ZETA (2025 - Q2)

Greetings, and welcome to the Zeta Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Pfau, Senior Vice President of Investor Relations. Thank you. You may begin. Matt Pfa

Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's Second Quarter 2025 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 our other filings with the SEC. With that, I will now turn the call over to David.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. We delivered another quarter of industry-leading growth, fueled by demand for our AI-powered marketing platform. In the second quarter, revenue was $308 million, up 35% year- over-year, and adjusted EBITDA grew by 52% to $59 million, both above our guidance. Zeta's unified platform with AI and proprietary data at the core continues to gain share as marketers look to automate complex workflows and drive measurable ROI at scale. Our first half results and strong sales pipeline provide us with the confidence and visibility to increase the midpoint of our full year revenue guidance by $21 million, which is $10 million more than our second quarter outperformance. A core differentiator driving our market share gains is our relentless focus on AI innovation. This quarter, we launched Zeta Answers, our first prescriptive AI framework, which transforms raw data into automated outcome-driven actions in real time, producing a superior return on investment. Unlike conventional analytics that stop at insights, Zeta Answers closes the loop by delivering immediate next best actions, enabling marketers to execute with precision at scale. Let me provide a couple of examples of how marketers are using Zeta Answers today. One of the largest state governments in the United States used Zeta to target job seekers to relocate to their state. Using our circles of influence capability, they engage not only job seekers, but also their close networks of friends, family and colleagues, driving a 30% higher engagement among audiences whose close contacts were also included. This example also aligns nicely with our new initiative to do more in the public sector. Second, a Fortune 100 technology company used our Leading Indicators module to identify intent signals and proactively tailor its marketing, resulting in a 10% improvement in engagement. Highlighting our ongoing investment in AI innovation, we recently appointed Nate Yohannes as President of the Zeta Data & AI Lab and Global Head of Research and Development. Nate is a proven leader at the intersection of artificial intelligence, product innovation and public policy with more than 15 years of experience in senior roles at Meta, Microsoft and the White House. A key driver of our second quarter growth was the sustainable momentum in our agency business. Our AI-powered platform is resonating with both holding companies and independent agencies. Since our last earnings call, we continued to expand with our large holding company clients, unlocking new capabilities, broadening our scope and making Zeta even more important to their success. Independent agencies also continued to be a strong growth driver, adopting our platform much like an enterprise client. Since our last earnings call, we platformed three additional independent agencies. Our momentum with independent agencies is building, and the second half pipeline is robust, given that there are hundreds of additional independent agencies that we can serve. A core long-term growth driver is our OneZeta initiative, which aims to accelerate multiuse case adoption across acquisition, growth and retention. We have found that clients utilizing us for all three use cases start a flywheel that leads to substantially better return on investment, a higher Net Promoter Score and a stickier customer that broadens their use of the platform over time. Since our last earnings call, we have had several significant OneZeta wins. Let me provide you with a couple of examples. A national discount furniture chain already using our growth module added both retention and acquisition under OneZeta, consolidating life cycle and acquisition marketing on a single platform and unifying data, decisioning and activation. Second, a leading hospitality brand after demonstrating success with our growth use case expanded to our retention use case through e-mail and is now evaluating mobile and CDP integrations, showing how OneZeta deepens return on investment and fuels ongoing expansion. Our growing OneZeta pipeline shows that broadening from one to multiple use case deployments will be a significant driver of growth in the Zeta 2028 plan. And I could not be happier with how quickly the team has hit the ground running, which has given us confidence to accelerate our investment in sales head count behind this initiative. As we head into the back half of 2025, our AI-driven momentum across the Zeta Answers release, new ZMP rollouts, agency expansions and OneZeta wins gives us conviction that our business is poised to capture even more market share going forward. Before I hand it off to Chris, I'm thrilled to announce that Zeta Live returns to New York City for our fifth annual conference on October 9. This year's theme is Achieve the Impossible. To headline the conference, we have chosen two icons who embody our theme better than anyone: seven times Super Bowl champion, quarterback and entrepreneur, Tom Brady; and 23-time Grand Slam champion and entrepreneur, Serena Williams. Together, they are GOAT squared, both changing the game and raising the bar for generations to come. In that spirit, Zeta Live will be a 1-day invite-only event this year with no live stream and only on-demand video available after the event. Throughout the conference, we will have three stages of thought leadership sessions by today's leading CEOs, CMOs, athletes, global thought leaders, brand marketers and advertisers. This year, because of demand, we will have a dedicated stage for Zeta's products and upcoming launches. Registration is already outpacing last year's record attendance. The day before, on October 8, we will host our second Investor Day, sharing our long-term road map, R&D pipeline and the expanded leadership team driving Zeta's growth. In closing, I couldn't be prouder of team Zeta for delivering 35% revenue growth and expanding margins at scale. As always, I would like to sincerely thank our customers, our partners, team Zeta and all of 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?

Thank you, David, and good afternoon, everyone. On our fourth quarter earnings call, we outlined an ambitious plan to surpass $2.1 billion in revenue by 2028 and expand our free cash flow margin by 700 basis points over the next 4 years. Our first half results put us firmly on track versus those goals. Compared to our initial guidance, excluding LiveIntent and political, first half revenue growth of 27% came in 600 basis points above expectations, and free cash flow conversion of 59% is 800 points ahead of our previous full year target. These first half results give us confidence to meaningfully raise our full year revenue guidance and significantly increase our free cash flow expectations. We also made great progress on our commitment to shareholders to reduce normal course equity dilution. And the changes we implemented earlier this year are already having a significant impact with ending second quarter share count flat with the first quarter. With that, let's dive into the details of the quarter. In Q2, we delivered revenue of $308 million, up 35% year-over-year or 27% when excluding the contribution from LiveIntent and political candidate revenue in the year ago period. Total revenue was $11 million or 4% better than the midpoint of our guidance. For context, when we provide quarterly revenue guidance, we typically try to leave ourselves 2 to 5 points of cushion relative to the midpoint. Total scaled customer count grew to 567, up 21% year-over-year and an addition of 19 customers sequentially. We had success in adding customers across an array of verticals with technology and media, consumer and retail, and advertising and marketing being the largest contributor. We had 168 super-scaled customers at the end of the second quarter, an increase of 17% year-over-year and 9% quarter-to-quarter. Scaled customer quarterly ARPU of $532,000 increased 11% year-over-year and super-scaled customer quarterly ARPU of $1.6 million increased 19% year-over-year. The higher ARPU was driven by increased agency expansion and channel and use case adoption. We saw the highest year-over-year growth in the number of customers leveraging 4 or more channels and significant growth in the number of customers using 2 or more use cases. On the agency front, the average number of scaled brands per large agency holding company increased 40% year-over-year in 2Q, a strong indicator of our sustained momentum within the agency ecosystem. This broader platform adoption points to the long runway ahead of us as evidenced by less than 20% of scaled customers using more than one use case, less than 20% using 4 or more channels and very early brand penetration with agencies. From an industry perspective, on a trailing 12-month basis, 6 of our top 10 verticals grew faster than 20% year-over-year. And like the first quarter, some of our fastest-growing verticals, those like consumer retail, travel and hospitality and technology and media, to name a few, continue to be with customers who are the most ROI-centric. We ended the quarter with 179 quota carriers, up 18% year-over-year and 6 heads sequentially, supported by an expanding sales pipeline. Our direct mix in the second quarter was 75%, up from 73% in the first quarter of 2025 and higher than 67% a year ago, resulting in direct revenue growth of 51% year-over-year. Higher usage of e-mail, agency direct-to-channel adoption and LiveIntent were the contributors to the increase in direct mix. On the back of higher direct mix, our GAAP cost of revenue in the quarter was 37.9%, a 120 basis point improvement sequentially and 200 basis points improvement from the second quarter of 2024. In the second quarter, we generated $58.8 million of adjusted EBITDA at a margin of 19.1%, 210 basis points higher year-over-year and $3.9 million better than the midpoint of our guidance. Lower cost of sales as a percentage of revenue and continued efficiency gains in our sales organization were the main drivers of margin improvement. This was our 18th straight quarter of expanding adjusted EBITDA margins year-over-year. Our GAAP net loss for the second quarter was $12.8 million, an improvement from a loss of $28.1 million in the second quarter of 2024. Second quarter net cash provided by operating activities was $42 million, up 35% year-over-year with free cash flow of $33.6 million, up 69% year-over-year, and representing a margin of 11%. This translated to a free cash flow conversion of 57%, a significant improvement from 51% in the second quarter of 2024. A key driver of our improving free cash flow conversion is disciplined capital expenditure spending, which was $7.5 million lower in the first half of 2025 versus 2024. We continue to have a working capital headwind from our growth with large agency holdcos but we expect it to lessen over time. To that end, if working capital was neutral, our free cash flow conversion would have been over 80% in the second quarter. We also repurchased 2.7 million shares for $32 million, accounting for 96% of our free cash flow generated in the quarter. Year-to- date, as of July 25, we have repurchased $69 million of our shares. We've utilized $85 million of our $100 million share repurchase authorization that was approved in November. And our Board just approved an additional $200 million 2-year share repurchase authorization. Now let's turn to our increased third quarter and 2025 outlook. Before getting to the numbers, let me highlight a few factors we considered when updating our outlook. First, since our last earnings call, customer behavior has remained consistent. Brands continue to invest in growth, and we are winning market share. Second, given our first half performance and strong pipeline, we have increased visibility and confidence in the back half of the year. Third, team Zeta continues to execute at a high level, and we're seeing early traction with our key long-term growth drivers, including AI consumption-based usage, agency expansion and OneZeta. And fourth, our increased focus on free cash flow has resulted in first half cash conversion coming in meaningfully ahead of expectations. With those factors in mind, we now expect 2025 revenue of $1.263 billion at the midpoint, an increase of $21 million versus the midpoint of our prior guidance. This represents reported growth of 26% and growth of 24% when adjusting for LiveIntent and political candidate revenue in the year-ago comps. For the third quarter, we now expect revenue of $328 million at the midpoint, $5 million higher than our previous guidance, and representing growth of 22%, both on a reported basis and when adjusting for LiveIntent and political candidate revenue in the year- ago comps. For adjusted EBITDA, we're increasing the midpoint of our 2025 guidance to $264.6 million, up $6 million from our prior guidance, and representing a year-over-year increase of 37% at a margin of 21%. The $6 million full year increase to adjusted EBITDA guidance drops at a margin rate of 29%. For the third quarter of 2025, we now expect adjusted EBITDA of $70.7 million at the midpoint, up from our previous guidance expectations of $69.7 million, and representing growth of 32% and a margin of 21.5%. We are significantly increasing the midpoint of our 2025 free cash flow guidance to $142 million, up $10.5 million from the midpoint of our previous guidance, and representing year-over-year growth of 54%. Our free cash flow guidance increase is meaningfully ahead of our adjusted EBITDA increase, driving our expected free cash flow conversion to improve to 54%, up from our previous guidance of 51% and 48% in 2024. This puts us on a great trajectory to achieve our 2028 target of 65% conversion. As mentioned upfront, we are also making solid progress on reducing dilution. In the second quarter, we had net zero dilution relative to the first quarter, driven by changes to our equity compensation plan as well as our aggressive share buyback during the quarter. As a result, we remain on track to achieve both our 4% to 6% normal course dilution target in 2025 and our $190 million equity compensation expense target. Lastly, we remain confident in our Zeta 2028 plan and are reaffirming our long-term targets, which project over $2.1 billion in annual revenue, at least 25% adjusted EBITDA margin, and 16% plus free cash flow margin in 2028. Now let me hand the call back over to the operator for David and myself to take your questions. Operator?

[Operator Instructions] The first question is from Scott Berg from Needham & Company.

David and Chris, really nice results here in the quarter. I guess several questions. David, you released a new AI module in the quarter. There's a lot of excitement, obviously, around technology and whatnot. But what are you seeing around interest level from customers and agencies. It sounds like you got out of the gate well with the product. But is the awareness where it needs to be with those customers and partners here in the short term to really kind of supercharge the results over the next couple of quarters? Or do you think it's really more of a fiscal '26 event than maybe a near-term '25 opportunity?

Well, first of all, thank you, Scott. We're obviously very proud of the quarter and feel like we did a pretty good job as an organization. I think a lot of what you're seeing when you see the financials at these rates, that's the output. The input is clients buying more of our products and getting more clients, right, and being efficient while running the business, which I think we did well. Our AI suite of products continues to be the lead and tip of the spear in driving additional growth to customers we're currently working with and new customers. So I think the awareness is good. I think we can continue to do better. And I think you're going to see all of this showcased at Zeta Live. One of the big differences, Scott, in Zeta Live this year is we're going to have a dedicated Zeta stage. We were able to get an extra floor in the building that we're operating in. And quite frankly, it was something that I had always shied away from because I wanted to use Zeta Live as thought leadership and really brand build, but what started to happen is our clients are so excited about our new products, they asked us if we could do our own stage to really just highlight a full Zeta track. And I think you're going to see a number of meaningful new releases and you're going to see a bunch of major upgrades around AI. So I think to answer to your question, I think the awareness is good and we're seeing meaningful uptake, but we can always do better. And I think that's what we're focused on.

Excellent. Looking forward to my first Zeta Live. And then from a follow-up question, I wanted to just understand linearity in the quarter. Liberation Day, we saw caused some unfavorable, I don't know, timing results from some other software vendors. Did you see anything in the quarter that maybe made the quarter back end loaded as something was caught up in April? Or was everything pretty well in line with your expectations pre quarter?

Scott, I'll jump in. Good to be speaking with you. As we said at the earnings call in May, our April was every bit as strong as our March, and we saw consistent growth throughout the second quarter of April, May and June. And just kind of some evidence points of it that we spoke about in the prepared remarks, the same verticals that were our fastest growing in the first quarter continue to be our fastest growing in the second, and that was 6 out of 10 growing over 20%. Our fastest-growing cohorts of the company when you look at kind of the usage of the business where those customers using 4 or more channels. Obviously, channel expansion is a key part of our ARPU growth model. Our fastest-growing cohort, kind of a good reflection of the progress and traction we're getting under the OneZeta program where those customers using more than one use case, which is great. And then lastly, as David has talked about our progress with the agencies, we had 40% growth in the large agency holdcos in terms of the number of brands on average that we're working with. So nicely broad-based and very consistent across the quarter.

And Scott, I would just add to it. We have found through the years that turbulence in the marketplace drives major adoption from our clients because unlike our competitors, our platform is so focused on return on investment and is so far superior to our competitors in return on investment, when there are lots of different moving parts in the economy, we have found that our growth rate has accelerated as I think you saw in the second quarter.

Understood. A really nice quarter.

Thank you, Scott.

The next question is from DJ Hynes from Canaccord Genuity.

This is Luke on for DJ. So Chris, we recently listened to a podcast that you were on, which was great, by the way. One of the things you said about Zeta and your role is that it's all about turning the right dials at the right time. But -- so I guess I'm curious, as you look at all the KPIs that you can control today, what dials are you turning and which are you dialing back?

You and my mom and my dad, thank you for that.

I thought you were very good.

I appreciate that. Luke, thanks for the question. Look, the dials that we have most under our control really are in the cost of revenue and in the expense line. And what the sellers have been driving on the top line is really a great byproduct of converting on the pipeline. So I'll give you a few data points on the sales pipeline conversion, which speaks to sales productivity and what we're doing there. And then I'll share with you what drove the very strong margin improvement across the board. On the sales productivity front, as you know, we track our sellers in the class or in, if you will, the year in which they join Zeta. We have data going back to 2021 for these, so we can reliably look at the metrics and get a sense for efficacy and efficiency. What's interesting about the latest class that we're working with right now is both the less than 12-month seller as well as the 12- to 24-month seller class, they have the highest pipeline both in deal count and in deal value that we've seen since 2022. And I think that's a reflection as we really pivoted to hire more experienced sellers that come in with industry expertise, really great pipeline that speaks to their fast start. And then even our most experienced sellers, those that have been with us 2 or more years, they continue to have win rates of over 50%. So the converting of the pipeline and training enablement that's happening in the market and product leadership speaks, I think, to some of the sales productivity that we're seeing. On the dials, as it relates to margin, obviously, we had a really good direct mix quarter. We talked about how our fastest-growing channels were those customers using 4 or more. The vast majority of that being those direct channels. That direct channel usage was up from 67% a year ago to 75%. And then not surprisingly, our cost of revenues as a percentage of revenue was down 200 basis points. So a really nice congruence there. And then on the expense line and on the cash conversion line, you're seeing very good discipline as it relates to CapEx and just continued strong management and measurement of where we invest, namely in world-class engineers. Nate is a great reflection of that. We're hiring great people under Nate and Chris Monberg and Neej Gore. And then obviously, adding more and more sellers that are supported by our pipeline and our productivity statistics.

And we've also been smart about eliminating certain functions in the company that are not driving value to free up additional budget so we can bring in the quality of engineers and salespeople we want. And I think we've been very disciplined about that as a company.

Really, really great color. And then maybe just a follow-up. One of the themes to emerge from Amazon's recent earnings is that firm's momentum in advertising, which is obviously it's complementing its e-commerce and cloud business. But what do you see as their approach to embracing ecosystem partners? Is that a channel you work with today? And how do you think about them from a competitive standpoint?

So we partner with Amazon in a number of ways. We don't generally ever see them as a competitor. I think Amazon has done a really good job, I mean [Audio Gap] understatement, as it relates to monetizing their existing platform and data. I think that they're going to continue to focus on that. And the vast majority of their advertising dollars come from vendors that are selling products or sellers that are selling products inside their ecosystem. As they expand and certainly through Prime, where we run a considerable amount of marketing for connected television, they've been an incredible partner to us, and we see them as somebody who will be an expanding channel for us.

The next question is from Gabriela Borges from Goldman Sachs.

This is Callie on for Gabriela. First one for me is, we're hearing a lot across the ecosystem around the ROI that people are seeing from AI being incorporated in both AI ad and marketing campaigns. Did you notice a substantial increase in AI-driven campaigns in 2Q? And seeing any potential changes in customer behavior as a result of that?

Well, I'll take that, Gabriela (sic) [ Callie ]. I'm David. So what I would say is that we are seeing a massive adoption of our existing customers for our AI tools and platforms. And customers last year who adapted our AI Agent Studio grew at 44% versus our average, I believe, is 30% or 31% last year as a company. So we're seeing meaningful uptake, Gabriela (sic) [ Callie ], in that AI adoption. We're also seeing the return on investment for clients of ours who are adopting the AI Agent Studio. So they're running agentic workflows, the return on investment is substantially higher then the return on investment for our clients who have not yet adopted them. So from an ecosystem perspective, as you know, we've been programming in artificial intelligence since 2017, and we're the only marketing cloud that has AI and data as native to the application layer. So the latency that is created by the stepping out of the platform to the algorithm to do a query and then stepping out of the algorithm to do a data dip back to the algorithm back to the platform to make a decision, that latency destroys return on investment. Our platform is able to do what takes them 5 to 7 seconds in a millisecond in many cases. That allows us to substantially better target our clients' marketing and allows substantially higher interaction rates and substantially higher return on investment to our clients. So we do see a meaningful change in the marketplace, and we are exactly where the marketplace is turning to.

Really appreciate all the detail there. And then I wanted to ask on the investments in sales head count that are kind of behind that OneZeta approach. Can you provide any more detail on where these additions will be concentrated? And what types of customers are you getting the most OneZeta success with either by customer size, geography or any other detail you can give would be great.

Geography primarily in this round, mostly to the U.S. From an industry vertical perspective, it really is very specific to who we are hiring. We don't hire industry generalists. We try to really be focused on where those individuals have had the most success. It's difficult to walk into a bank on a Monday and an airline on a Thursday, really deep credibility. David, I'll let you speak to the amazing job Ed is doing and...

Yes. So Gabriela (sic) [ Callie ], I think if you look at Ed See, who, as I'm sure you're aware, was one of the top global partners at McKinsey focused on their CMO practice. Ed joined us recently to effectively run our OneZeta strategy. We're calling him our Chief Growth Officer, but he's really in charge of this, and he's building an elite team inside of Zeta that is allowing us to scale OneZeta substantially faster than I think we might have originally thought. Now the good news is because we grew the business at 35%, we were then able to grow profit at 52% and of course, we grew free cash flow at 69%, we're seeing the investments into head count more than paying off from higher growth with higher gross margin, which is leading to a substantially higher drop to profit than revenue growth. And I think that's a trend you'll see continue, where, yes, we're going to continue to invest into salespeople and engineers, but based on our current trajectory, we expect to continue to grow profit and gross profit faster than we're growing revenue in the years to come.

The next question is from Koji Ikeda from Bank of America.

I wanted to ask about your product strategy here? And which one of the three products is maybe driving better usage or net retention and which one is driving better land? Looking at the data management piece, the marketing automation piece and the engagement piece, is there one that's better than the other within those two categories? Or is it really about the OneZeta land strategy right now?

I think we're seeing growth across the board, Koji. We're seeing growth in all use cases. We're seeing a higher number of channels being utilized by our clients than ever before. And as I've said before, the reason OneZeta is such a good strategy is not only does it drive substantially higher revenue growth and profit to Zeta, it starts a flywheel for the customers where customers who have adopted our three main use cases: customer acquisition, customer retention, customer monetization, are seeing the flywheel drive substantially higher return on investment across all three use cases for them. So what we learned in acquisition drives value to retention, which drives value to monetization, which drives value back to acquisition. And as clients adopt it, we're seeing them move substantially more wallet share from our competitors to us. So I think that's one of the reasons we're growing so much faster than the market itself. So we're seeing individual clients growing. We're seeing all three use cases growing. We're seeing more channels per client, although we're seeing that at an even faster pace when it's happening inside of the OneZeta environment.

The other, Koji, metric that you could argue even more important than the financial metrics is NPS, Net Promoter Score, for customers that use more than one use case of Zeta is higher than those that don't.

Got it. And Chris, a follow-up for you. It's on gross margins. And so maybe remind us if you've given us a target of where gross margins can go for the business? And the reason why I ask is direct revenue mix is now 75%, driving gross margins of 62.2%. Last quarter, 73% direct mix, driving 61%. It does feel like we're on that upward trajectory of gross margins. And so help us understand kind of the puts and takes there and where gross margins could go?

Thank you, Koji. That is such a good question. If you go back to our February earnings call, when we put out the Zeta 2028 model, and we talked about our at least growth goal of getting to $2.1 billion, at least 25% adjusted EBITDA margins, and at least 16% free cash flow margins, embedded in that was an assumption for where our cost of revenues could go down by, which we said was between 100 basis points and 300 basis points. So with that ability to kind of zoom out as what is the kind of the big goal and where we see ourselves being in, you're trying to still be conservative. But now you kind of zoom into the quarter, as you pointed out, 75% direct mix compared to 67% a year ago, resulted in 200 basis points of reducing cost of revenue. So right in that kind of midpoint of our target range. So we're really happy with where mix landed. It very much jives with our expectations for the model. Could we be higher than 63%? Of course. Could we be higher than 62% gross margin? We definitely can. But right now, we're happy with the expansion that drove those types of margins was because agencies are converting more and more to direct, the use case, multiuse case adoption, we get scale off of that as we do get scale off of multichannel adoption. So kind of when all of those factors are working together, we're at the higher end of the range. David?

And Koji, I hate to say it this way, but it's exactly what we said was going to happen as most of our agency clients on board, they start in integrated platforms, and then they begin to test and see the return on investment in direct platforms. And it's really important to note that our clients see a substantially higher return on investment to them when they're on our direct platform versus integrated platforms. And the migration is really just beginning. So we feel very good about where we are.

The next question is from Terry Tillman from Truist Securities.

Great. David, Chris, Matt, this is Bobby Dee on for Terry. I'm curious if you all have seen a trend at all with brands starting to bring their marketing operations more and more in-house, particularly as a result of AI and AI agents helping folks do more with less? And if that is the case, how do you think that affects Zeta going forward? And then I have one follow-up.

So Bobby, great question. The funny thing is, and I hate to even say this, but the answer is really not yet. We continue to see most enterprises using very large or independent agencies to manage their marketing. That being said, I don't know one enterprise that is not currently testing internally with AI tools to better manage their marketing in partnership with their agencies and with others. And I think it's one of the reasons we continue to see the momentum and sustainability in our agency and independent, I guess, company, it's their agencies but I should say agency holdcos and independent agencies. Sorry, that's a mouthful but that's how I should put it. We continue to see incredible sustainability and growth there as evidenced by the fact we grew the brands we work with, with our current agency holdcos by 40% year-over-year. We're still only touching a miniscule percentage of the brands that they work with. And that's because the agencies are adopting our AI tools to better help their clients, and it's become a very symbiotic relationship between the enterprise, the agency and Zeta.

Thanks, David. Also very much intrigued by the Zeta Data & AI Lab Group. I'm curious if you can discuss their North Star goals and what success for them looks like over time?

Well, thanks. So we were very excited to get Nate Yohannes to come join us after being at Meta for many years, Microsoft for many years and at the White House. And really, for us, this is what I would call our innovation factory. It's going to be cranking out next- generation AI tools like we haven't before. And quite frankly, we're probably 18 months ahead of most of our competitors as it relates to agentic workflows, AI products, AI tooling, my goal is to continue to stay 18 to 24 months ahead of our competitors, and bringing in somebody like Nate to help Chris Monberg and help Neej Gore to really continue and drive innovation, I'm just incredibly excited about bringing him in. You'll see a lot of new releases and very exciting announcements from the Zeta AI & Data Lab (sic) [ Zeta Data & AI Lab ] at Zeta Live.

The next question is from Matthew Swanson from RBC.

I know this has kind of come up in bits and pieces during Q&A. But if we can just kind of double-click on the success that you're seeing with independent agencies and maybe looping in a previous question, are independent agencies, do you think, seeing more pressure to partner with Zeta to get GenAI tools now that they're competing with so many GenAI tools from Walled Gardens and other big direct companies.

So Matt, to answer your second question first, absolutely. Independent agencies, which in the past were able to get by with having one really good function, so maybe they're incredible on creative or they're good on a media buying strategy or they're very, very good at seat management or planning and they're very good on relationships regionally. And as they are starting to come under pressure, it's very difficult for those agencies to make the type of investments into building AI in today's world that we have made. I think people forget that by starting building AI in 2017, we were able to buy a lot of the things that today are 5, 7, 10x more expensive, we were able to get those things in a much more reasonable cost, and we've been able to drive meaningful free cash flow growth because those investments have made. They were still very large investments over the years, it would be very difficult for the average independent agency to make that investment. So by partnering with Zeta, we're able to put them in a place where they can have the most cutting-edge tools, artificial intelligence, access to proprietary data they would never have access to, and we're treating -- to answer your first question, we're treating these independent agencies more like a very large enterprise where we're fully platforming them, and everything they're doing is on platform. And I think you're starting to see that in sort of the clicking up of the direct and you're seeing our larger agency holdcos migrating on to direct channels, and you're starting to see that in the lowering of our cost of goods sold. So right now, we're feeling very good about the independent agency ecosystem. I mean it has incredible people in it. They have incredible liens. And I want to be clear, these can long-term many of them can be 9-figure customers. So these are -- some of these agencies are running $1 billion, $2 billion, $3 billion, $5 billion a year in marketing. We're very excited about the opportunity, and we continue to focus on it.

That's super helpful. And then maybe kind of following up in the same mindset, maybe it's a similar answer. But it seems like throughout the call, we talked about the strength of the pipeline over and over again. I know in Q1, there was some commentary about the best that you guys have ever felt about pipeline. Maybe thinking about how that pipeline gets filled compared to a couple of years ago and just the scale of the company and the brand recognition, how much has kind of the marketing go-to-market side changed in terms of how many people are coming to you already understanding what Zeta does or at least understanding the need for the solution relative to where you were before?

So Matt, that's a big question. Let me start by saying that we feel like we are solidly moving from what we call Zeta who, we are now solidly in the why Zeta section of our brand's evolution. And truly what we're seeing is we're seeing this evolution where people are now coming to us, they know who we are, or if we're going into a meeting, people know who we are and why we're there. Now we just have to convince them why our products are better. And I'll tell you, we just recently did the Cannes Lions conference. And we did our first ever activation there. We did the Zeta Cafe at Zeta Beach. And I would tell you, it was the most exciting time for me in 17 years of running Zeta. We met with everybody. We were doing 17 meetings a day times 20 or 30 people there. I was bumping into the CEOs of Fortune 500 companies at cocktail parties and dinners and everybody knew who we were. Not one person said, "Who are you guys? What are you doing here?" And to me, that is why we're seeing the pipeline continue to be at records, it's why we're continuing to see conversion rate higher than ever and I think it's going to continue to drive where we're going as a business.

The next question is from Zach Cummins from B. Riley Securities.

David and Chris, congrats on the strong results. Maybe just dove tailing a bit off of Matt's question around independent agencies. And maybe Chris, you can give more insight on this. But can you give us a sense of when you're landing one of these new independent agencies, what's the mix of direct versus indirect spend when you start out and kind of how does that evolve over the life of the relationship versus maybe one of your holdco companies?

Yes. As David mentioned, there's a lot of synergy with how we land an enterprise, frankly. Oftentimes, they'll start with pilots and proof of concepts just to get a sense of the capabilities of the platform, then they'll lead to a much larger, what we call platform deal, which, in our speak, means multiyear engagement and then usage around our direct channel. So in the independent agency side, it would be unusual to start heavily in social. It's much more common and the norm to begin first in direct.

Got it. That's helpful. And my one follow-up question geared towards David. Nice to hear the call out around the big public sector opportunity you had with the Zeta Answers. So just curious of how you're thinking about just opportunities for expansion in the public sector, just given it's not really a notable vertical for Zeta at this point?

Yes. We're very excited about the public sector. I would tell you that -- we've brought in a very solid team. As Chris always points out, it's very difficult to walk into a credit card company on Monday and an airline on Tuesday. So we have begun the process of building out a very experienced, highly capable team that is used to selling into the public sector. And interestingly enough, if you look at our political business, the relationships that we've built there are leading to other business as those candidates win. So it's been very interesting to look at it from a life cycle perspective. It's just getting started. But I think in the years to come, it's going to become a very meaningful business.

Understood. And looking forward to Zeta Live later this year.

We're looking forward to having you, Zach.

The next question is from Richard Baldry from ROTH Capital Partners.

If we look back a year ago in 2Q, you added 43 scaled customers year-over-year. Moving up to this year, that number is 99 on a year- over-year basis. Can you talk a little bit about how that's happening? Is it ARPU growth that's taking people up across that threshold a little faster? Or is it more about just new logo wins, is it win rates, accelerating pipeline, help us understand how extensible that is?

Yes, Rich, once again, we've meaningfully grown our sales force, as Chris can get into in a moment. And this movement from why -- from Zeta who to why Zeta has been incredibly impactful in the conversion of our pipeline to sales because we're seeing people who come into the pipeline, they know who we are, we don't have to spend our entire time trying to convince them that we are capable. They come in knowing that. And I think that's led to a much higher sales rate. Chris?

Yes. It's clearly outpaced our expectations, which is a positive. I don't want to get too far ahead of ourselves. I mean, we put out the Zeta 2028 model for a certain account of growth in customers and a certain growth in ARPU. I think right now, we continue to see the synergy benefits of LiveIntent, which results in more customers, albeit at a smaller starting ARPU, but that's fine. That's our model to cross-sell. But yes, very pleased with how we've gotten started and it's ahead of our model.

And you talked briefly by saying there is -- you had a miniscule percentage of brands with the large agencies. Is there a way to put any numbers around that? And is this really applicable across their whole bases? And sort of where they maybe started, they started with small, midsized customers going up to large. How do we think about the growth path ahead with those agencies?

I'm going to take a wild guess here, and it is a wild guess, Rich. I would tell you in the United States, we are currently working with between 1% and 3% of the clients that the agency holdcos in this country represent. And maybe I'm off, maybe it's 4%, but it's not 10%. And yes, they generally start you with midsized customers. I mean, agency holdcos tend not to work with small customers, but they look at midsized customers who are spending $100 million a year and they look at large customers who are spending billions a year. We are now starting to break into their larger customers, which is one of the reasons I think you're seeing the sustainability and solid growth in the agency holdco business in addition to the other enterprise direct business growing nicely as well. So I think that the metric I point out and one of the metrics I like to talk about is today, our 567 global enterprise clients spend greater than $100 billion a year in marketing. At the middle of our range this year, we have approximately 125 basis points of wallet share. How do I get that to 500 basis points or 1,000 basis points of wallet share in the years to come? And I think the agency holdco penetration, which is so small, but growing, will be a meaningful part of that in the years to come.

Congrats on a great quarter.

Thank you, Rich.

The next question is from Elizabeth Porter from Morgan Stanley.

You've really accelerated the pace of AI products more recently. And we often hear just more broadly in the industry about AI solutions needing a lot more handholding or support with customers just to get them up and running. So I wanted to know if Zeta is seeing similar dynamics? And if so, kind of what investments are you looking to make to support adoption? Or if not, kind of how your products may be different and easier to implement for customers?

That's a great question, Elizabeth. And I would say that we invested early in our learning and development group. And it's one of the most important and most unsung groups in Zeta. And a lot of it started because when we started selling AI and data as native to the application layer, nobody had any idea what we were talking about. So we built this incredible group, and literally, they built an incredible repository that can be accessed by the clients that automatically trains them using this repository of cleaning materials, tools and, of course, ZOE, which is the voice-enabled system, which also helps with training on the utilization of the agentic workflows and other tools. So what I would say is there's always some handholding. I imagine our handholding is substantially less than most companies because ours is fully integrated. And I believe that our learning and development group is incredibly well positioned to do this.

Great. And then a quick follow-up. At Cannes Lions, it certainly sounds like you were very busy. Historically, has that been a driver to the model at all, whether kind of seeing an inflection in customer changes. Is it something we should pay attention to more in the future just as kind of that brand recognition expands?

It's a new thing. And yes, I think it will be very impactful. We saw a meaningful increase to our pipeline coming out of Cannes Lions. And I would tell you that the praise for our team that did that activation was off the charts. It -- I mean we were right in the middle of the beach. So if you're angling to be able to come over to the south of France with us next summer, Elizabeth, then check this out, we're all in, we'd love to have you. And it is worthwhile because we see meaningful step-up there. I would go so far as to say right now, the two most important events of the year for Zeta are Zeta Live and Cannes Lions. And it's -- that's a bit of a change over the last few years, but very exciting.

The next question is from Arjun Bhatia from William Blair & Company.

This is Alinda on the line for Arjun Bhatia. So in the past, you spoke on the full year guide with a layer of conservatism given the dynamic macro. Can you maybe comment on what the current guide contemplates in terms of the macro?

This is Chris. What I talked about in the prepared remarks, which is not a change from our prior practice, but just to put it out there with clarity, was in any quarter, we like to give ourselves 2 to 5 points of growth cushion or so on the top line guide. What we talked about, you're right, last quarter was we built in an extra $10 million of cushion. We put $5 million in the third quarter and $5 million in the first quarter, and we've removed that. That's based upon the good visibility that we have coming into the second half and then further bolstered by, as David mentioned, the very strong pipeline and the sales productivity behind it.

The next question is from Jason Kreyer from Craig-Hallum.

Just one question for me. [Technical Difficulty]

Pardon me. One moment, please, while we would reconnect to Jason.

You guys got me?

Yes, Jason, I'm sorry, we didn't hear any of your question, I apologize, other than you said just one question from me.

Okay. You can hear me now. So when you launched OneZeta last year, you started with like 10 clients, you expanded that to a lot more this year. I'm curious how you take OneZeta and you go back to the existing 500 customers and help them add more use cases?

Let's talk about 567 customers, come on, we don't want to lose that last 67. In all seriousness, we are doing incredible case studies internally with existing clients who are using OneZeta and the NPS score, as Chris pointed out, is so much higher than our regular NPS score and the return on invest is so much higher than even our very high average, as we're showing that to other customers, Ed and the elite team that he's building are showing them a road map to building the same flywheel for themselves. And it's been very exciting to see the adoption rate there. I mean I will tell you, Jason, my goal is to have every client be a OneZeta client. We're not going to get there overnight. It might take us years to get there, but there's no reason that they shouldn't be.

The next question is from Jackson Ader from KeyBanc.

The brand count within the agency customers being up 40%, I'm just curious like how much is that within your power like Zeta's power to kind of ratchet up or -- well, I guess, you would never ratchet it down, but like how much is that within your power versus maybe the agency being the one to decide the rate and pace of turning on the different brands?

I mean it's a joint relationship between us and the agency. And I think it's like any other business. The better you do, the more they give you. And the fact that we were able to grow brands 40% year-over-year while still being well under 5% of the brands that the agency holdcos in this country represent, I think, speaks to the sustainability and durability, Jackson, of our agency holdco business. And I think that we've got a team that's fully embedded. And every day, we're growing the brands we work with, and we are adding additional brands.

Okay. All right. I'll sneak one more in, I know it's getting late. At the outset of the year, autos and insurance, those two verticals were coming off exceptional 2024. And so part of like the growth rate assumption and guidance was like, look, these are not going to -- you can't run that back. But I guess my question is like, I'm surprised to see those two verticals in the top 5 growers so -- just given the strong '24. So what are like the durable trends driving those still being in the top half of your verticals even after unlikely sustainable 2024?

I mean, we're just so thinly penetrated into those two verticals. So I mean, by the way, again, another part of the business that exceeded where kind of our head space was. But you're right. They both not only lapped on really strong growth, but have sustained it, as have, by the way, lots of other verticals. But I think it more speaks to even though they're, call it, 4% on the automotive side, and on the insurance side, like 10%, 11%, 12% of revenue, those only represent -- remember, for a lot of those customers, we maybe only doing one use case. So there's ample room to sell not only within the existing customer base, but really a lot of new logos that we haven't yet reached out to either directly or through the agency.

I mean you're talking about two of the largest verticals for marketing globally, Jackson. So the fact that we're able to grow them when we have such small wallet share, I think, speaks to the sustainability of our platform and our ability to show return on investment.

Next question is from Clark Wright from D.A. Davidson.

Awesome. This quarter, you're firing all cylinders, and it seems like momentum with the agency business is very strong. I'd love to kind of understand where you expect that segment to be as a percentage of the business at year-end. And additionally, if you could exclude the agency business, what would ARPU growth have been this quarter?

Yes, those are two data points, Clark, that we -- I don't want to give guidance to that the -- especially on the where could agencies be front. I mean this year, they've, from 2023 to 2024, have effectively doubled in size, and they're really growing nicely. And yes, I'm not going to break it out that way.

And by the way, I think it's important to note, Clark, our enterprise business is growing nicely, too. So it's not like you just have the agency holdco business and the independent agency business growing and the enterprise business is not. So I think, as Chris said, we're not going to break it out. But I have said publicly, we think that agency business continues to be a minority component of our business for many, many, many years to come.

There are no further questions at the time. This concludes the question-and-answer session and today's teleconference. You may disconnect your lines at this time. Thank you for your participation.