Advertising and marketing company Zeta Global (NYSE:ZETA) reported results ahead of analysts' expectations in Q3 FY2023, with revenue up 24.1% year on year to $189 million. The company also expects next quarter's revenue to be around $207 million, in line with analysts' estimates. Turning to EPS, Zeta made a GAAP loss of $0.27 per share, improving from its loss of $0.49 per share in the same quarter last year.
Zeta (ZETA) Q3 FY2023 Highlights:
- Revenue: $189 million vs analyst estimates of $178.9 million (5.65% beat)
- EPS: -$0.27 vs analyst estimates of -$0.27 (1.82% beat)
- Revenue Guidance for Q4 2023 is $207 million at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow of $13.5 million, down 20.1% from the previous quarter
- Customers: 440 customers paying more than $100,000 annually
- Gross Margin (GAAP): 61.1%, down from 62.2% in the 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.
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)
As you can see below, Zeta's revenue growth has been strong over the last two years, growing from $115.1 million in Q3 FY2021 to $189 million this quarter.
This quarter, Zeta's quarterly revenue was once again up a very solid 24.1% year on year. On top of that, its revenue increased $17.2 million quarter on quarter, a very strong improvement from the $14.2 million increase in Q2 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 18.2% year on year to $207 million, slowing down from the 29.9% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 16.1% over the next 12 months before the earnings results announcement.
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 61.1% in Q3.
That means that for every $1 in revenue the company had $0.61 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 $13.5 million in Q3, roughly the same as last year.
Zeta has generated $54.2 million in free cash flow over the last 12 months, a decent 7.8% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from Zeta's Q3 Results
With a market capitalization of $1.67 billion, Zeta is among smaller companies, but its $120.8 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We enjoyed seeing Zeta exceed analysts' revenue expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, its gross margin declined. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $7.73 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 Zeta isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid over the last two years, though we don't expect it to maintain that historical pace. And 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 12 months is 1.5x, 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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