Zeta's (NYSE:ZETA) Q1 Sales Top Estimates, Provides Optimistic Full-Year Guidance

Advertising and marketing company Zeta Global (NYSE:ZETA) announced better-than-expected results in Q1 CY2024, with revenue up 23.7% year on year to $194.9 million. On top of that, next quarter's revenue guidance ($212 million at the midpoint) was surprisingly good and 3.9% above what analysts were expecting. It made a GAAP loss of $0.23 per share, improving from its loss of $0.27 per share in the same quarter last year.

Zeta (ZETA) Q1 CY2024 Highlights:

Revenue: $194.9 million vs analyst estimates of $187.2 million (4.2% beat)
EPS: -$0.23 vs analyst estimates of -$0.25 (7.3% beat)
Revenue Guidance for Q2 CY2024 is $212 million at the midpoint, above analyst estimates of $204.1 million (adjusted EBITDA guidance also ahead)
The company lifted its revenue guidance for the full year from $875 million to $900 million at the midpoint, a 2.9% increase (adjusted EBITDA guidance for the period also raised)
Gross Margin (GAAP): 60.6%, down from 65.5% in the same quarter last year
Free Cash Flow of $15.21 million, down 16.3% from the previous quarter
Customers: 460 customers paying more than $100,000 annually
Market Capitalization: $2.8 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 three years, growing from $101.5 million in Q1 2021 to $194.9 million this quarter.

This quarter, Zeta's quarterly revenue was once again up a very solid 23.7% year on year. However, the company's revenue actually decreased by $15.37 million in Q1 compared to the $21.34 million increase in Q4 CY2023. Regardless, we aren't too concerned because Zeta's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.

Next quarter's guidance suggests that Zeta is expecting revenue to grow 23.4% year on year to $212 million, in line with the 25.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 18.3% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, Zeta reported 460 enterprise customers paying more than $100,000 annually, an increase of 8 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

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 60.6% in Q1.

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. While its gross margin has improved significantly since the previous quarter, Zeta's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

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 $15.21 million in Q1, up 52% year on year.

Zeta has generated $59.72 million in free cash flow over the last 12 months, or 7.8% of revenue. This FCF margin enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Zeta's Q1 Results

We were impressed by how strongly Zeta blew past analysts' billings expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates. On the other hand, its new large contract wins slowed. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is flat after reporting and currently trades at $13.05 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 revenue growth has been solid over the last three years. And while its existing customers have been reducing their spending, which is a bit concerning, the good news is its efficient customer acquisition hints at the potential for strong profitability.

Zeta's price-to-sales ratio based on the next 12 months is 2.5x, suggesting the market is expecting more moderate growth relative to the hottest software 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, it seems to be trading at a pretty compelling price right now.

Wall Street analysts covering the company had a one-year price target of $15.35 right before these results (compared to the current share price of $13.05).

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