.0 million to $117.1 million.
  • At June 30, cash and cash equivalents were $117.1 million; working capital was $99.3 million. Gross borrowings were $185.0 million ($183.9 million net of deferred financing costs), implying approximately $67.9 million of net debt against reported cash.
  • The $247.5 million secured credit facility had $45.6 million undrawn; an additional $1.2 million letter of credit was outstanding against the facility. Debt bears variable interest at SOFR plus 2.125%–2.625%; its effective rate was 7.1% for the first half. Maturity is February 3, 2026.

Changes versus the comparable period

Revenue grew 25.1% in Q2 and 25.0% in the first half. GAAP net losses narrowed, while adjusted EBITDA and its margin increased. Lower stock-based compensation was a major contributor to reduced general and administrative and selling and marketing expenses; total stock-based compensation fell to $57.6 million in Q2 from $82.3 million, and to $122.1 million in the first half from $156.1 million. Interest expense increased 67.9% in Q2 and 77.0% for the first half, primarily reflecting higher interest rates. First-half investing outflows rose, including $18.2 million for acquisitions and other investments compared with $9.2 million in 2022.

Outlook, risks and unusual items

  • The filing gives no numerical revenue, earnings or cash-flow guidance. Management expects cash, operating cash generation and available facility borrowings to cover working-capital needs for at least 12 months and thereafter for the foreseeable future, while noting weaker-than-expected performance could adversely affect liquidity.
  • Management expects G&A and selling and marketing expense to increase in absolute dollars over time, while G&A is expected to decline as a share of revenue over the long term. It expects continued R&D investment. These are expectations, not committed guidance.
  • Q2 included $2.8 million of restructuring expense related to employee termination costs. The WhatCounts asset acquisition closed March 1, 2023 for total consideration of approximately $16.0 million, including estimated earn-outs.
  • Acquisition-related liabilities totaled $34.7 million, including an $8.0 million liability connected to contested eBay CRM acquisition litigation. The ultimate resolution could be higher or lower than the accrued amount. Management said other ordinary-course proceedings were not expected to have a material effect.
  • Zeta and senior executives received SEC subpoenas in an investigation into Kubient, Inc., as did the U.S. Attorney’s Office for the Southern District of New York in a parallel investigation. The company said its business with Kubient was quantitatively insignificant, ended in 2020, and that it is cooperating.
  • Key disclosed risks include customer retention and growth, data collection and privacy/regulatory changes, email-delivery standards, cybersecurity, and dependence on third-party infrastructure. Variable-rate debt creates interest-rate exposure: a one-percentage-point rate change would change annual interest expense by approximately $1.9 million. The company reported covenant compliance at June 30, 2023.
  • The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. Its share-repurchase and executive tax-withholding program authorized up to $50 million through December 31, 2024; $32.4 million remained available at quarter-end.

Important facts for investors to verify

  • Whether customer growth, scaled-customer ARPU and revenue gains—especially the contribution from new customers—continue, and how the shift toward integrated-platform revenue affects margins.
  • Cash conversion and receivables: accounts receivable increased to $122.0 million from $106.3 million, while first-half operating cash flow benefited from noncash stock compensation and higher accounts payable.
  • The sustainability of adjusted EBITDA improvement, including the substantial stock-based compensation add-back, and progress toward GAAP profitability.
  • Variable-rate debt costs, available revolver capacity, covenant headroom and the company’s ability to refinance or repay borrowings due in 2026.
  • Outcomes and potential cash effects of the contested eBay CRM liability, acquisition earn-outs, and the Kubient investigations.