Zeta (ZETA)

Advertising and marketing company Zeta Global (NYSE:ZETA) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 35.6% year on year to $264.4 million. Guidance for next quarter’s revenue was better than expected at $296.5 million at the midpoint, 1.7% above analysts’ estimates. Its GAAP loss of $0.10 per share was in line with analysts’ consensus estimates.

Company Overview

Co-founded by former Apple CEO John Sculley, 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 utilize 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. 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)

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Zeta’s sales grew at an impressive 30.6% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers.

This quarter, Zeta reported wonderful year-on-year revenue growth of 35.6%, and its $264.4 million of revenue exceeded Wall Street’s estimates by 4.1%. Company management is currently guiding for a 30.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.1% over the next 12 months, a deceleration versus the last three years. Still, this projection is healthy and indicates the market is forecasting success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Zeta’s billings punched in at $260.1 million in Q1, and over the last four quarters, its growth was fantastic as it averaged 40% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Zeta is extremely efficient at acquiring new customers, and its CAC payback period checked in at 5.3 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Zeta more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Zeta’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 97.1% in Q1. This means Zeta’s revenue would’ve decreased by 2.9% over the last 12 months if it didn’t win any new customers.

Zeta has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.

For software companies like Zeta, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Zeta’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.4% gross margin over the last year. That means Zeta paid its providers a lot of money ($39.64 for every $100 in revenue) to run its business.

In Q1, Zeta produced a 60.9% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Zeta’s expensive cost structure has contributed to an average operating margin of negative 4.5% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Zeta reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Zeta’s expanding sales gave it operating leverage as its margin rose by 15.2 percentage points. Still, it will take much more for the company to reach long-term profitability.

Zeta’s operating margin was negative 6.1% this quarter. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zeta has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.8%, subpar for a software business.

Zeta’s free cash flow clocked in at $28.2 million in Q1, equivalent to a 10.7% margin. This result was good as its margin was 2.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Zeta’s free cash flow margin of 9.8% for the last 12 months to remain the same.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Zeta is a well-capitalized company with $364.4 million of cash and $196.5 million of debt on its balance sheet. This $167.9 million net cash position is 5.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Zeta beat analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The market seemed to be hoping for more, and the stock traded down 4.8% to $12.89 immediately after reporting.

Updated: May 16, 2025 at 10:32 PM EDT

Before deciding whether to buy Zeta or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Zeta’s business quality ultimately falls short of our standards. Although its revenue growth was strong over the last three years, it’s expected to deteriorate over the next 12 months and its software has low switching costs and high turnover. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its gross margins show its business model is much less lucrative than other companies.

Zeta’s price-to-sales ratio based on the next 12 months is 2.3x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $25.75 on the company (compared to the current share price of $13.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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