Zeta Global's Revenue Growth Rate Drops While Operating Losses Continue

A Quick Take On Zeta Global

Zeta Global Holdings Corp. (NYSE:ZETA) reported its Q1 2023 financial results on May 4, 2023, beating expected revenue but missing EPS estimates.

The company operates a programmatic marketing automation and consumer intelligence platform for advertisers worldwide.

I previously wrote about Zeta Global with a Buy rating.

I'm concerned about Zeta's combination of slowing top line revenue growth and continued high operating losses, both of which have been punished in a higher cost of capital environment.

As such, I'm on Hold for ZETA stock for the near term.

Zeta Global Overview

New York, NY-based Zeta was founded to develop advanced online advertising capabilities for companies to generate greater returns from their online marketing efforts.

Management is headed by co-founder, Chairman and CEO David Steinberg, who has been with the firm since and was previously the founder and CEO of InPhonic, a wireless phone and communications products company.

The company's primary offerings include:

• Opportunity Explorer.

• Identity Graph.

• Intent Graph.

• Agile Intelligence.

• APIs.

The firm pursues primarily large-sized clients across all major industry verticals via a direct sales model.

Zeta's Market & Competition

According to a market research note by eMarketer, the market for digital ad spending was an estimated $153 billion in 2020 and is forecast to reach $315 billion by 2025.

In 2020, despite the global pandemic, digital ad spending grew by 12.7%.

The note asserts that 2021 saw significantly increased digital advertising growth after a slower than expected 2020, but that future growth rates will decline through 2025.

The chart below shows the report's forecasted growth trajectory and digital ad spend percentage of total, from 2020 to 2025:

Potential competitors include:

• Google.

• Adobe.

• Yahoo.

• Meta.

• Oracle.

• Skai.

• Amazon.

• Criteo.

Zeta's Recent Financial Trends

• Total revenue by quarter has grown per the following chart:

• Gross profit margin by quarter has trended slightly lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have also trended lower, a positive sign:

• Operating income by quarter has remained heavily negative, as the chart shows:

• Earnings per share (Diluted) have also remained negative:

(All data in the above charts is GAAP)

In the past 12 months, ZETA's stock price has risen 6.85% vs. that of the iShares Expanded Technology-Software ETF's (IGV) growth of 8.53%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $107.8 million in cash and equivalents and $183.8 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $56.7 million, of which capital expenditures accounted for $20.7 million. The company paid a whopping $289.7 million in stock-based compensation, or SBC, in the last four quarters.

Valuation And Other Metrics For Zeta Global

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ZETA's most recent Rule of 40 calculation was negative (2.1%) as of Q1 2023's results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Zeta Global

In its last earnings call (Source - Seeking Alpha), covering Q1 2023's results, management highlighted the market environment of seeing "organizations more willing to take risks with new partners and adopt new solutions in order to drive better outcomes."

Leadership believes that the firm's long-time integration of machine learning and AI technologies to enhance its offering puts the company's solution in the sweet spot of where the market is heading.

Management did not disclose any company or customer retention rate metrics for the quarter.

Total revenue for Q1 2023 rose 24.8% YoY, while gross profit margin fell 1.4 percentage points.

Selling, G&A expenses as a percentage of revenue dropped 17.4 percentage points, a very positive move, and operating losses narrowed by 22.9% YoY while still remaining quite high.

Looking ahead, management increased its 2023 revenue guidance by $10 million to $701 million at the midpoint, or 19% growth over 2022.

If achieved, that 19% annual expected growth rate would be considerably less than 2022's 28.95% growth rate over 2021, so the firm's growth rate appears to be slowing significantly.

The company's financial position is solid, with plenty of liquidity, a moderate amount of long-term debt and strong free cash flow.

ZETA's Rule of 40 performance has been negative, with good revenue growth but poor operating results.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng[es][ing]" four times, "Macro" three times and "Volatil[e][ity]" five times.

The negative terms refer to the current volatile macroeconomic conditions, which can be a negative or a positive for the company.

Regarding valuation, the market is valuing ZETA at an EV/Sales multiple of around 3.2x.

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 7.9x on June 1, 2023, as the chart shows here:

So, by comparison, ZETA is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of June 1, 2023.

Risks to the company's outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.

A potential upside catalyst to the stock could include growing interest in the firm's AI-related services, leading to revenue upside in the coming quarters.

However, I'm concerned about the combination of slowing topline revenue growth and continued high operating losses, both of which have been punished in a higher cost of capital environment.

As such, I'm on Hold for Zeta Global Holdings Corp. stock for the near term.

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