Zeta Global Holdings Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated financial statements; amounts below are in U.S. dollars and millions unless noted.
Business context
Zeta operates a marketing technology platform combining proprietary data, artificial intelligence and software for customer acquisition, retention and engagement across digital channels. The company completed its IPO on June 14, 2021, raising approximately $132.7 million in net proceeds before other offering expenses. The filing reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $115.1 | $95.3 | $323.5 | $253.7 |
| Operating income/(loss) | $(66.9) | $0.6 | $(187.3) | $(14.7) |
| Net loss | $(69.1) | $(13.0) | $(188.4) | $(44.4) |
| Basic and diluted loss per share | $(0.53) | $(0.51) | $(2.60) | $(1.70) |
| Adjusted EBITDA, non-GAAP | $16.0 | $12.3 | $40.4 | $21.8 |
| Adjusted EBITDA margin, non-GAAP | 13.9% | 12.9% | 12.5% | 8.6% |
Q3 revenue increased 20.8% year over year, reflecting $13.6 million from new customers and $6.2 million from existing customers. Nine-month revenue grew 27.5%, with $38.9 million from new customers and $30.8 million from existing customers. Direct platform revenue was 75% of nine-month revenue, versus 71% in 2020.
Q3 cost of revenue, excluding depreciation and amortization, was $44.5 million, or 38.7% of revenue, compared with $40.7 million, or 42.7%, a year earlier. The reported operating loss widened substantially as operating expenses rose, especially stock-based compensation. Stock-based compensation was $69.3 million in Q3 and $188.6 million for the first nine months, compared with $0.03 million and $0.08 million, respectively, in 2020. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, stock compensation.
For the first nine months, operating cash flow was $23.4 million, investing cash flow was $(22.5) million and financing cash flow was $64.7 million. Cash increased by $65.5 million to $116.2 million. Investing included $13.4 million in website and software development, $6.9 million in capital expenditures and $2.2 million for acquisitions.
Balance sheet and financing
- At September 30, cash and cash equivalents were $116.2 million; working capital was $95.4 million.
- Long-term borrowings were $183.5 million net of deferred financing costs; gross borrowings were $185.0 million. The senior secured facility totals $222.5 million, matures February 2026 and carries variable interest at LIBOR plus 2.125% to 2.625%. The company reported covenant compliance.
- The company repaid and terminated prior credit facilities through the February 2021 refinancing. The $10 million PPP loan was forgiven in June 2021, producing a $10 million gain on debt extinguishment in the nine-month results.
- Cash proceeds from the IPO and new credit facility were partly offset by debt repayments and $64.5 million of stock repurchases connected with the IPO and related withholding obligations.
Material changes, outlook and risks
- Operating expenses rose sharply year over year, led by stock-based compensation and higher employee costs. Management attributed Q3 expense increases in general and administrative, selling and marketing, and research and development largely to these items.
- Management said scaled customers declined to 347 from 354 year over year, as some travel, hospitality and financial-services customers reduced or paused spending during the pandemic. Higher average revenue per scaled customer and growth in new customers supported revenue. Management expects affected industries to recover and expects its revised “hunter/farmer” sales model to support new business and customer expansion.
- Management believes cash, operating cash generation and available credit should fund working capital needs for at least 12 months, but cautioned that weaker-than-expected performance could adversely affect liquidity. It expects continued investment in sales, marketing and research and development; no specific forward revenue or earnings guidance is provided in the filing text.
- Variable-rate debt creates interest-rate exposure: a hypothetical one-percentage-point rate change would alter annual interest expense by approximately $1.9 million. Management did not consider foreign-currency or inflation exposure material at the reporting date.
- Three previously identified material weaknesses in internal control over financial reporting—segregation of duties, risk assessment, and documentation/accounting analysis—were still being remediated. Management aimed to complete its remediation plan during 2021, but said additional time may be needed to establish effectiveness. Disclosure controls were deemed effective as of September 30.
- An eBay CRM acquisition-liability dispute resulted in a $9.786 million payment on October 14, 2021 against an accrued amount of $9.137 million. The remaining $8 million liability was still contested; a $6.028 million letter of credit was in the process of cancellation.
- On October 1, 2021, the company acquired a digital survey platform for $17.9 million cash and shares valued at $23 million, with a possible additional $22 million earn-out and $1.75 million indemnity holdback. The purchase-price allocation and financial effect were not yet available.
- Other key risks include customer and data dependence, changes in privacy rules or browser/mobile policies, email-delivery standards, cybersecurity and third-party infrastructure. The filing reported no material changes to prospectus risk factors and no litigation then expected to have a material adverse effect.
Investor verification priorities
- Assess the sustainability of revenue growth and customer expansion, including the decline in scaled-customer count and pandemic-related customer mix effects.
- Reconcile GAAP losses with adjusted EBITDA and evaluate the scale, timing and potential dilution from stock-based compensation and unvested awards.
- Review cash conversion, investment requirements, gross debt, variable interest exposure, covenant headroom and availability under the credit facility.
- Track remediation of the material weaknesses and whether management later concludes internal controls are effective.
- Verify the ultimate resolution and cash impact of the eBay CRM dispute, and the completed accounting and performance of the October survey-platform acquisition.
- Consider the governance implications of the dual-class structure: Class B shares carry ten votes per share, versus one vote per Class A share.