ZETA Global Holdings Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Zeta Global is a marketing automation platform that helps companies target consumers through data, AI, and machine learning.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Zeta Global provides a cloud-based marketing platform powered by data and AI. The company’s platform enables enterprise customers to acquire, grow, and retain customers by orchestrating various omnichannel marketing activities. Here’s a breakdown of their business:

Revenues: Zeta generates revenue primarily through its technology platform that relies on subscriptions, usage-based fees, and professional services designed to enhance their revenue stream.
Customers: The company works with various industries including financial services, consumer, retail, and technology. It serves a diverse customer base, which they categorize into enterprise, mid-market, and small-to-medium businesses.
Data Assets: The foundation of Zeta’s platform is its access to a vast data set which the company leverages in combination with AI to deliver targeted advertising and personalized marketing.
AI: The company invests heavily in AI technologies, including AI-based data engines, to provide insights and decision-making capabilities to its customers.
Geographical Diversity: While operations are mainly in the U.S., the company also has customers in Latin America, Europe, and Asia. It generates revenue in local currencies including US dollars and British Pounds.
Competition: A few key competitors are Adobe, Braze and Salesforce.

Industry Trends:

The increasing importance of data: The marketing industry is relying more and more on data analytics and targeting capabilities, which increases demand for services like Zeta Global’s.
Shift towards omnichannelling: Customers are now reaching brands through multiple touchpoints like web, mobile apps, or social media. Marketing campaigns should be integrated through all of them.
Growing focus on AI: Customers are looking for new approaches and innovative solutions powered by AI and machine learning to better understand and target their potential consumers.
Emphasis on personalization: Brands are aiming to provide personalized experiences to the consumers, increasing the demand for marketing that can identify and target individual needs.

Financials Deep Dive (using information from 2021, 2022, and 2023 reports and earnings calls):

Revenue: Zeta has shown strong revenue growth in the last three years, growing from $480 million in 2021 to $690 million in 2023, with an increase of almost 44% in 2022 and 23% in 2023. The company also highlighted strong growth in their existing business from their core platform, and an increasing number of new customer acquisition. Revenue growth in 2023 was 26%, and Q1 2024 revenue growth was 21% year-over-year.
Margins: Zeta is showing better operating profits, and a rise in operating margin from -31% in 2021 to -13% in 2023. However, the company is still loss-making. EBITDA margin has increased substantially from negative territory in 2022 to positive territory in 2023 (adjusted EBITDA margin was 13.5% in 2023).
Customer Metrics: Zeta has 400+ scaled customers, and more than 5,000 customers in total. Scaled customers average more than $200,000 in annual revenue with an average customer lifetime of 7 years.
Debt: Long-term debt is a major part of Zeta’s financial structure, at around $155 million in the most recent report. The company has used borrowings mainly for funding acquisitions, particularly in the most recent years.
Cash Flows: Zeta has become cash positive in the most recent years, especially in 2023, with the intention to become consistently free-cash-flow-positive in the future.
Balance Sheet: Total assets are around $850 million and total liabilities are around $360 million. Overall the balance sheet is leveraged, especially with high long-term liabilities (including debt and leases) around $400 million and intangible assets at $175 million, as well as a huge accumulated deficit of more than $600 million.
Stock-Based Compensation (SBC): Zeta is spending a significant amount on SBC, which leads to a difference between reported profits and owner earnings. The company has an existing stock plan as well as various incentive programs. However the value of outstanding options has decreased from around 18 million to 15 million in last year.

Zeta has a high net leverage but management has reduced the levels of debt. The majority of their debt consists of a long-term debt, which is likely to continue in future years.

Moat Analysis:

Network Effects: The company is trying to exploit network effects by acquiring and connecting various data sources, making their platform more relevant as more customers use the service. The strength of these network effects is yet to be proven, and the company has had a tough time generating profits and free cash flows.
Customer Switching Costs: Zeta’s main business relies on providing services to enterprise customers and trying to integrate within their existing infrastructure. These kind of integrations may provide significant switching costs, making the clients stick with Zeta over a long period of time.
Intangible Assets: The company’s brand strength is not established and not a major part of their revenues, and their intellectual property is not clearly defined.
Cost Advantage: While the company has a data advantage, and tries to increase profitability through economies of scale and operating leverage, a low cost is not established within its core business. Thus, it could not compete effectively with other low-cost providers.
Scale: While having a strong market presence in some areas, they are a smaller company when compared to its competitors.

Based on the analysis, we have given ZETA Global a moat rating of 2 out of 5, as it has some minor competitive advantages like customer switching costs, but lacks on various other key elements. This is why the company can have sustainable profits, but that is yet to be proven.

Legitimate Risks:

Competition: The marketing technology landscape is highly competitive, and includes established players such as Adobe, Salesforce, and Braze. These companies have far higher resources, expertise, and customer base than Zeta.
Technological Changes: The marketing industry changes rapidly, meaning Zeta may not be able to effectively adopt to new technologies and market needs. For example, AI and Machine Learning-while they are the foundation of Zeta-may make the platform obsolete with the rise of other innovations. Also companies are focusing more and more on data privacy, reducing the data available to Zeta.
Acquisition Risk: ZETA’s financial situation is under pressure with increasing debt. While the company generates good revenues from its acquisitions, a large portion of goodwill sits on their books.
Execution Risk: Many companies have tried to integrate data analytics with marketing automation systems, but failed. Thus, the management needs to execute it properly, especially at such a scale.
Integration Risk: A significant portion of Zeta’s growth comes from acquisitions. Integrating them with its core business may create hurdles in operations and efficiency.
Financials: ZETA continues to be loss making. The current debt is also considerably high. While profitability has started to improve, there is always a possibility of not being able to maintain consistent profitability.

Business Resilience:

Zeta Global shows some resilience, primarily because of its business model which incorporates many different tools in marketing automation. However, this resilience could be threatened if those core competencies are challenged by new or existing technologies.

Controversies, Concerns, and Management’s View:

Heavy Reliance on Acquisitions: The company is using its stock as currency to acquire multiple companies, meaning it can face risks of overvaluation, lack of integration, and more.
Debt: As highlighted above, the debt is high. The company is in constant need of raising more funds and/or diluting equity for acquisitions.
Profitability: The company is still loss-making, and needs to show profitability by scaling its businesses, cutting costs, and improving its current systems.
Management’s view: In the latest earnings call (Q1 2024), the management is showing confidence about future profitability, emphasizing on the improvements they have made over the past few years, as well as the benefits of their recent acquisitions. The management is focused on the expansion of existing customer base, new customer growth, international business expansion, AI expansion, and improvement of efficiency and operational performance.

Understandability Rating: 3 / 5

Zeta Global’s business model is not extremely complicated and can be understood by layman to a great degree. The company’s focus is on marketing, utilizing data and AI to improve advertising capabilities. While the core business of the company is easy to understand, its implementation and various processes, like its AI based data analytics capabilities and the company’s approach to integration, are more difficult to comprehend, and requires more research for a typical investor to fully understand.

Balance Sheet Health Rating: 2 / 5

While Zeta’s business model has potential, the financials of the company have many issues. The company’s high debt levels, large accumulated losses, limited liquidity, and low profitability all point towards an unhealthy balance sheet. The company needs to improve its profitability, cash flows, and liquidity before becoming more healthy.