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Zeta (NYSE:ZETA) Exceeds Q4 Expectations, Provides Optimistic Full-Year Guidance


Full Report / February 27, 2024

Advertising and marketing company Zeta Global (NYSE:ZETA) beat analysts' expectations in Q4 FY2023, with revenue up 20.1% year on year to $210.3 million. The company expects next quarter's revenue to be around $187 million, in line with analysts' estimates. It made a GAAP loss of $0.22 per share, down from its profit of $0.08 per share in the same quarter last year.

Zeta (ZETA) Q4 FY2023 Highlights:

  • Revenue: $210.3 million vs analyst estimates of $207.5 million (1.3% beat)
  • EPS: -$0.22 vs analyst expectations of -$0.16 (35.1% miss)
  • Revenue Guidance for Q1 2024 is $187 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for the upcoming financial year 2024 is $875 million at the midpoint, beating analyst estimates by 2.9% and implying 20.1% growth (vs 23.5% in FY2023)
  • Free Cash Flow of $18.22 million, up 36.4% from the previous quarter
  • Customers: 452 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 59.8%, down from 62.3% in the same quarter last year
  • Market Capitalization: $2.21 billion

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.

Advertising Software

The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for 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 $134.8 million in Q4 FY2021 to $210.3 million this quarter.

Zeta Total Revenue

This quarter, Zeta's quarterly revenue was once again up a very solid 20.1% year on year. On top of that, its revenue increased $21.34 million quarter on quarter, a very strong improvement from the $17.17 million increase in Q3 2023. This is a sign of re-acceleration of growth and great to see.

Next quarter's guidance suggests that Zeta is expecting revenue to grow 18.7% year on year to $187 million, slowing down from the 24.8% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $875 million at the midpoint, growing 20.1% year on year compared to the 23.3% increase in FY2023.

Large Customers Growth

This quarter, Zeta reported 452 enterprise customers paying more than $100,000 annually, an increase of 12 from the previous quarter. That's a bit fewer contract wins than last quarter but about the same as what we've typically seen over the last year, suggesting that the company still has decent sales momentum.

Zeta customers paying more than $100,000 annually

Profitability

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 59.8% in Q4.

Zeta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, sales and marketing, and general administrative overhead. Zeta's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Zeta's free cash flow came in at $18.22 million in Q4, up 31.9% year on year.

Zeta Free Cash Flow

Zeta has generated $54.56 million in free cash flow over the last 12 months, or 7.5% of revenue. This FCF margin enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Zeta's Q4 Results

It was good to see Zeta's full-year revenue forecast beat analysts' expectations. We were also glad next year's revenue guidance is strong. On the other hand, its gross margin fell and its new large contract wins shrunk. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $10.76 per share.

Is Now The Time?

When considering an investment in Zeta, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although we have other favorites, we understand the arguments that Zeta isn't a bad business. We'd expect growth rates to moderate from here, but its . And while its existing customers have been reducing their spend, which is a bit of a concern, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

Zeta's price-to-sales ratio based on the next 12 months is 2.1x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There are things to like about Zeta and there's no doubt it's a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $14.22 per share right before these results (compared to the current share price of $10.76).

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