Zeta (NYSE:ZETA) Reports Bullish Q3, Provides Optimistic Full Year Guidance

Full Report / January 23, 2023
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Advertising and marketing company Zeta Global (NYSE:ZETA) beat analyst expectations in Q3 FY2022 quarter, with revenue up 32.2% year on year to $152.2 million. The company expects that next quarter's revenue would be around $160 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Zeta made a GAAP loss of $69.4 million, down on its loss of $69.1 million, in the same quarter last year.

Zeta (ZETA) Q3 FY2022 Highlights:

  • Revenue: $152.2 million vs analyst estimates of $141 million (7.94% beat)
  • EPS: -$0.49 vs analyst expectations of -$0.45 (8.08% miss)
  • Revenue guidance for Q4 2022 is $160 million at the midpoint, above analyst estimates of $158.8 million
  • Free cash flow of $9.65 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 62.2%, up from 61.3% same quarter last year

Co-Founded by former Apple CEO, John Scully, Zeta Global (NYSE:ZETA) provides software and data analytics tools that help companies market their products to billions of customers.

As customers have increasingly moved online, more data has become available to businesses that allows them to more efficiently market their products. Zeta Global helps businesses utilise this data to market more effectively.

Today, much of what we do on the internet can be tracked and used to determine what types of products we may be interested in. Historically, brands had very limited data on who their customers were and how they were reaching them. With old advertising methods such as billboards and television ads, businesses had no way of ensuring that the people who saw their ads would be their target customers.

Using trillions of data points from activity across the internet, Zeta Global determines which customers would be interested in which products and helps businesses find customers that are most likely to buy their products.

The digital advertising market is large, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need for a software that enables advertisers to use data to automate and optimize ad placements.

Other providers of sales and marketing solutions include AppLovin (NASDAQ:APP), DoubleVerify (NYSE:DV), LiveRamp (NYSE:RAMP), PubMatic (NASDAQ:PUBM), The Trade Desk (NASDAQ:TTD)

Sales Growth

As you can see below, Zeta's revenue growth has been strong over the last two years, growing from quarterly revenue of $95.2 million in Q3 FY2020, to $152.2 million.

Zeta Total Revenue

This was a standout quarter for Zeta, with the quarterly revenue up 32.2% year on year, which is above the trend for the company. On top of that, revenue increased $14.9 million quarter on quarter, a very strong improvement on the $11 million increase in Q2 2022, and a sign of re-acceleration of growth.

Guidance for the next quarter indicates Zeta is expecting revenue to grow 18.6% year on year to $160 million, in line with the 17.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.4% over the next twelve months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Zeta's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 62.2% in Q3.

Zeta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Zeta's free cash flow came in at $9.65 million in Q3, up 25.9% year on year.

Zeta Free Cash Flow

Zeta has generated $47.8 million in free cash flow over the last twelve months, a decent 8.68% of revenues. This FCF margin is a result of Zeta asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Zeta's Q3 Results

With a market capitalization of $1.71 billion Zeta is among smaller companies, but its more than $114.8 million in cash and positive free cash flow over the last twelve months give us confidence that Zeta has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Zeta outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company currently trades at $8.68 per share.

Is Now The Time?

When considering Zeta, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Zeta is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Zeta's price to sales ratio based on the next twelve months is 1.9x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While Zeta wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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