Zeta Global Holdings Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated financial statements; amounts below are in millions of dollars unless noted.
Business context and performance
Zeta provides data-driven marketing technology and automation through its Zeta Marketing Platform. It operates as one reportable segment. Q3 revenue growth reflected $35.1 million from new customers and $1.6 million from existing customers; for the first nine months, the respective contributions were $67.1 million and $35.5 million.
- Scaled customers rose 13% to 440 year over year; super-scaled customers increased to 124 from 106. Q3 scaled-customer ARPU grew 10% to $418,373, and super-scaled-customer ARPU grew 8% to $1.2 million.
- Direct platform revenue was 70% of Q3 revenue and 72% for the nine-month period, down from 74% and 78% in the comparable 2022 periods; integrated platform revenue made up the balance.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $189.0 | $152.3 | $518.4 | $415.8 |
| Revenue growth | 24.1% | — | 24.7% | — |
| Operating loss | $(37.2) | $(66.2) | $(135.8) | $(211.3) |
| Net loss | $(43.1) | $(69.4) | $(152.2) | $(227.5) |
| Basic and diluted loss per share | $(0.27) | $(0.49) | $(0.99) | $(1.66) |
| Adjusted EBITDA (non-GAAP) | $33.7 | $22.4 | $84.6 | $59.8 |
| Adjusted EBITDA margin (non-GAAP) | 17.9% | 14.7% | 16.3% | 14.4% |
Gross margin, calculated as revenue less cost of revenue excluding depreciation and amortization, was approximately 61.1% in Q3 2023 versus 62.2% in Q3 2022, and 63.4% for the first nine months versus 64.0%. GAAP operating margins were approximately negative 19.7% and negative 43.5% for the respective Q3 periods, and negative 26.2% and negative 50.8% for the nine-month periods.
- Q3 cost of revenue increased 27.7%, faster than revenue, primarily due to higher media costs. Nine-month cost of revenue increased 27.0%.
- GAAP net loss narrowed, while stock-based compensation remained substantial: $57.7 million in Q3 and $179.7 million for the first nine months of 2023. The non-GAAP Adjusted EBITDA measure excludes stock-based compensation and other specified items.
- Interest expense rose 42.0% in Q3 and 62.7% year to date, largely reflecting higher interest rates. Nine-month restructuring expense was $2.8 million; there was none in the comparable 2022 period.
Cash, liquidity and debt
- Cash and cash equivalents were $120.8 million at September 30, 2023, versus $121.1 million at December 31, 2022. Working capital was $107.0 million.
- For the first nine months, operating cash flow was $63.6 million, compared with $55.4 million in 2022. Investing cash use was $45.5 million, including $14.9 million of capital expenditures, $12.3 million of software development costs, and $18.2 million for acquisitions and other investments. Financing cash use was $18.4 million; cash declined $0.3 million overall.
- Long-term borrowings were $185.0 million principal, or $184.0 million net of deferred financing costs. The $247.5 million senior secured facility had $45.6 million undrawn, subject to a $1.2 million letter of credit. The variable-rate debt bears interest at SOFR plus 2.125%–2.625%, matures February 3, 2026, and had a 7.2% effective rate for the nine months.
- The company reported compliance with financial covenants at quarter-end. A hypothetical one-percentage-point interest-rate increase would increase annual interest expense by approximately $1.9 million.
Changes, outlook, risks and unusual items
- Revenue grew strongly, but cost of revenue grew faster and gross margin declined modestly. Lower stock-based compensation helped reduce reported operating expenses and net loss year over year.
- The company said cash, expected operating cash flow and available credit should fund working-capital needs for at least the next 12 months and thereafter; it cautioned that weaker-than-expected operating performance could adversely affect liquidity. No specific full-year revenue or earnings guidance is provided in the filing text.
- Management expects certain operating expenses to rise in absolute dollars, including general and administrative and selling and marketing expenses; it expects general and administrative expense to decline as a percentage of revenue over the long term. Interest expense is exposed to variable rates.
- Acquisition-related liabilities were $30.3 million, including $6.3 million expected to be paid within 12 months for the eBay CRM matter. Fair-value changes in acquisition earn-outs contributed to other expense. The company acquired WhatCounts in March 2023 for total consideration of $16.0 million, including estimated earn-outs.
- The company and members of senior management received SEC subpoenas in an investigation concerning Kubient, Inc., as well as subpoenas from the U.S. Attorney’s Office for the Southern District of New York in a parallel investigation. Zeta says its business with Kubient was quantitatively insignificant, ended in 2020, and that it is cooperating.
- Other risks include dependence on online data collection and third-party infrastructure, privacy and security, email delivery standards, customer retention and growth, and litigation. Management said ordinary-course proceedings were not expected to have a material effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether customer growth and retention can sustain revenue growth, particularly as revenue mix shifts toward integrated platform services.
- How gross margins, operating losses and cash conversion trend, and how much Adjusted EBITDA performance depends on stock-based-compensation add-backs.
- Variable-rate debt costs, covenant headroom, scheduled repayments and the availability of revolver capacity.
- Collection of receivables, including the customer representing more than 10% of receivables at quarter-end, and the valuation and payment timing of acquisition earn-outs.
- Developments in the Kubient investigations and any resulting legal, financial or reputational consequences.