David Steinberg: Yeah. So it’s interesting. Yes, so to answer your question. Unequivocally, the more of these streaming platforms that insert ads, I call it pre-roll, but it’s — it’s not always accurate, but sort of pre the beginning of the content, the middle of the content, the end of the content, all of the above. Every one of those units is a massive opportunity for us. And to be totally transparent, we are already plugged into all of them. So we see this as a unique opportunity to expand out. Now, the largest platform sort of started off trying to get these massive minimums out of enterprises to partner with them. And it didn’t work quite the way they had originally planned, to say the least. They’ve now come back. And we’re seeing what we think are very unique opportunities to scale that business with all of the streaming platforms, including the largest one.
Christopher Greiner: We had a neat growth quarter, actually, in the fourth quarter, Luke, on CTV. It grew 30% quarter-to-quarter. And if you follow the pattern of CTV’s usage around advocacy and political, one word for shadow would be a nice year in 2024 as well.
David Steinberg: Chris beat me to the punch as usual. I shudder to use the term political. I generally call it all advocacy for a host of reasons. But obviously, our advocacy business does encapsulate political. Very CTV-centric, very focused on hyper-targeting, nowadays. And the way to really do that is CTV, not linear. So we see this as a big opportunity, to your point, Luke.
Luke Hannan: Awesome. Thank you.
Operator: Our next question is from Zach Cummins with B. Riley Securities. Please proceed.
Zach Cummins: Hi. Good afternoon, David and Chris, congrats on the strong 4Q, and thanks for taking my questions. Chris, my first one is more of just a clarifying question. I believe there’s a year-over-year decline in your super-scaled customer ARPU here in Q4. I’m assuming most of that’s related to headwinds with auto and insurance, but just wanted to get some clarity around that and expectations for growth in that metric moving forward?
Christopher Greiner: Yes. No, I think that is the driver. What’s interesting on the scaled customer count side, we’ve got 131 now, which is up seven quarter-to-quarter, but on a year-over-year basis, was up 27% in count with the revenue associated with super-scaled customers up 25%. There’s a good slide that we update annually in the slide deck that demonstrates the progression of scaled customers in their tenure, which I think is a really good kind of progression, if you will, on how they spend with us, where those year-one scaled customers, which was around 10% of this year’s revenue, their average revenue spend is around 600K. If you go to that next tier of one to three-year scaled customers, they spend more than two times that on average, at $1.3 million.
And then you go to that next cohort of now more than three-year tenured scaled customers, they’re spending 3.5 times as much as the year one at over $2 million. So it’s a nice way to demonstrate the stickiness of the platform. As we talked about, the net revenue retention for the year was right in our model of 110% to 115% at 111%. But if you exclude automotive and insurance to your question, that net revenue retention was 118%. And as I said, as part of the prepared remarks, we think we will be at the high-end of that 110% to 115% range just as we sit here today in 2024.
Zach Cummins: Understood. And my one follow-up question is, most of your growth over the past couple of years has really just been driven by your direct go-to-market motion and investing in that. But it seems you’re starting to get more opportunities on the partnership side, especially the system integrators. So just curious of how you’re thinking about investments in the direct channel versus maybe leaning into some of these channel partnership opportunities?
David Steinberg: It’s a great question, Zach. Obviously, we’ve added channel partners in Snowflake, AWS. We’ve added the agency channel, which is sometimes directly with the agency, sometimes partnering with them to go to other enterprises. We are going live with our first two SI integrations, probably be done with them this quarter, perhaps early second quarter. So this has also gone from sort of what we want to do to what we’re doing. We’re very excited about the SI environment. And what we’re seeing is enterprises are going to their SI vendors and asking them to work with us in addition to us going to the SIs and saying we’d like to partner with you. I want to reiterate again, and I’m sure I’ll sound like a broken record, but if I don’t, Scott will kick me under the table, our currently conservative projections do not include meaningful revenue in the SI channel for this year, which is not to say we don’t think it could be meaningful this year, and which is not to say that we don’t expect it to be meaningful in the years to come.
But to have gone from talking about this to we’re knee deep in two integrations with them now, which will launch two separate systems integrators with two separate enterprises. We’re very excited about those prospects.
Zach Cummins: Great. Well, thanks for taking my questions and best of luck in the coming quarter.
David Steinberg: Of course. Thank you.
Operator: Our next question is from Arjun Bhatia with William Blair. Please proceed.
Arjun Bhatia: Hey, guys. Thank you and nice job on a strong Q4 here. When we kind of talk to customers and agencies throughout the ecosystem, it seems like the CDP layer certainly is an important differentiator to drive more personalization. I know, you guys have a pretty strong CDP layer yourself. But can you maybe just talk about when you’re going up against or going to customers in RFPs, like how much of a factor is that in deciding to choose data versus some of the other players? And maybe if you could compare, contrast the CDP layer relative to your data capabilities, where customers are placing more emphasis in recent RFPs?
David Steinberg: It’s a great question, Arjun. Listen, I would say that our CDP technology is as good, if not better, than any other CDP technology in the world. And I will also tell you that the vast majority of the large HoldCos, as it relates to technology holding corporations, that say they have CDPs are really DMPs that they’ve sort of rebranded. So when we go up against a lot of those big guys, we’re really able to talk about what a CDP is, right? What does that stand for? It’s a Consumer Data Platform. And what does that mean? It means you can see to the absolute individual level of your customers by record. It doesn’t mean you’re building cohorts. It doesn’t mean you’re putting together large sort of segments. It means you can see an individual.
Most of these other large companies can’t do that, right? It’s just not there. And most of the smaller guys who are coming up, they either run it as a standalone product, which is quite hard, or it’s part of another, perhaps roll up or something that it’s sitting inside of there. So when we look at our technology, we think it’s best to breathe. Now, it’s hard to bifurcate that from our data and data quality, because it’s such an important component of how we sell the product, right, the ability to import all of your data to the CDP, the ability to match on average greater than 80% of that data to the Zeta data cloud, the ability to append into your data, hundreds if not thousands of incremental data elements, the ability to seamlessly integrate our algorithms around natural language processing and now Generative AI, into that CDP, while keeping all of their data safe, while simultaneously importing the data from the Zeta data cloud just nobody else out there that can do those things.
So I don’t know why people choose us as it relates to. Is our technology superior? Is our data superior? Is our superior? What I know is we’re winning greater than 50% of the RFPs and engagements we get invited to participate in. And there’s an average of 12 enterprises that show up to compete in each one of those RFPs. So I think that the collective’s really important. And to just final — put a final sort of footnote on that, I can’t think of anybody who’s bought a CDP from us that didn’t integrate our data, right? There’s just no reason not to. Like it’s extra data that imports that you can’t get from any other source in the world because we don’t sell our data to anybody at any time at any price. So I do think it’s pretty interconnected.
If a client came to us and said, we’d like to buy your CDP and we don’t want to integrate to your data cloud, we’re more than happy to do that. And I think we would win that as well, if that makes sense.
Arjun Bhatia: Yes, that’s clear, super helpful. And if I can maybe follow-up again on some of the agency traction that you’re seeing in the mix between direct and indirect, do you have a sense for some of these newer agencies that have come on since you started this initiative, how their mix is either shifting or how they’re kind of indicating to you that they may shift the mix in 2024? Like, are we getting signs that they’re shifting more to direct, or is it a little bit too early to tell at this point?
David Steinberg: Yes. So, it is early to tell. But I think as Chris eloquently pointed out, we think that gross margins sort of hit bottom in Q4. And one of the big opportunities is migrating those large agency holding corporations the exact way we’ve migrated the first one that we worked with, where I know there’s a great slide on that in our deck, because they showed it to me earlier today, but we went, Slide 13. Chris is writing it down for me again. So on Slide 13 of our supplemental investor deck, you can see how that client started at sub-10% and grew to greater than 70%, right, over the years. We believe that our other two scaled agency hold corps are going to follow a very similar pattern. Now, the one caveat is we’re drinking out of the fire hose with some of these guys.
I mean, it’s growing rapidly. And as those divisions are growing rapidly, are you able to migrate the other guys fast enough for the third or new guys coming in? What I really care about, and this might be an unpopular thing to say, but to me, I’ve always aspired to run a company that was at the rule of 40. And that’s sort of what I’ve looked at, right? Not only did we deliver our seventh quarter in a row above the rule of 40, we have guided this year to the rule of 40. And a lot of that is because even if the gross margins stay in the low 60s. The gross margin on the agency hold companies is, substantially higher than our operating margins. It’s higher than our long-term operating margin goals, and they take on very limited incremental overhead.
So, most of that money drops to the EBITDA line at a substantially higher percentage than the actual current operating margins, even in the fourth quarter. So, yes, we think they’ll come back. Yes, we think we’ll migrate them. But to me, what matters is, are we going to grow the business greater than 20%? We believe we will. And are we going to see greater than a 20% operating margin? We believe we will. So I think we’re in good shape for this year.
Arjun Bhatia: Appreciate that. Thank you.
Operator: Our final question is from Richard Baldry with ROTH Capital Partners. Please proceed.
Richard Baldry: Thanks. First one may or may not even be a question, but I think in the past I’ve heard that the average number of people in each RFP was higher. I have a number of 17 in my head. If I’m wrong, then just disregard. But if it is higher, who would you be seeing sort of fading out of the competition, sort of smaller, midsize, or larger? And then the second question would be around free cash flow. And I came on later, so I’m not sure if this has been addressed, but you know, over this year’s guidance and then, the 2025 guide that you’re ahead of, you generate something close to $200 million in free cash flow. Could you talk maybe about where your priorities are to deploy that, either, more aggressive buybacks, offensively on acquisitions, pay down of debt, just so we have some idea where that’s going to get deployed. Thanks.
David Steinberg: Rich, so no, thank you for joining. We know you’re on vacation. I didn’t even know you took vacation. So I appreciate your joining us from it. Yes, it used to be a larger number showing up to the RFPs. And what we’re seeing is the point solutions are just not being invited the way they used to be, right? So you’ve got, especially around CDPs, where you have a lot of small independent CDPs that are really having a tough time as standalone businesses, and quite frankly, we’re not seeing some of the former European players who were talking a big game a couple of years ago. We’re just not seeing them anymore. So it is down. And I have said 17 in the past, and now I would say 12. I had a funny joke to make around the $200 million in free cash flow, which Chris told me not to tell.
But I will let Chris talk to what we’re going to do with the next 2-years, just to quantify for anybody else listening that would be about $200 million between ’24 and ’25 combined.
Christopher Greiner: I think we’ll continue to be opportunistic on share buyback. We’ll continue to be opportunistic on M&A. And I think, you know, Steve Vine and David did a really neat job laying out what is opportunistic mean for M&A at our Investor Day. But we were very focused on increasing free cash flow conversion, you’ll see that the guidde, this is the first time we’ve put out an in-year guide on free cash flow. We’ve obviously had a long-term model, but at $80 million in free cash flow at the end of 2024, that represents 48% conversion up from 42% the last two years. So continuing to get up to that 55% level. I think it’s interesting, we talked about in the prepared remarks, Rich, we had a $25 million working capital headwind from the agencies and just their difference in payment cycles than our enterprise customers.
If not for that headwind, if it just would have been neutral, conversion would have been in the 60%s. So we see a nice clear path as we get through the years of continuing to increase that percentage. David, anything you’d want to close with?
David Steinberg: Yes, just, and to that point, we knew that was going to happen and we said it was going to happen at Analyst Day, right? So when we did our Investor Day, we were clear about that. One of the things you do when you work with these very large agency hold companies is you understand that you’re going to be paid a little bit slower than you’re normally paid. The good news is we’ve collected 99.999% of the revenue. I’m not allowed to say 100%. I can’t think of ever writing any of it off, but I’m sure somebody slow paid or didn’t pay us on a dollar at some point. I’m being facetious, so I shouldn’t do that on this call. But we collect it all. And it’s put us in a very unique position that we have the balance sheet to be able to do that, where a number of the smaller competitors do not have the balance sheet to partner with those large agency hold companies, which is giving us yet another competitive advantage as we move into the marketplace.
And by the way, Rich, as we put more cash on the balance sheet, it puts us in a position to, more M&A, more buybacks, but it also puts us in a position to do more deals like this, where we’re able to expand and scale even faster as a company.
Richard Baldry: Great. Thanks for the commentary and congrats on a great quarter.
Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to David Steinberg for closing remarks.
David Steinberg: Well, I will close it as I think I’ve closed the last few, which is, thank you. I really appreciate all of the different constituencies that are involved in our organization. First and foremost, our Zeta people, I do believe — we have built one of the best teams in the world. It was funny because we had had some meetings recently with an organization that was trying to get to know us for a whole host of reasons, and they called me and said, you have one of the best management teams I have ever experienced, and I believe you could run a company 10 times bigger than the current loop, current one you’re running. And I very quickly said, I look forward to doing that in the next 5 to 10 years. But the reality is, we have an incredible team.
We have incredible people who really work their butts off to deliver for our clients, keep us on the cutting edge innovationally, and focusing on doing the absolute best job we can, while simultaneously creating one of the best places to work. I also deeply appreciate the analysts who follow us. I know there’s a lot of time and a lot of companies you can follow. I deeply appreciate our shareholders who have stuck with us and believed in us, and our goal is to make you look really smart over the next year or two as we continue to execute. As I like to say internally, this was our 10th consecutive quarter of beating and raising. I look forward to next December when I can say, or next, February, whenever, when I can say this is our 14th consecutive quarter of beating and raising.
And I want to thank our customers who have really banked their relationship with their end users and their enterprises on the Zeta people and the Zeta platform. Thank you very much, and I hope everybody has a wonderful day. Bye.
Operator: Thank you. This does conclude our conference. Thank you for your participation. You may now disconnect.
