AI Drives Innovation and Growth for Tech Giants in Q4 2024 Earnings

Outbrain (OB) Q4 2024 Earnings Call Transcript | The Motley Fool

Good day, and welcome to Outbrain Incorporated fourth-quarter and full-year 2024 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain's investor relations. Please go ahead. Unknown speaker -- -- Analyst Good morning, and thank you for joining us on today's conference call to discuss Outbrain's fourth-quarter and full-year 2024 results. Joining me on the call today, we have David Kostman and Jason Kiviat, the CEO and CFO of Outbrain, which will operate under the Teads brand. During this conference call, management will make forward-looking statements based on current expectations and assumptions, including statements regarding our business outlook and prospects and our recently complete acquisition of Teads. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31st, 2023, and our definitive proxy statement filed with the Securities and Exchange Commission on October 31st, 2024, and as updated in our subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as the call's original date, and we do not undertake any duty to update any such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth-quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com, under News and Events. With that, let me turn the call over to David. David Kostman -- Chief Executive Officer Thank you, Meg. Good morning, and thank you for joining us today. On February 3rd, we closed our acquisition of Teads. This merger brings together two Open Internet category leaders, combining the extensive expertise of Outbrain in performance and of Teads in video and branding into a single solution for omnichannel outcomes across the marketing funnel. This new and expanded company will operate under the name Teads. There's a huge opportunity to take advertising on the open internet to the next level. Today's Open Internet platforms focus on scale and efficiency. Marketers have shown us they expect more from their advertising. They need a partner that can surface the meaningful moments in the consumers' buying journey, using a deeper understanding of audience engagement and behavior, to identify when they are ready to discover new products or services and evaluate purchase decisions. Our unique data set and AI-driven prediction technology better positions us to provide these solutions. The new teams will better serve enterprise brands and agencies as well as mid-market advertisers and direct response advertisers by delivering elevated outcomes from branding to performance objectives. This foundation will enable us to derive new incremental value from the Open Internet as a true brand-formant solution. Now, let me provide an update on Outbrain's stand-alone Q4 and full-year results. For Q4, I'm pleased to report that Outbrain delivered both extra gross profit and adjusted EBITDA within our guidance range. We also generated record-free cash flow. This is part of our continued trajectory for several quarters. Q4 results were driven by strength in the same key pillars we presented to you over the last couple of years. These will continue to be important drivers of our business. The first pillar, expanding our share of wallet from advertisers. It is important to clarify that we serve enterprise brands and their agencies, both for branding and performance needs, as well as the segment of small and medium enterprises and direct response advertisers that are looking primarily for performance in ROAS. So with brands and agencies, we've seen continued momentum in our performance solutions. Our direct response advertisers have embraced the use of our Outbrain DSP, which saw growth of 45% in advertiser spend in 2024, due to the continued delivery of superior performance, both on the Outbrain publisher base and third-party properties across different formats such as native, display and video. As a reminder, we have been doing this for several years, leveraging the performance DSP we acquired in 2017, which also provides a value of the bidding edging and DSP capabilities, expanding our platform's reach. The second pillar, expanding beyond our traditional feed. Revenue generated from supply beyond our traditional feed represented approximately 30% of our revenue in Q4 2024 versus 26% in Q4 2023. We have continued to grow this metric quarterly for the last two years, demonstrating our focus on expanding our inventory diversity beyond our exclusive publisher base and extending the reach for our advertisers to OEMs, apps, and other platforms. One of the more exciting developments here was the launch as a beta in September of Moments, our vertical video experience that brings social media experiences to the Open Internet. To date, we have more than 40 media owners using Moments, including New York Post, News Australia, RTL, and Rolling Stone. Initial user engagement results are strong with swipe depth growing from about three videos on average to 7.2 and the percentage of people engaging with the experience growing from about 35% to over 47%. In addition, we are encouraged by the interest that legacy TV advertisers have expressed in Moments, as it provides powerful video experiences for premium brands. Another example of how this combination will provide meaningful synergy. And the third pillar is deepening our premium media owner partnerships. In Q4, we successfully renewed agreements with some of our important publishing partners, including Spiegel in Germany, Il Messaggero in Italy, and Grape in Japan. We also secured new business partnerships from competitors and launched new partners, including Penske Media in the U.S. and Prensa Iberica in Spain. We believe this again demonstrates the significant value proposition we offer when it comes to strategic relationships with premium publishers globally. On the technology front, over 70% of our customer base has used our AI-based creative automation suite. As a reminder, the creative automation suite uses our algorithms and predictive insights to fuel the product's generative AI delivering more relevant, highly targeted creatives optimized for consumer engagement. The strong foundation we built with the AI creative automation suite informs how we think about some of the highest potential applications of AI as the new Teads. We plan to leverage AI to create a greater continuity of experience across the consumer journey, leveraging the exclusive inventory environments we own from CTV home screens to premium publishers, as well as in our in-house creative studio that utilizes data and interactivity to deliver video and viewable display assets that deliver on advertisers' KPIs. The new Teads is one of the largest platforms on the Open Internet that can create meaningful audience moments across screens from mobile, to CTV, to apps and beyond. We believe that the combination of our unique core assets positions us extremely well to capture more and more share of wallet away from other platforms. First, the new Teads combines best-in-class capabilities from our branding performance to deliver outcomes and superior ROAS. Teads brings extensive expertise in branding and creative capabilities across screens. Advertisers are looking for KPIs way beyond just reach. They want results. It's also evident that the combined performance plus branding strategy can increase return on investment for advertisers with an independent study estimating a total revenue impact increase by 90%. That's why in the future, brand performance is a huge opportunity. Second, the new Teads has the most direct exclusive supply path on the Open Internet across the digital landscape. As you've heard over the last couple of years, including from many of our peers, this is becoming increasingly important as advertisers are looking for curated premium environments to limit the risk of open exchange buys on DSPs. And we believe that, also CTV is becoming a core part of the performance marketing mix. Our CTV presence from the teeth side, combined with the leadership with performance marketers that legacy Outbrain brings to the table, positions us well for growth in this area, which is an important element of our combined product strategy. And third, we have exceptional global reach with more than 2 billion unique users and proprietary data signals to our exclusive comment page with the most premium media properties. I want to underscore that, Teads already has more than 50 joint business partnerships with the leading premium brands of the world, including Apple, Visa, Louis Vuitton, McDonald's, Nissan, and many others. These partnerships generate an average of $5 million per year and upwards of $20 million per year. It's important to note that even before the combination with Outbrain, Teads had a significant amount of performance budgets from these advertisers. These types of relationships are the privilege of only the largest players in the digital advertising space. Teads has been growing these direct relationships with the advertisers and their agencies for many years, having developed a winning multi-touch strategy of working directly with the advertisers and their agencies, which are primarily the largest agency holding companies. The response from these advertisers to the new Teads value proposition of branding and performance has been overwhelmingly positive, which bodes well for our cross-sell synergy plan. If you combine these joint business partnerships with a strong focus on small, medium enterprises of the legacy Outbrain, we believe we have a great coverage of the market. I want to spend a minute talking about the status of the post-merger integration. As Jason will discuss, we are also well underway in the realization of the synergies of $65 million to $75 million we presented to you. We had the opportunity to plan the post-merger integration in detail for over six months. And as a result, we first executed on the headcount reductions in our plan in the first week, which we expect to result in approximately $35 million of just the compensation savings on an annualized basis. Second, we effected the reorganization and combination of the two organizations in the first two weeks, meaning that the merged new company structure with clear leaders and roles and responsibilities is in place. Third, we already implemented certain synergies by connecting the demand and supply of the two platforms where feasible. And fourth, our global sales teams are working on the cross-selling opportunities as one team with aligned incentives and books of business, already testing the water, and actually have already sold the first campaigns with key elements of our combined performance and branding value proposition. We've seen strong enthusiasm and confidence in our new combined team since closing the deal, with many already seizing the new business opportunities this merger has unlocked. We expect this to begin positively impacting our Q2 results. Operating, as we say it internally as one team and one dream is underway, which I believe will ensure we are ready to capture the large opportunity ahead despite some short-term increased disruptions, which are natural consequences of such quick and decisive moves when merging two same-size companies. To sum it up, the early momentum is energizing, and we're just getting started. Now, I'll turn it over to Jason for a more detailed financial update. Jason Kiviat -- Chief Financial Officer Thanks, David. As David mentioned, we achieved our Q4 guidance for Ex-TAC gross profit and adjusted EBITDA, generating significant free cash flow in the quarter and for the year. As we saw solid profitability and cash generation, as we see continued benefits from the changes we've been making to our revenue mix and cost structure as noted on prior calls. Revenue in Q4 was approximately $235 million, reflecting a decrease of 5% year over year. Though total ad spend was materially flat year over year in the quarter and increased year over year on a full-year basis. New media partners in the quarter contributed 9 percentage points or approximately $21 million of revenue growth year over year. The net revenue retention of our publishers was 86%, which reflects downward pressure of ad impressions, particularly from one key supply partner as noted in prior quarters. And logo retention remained high, finishing for the full year at 98%. We saw CPCs remain stable to positive, netting to a slight increase year over year for the quarter for the second quarter in a row. This, along with continued improvements in click-through rates, drove further growth in RPMs, which have improved in each quarter of 2024. Ex-TAC gross profit was $68.3 million, an increase of 7% year over year, continuing the trend of acceleration and outpacing revenue for the seventh quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance in certain deals. While Ex-TAC gross profit continued year-over-year growth in Q4 on the strength of our growth areas and positive momentum of RPMs, as noted in prior quarters, one of our key partners transitioned to new bidding technology, and we completed the transition in early May 2024. This volatility continued to impact our overall growth in Q4 by a high single-digit percentage, and our overall Q4 Ex-TAC gross profit would have grown in the mid-teens percentage year over year, excluding this one isolated headwind. We remain focused on rescaling and optimizing this supply. Operating expenses increased year over year, predominantly driven by onetime costs of $5.5 million related to our transaction with Teads. And as a result, we grew our adjusted EBITDA 21% year over year to $17 million, which reflects another consecutive quarter of margin improvement. Moving to liquidity. Free cash flow, which, as a reminder, we define as cash from operating activities less capex and capitalized software costs, was approximately $38 million in the fourth quarter and $51 million for the year. This is a tremendous outcome and comes as a result of cash profitability, strong working capital performance, and timing benefits. As a result, we ended the quarter with $166 million of cash, cash equivalents, and investments in marketable securities on the balance sheet and no debt. While we maintain an authorized amount of $6.6 million under our existing share repurchase program, there were no share repurchases in Q4. Given the finalized acquisition of Teads, we currently do not intend to repurchase shares in the near term as we have previously stated in August when we announced the Teads acquisition. We announced that we completed the acquisition of Teads in February, and subsequently completed the private offering of $637.5 million in aggregate principal amount of 10% senior secured notes due in 2030. As I mentioned, when we closed the transaction, we are very excited about the combined company's transformative financial profile, including the significant expected impact of synergies on our top and bottom lines. We estimate $65 million to $75 million of an annual impact on adjusted EBITDA, including $60 million from costs to be realized fully in 2026. As David covered, about half of the goal we set for ourselves in annual run rate was already secured in the first couple of weeks post closing, focusing initially on cost-related synergies. Naturally, that will have a significantly greater impact on our bottom line as the year progresses. Now, turning to our outlook. Given the short time elapsed since we closed the transaction, the fact that the transaction closed almost mid-quarter and our focus on integration and synergy capture, while we are sharing our outlook for both Ex-TAC gross profit and adjusted EBITDA for Q1, we are currently only sharing our full-year outlook for adjusted EBITDA. Also, I'll provide some points of additional context to help frame how we see this year playing out, and we will plan to update more on our progress and outlook on upcoming calls. In our guidance, we factor in the closing date of the merger of February 3rd and note that the company's accounting is subject to further policy alignment analysis. With that context, we have provided the following guidance. For Q1, we expect Ex-TAC gross profit of $100 million to $105 million, and we expect adjusted EBITDA of $8 million to $12 million. For full-year 2025, we expect adjusted EBITDA of at least $180 million. Now, a few points of additional context. On a pro forma basis, while we are still expecting an overall year-over-year decline in Ex-TAC gross profit in Q1, we have seen improvement in the year-over-year performance of legacy Teads in the first few months of the year relative to Q4 of last year. On a pro forma basis, we expect to see improvement in year-over-year growth rates over the course of 2025 with H2 seeing single-digit positive growth year over year. And note, to provide continued transparency, we have provided legacy Teads' 2024 quarterly Ex-TAC and adjusted EBITDA in our Q4 earnings release. Note that, these are as legacy Teads presented them on a non-IFRS basis and are reconciled to IFRS measures and potentially subject to further U.S. GAAP and policy alignment. With respect to expenses, we anticipate the synergy realization to increase over the course of 2025 from a few million dollars in Q1 up to Q4, reflecting the run rate of our 2026 estimated synergy amount. Lastly, on a personal note, I'm very excited about the future. The combined company's financial profile is very attractive, and the combined teams' excitement has never been higher. We look forward to keeping you updated while we continue along this exciting new chapter. Thank you. [Operator instructions] Our first question comes from Andrew Boone with Citizens JMP. Please go ahead. Andrew Boone -- Analyst Good morning and thanks so much for taking my question. I wanted to ask about the transition of publishers and advertisers onto what is the combined platform. Can you guys help us understand where we are in that transition, whether there's any concern around dis-synergies from maybe potential leakage or anything else that you guys are seeing as we understand that 1Q '25 guidance? And then a little bit of a bigger picture. Yesterday, we had a competitor talk about potential issues with the TAM of Native Advertising. I think it would be great if you can just address that. What are you guys seeing around demand for Native Advertising and that format more broadly? How do you guys think about the opportunity? Thanks so much. David Kostman -- Chief Executive Officer Thanks, Andrew. So I'll take that. So first on the transition, our focus right now was to sort of unify the teams, start cross-selling. We have a very clear road map around the integration of the platforms and a strategic road map that is focused both on the traditional publisher side and particularly on CTV and the ability to deliver performance on CTV. So that's -- we've had 6 months of planning to do. So we have that in place. Eventually, what we plan to do is really to deliver a lot of the performance capabilities from Outbrain into Teads Ad Manager, which is the platform where we're going to be serving primarily brands and agencies and SMEs. And we're going to continue to invest in our DSP business for direct response advertisers. The tech transition and integration will take time, but our teams' already sort of cross-selling with the back office supporting that. We already have, I think, three actually cross-selling opportunities that we are answering, which is super exciting. In terms of the sort of core legacy market, I think we've been talking for the last two, three years about three core growth drivers that actually, and I repeated today. One is expanding beyond the feed. So we have already embarked on that journey a couple of years ago. Today, it's about 30% of our business is beyond the traditional feed. We sort of saw the need to deliver to performance advertisers at larger scale around the whole Open Internet. So we did that. The second is really shifting a lot of the performance buyers, the direct response buyers into the Outbrain DSP, formerly known as Zemanta. So that has been another growth driver, which saw 45% growth in the revenue spend and the ad spend on that platform. And third, if you look at our numbers, which we sort of delivered the organic numbers, we've been continuously growing our extra gross profit and accelerating it. So it's still single digits, but growing nicely toward the higher single digits. And we will continue to invest in these growth drivers. Thank you. The next question comes from James Heaney with Jefferies LLC. Please go ahead. James Heaney -- Analyst Great. Thanks, guys for the question. In your prepared remarks, you mentioned the impressive growth that you saw in the Outbrain DSP. Can you just talk about some of the drivers of that growth and how we should think about the strategy for Outbrain DSP going forward under the combined company? And then I just had another one. Thank you. Hi. So generally, I mean, we've been -- we bought Zemanta about seven years ago, and we used the bidding technology and the ability to broaden the ability to get more share of wallet from performance advertisers by broadening the ability to bid not only on Outbrain inventory, traditional outbid inventory that's connected to Amplify, which is our exclusive publisher base, but to bid outside of that inventory into native, into display and video. So we've been doing that, and that has been a growth driver we identified. I mean, traditionally, we used to sell it when we bought the business as a sort of mid-market performance DSP competing with other DSPs. And we identified certain segments of buyers where the performance is so superior to sort of our direct connection, which allowed us to significantly grow the share of wallet with performance advertisers. And I think, again, we will continue, as I said earlier, we will continue to invest in that. We think it's a great platform for performance and that will serve the segment of direct response advertisers. We will consolidate many of the capabilities of performance that we have from that platform into Teads Ad Manager, so that our brand and agency segment and SMEs will also be able to enjoy the ability to sort of launch campaigns and sort of in the future, I talked about brand format. I mean that's sort of a little bit futuristic. But the ability -- the unique ability to connect in sort of the same instance, the launch of a campaign for branding and performance, I mean, it has been proven many times that those two sort of really support each other. We've seen a lot of research also talk about growth in revenue when you combine these two, and we will have the unique capability to really link a branding campaign with a performance campaign. But today, our focus is to sell branding and performance and bring a lot of the capabilities that legacy Outbrain has into the Teads Ad Manager. Jason Kiviat -- Chief Financial Officer Maybe one quick point that, we've talked about the last couple of quarters, but for clarity. So when the customer is spending on the DSP, they're accounting for it as a net revenue recognition as opposed to a gross revenue recognition on our core demand platform. That's the biggest driver of the disparity between when I say gross revenue for -- as reported on our P&L is down a few points year over year, but our total ad spend is up year over year. That's the big difference in that we've actually been growing ad spend overall. It might not reflect on the face of the P&L and the biggest reason why is the shift to the DSP business. James Heaney -- Analyst OK. Yeah. That's helpful. And then just another one on the -- you mentioned the traditional supply outside of your traditional feed now 30% of revenue versus 26% last year. How do you envision that progressing over the next few years under the combined company? Is that -- does it ever get to a majority or how do we think about that? David Kostman -- Chief Executive Officer So I think when we report this number, it's sort of just legacy Outbrain. So sort of as a percentage of the combined company, it's going to get much lower, but we continue to invest. We will continue to invest in that. We think it's a great capability for performance buyers that are looking at buying sort of into display, into other formats. So we think that is a growth driver that will continue to support our overall growth. Thank you. Our next question comes from the line of Ygal Arounian with Citi. Please go ahead. Ygal Arounian -- Analyst Hey. Good morning guys. Maybe just on the Teads sales force factor sort of transitioning out and that impact in 1Q, you talked about better performance in February. Just how is that trending? And as we look at the full-year EBITDA guidance, maybe relative to the initial outlook you had when you proposed the merger, what are the factors there? Is it a slower rollout of the cost synergies? Are there revenue synergies in 2025 at all? Just help us kind of bridge through the integration over the course of the year and into next year. Jason Kiviat -- Chief Financial Officer Sure. So maybe I could take both of those, David. Certainly, feel free to add. So as far as what we've seen with the legacy Teads business and maybe just quickly a disclaimer that the closing date of February 3rd, so our guidance forward and our reporting, obviously, in the future will be effective as of that day. For transparency, as I said on the call, we did share in the earnings release the legacy Teads 2024 results by quarter just for transparency, because we do plan going forward to talk about the combined business. So obviously, right now, just based on the fact that we're so recent to closing, I'll give a little color on the two legacy businesses separately for Q1 and for how we see the year playing out to answer your two questions. So in terms of the Q4 legacy Teads business, we talked at closing about the idiosyncratic drivers of French political instability and as you pointed out, the sales force decline and just the merger kind of pending merger impact distraction overall that the U.S. and global team saw as a headwind. We've seen both of those really turn around in the last couple of months to a different extent. So with respect to France, we saw the recovery very quickly in January, returning to year-over-year growth, which really proves that that was really a one-time thing that's quickly snapped back. In terms of the distraction, the global revenue and Ex-TAC that we're seeing from the legacy Teads business has improved in January versus Q4 on a relative year-over-year basis, in February versus January on a relative year-over-year basis. And we feel good about, obviously, the March pipeline based on where we are now entering March. So we've seen positives bringing the team together pretty quickly and energizing the combined team has been already showing up in the results is the good thing here. And what that nets to is we do expect a year-over-year decline in Q1 from the-from the legacy Teads business, but to a lesser extent than we saw in Q4. And again, it's improved over the course of the quarter as well. And that's despite actually an incremental FX headwind that we see in Q1 relative to Q4 as well. So net-net, positive. We see good trends, and we obviously project that forward. As far as your question on the year, we do expect Outbrain -- the legacy Outbrain side to continue the acceleration of growth that we've seen over the course of this past year through continuous growth of yields and contributions from the areas that we just talked about to James' question, to DSP and supply outside of feeds. So we entered the year with that momentum. And then on the Teads side, like I said, we've seen the trends turning positive over the last couple of months. Obviously, we're pretty early days still here. And to your question, we've gotten pipes connected on the cross-selling and on the synergy capture on the top line, but we expect that to play out more over the course of the year. And we do expect to return to overall pro forma growth by the second half of the year. Maybe just a color on a couple of other things with respect to the year. Seasonality, obviously, our seasonality changes as a combined company. Maybe a couple of data points that could be helpful to modeling. We do expect the Ex-TAC and the EBITDA to be a little bit different pacing than what you might be used to with legacy Outbrain. If you look at the last few years, the average Ex-TAC by quarter, 21% in Q1, 23% to 24% in Q2, Q3 and 32% in Q4, while expenses are much more flat over the course of the year. And what that means is the EBITDA -- two-thirds of the EBITDA is typically recognized in the second half of the year. So between that and the synergy realization ramping up, I said on the call, we do expect a few million dollars of synergy realization in Q1. But just based on the timing of close and the actions we've taken, we do expect it to ramp up over the course of the year and finish the year at that run rate that we've estimated for 2026 so. It's early days. We're obviously focused on the integration, and we plan to keep you updated on our progress as we move forward. David Kostman -- Chief Executive Officer I just want to add a couple of points. One is really there's excitement on the sales teams around the cross-selling, and we've seen already some actually materializing and I've been seeing many customers and the feedback is excellent. So I think that's not something that sort of we're baking into what you see here. And we talk about CTV also has been -- it's a business that last year for Teads, it's close to triple. It was 10% of Q4, and it's going to be potentially a higher percentage in Q1. So, we see a lot of opportunity around that business, too. And when CTV grows, it also helps Teads particularly, because of the omnichannel capabilities. So that will also have a positive impact around the online video business, which we've, I think, talked about it when we announced the deal. What we see when advertisers spend both on CTV and on online video with Teads, it's normally 50% higher total spend than when you just spend on one of the platforms. So the growth of CTV will also, we believe, continue to support growth in the online video. Ygal Arounian -- Analyst OK. That's really helpful. Thank you. And just a follow-up on the CTV opportunity, particularly given the strength that Teads is seeing there. And just kind of, I think, what you're implying is shift from where CTV has been, historically, more upper funnel and brand and there seems to be a growing focus around performance. Is that a learning change for advertisers? Are they kind of knocking on the door to be a little bit more performance? And maybe just what's that -- whether it's competitors [Technical Difficulty] or conversations with advertisers, what's that like? Maybe kind of broadly would be helpful. Thank you. David Kostman -- Chief Executive Officer So I would take that. So I think we're very excited about CTV and the progress that Teads made over the last couple of years, which has been mostly focused around branding and sort of really leveraging the joint business partnerships that Teads has with more than sort of 50 of the most premium brands of the world that are sort of doing omnichannel video with them. We believe that the performance is a huge, huge opportunity. We've had many of our SME buyers ask us for video and ability to deliver on CTV. We think it's the early days. I think CTV is a medium that will sort of drive a lot of value for performance, both for brands, I mean, when we talk about enterprise brands that want to drive not just brand awareness, but eventually want to convert the sales and for small, medium enterprises that today, video production with AI is in a different level than it was before. So you can generate those creative assets. Part of the strength of Teads is the sort of studio, which is helping advertisers take those assets and make them sort of more interactive and trigger more of a sort of either attention or performance. So we believe that the combination of Teads capabilities there, the exclusive placements that Teads has on CTV, the huge client base, customer base that Outbrain has on the performance side, the combination of those is going to be something that is pretty unique in the market, and it's a significant part of our strategic product road map investments. [Operator instructions] Our next question comes from the line of Laura Martin with Needham and Company. Please go ahead. Laura Martin -- Analyst Hi, there. So I appreciate the synergies. They go up every time we talk. So at the high end of that $60 million to $75 million of synergies, how much of that is cost? And how much of that is revenue synergy at this point? Jason Kiviat -- Chief Financial Officer Sure. So I can give some color to that, Laura. Thanks for the question. So yes, we estimate for 2026, an annual number in 2026 achieved of $65 million to $75 million. Of that, $60 million is costs. I can break that down further. And then the remaining $5 million to $15 million is the EBITDA impact of revenue synergies. So we're keeping that revenue synergies number fairly conservative for these first couple of years here. It is I think the biggest long-term opportunity for sure and what makes us all very excited between the various drivers there of cross-selling and geographies and just the data -- combined data impact. So that one is big, but we're keeping it pretty small for our estimates right now. So the $60 million of costs that we expect to achieve by next year, that is -- three-quarters of that of $45 million is personnel related. And as David said, we've actioned the majority of about 70-plus percent of this already. So this will -- this is already secured. We have a limited impact in Q1 just based on the timing, but it should play out over the next couple of quarters and get there by year-end pretty confidently. The other $15 million of those -- of that $60 million of cost is a combination of non-compensation, which is things like headcount-related items, software licenses, combining offices, any etc., discretionary spend like on marketing and then, of course, professional fees and things that you just don't need to of anymore. So that one will play out, a little bit kind of in time. Some of them are right away. Some of them take time until you do your insurance policy or do your marketing events, etc. But we have pretty high confidence in that number as well with some upside. And then the third area there is, traffic acquisition costs, which, as you know, is the largest cost here. This is the most exciting one for me personally. There's just always a lot of room to optimize how we put our demand on supply to optimize our margins from a tax perspective. We've already connected the pipes of supply to demand in both directions, and we already have items flowing at a small scale right now, but we do believe that we're able to capture a several million-dollar opportunity in the next couple of years from just better optimization of putting demand on supply where it makes more sense. David Kostman -- Chief Executive Officer Just in context on the top-line synergies, I mean, we're talking here on what we're sort of giving in these numbers, it's less than 2% in total. So we believe there's significant upside there. Laura Martin -- Analyst OK. Second, in the press release, you said that, your go-to-market is going to be Teads. Does that imply we're changing the name of the company? We're changing the ticker symbol? Can you expand on this comment in the press release that you're going -- your go-to market will be Teads going forward? David Kostman -- Chief Executive Officer Yes, Laura. So when we announced the deal and when we announced the closing, we said, yes, we're going to move forward and operate under the name Teads, the name we made a decision to take that name. We call it the new Teads. I mean, if you look at the old Teads either logo and positioning, it's a totally refreshed Teads in the sense that it's combining performance capabilities with branding capabilities, many more formats. So we refreshed the whole branding and positioning of the company, and we're going to be calling it Teads, and that will be a name change and over time, also a ticker change. So we're very excited about this sort of change. I think the market in sort of our industry has been very well received. I think, Teads brand is associated with sort of quality premium brands, video, which are the areas where we're going with CTV. So we felt that this is the right decision. And I think everyone also at legacy Outbrain is very excited about it. Laura Martin -- Analyst OK. And then staying with you, David, my last question is about news. So the drumbeat of ad agencies talking about we need to fund news is really getting louder. My question is, do you see money coming back into news? Or do we still have entire agencies that are buying no news regardless of whether it's political or is there any money coming back into the news genre that you're seeing? David Kostman -- Chief Executive Officer So I would say, Laura, our mix of inventory is way beyond news, but I do see some positive trends. I think it's early days. I think you and I talked about it. I mean, we're in at CF. There's a lot of effort going on between sort of the industry talking to CMOs and to the agencies about sort of the value actually, and the fact that having brand advertising need to news is a positive impact. So I think it's happening. I think it's small steps in the right direction. Thank you. Ladies and gentlemen, that brings us to the end of the question-and-answer session as there are no further questions, I would now like to hand the conference over to the management for closing comments. David Kostman -- Chief Executive Officer So thank you all for joining us. As you can -- I hope you can see how excited we are about this combination, sort of the new journey we're embarking on. I think, we are very excited about sort of the legacy Outbrain business and the growth drivers. We can see the benefits of the combination already materializing, and we look forward to continuing to update you on the progress.

Snowflake (SNOW) Q4 2025 Earnings Call Transcript | The Motley Fool

Good afternoon. Thank you for attending the Q4 fiscal year '25 Snowflake earnings conference call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call and opportunity for questions and answers at the end. [Operator instructions] I would now like to pass the conference over to our host, Jimmy Sexton, head of investor relations. Jimmy, please go ahead. Jimmy Sexton -- Head of Investor Relations Good afternoon, and thank you for joining us on Snowflake's Q4 fiscal 2025 earnings call. Joining me on the call today are Sridhar Ramaswamy, our chief executive officer; Mike Scarpelli, our chief financial officer; and Christian Kleinerman, our executive vice president of product, who will participate in the Q&A session. During today's call, we will review our financial results for the fourth quarter of fiscal 2025 and discuss our guidance for the first quarter and full year fiscal 2026. During today's call, we will make forward-looking statements, including statements related to our business operations and financial performance. These statements are subject to risks and uncertainties, which could cause them to differ materially from our actual results. Information concerning these risks and uncertainties is available in our earnings press release, our most recent Forms 10-K and 10-Q, and our other SEC reports. All our statements are made as of today based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During today's call, we will also discuss certain non-GAAP financial measures. See our investor presentation for a reconciliation of GAAP to non-GAAP measures and business metric definitions, including adoption. The earnings press release and investor presentation are available on our website at investors.snowflake.com. A replay of today's call will also be posted on the website. With that, I would now like to turn the call over to Sridhar. Sridhar Ramaswamy -- Chief Executive Officer Thanks, Jimmy, and hi, everyone. Thank you all for joining us today. What a difference a year makes. It was on this call last year where I was introduced to you as Snowflake's new CEO. I look at the progress we have made in just one year, and I could not be more proud of our team. Our core business is very strong. Our product delivery is in overdrive and our go-to-market engine is humming. We're innovating better than ever and firing on all cylinders. And we have an enormous opportunity ahead of us. Right now, Snowflake is the most consequential data and AI company on the planet. As I said in our third quarter call, our North Star is to deliver the world's best end-to-end data platform powered by AI and we are making progress every day to deliver on that vision. I'm incredibly proud of the operational rigor we have incorporated into our company, delivering greater efficiency while also aggressively investing and delivering on growth. And our focus on our customers has never been stronger. We continue to hear how easy and cost-effective our platform is. And we are hearing more and more multiproduct adoption because of the tremendous value we are delivering to our customers. We're keeping our foot on the gas. We are building on our strengths and going after the opportunities ahead with urgency and focus to ensure we continue our strong momentum throughout this year. You can see this progress in our strong fourth quarter results. We just getting started. Product revenue for Q4 was $943 million, up a strong 28% year over year. Remaining performance obligations totaled $6.9 billion with year-over-year growth of 33%. Our net revenue retention was a very healthy 126%. In the quarter, our non-GAAP operating margin increased to 9%. And our non-GAAP adjusted free cash flow margin was 43%. As you can see, we delivered another quarter of strong revenue growth and overall very healthy results. As I said last quarter, we are obsessed with driving product cohesion. We are continuing to win in the market because Snowflake is easy to use, helps customers break down silos to collaborate and be connected and is trusted by companies of all sizes and industries. This is why iconic brands like ExxonMobil, Honeywell, the London Stock Exchange Group, and thousands more are betting their business on Snowflake Fiserv, a global provider of payments and financial technology, for example, is transforming how businesses and financial institutions use data by providing them with their own analytics platform through Snowflake. This empowers Fiserv customers to have access to insights from their transaction data, combine it with market information, and train their own AI models, enabling smarter business decisions that were previously only possible for large enterprises. Last quarter, we held our BUILD summit, our biggest event of the year for our builders and developers, followed by regional meet-ups and events around the world. So, far, a record of more than 20,000 attendees have joined these events showing incredible momentum and excitement for our product vision. We continue to hear how we are making it simpler to develop, build and innovate on our platform. More and more customers are switching to Snowflake and realizing the incredible ease of use and cost savings our platform delivers. We are also helping our customers develop entirely new revenue streams to monetize their data. For example, supply chain leader, Blue Yonder, leverages Snowflake's robust data management capabilities and scale to help companies transform their operations by offering AI-powered insights. The Blue Yonder platform processes over 20 billion AI predictions daily to help retailers, manufacturers, and logistics providers better manage inventory, optimize deliveries, and respond to disruptions. It enables their business, their customers to access powerful supply chain intelligence that would be impossible to build on their own. As our competitors continue to require expensive engineering resources to maintain and scale, more and more customers are seeing real bottom-line impact. By turning to Snowflake, we have seen more and more Snowflake customers save over 50% by migrating to us from other providers. In fact, we recently announced that SnowConvert, Snowflake's native code conversion. Tooling is now free for anyone to help accelerate migrations from Oracle, Teradata, and many other systems to realize these benefits in data analytics. Snowflake is also the de facto circulatory system in the enterprise world, the ability to collaborate and share data is one of our core differentiators. We are seeing strong adoption of our data-sharing capabilities with customers like Stripe, NTT, and Braze, which each have active data-sharing connections with over 160 partner and customer organizations. These connections enabled them to securely exchange data with their partners and customers, driving value across our ecosystem. We are continuing to innovate at lightning speed. This past year, we brought over 400 product capabilities to market or double the amount we launched the previous year. We have seen incredible growth in our data engineering business and continue to see strong adoption of open data formats, especially truly open modern data formats like Apache Iceberg, which is transforming how organizations manage and query data at scale. We have also seen amazing growth in the number of companies building and collaborating on Snowflake with over a third of our capacity customers collaborating with data on a regular basis. When it comes to AI, last year was foundational for us. We introduced AI, which is now being used by customers to seamlessly build data agents for both structured and unstructured data with state-of-the-art retrieval using Cortex Search and Analyst. We are supporting a range of market-leading models, including Anthropic's Claude, Meta Llama, and DeepSeek. And I'm sure, you saw that we just announced our expanded partnership with Microsoft that brings OpenAI's models into Cortex. This makes us the only data platform to seamlessly host both Anthropic and OpenAI, world-leading models enabling our customers to build data agents while ensuring that their data remains secure in Snowflake. And just a few weeks ago, we introduced Cortex Agents, a world-class agent orchestration framework to enable seamless planning and execution of tasks across structured and unstructured data, all powered by leading models such as Anthropic's Claude. They leveraged Cortex Analyst and Cortex Search to deliver state-of-the-art accuracy, along with enterprise-grade reliability and governance so customers can build agents at scale. And today, we announced that we are deepening partnership with Microsoft. We are making Cortex Agents available in Microsoft 365 CoPilot and Microsoft Teams, bringing millions of users, seamless access to information, and accelerated productivity, all within the Microsoft platform. All of these innovations are focused on driving real value for our customers. We make it easy for people to create a chatbot on structure or construct retail. And these in turn are the essential building block for a strong AI foundation. As we head to the next inflection point with agents, we now have over 4,000 customers using our AI and ML technology on a weekly basis. Take AstraZeneca. They are harnessing the power of data in Snowflake to revolutionize healthcare by making its data AI-ready. By unifying their research data, they're accelerating drug discovery and clinical development to deliver life-saving medicines to patients faster, working toward their ambitious goal of 20 new medicines by 2030. And State Street, which manages 10% of the world's financial assets is using Snowflake AI and machine learning to uncover new market insight that help financial institutions make better investment decisions. As our AI offerings continue to scale at lightning speed, our core business continues to be incredibly strong. We have talked a lot about delivering on our vision of being the end-to-end technology provider for our customers data journey. Already, we are introducing additional snowflake connectors in private preview, leveraging the technology from our acquisition of dataflow to provide seamless connectivity and data integration. With key platforms like SharePoint, Google Drive, Workday, Slack, and many more, our customers are loving this capability, and we have strengthened our foundation to deliver an extensible and flexible connectivity platform for unstructured data, as well as structured data. As we continue to bring new innovations to market, we are focused on scaling efficiently. We are investing in the growth of our go-to-market operations and maintaining our seamless collaboration between engineering, product, marketing, and sales to bring products to market effectively, delivering more value to existing customers, as well as winning new ones. Using our Cortex AI technology, our DTM teams can now quickly discover the most relevant sales content by asking natural language questions of our sales knowledge assistant. And with our fast-ramp, they can get deep insight into our customers' consumption trends in our Customer 360 app. You'll also see our emphasis on rigor and efficiency in our growth plans. Our headcount growth over the next year is focused on engineering and sales, which are teams the direct impact to revenue. We are using AI internally to drive efficiency in incredible rates. Our teams are able to tap into a wealth of data and information faster than ever before. It is this operational rigor that we instituted in fiscal '25, that is now our way of life going forward, investing in growth while having a maniacal focus on driving efficiencies throughout our business. Mike, why don't you take us through more of the financial details. Mike Scarpelli -- Chief Financial Officer Thank you, Sridhar. In FY '25 product revenue grew 30% year over year to reach $3.5 billion. Our core business is strong. We continue to see stable consumption patterns as evidenced by our 126% net revenue retention rate. New products are becoming an important growth driver. Snowflake contributed 3% of FY '25 product revenue and we are seeing strong adoption of our new data engineering and AI features. In Q4, technology customers outperformed while financial services continues to be our top vertical. EMEA with another source of strength. The Q4 holiday impact was consistent with our expectations. Remaining performance obligations grew 33% year over year. During the quarter, several large customers ran out of capacity before their contract end date as their revenue outpaced their contracted bookings instead of pulling forward the renewal cycle, these accounts are now purchasing as they consume. This is common for large customers, and we do not view this choice as indicative of their future consumption patterns. Turning to margin. FY '25 non-GAAP product gross margin of 76% landed in line with expectations. FY '25 non-GAAP operating margin was 6%. Last quarter, we discussed our plans to improve efficiency. These efforts include centralizing teams targeted early career hiring, removing redundant management layers, and continuous performance management. In Q4, these efforts yielded meaningful margin gains. Q4 non-GAAP operating margin of 9% outperformed expectations. FY '25 non-GAAP adjusted free cash flow margin of 26% landed in line with our expectations. In FY '25, we used $1.9 billion to repurchase 14.8 million shares at a weighted average share price of $130.87. We did not make any repurchases in Q4. We still have $2 billion remaining on our authorization through March 2027. We ended the year with $5.3 billion in cash, cash equivalents, short-term and long-term investments. Moving to our outlook. We expect Q1 product revenue between $955 million and $960 million, representing 21% to 22% year-over-year growth. As a reminder, Q1 the most difficult year-over-year comparison as we lap leap year. We expect Q1 non-GAAP operating margin of 5%, and this margin outlook includes expenses associated with our annual sales kickoff event posted in Q1. We expect approximately $15 million in expenses similar to last year. For FY '26, we expect product revenue of approximately $4.28 billion, representing 24% year-over-year growth. We are forecasting stable growth within our core business. We expect new product features to contribute to the step-up in year-over-year growth rates in the second half of the year. As always, our forecast includes headwinds associated with performance improvements. As I said last quarter, product improvements are an ongoing part of our business, and we will not be breaking out assumptions for specific features moving forward. Turning to margins. We expect non-GAAP product gross margin of approximately 75%. longer term, we expect easier GPU access and growing AI revenue to benefit product gross margins associated with new product features. Non-GAAP operating margin will expand to reach 8% for the year. We expect non-GAAP adjusted free cash flow margin of 25% for the year. Our strong revenue growth, combined with a more thoughtful approach to hiring, and increased leverage from AI will benefit stock-based compensation as a percent of revenue. In FY '26, we expect SBC as a percent of revenue to decrease to approximately 37% from 41% and will continue to decrease year on year. We will be hosting our Investor Day in conjunction with our Summit Conference the week of June 2nd in San Francisco. If you are interested in attending, please email [email protected]. Before opening up the line for questions, you've likely seen our filing -- sharing that I plan to retire once the successor is in place and up to speed. The company executed well in FY '25 under the new leadership of Sridhar, and I feel we are set up for success in 2026 and beyond. This is the right time to hand the reins over to a new CFO. The company will be kicking off a search for my replacement, and I will stay on board full-time until a suitable replacement is in place and the transition is completed. Sridhar Ramaswamy -- Chief Executive Officer Mike, before we jump into Q&A, I want to take a moment to express my gratitude. Over the past year, you've been an incredible partner. And I'm deeply appreciative that you will continue to be as we work together to make this a smooth transition. Snowflake wouldn't be the iconic company it is today without your years of leadership. And I know I speak on behalf of all of our employees when I say, we are so happy for you, and we look forward to celebrating you over the coming. We can now open up the line for questions. Operator [Operator instructions] We will pause here briefly as questions are registered. The first question is from the line of Keith Weiss with Morgan Stanley. Your line is now open. Sanjit Singh -- Analyst Thank you. This is Sanjit Singh for Keith. I want to extend my congrats. Not many software companies at scale are growing 30% in this environment. And then, Mike, congrats on a stellar distinctive career in software. With that, maybe just some of the questions, maybe Mike to start with you. On your comment on these large customers in Q4 exhausting their commitments, but not necessarily renewing going on demand. How usual or unusual is that? And do you expect these customers just to sign a commitment contract in due course? Mike Scarpelli -- Chief Financial Officer Yeah. I fully expect they're going to sign a new commitment. But as you know, we typically sign a three-year contract with our customers. Once they're up and running, many new customers start at one year, the first year then go to three years. And under their contract, they make a capacity commitment to us based on what they expect they're going to go through. But if they burn through that commitment before the end of the contract term, the customer has two options. They can do an early renewal and make a new capacity purchase. Typically, they only do that if they're going to get some economics for, that makes sense to them or they continue to purchase under the same terms as they go to the end of their contract period, at which time they must do a new capacity purchase of equal to or greater than to get the same economics that they have in their contract. So, this has always happened. We just had a few big customers that, that happened to in this quarter, and I fully expect sometime over the next month to six months, so those people will sign new contracts. Sridhar Ramaswamy -- Chief Executive Officer And I'll just add on a couple of obvious statements, which is that these customers reaching their capacity earlier is a good thing. It means that their consumption has gone over what they predicted at the beginning of the contract. Generally speaking, these accounts are in a pretty happy place. Yes, there's sometimes a little movement here and there with timing. Sanjit Singh -- Analyst Yeah, that makes complete sense. And then Sridhar, for you, Mike also sort of framed the guidance where the new products probably shows some more muster in the second half of this year. You've done a lot of work. The team has done a lot of work accelerating the pace of product innovation. Could you give us some color on the adoption trends within the data engineering portfolio and so one bucket? And then looking at sort of the AI/ML application platform side with some of the announcements supporting both OpenAI models and Anthropic models, when do you think that starts to unlock more workloads, more customer adoption, and ultimately, a greater revenue as we look to the balance of this year? Sridhar Ramaswamy -- Chief Executive Officer Yeah. That's a great question. And in areas like data engineering, as you know, we've been working on technologies like Snowpark, which is our version of Spark. And we have talked about how that has already driven robust adoption. I think what is new in the world of open data is what all of like the technologies that we are bringing allows us to do in this like vastly expanded scope of data that is available to us. And we are increasing that by making investments in companies like Datavolo and turning that into a large set of connectors that can bring in more data. And both Christian and I and the sales teams track these different areas. We have talked to you previously about product features like dynamic tables. This truly is an amazing product, where setting up complicated pipelines is roughly as simple as writing a SQL query. So, we are seeing a lot of brisk adoption, and it can also reach scale very quickly because it feeds very naturally into large-scale applications. We're very -- both Christian and I and others are very confident on that side. AI is interesting in the sense that it's a much newer product in a set of products, generally speaking. And throughout the world, not just at Snowflake, we are seeing broad adoption of AI. The way we approached it, which is to build rock solid primitives, our search product, for example, is among the best in the world. We published a benchmark recently showing how it was in the top three. And so, products like that have a lot of potential, but you'll also see a multiplicative effect. The more the great connectors that you have in portfolio, the more data can be brought in for applications like search. In turn, they will drive other applications that our customers or our partners can build on top of Snowflake, for example, let's say, like an insurance underwriting application or like a legal analysis kind of application. More and more of those kinds of things become possible with the combination of data engineering and AI technologies. We have seen broad adoption of AI. We expect that to turn into real revenue over the coming quarters. But the point that I want to make is that all of these fit together seamlessly. The more we can do with ingestion, the more options there are for us to do meaningful things to data engineering. The more we can do with data engineering and support of formats like Iceberg, the easier it is for people to use Snowflake ad hoc analytics use cases on data that is sitting in that are sitting in cloud storage. And the more data that is sitting in our accessible to Snowflake, the more value you can get out of products like Cortex Analyst and now Snowflake intelligence. So, it is this tying in that I think is pretty unique to us. And yes, we expect these to meaningfully contribute in the latter half of the year. Thank you for your question. Next question comes from the line of Kirk Materne with Evercore ISI. Your line is now open. Kirk Materne -- Analyst Yeah, thanks very much. Congrats on a great quarter, and Mike, congrats on a great run at Snowflake. Sridhar, I don't know if it's for you or Christian, but over the last 6 to 12 months, we've seen a lot of new announcements from data companies sort of partnering up with enterprise software vendors like ServiceNow or Salesforce and you guys have partnered with them. One of your competitors just partnered with SAP. I guess what's the best way to interpret these announcements in terms of where the center of gravity from a data perspective lives? I was just wondering if you guys could comment on that. And then, Mike, really quickly for you. Just any adjustments to the sales comp model that we should be aware of this year? Thanks very much. Yeah, on the comp model, probably the biggest change is taking a little bit of a step back in terms of allocation. We're still principally paying people on their variable comp on revenue. But we do think it's important that reps also have a total contract bookings number as well, too. And so, there's going to be a quota as well on bookings, but the bulk of their earnings will come from consumption revenue. Sridhar Ramaswamy -- Chief Executive Officer Great. And going back to the first question, we call ourselves the AI data cloud for a good reason. This is because most customers see us as the best place to get value from data, especially analytic and predictive value from data. At Snowflake itself, for example, we have connectors that bring in data from Salesforce, from ServiceNow, from GitHub and the list sort of goes on and on. And I think what's obviously been very interesting for all of us, even prior to the AI revolution, is being able to look at this data, say Workday data, as well as Snowflake data along with Salesforce data all in the same pane. All of us have access to reports that can stitch these kinds of data together. And so, we have done a number of partnerships with many companies, some of our best ones are with folks like ServiceNow and Salesforce. We have bidirectional integrations with them, where a lot of customers bring data from those applications into Snowflake. It works very, very smoothly. I think what is unique in the world of Agentic AI is the time to value from data can become exceptionally quick because you're not in the process of building painful integrations, painful new applications. And some of the things we ourselves, again, have been able to build with Snowflake intelligence have been pretty remarkable. We do expect this trend to continue. Of course, players like ServiceNow, or Salesforce or SAP, they're going to have a class of applications, which can benefit from data that is coming from outside. And hence, we do bidirectional partnerships. The larger theme that I would find to in both of this is that of giving customers choice. Customers should have the right to decide where it is that their data should be. And as far as we are concerned, I think we are very uniquely positioned as a central and very efficient repository of data for most companies. And yes, some of our customers will take data over to one of the folks that I mentioned. SAP, in particular, Christian will give us an update. Christian Kleinerman -- Executive Vice President, Product Yes. So, as Sridhar said, we've always done bidirectional type of sharing and data movement with a number of partners. While we don't have a specific announcement to share at SAP today, I can tell you that we are working with SAP. We like what they're doing with the business data cloud products. And we have a common commitment to foster an open data environment and hope to share more with all of you soon. Thank you for your question. The next question is from the line of Raimo Lenschow with Barclays. Your line is now open. Raimo Lenschow -- Analyst Perfect. Thank you. Congrats from my end for the quarter and for Mike. It was an honor working with you over the last two years. Two questions. One for Sridhar and one for Mike. Sridhar, how do we think about adjacencies for your offering that you kind of might want to consider? Or how do you think about them? Like, for example, this quarter, there was a big debate about streaming and how that might fit into you. So, maybe, can you kind of talk about like how you see the product evolving from your perspective? And then, Mike, for you on guidance, how conservative are the assumptions this year in the guidance versus kind of what you, for example, did last year when you had the CEO change, obviously, how did the economy also play into the guidance for this year? Thank you. Sridhar Ramaswamy -- Chief Executive Officer Great. I'll take -- sorry, can you repeat the first question? I want to make sure I get it right. Raimo Lenschow -- Analyst It's just more -- if you think about adjacencies for where you want to play versus where you want partner and there think about streaming, for example, as one of the kind of areas? Sridhar Ramaswamy -- Chief Executive Officer Yeah. Like overall, we work with a number of partners, and the data space is a very large space. We try to be very open and clear with our partners about where our big areas of investment are. And absolutely, we work with a number of folks in streaming. But both streaming and ingestion are areas where we think it is important for us to have a good offering in place. And while it looks simple, streaming comes in many shapes and sizes that are on-prem solutions that are great, that are more native sort of solutions and the same goes for connectors. We will have a robust ingestion offering, and we continue to work with partners. We do continue -- we do think of streaming as a critical area for Snowflake. Just like we think of Snowflake Intelligence, which begins to merge the line between what one would think of as BI and a new class of application. It's literally -- it's a new thing. We think it's important for us to have a presence there. Christian, any thoughts to add? Christian Kleinerman -- Executive Vice President, Product No. We, at the same time, partnered with a number of players. We continue to be very good partners. We have lots of customers that use us alongside other technologies. You may be alluding to Red Panda, but also companies like Confluent are great partners, and we will continue to do that. Mike Scarpelli -- Chief Financial Officer And then, Raimo, on your question of guidance, I'm just going to say the guidance, I feel is appropriate. We've always tried to give meaningful guidance. And given the scale we're at right now, we think a 3% beat should be considered a big beat. And I feel good about the guidance that we've set for the quarter and the year. And by the way, everyone makes it sound like this is my last call. I think I'll be here for a little while longer. Thank you for your question. Next question is from the line of Brad Zelnick with Deutsche Bank. Your line is now open. Brad Zelnick -- Analyst Great. Thank you so much for taking the questions. Maybe first for Sridhar, with Cortex Agents announced for agent orchestration, can you talk a little bit more about what differentiates your offering versus many other agent offerings out there and maybe where the product vision came from? Was this something customers were asking for? And are there any early adopters maybe that you're working with out there? Sridhar Ramaswamy -- Chief Executive Officer It's a good question. I think the best answer to that goes back to something that I talked about earlier in the context of the data cloud. I think we are rapidly approaching a world in which data is even more central than before. Previously, if you had data sets and wanted to stitch them together and/or build an application, you had to painfully engineer semantics, figure out how to do it, build an application and then figure out how to write, for example, how to use an API to write back data what, for example, cloud does incredibly well is it can produce pretty professional-grade UI with instructions in English, which was just like unthinkable a couple of years ago. I think it is the centrality of data that plays into how we think about agent flows. Then other software vendors talk about agent applications, they are generally limited to the context of the particular function that they serve. So, for example, if you have a customer service offering, then you will naturally offer a customer service agent that can automate parts of the work that agent is going to do. We are uniquely positioned in that we are a horizontal platform. Customers store all different kinds of data with us. And that makes it possible to create pretty interesting new applications. It's too early for me to speak in public about customers and use cases just yet. But I can give you lots of examples even within Snowflake, where the ability to look at data that is sitting in Salesforce, which is where all our meeting data lives are the -- and simultaneously look at all of our enablement material or notes from each of the use cases. And then using that to update some stores, update the status of things. This is an application that we're super excited about. It is this combination of structured data, unstructured data, tool calling that are the basic ingredients. And we can also scale these very effectively with a number of partners that we have, companies like Elementum build on top of Snowflake and they're going to use the core infrastructure that we provide to drive these kinds of agent applications. Brad Zelnick -- Analyst That's really helpful. Thank you, Sridhar. And Mike, just for you, with Q4 being such a bonanza bookings quarter, where you do a lot of big deals with large customers. Can you talk more about the trends you're seeing with your largest customers, maybe the momentum and expansion rates and the services that they're embracing and plan to consume this year? Thanks. Mike Scarpelli -- Chief Financial Officer Yeah. I'll just say the momentum continues with their large customers. They continue to grow and consume like any quarter, some overachieve our forecast. Some are under. There was nothing unusual there. But large customers really are the ones that drive our revenue growth. I was very pleased with the number of million-dollar plus customers growing in the number of $5 million and $10 million as well, too. So, I'm very pleased there. And I think our sales organization has really built up a lot of muscle, too. This year to really identify new workload opportunities and go live. I think our professional services and our partners are getting better at migrations and handling a number of these things as well, too. I think our SE organization has really stepped up and is going to really help drive a lot of those new workloads next year in Snowflake. Great stuff and congrats on a strong finish to the year. Thank you. Operator Thank you for your question. Next question is from the line of Brent Bracelin with Piper Sandler. Your line is now open. Brent Bracelin -- Analyst Afternoon. Mike, happy to learn, you're not leaving anytime soon here. We'll save the congrats. But I did want to ask you a question around product growth. The guide implies an acceleration for the first time into the second half in three, three and a half years. What's driving the optimism on acceleration? Is it all new products? Or are you feeling better about consumption activity across the base? Mike Scarpelli -- Chief Financial Officer It's both. The core of our business is very strong, coupled with the new products that we see that will be going into production. Also, on top of, I'm pleased with the muscle we've been building on new customer acquisitions, and that's going to start to kick in. in the second half of the year. We do get a lot of visibility into our existing customers with planned migrations that they have. And I think that is looking very good for the second half of the year. And remember, our guidance for Q1 seems low, but that is because of the -- that we miss one business day because of leap year, and that's a fair chunk of revenue that comes out of that when you're looking at that growth rate just in Q1. Brent Bracelin -- Analyst Helpful color there. And then Sridhar, just as you think about growth levers to the business, one area you flagged was this idea of Snowflake's role in AI-powered advertising. You clearly know the advertising market well. I never really thought of the large ad market as a meaningful opportunity for Snowflake. Can you just double-click into when you think about the AI-powered ad market, is there an unlock that you see there for Snowflake in that kind of new workload scenario? Thanks. Sridhar Ramaswamy -- Chief Executive Officer We've actually been in this area for -- in the area of marketing and advertising for a fairly long time. There are tons of CDP, start-ups, and others that custom CDP that people build customer data platforms on top of Snowflake. In fact, we acquired a company called Samooha because data clean rooms are a really powerful enabling technology for things like conversion lift. And part of what we facilitate in this role as like a ecosystem player is automating even more operations. We talked last time about this idea called AI SQL, which is what are the primitives you can put into SQL such as that image analysis, video analysis can be done very easily by analysts, so you can ask questions like does putting a Christmas tree into the ad increase the click-through or the conversion rate of an ad that you show over the holidays? And so, I think like as we introduce multimodal capabilities into Cortex, I think the lens of what is achievable with Snowflake will continue to expand. And of course, with language models, with AI models in general, the generative applications, how can you generate creative. How can you generate copy for creators. Those are also areas that become easier and easier to do. And so, that's our broad role. It's an important vertical, both marketing and advertising for Snowflake. But I think the arc is moving more from measurement and privacy-preserving technology to also generative technologies that can power more automated testing, and like things like auto AI measurement using Snowflake. Thank you for your question. Next question is from the line of Alex Zukin with Wolf Research. Your line is now open. Alex Zukin -- Analyst Yes, thanks for taking the question. Mike, I look forward to our banter for at least a few more quarters. Sridhar, maybe just on looking at the spend intensity in your market, it seems like something has changed to the positive over the past six months. It seems like it's gotten better. You've been meeting with a lot of customers. Mike mentioned the tech and financial services verticals outperforming. But maybe can you talk to how much of this is a broader demand environment versus sales execution improvements versus confidence in kind of like better product innovation velocity, releasing of new products? Anything you can do there I think would be helpful. Sridhar Ramaswamy -- Chief Executive Officer Well, you know how this works. Positive feedback cycles like feed on themselves. But I would say, in my mind, the pretty substantial changes that we've made in how we operate as a company, absolutely. First is around product velocity. I think if you look at the pace, of how we've been able to get AI products out to market, I think it's been remarkable. But there's a lot more innovation that is happening. We have a big effort around AI-powered migrations that you will hear more about. We have invested heavily in data collaboration and sharing with release of things like an internal marketplace for our data. Lots of new products in the data engineering space, including Iceberg. So, from that perspective, I think we are just feeling more confident about who we are and obviously expanding the aperture of what is possible. Previously, it used to be that people would have to bring their data into Snowflake to get something done. But with things like Iceberg, we can take care of that right off the bat without any need for movement. I think product velocity is one part. But to what Mike was talking about, I think there is an awareness of the use case life cycle of the discipline needed to understand where we can create value for our customers, map it out in a thoughtful way and then engage in a fairly I would say, constant or constant conversation about what are the best places our account teams and our customers can come to a shared understanding of the projects that we should be working on. Anything that area is becoming more and more of a science where we are able to say what the best people and the team do and have more folks to be more like them. I think there's just a maturity when it comes to use case prosecution. I think the third piece which is what gives us confidence about new products is then how all of these come together in how things are multiplexed over from the product team to the sales team. I mean at the end of the day, it's unreasonable for Christian or I to expect that one salesperson is going to know about the 400 things that we launched last year is just not a thing. And so, we increasingly have specialist teams that know what it is to take, for example, clean rooms to the two dozen most important customers that they must reach this year, say, compared to pretty much all of our customers who we think can benefit from key data engineering features our key AI features. I think it is that maturity and the ability to take the right feature to the right customer to create value that I think positions us overall better. And the final thing that I'll add on here is that we've also cleaned up how we work with partners, definitely ISVs, but also system integrators. And I think you will see more progress on that side as well. So, we are very proud that our ISV partners like relational AI our Qumu are, of course, Blue Yonder with whom we have a fairly deep partnership or succeeding along with Snowflake. So, it's a multifaceted effort, but they build on the same core perimeters great product, a sales team that knows how to execute at scale and an ability to thoughtfully overlay new things that we should be doing on what is a very large sales force. Alex Zukin -- Analyst Super helpful and really clear. Mike, maybe one for you, while we still have you. The guide for next year, it does seem like it's starting. I think you've gotten this question in a few different ways. It's starting at a stronger place than if I look at a year ago. If we look a year ago, when you were incorporating maybe some Iceberg risk. So, to the extent that you can put finer point on that confidence that you have to put that guide out there, again, implying some acceleration. You mentioned some -- Sridhar mentioned some new products potentially ramping in the second half from a contribution standpoint. How do we think about Iceberg as a tailwind or a headwind in that guide? How do we think about NRR stabilization at 126% in the context of that guide. Any finer point you put on it? Mike Scarpelli -- Chief Financial Officer Yeah. First of all, I think NRR is pretty stable. I'm not saying it's not going to go to 125% or 124%, but I don't really see it. It's going to be in the mid-120s is what we are predicting. In terms of Iceberg, we're really now seeing Iceberg as more of a tailwind than a headwind as we -- it's opening up so much more data for us. We've yet to see massive amounts of data move out of Snowflake. Yeah, there has been some, but storage remains at roughly 11% of our revenue. And we are seeing workloads that otherwise wouldn't have been accessible to Snowflake. So, I think that's good. And our guide is based upon the strength of what we're seeing with customer commitments. And as I said before, we've done a really good job this year. There's still room for improvement always and there will always be room for improvement. But I think we're getting much better at working with customers to identify new workloads that will go into production that gives us that confidence. Sridhar Ramaswamy -- Chief Executive Officer Just to add on what Mike said, which is, I've said this before, the Iceberg story is one that Snowflake can write. We've made all the right investments in the format how broadly it is getting adopted. And yes, while there will be some customers who might want to move data that is instantly over to Iceberg. There is vastly more opportunity for us to take Snowflake to where the data is. And that's what I mean when I say this is our history to write. And that's what we are in the process of doing. We have had success with a number of data engineering use cases. We think that there are a lot of data analytics use cases to also go after, and that's the exciting opportunity that has opened up for us. Christian Kleinerman -- Executive Vice President, Product And I'll add that I think on Iceberg, we've shifted from theoretical to actual consumption, actual revenue coming already materialized into us. Thank you for your question. Next question is from the line of Mark Murphy with J.P. Morgan. Your line is now open. Sonak Kolar -- Analyst Great. Thank you for taking the question. This is Sonak Kolar on for Mark Murphy, and I echo the congrats. Sridhar, curious to get your take on a couple of the major recent industry developments, one being DeepSeek models and the other being the large-scale data center build-outs with Stargate of $100 billion to $500 billion, and now Meta announcing the $200 billion project. How would you think through the direct and kind of indirect opportunities for Snowflake with that much data in motion? For instance, DeepSeek usage in Cortex or some of the broader data management or data integration needs as your customers start to tap into those services? Thank you. Sridhar Ramaswamy -- Chief Executive Officer This is a pretty dynamic space, which seems to change pretty dramatically every three months. But in as much as DeepSeek is interesting, I think the work that xAI is doing and Grok 3 and what it is capable of is equally interesting. I think we are definitely headed to a world in which there are now several players. It's not two any longer that are leading the charge when it comes to the world's innovations with AI. And the fact that it is a healthy combination of open-source models, as well as proprietary model, we think is a good thing. As I said, our value comes from our customers being able to bring all of their data together into one place and drive more and more value with it. And what our partnerships with the leading model makers of the world indicates is an implicit acknowledgment that we have a big role to play in this world of AI. And so, what we are doing is building the best products that can take advantage of the data gravity that we have and access to the biggest, best models that there are on the planet. Absolutely. I think there is a belief on the part of many, especially the ones that can afford it that there are more breakthroughs to be had by investing hundreds of millions of dollars. I mean, sadly or not. That's not us. But I feel very happy about our ability to work with these folks and create value for our customers. Sonak Kolar -- Analyst Thank you. Thank you and congrats on a very productive first year. Thank you for your question. Next question comes from the line of Kash Rangan with Goldman Sachs. Your line is now open. Matt Martino -- Goldman Sachs -- Analyst Hey, thanks for taking my question. This is Matt Martino on for Kash Rangan. Sridhar, one for you. I know Snowflake is recently coming off their sales kickoff. So, it would just be great to get some of your takeaways from the event and kind of what the key message was to the sales force, whether it's around prosecuting new use cases or pushing some of the newer products Snowflake is bringing to market? Thank you. Sridhar Ramaswamy -- Chief Executive Officer As you folks know, sales kickoff is about unifying around a common message, a common team a sense of purpose. I think I found the enthusiasm among the folks to be infectious. I think it was very good. I can't obviously attend like all of the meetings. They're all in parallel. I looked at some of the material. I think the level of sophistication that our leaders are bringing to how they take care of business where they find out what do exemplary essays to and how do we hold them as a role model for others and how we thoughtfully add on new products. As I said, we are at a place where it's pretty unreasonable for anyone to expect that they're not going to know everything that Snowflake does. So, we've introduced things like colleges. These are essentially constructs within Snowflake cross-specialization in different areas, so that somebody that wants to become an expert in machine learning within a particular pod can sign up, become that expert and serve as a point of contact for that particular pad. So, what I would say I saw was this sort of sophistication and confidence in being able to take our product to market. And of course, there's a lot of how do we do right by the customer, what creates value for them, how do we work with them, that was also front-end center. But these folks are also there. Anything else to add, Mike, Christian? Christian Kleinerman -- Executive Vice President, Product Lots of excitement for our product lineup and what's coming. We'll share more at Summit. Thank you for your question. Final question is from the line of Joel Fishbein with Truist Securities. Your line is now open. Joel Fishbein -- Analyst Thanks for taking the question. I guess it's a two-part. One for Sridhar and one for Mike, but same topic. Mike, you had an expansion with your partnership with Microsoft and relates to Open AI. I would love to just get a little more granular about what that means for you guys for Snowflake. And Mike, if you can potentially quantify what that could mean from a revenue standpoint in the future? Thanks. Sridhar Ramaswamy -- Chief Executive Officer I'll start, and Christian should add. We have a broad and deep partnership with Microsoft at the level of data, but also at the level of products where things that we create come out in Microsoft Copilot, come out in Teams. And so, I'm very happy with that partnership. We are increasingly going to market together in a number of situations. And so, I think that is all hugely positive. What are the specifics of this partnership mean is that OpenAI models that effectively accessible within Snowflake security perimeter. And that's a highly technical definition. It is basically the guarantee that we make to our customers that their data is fully under our control. It's a big deal for our customers. I think what this means in practice is that every product that we make starting with simply having the model available in a model garden that we have, I use Anthropic all the time in one of our internal instances, that ability to have access to these world-class models to then build different kinds of chatbot, different kinds of agentic applications. And so, what this enables is for us and our customers is to be able to build world-class applications without having to have data go anywhere else without special licenses that are needed. It just means that like OpenAI models are available out of the box just like Anthropic models are available on AWS out of the box. So, I think this is a pretty big deal for a lot of our customers. Christian, color on the overall partnership. Christian Kleinerman -- Executive Vice President, Product We're leveraging for our own products on top of that is in leveraging this model. So, it's good for our customers to use directly, but also for ourselves. Mike Scarpelli -- Chief Financial Officer Yeah. And I'll just say, Joel, from a -- what is that impact going to be on our business. Obviously, we wouldn't do it if we didn't think it could be impactful to our business, but it's too early to say. And I would say that would be upside in our revenue once we see traction with that. But it's going to take some time before we get this rolled out to customers. Thank you for your question. There are no additional questions waiting at this time. So, I'll pass the call back to Sridhar for any closing remarks. Sridhar Ramaswamy -- Chief Executive Officer Thank you. In closing, think Snowflake stands to benefit enormously from the data and AI revolution that is sweeping the enterprise market. Our philosophy of an easy-to-use, fast-to-value efficient product makes us uniquely differentiated and much loved by our customers. 30% product revenue growth in fiscal '25, combined with our strong initial outlook for fiscal '26 think demonstrates our ability to execute that scale. And so, we are going to continue our strategy of driving high growth and efficiency. Our ability to release products and take them to market quickly is what enables high growth. Simultaneously generating more than $1 billion of adjusted free cash flow, expanding operating margin, and increasing SBC efficiency further demonstrate the strength of the business. I think the long-term profile of Snowflake is one that showcases durable growth and continued margin expansion, which I think is very unique. And this is really exciting, and I look forward to sharing more and more of our progress with all of you along the way. Thank you all for joining us.

Workday (WDAY) Q4 2025 Earnings Call Transcript | The Motley Fool

Welcome to Workday's fourth quarter and full year '25 earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the call. During the Q&A, please limit your questions to one. I will now hand it over to Justin Furby, vice president of investor relations. Justin Furby -- Vice President, Investor Relations Thank you, operator. Welcome to Workday's fourth quarter fiscal 2025 earnings conference call. On the call, we have Carl Eschenbach, our CEO; Zane Rowe, our CFO; and David Somers, our chief product officer. Following prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations, and other matters. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our fiscal 2024 annual report on Form 10-K and our most recent quarterly report on Form 10-Q, for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release, in our investor presentation, and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Additionally, the transcript of this call and our quarterly investor presentation will be posted on our Investor Relations website following this call. Also, the customers' page of our website includes a list of selected customers and is updated monthly. Our first quarter fiscal 2026 quiet period begins on April 15, 2025. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2024. Thank you, Justin, and thank you all for joining us today. Workday delivered another solid quarter in Q4 with 16% subscription revenue growth and 26% non-GAAP operating margin. These results are a testament to how businesses of all sizes, industries, and geographies are increasingly turning to Workday as their trusted partner, and I'm incredibly proud of how our teams executed in Q4 to deliver a solid year. As organizations look for ways to boost productivity and run more efficiently, our value proposition has never been stronger. Workday gives them the ultimate advantage, helping them manage what matters most, their people and their money. And with our unified platform, our customers can unlock value faster, reduce their total cost of ownership, and harness the power of AI across our best-in-class HR and finance solutions. On the AI front, we just launched the Agent System of Record, a centralized system to manage all of an organization's AI agents from Workday and third parties alike. With this innovation, our customers will be able to manage their entire workforce, humans and digital, on our trusted platform. I'll talk more about this exciting announcement later in the call. But now let's turn to our customers and industry momentum in the quarter. During Q4, we welcomed incredible new customers, including Bayer, Henkel, Iberostar, the state of North Carolina, and First-Citizens Bank & Trust Co. We also expanded with industry leaders, including Cisco, Mondelez, Sutter Health, and Toyota. Workday now serves more than 11,000 customers across industries and geographies, including more than 60% of the Fortune 500 and 30% of the Global 2000. And that says a lot about the strategic nature of our platform. Our industry focus is a huge contributor to this growth, and Q4 was no exception. In SLED, the city of Minneapolis, St. Louis County, and City University of New York all chose our full suite in Q4. We also signed our largest Workday Student deal ever with the Minnesota State Colleges and Universities. This is a massive project to improve the experience for 270,000 students and 14,000 faculty. Workday Student is quickly gaining traction as the top choice for higher education institutions. We now have more than 135 customers, and we expect roughly half of them will be live by the spring. After rapid adoption here in the U.S., we're excited to expand Workday Student into Canada and the Australia, New Zealand markets this year. We also have a growing opportunity with the U.S. federal government, thanks to the administration's strong focus on driving efficiencies and IT modernization. Our recent wins at the DOE and DIA have helped set a solid foundation in this sector, opening up a number of exciting Fed opportunities. Financial services continues to be one of our largest industries. In Q4, we had significant expansions with Aon and Sallie Mae Bank, and we closed a large core FINS deal with a Fortune 500 organization. Health care also once again delivered with notable full suite wins including North Mississippi Medical Center, Hackensack Meridian Health, and UnityPoint Health. More than 30% of our net new wins in the quarter were full suite, and across our focused industries of SLED and healthcare, that number climbs to 50%. We had a record number of core FINS wins in both Q4 and the full fiscal year. We now have over 6,100 core HCM and financial customers, and more than 2,000 of them are leveraging our full suite. Our investments in financials, both in innovation and go-to-market, continued to pay off with strong growth in new ACV in Q4. In addition to a record number of core financials wins, we saw strong momentum for our financial planning, accounting center, student, and procurement solutions. And we continue to see increasing demand for AI solutions. In fact, AI is front and center in every conversation I have with customers, prospects, and partners. They want to move beyond incremental productivity gains. They're also looking for ROI that helps them drive growth back into their business. Similar to Q3, we once again saw 30% of our customer expansions involve one or more AI SKUs, including Extend Pro, Recruiting Agent, Evisort and our recently rolled out Talent Mobility Agent. Extend Pro, which enables our customers to build AI applications on top of our platform, continues to be one of our fastest-growing SKUs. In Q4, new ACV more than doubled over Q3. Developer Copilot, which is part of Extend Pro, is delivering real results. We're hearing from customers that they're seeing productivity gains of over 50%. This is helping them build apps much faster. Recruiting Agent had an exceptional close to the year with wins at BP, Genpact, and many more. New ACV in Q4 nearly doubled from Q3, and this product continues to boost the average selling price of our core recruiting solution. In fact, in Q4, it was even higher than the 1.5x uplift we reported in Q3. A great example of customers willing to pay for high ROI solutions. Our approach to AI has always been customer-centric. While others rush to charge for early gen AI features, we integrated them into our core offering. Now that our AI has evolved and delivering tangible ROI, we have new monetization opportunities that will fuel our long-term growth. And perhaps more importantly, we are further distancing ourselves from the competition. With more than 1 trillion transactions processed on our platform in FY '25, our AI leverages the world's largest and cleanest HR and financial data set. And the combination of this data with our ability to understand the context behind it puts Workday in a unique position. Following the announcement of our new role-based agents at Rising, we launched four more agents for contracts, payroll, financial auditing, and policy. These are not task-based agents like most of the market today. Our role-based agents contain a configurable set of skills that give them greater ability to support people in their roles. Each has multiple skills and can perform a large number of tasks. That's where true ROI is and where we see that customers are willing to pay. Over the past year, hundreds and maybe thousands of agents have been introduced into the market across a number of vendors. As more agents are deployed, organizations risk fragmented operations, increased security risks, and difficulty measuring the true value of their AI investments. At this point, there's no central place to manage agents, and there is a real risk of sprawl. That's what the Workday Agent System of Record aims to solve. It will manage a business' entire fleet of AI agents alongside their human workforce, all on a trusted platform. And it won't just manage Workday agents. It will also manage customer-built agents and partner-built agents. Since the launch, we've had strong interest from our customers and technology partners who'd like access to the Workday Agent System of Record to mitigate risk in the enterprise. Partners continue to play a strong role in Workday's growth, and they also extend the power of the Workday platform. In Q4, more than 15% of our net new ACV was sourced through partners, up from more than 10% last quarter. And we're just getting started. Not only are we leaning into partners to drive increased pipeline for our core products, but we're also collaborating with them to create new lines of business through partner programs like Workday Wellness, where we signed five strategic partners in Q4. And we're innovating with them as well. Our Built on Workday program continues to gain traction. Since its launch at the end of June, we have 72 partners building and selling applications on the Workday platform. Finally, in the quarter, we also signed our first strategic talent partnership with Randstad, which brings together the power of Workday Recruiting Agent with the global candidate data pool of the largest talent company in the world to help our customers increase hiring efficiencies and drive better talent outcomes. Turning to international. We delivered solid performance across a number of our key geographies in Q4. We also hosted a record-breaking EMEA Rising in December with 5,000 attendees, which helped drive momentum in the quarter. Despite the continued macro headwinds in EMEA, our two largest markets, the U.K. and Germany, had their strongest quarter of the year. This shows what I've said many times. When customers are ready to make a spending decision, Workday is the choice. In the DACH region, we formed some fantastic new relationships in our competitors' backyards in Q4 with great German companies like Bayer and Henkel selecting Workday core HCM. In APAC, we had several important wins, including Binance, Nine Entertainment, and JINGDONG. And in Japan, we're continuing to build the foundation to grow in this important market with the opening of our Osaka office. I want to thank my Workmates, our customers, and our partners for helping us end FY '25 strong. I'd also like to recognize Doug Robinson for helping us close the quarter on a high note. Thank you, Doug, for your dedication to building this company. Before we close, I'd like to share a couple of other leadership updates. After 10 incredible years, Sayan Chakraborty has decided to retire from Workday. He has been a driving force for our innovation strategy, and we can't thank him enough for the impact he has had. With Sayan's retirement from Workday, we're excited to welcome Gerrit Kazmaier as our new President of Product and Technology. Gerrit joins us from Google, where he led data analytics and BI for Google Cloud. Prior today, he spent nearly 11 years with SAP. With his expertise in AI, data, ERP, and enterprise business processes, Gerrit is the ideal person to lead our product and technology strategy. Gerrit will start on March 10, and Sayan will stay on as an advisor through the end of May to help with the transition. It's been a year of change at Workday, and we'll continue to evolve in the coming years to go after the massive opportunity ahead of us. Our recent restructuring was a tough but necessary decision that will help us invest in the business to meet our customers' needs. We're entering FY '26, our 20th year in business, with an amazing team, renewed energy, and a clear view of how we can fulfill our founder's vision to revolutionize enterprise software, this time with AI. Thank you again for joining us. And with that, I'll hand it over to Zane. Zane Rowe -- Chief Financial Officer Thanks, Carl, and thank you to everyone for joining today's call. Our Q4 results were driven by solid performance across key growth areas of the business, including continued momentum with full suite and our financial solutions, growing demand for our AI SKUs, and strong execution across key industries. Turning to results. Subscription revenue in Q4 was $2.04 billion, up 16%, benefiting from favorable linearity of new ACV bookings within the quarter. Full-year FY '25 subscription revenue was $7.718 billion, growth of 17%. Professional services revenue was $171 million in the quarter and $728 million for the full year. Total revenue in Q4 was $2.21 billion, growth of 15%, and for the full year was $8.45 billion, up 16%. U.S. revenue in Q4 totaled $1.66 billion, up 15%, and international revenue in the quarter was $556 million, growing 16%. For the full year, U.S. revenue was $6.33 billion, up 16%, and international revenue was $2.11 billion, up 17%. Twelve-month subscription revenue backlog, or cRPO, was $7.63 billion at the end of Q4, growing 15%. Early renewal activity in the quarter was slightly higher than expected and contributed to the outperformance. Total subscription revenue backlog at the end of Q4 was $25.06 billion, up 20%, and gross revenue retention rates remained strong at 98%. Non-GAAP operating income for the fourth quarter was $584 million, representing a non-GAAP operating margin of 26.4%. The year-over-year improvement benefited from a combination of revenue outperformance, ongoing cost discipline, and improved efficiencies across the company. Full-year non-GAAP operating income was $2.19 billion, reflecting a non-GAAP operating margin of 25.9%. GAAP operating income in the quarter was impacted by a $75 million charge primarily related to the previously announced restructuring. Q4 operating cash flow was $1.11 billion, resulting in full-year operating cash flow of $2.46 billion, growth of 15%. We repurchased $99 million of our shares during the quarter and $700 million for the full year, helping drive annual dilution below 1% for the year. The timing and amount of our repurchase activity in the quarter was impacted by trading constraints. We had $802 million in remaining authorization as of year-end. We ended the year with $8 billion in cash and marketable securities. Our head count as of January 31 was approximately 20,400 Workmates, not reflecting the restructuring that took place in early February, which we expect will reduce our workforce by approximately 8%. Now, turning to guidance. We're pleased with the execution we are driving across several of our key strategic areas. And given our solid performance in the fourth quarter, we continue to expect FY '26 subscription revenue of approximately $8.8 billion, growth of 14%. This outlook incorporates the impact of the continued strengthening of the U.S. dollar, which is a roughly $20 million incremental headwind since we provided guidance last quarter. We anticipate Q1 FY '26 subscription revenue to be approximately $2.05 billion, growth of 13% or 14% when normalizing for the effect of the leap period last Q1. We expect cRPO to increase between 14.5% and 15.5% in Q1. We expect subscription revenue to increase roughly 5.5% sequentially in Q2. We continue to expect a slightly faster pace of year-over-year subscription revenue growth in the second half of FY '26 relative to the first half. This is driven by continued momentum across our investment initiatives in addition to revenue building from certain deals we closed in FY '25 and discussed on our last earnings call. We anticipate FY '26 professional services revenue of approximately $700 million as we continue to leverage our partner ecosystem. For Q1, we expect professional services revenue of $165 million. We expect FY '26 non-GAAP operating margins of approximately 28%. This outlook incorporates an accelerated pace of AI investment across our platform and targeted investments across key areas of the business. We will also continue to drive efficiencies and look for improvements in operating our business at scale. For Q1, we expect a non-GAAP operating margin of 28%. GAAP operating margin for the first quarter is impacted by the previously announced restructuring. We expect to incur an additional restructuring expense of approximately $180 million in the quarter, which will be excluded from our non-GAAP results. We expect the GAAP operating margins to be approximately 30 and 21 percentage points lower than our Q1 and full-year FY '26 non-GAAP operating margins, respectively. The FY '26 non-GAAP tax rate is expected to be 19%. We expect FY '26 operating cash flow of $2.75 billion, which includes roughly $180 million of cash outflows related to the restructuring, which we expect will be incurred in the first half of FY '26. We expect FY '26 capital expenditures of approximately $250 million, down slightly from FY '25. We entered the new fiscal year with clear momentum and are focused on investing strategically to support our medium-term objectives of mid-teens subscription revenue growth and 30% non-GAAP operating margin while building the foundation to support enduring growth and margin expansion. With that, I'll turn it back over to the operator to begin Q&A. Operator Thank you. We will now be conducting the question-and-answer session. Please limit your questions to one. [Operator instructions] The first question is from Mark Murphy from JPMorgan. Thank you very much. Congrats. It's nice to see the cRPO dollars added figure, I believe, reached its highest level ever. I wanted to ask if you can walk us through the vision and the scale of the investment that you think is required for the Agent System of Record. I'm curious if a chunk of the savings from the restructuring are going to be redirected into building that Agent System of Record. And then do you -- relating to that, do you have any lighthouse customers that are raising their hand in some way, saying we want to manage entire fleets of agents, including some third-party agents using that product? Carl Eschenbach -- Chief Executive Officer Yeah. Hi, Mark. This is Carl. Before I answer your question, if you don't mind, I'd just like to again thank my Workmates, partners, and customers on a really good Q4 and a solid FY '25 finish. The diversity and durability of our business and the demand for the Workday platform has continued to help us drive toward our goal of delivering durable growth at scale and expanding operating margins. Again, thank you to everyone. So let me start by answering your question around investments. As we said in my prepared remarks, a restructuring is never something easy to do. But we thought it was absolutely necessary for us to be able to reinvest back in, specifically into the product and technology organization around our Agent System of Record that we announced two weeks ago. We have seen, since that announcement, an incredible uptake in interest both from customers and from our partner community who want to build agents and understand there is a risk of them entering the enterprise in an uncontrolled way. So, there's no doubt this investment is required because of the demand we're seeing. It's also required on the go-to-market side, where we're going to continue to invest to be able to take the Agent System of Record along with all of our role-based agents deeper into the enterprise. And David, who runs product for us, anything to add there? David Somers -- Chief Product Officer Yeah. No. I mean, I think we've been extremely pleased with the response that we've gotten, and you mentioned this, Carl, not with just customer response in terms of Agent System of Record but also from partners. And yes, there -- I think there's -- one of the specific questions you asked was interested in not only managing Workday agents within that product but also third-party agents. And we see a lot of interest in both of those areas, whether that's customer-built agents or even third-party partner-built agents being managed within the Agent System of Record. So, once again, a significant opportunity we see to deliver value to our customers there. Next question is from Kash Rangan from Goldman Sachs. Please go ahead. Kash Rangan -- Analyst Yeah. Thank you very much, and congrats on a nice finish to the year. Carl, one question for you. You guys have tremendous visibility in your business. Your backlog is -- cRPO, three times over, right? But on the flip side, as you have contracts that come up for renewal from presumably 2022 levels, customers signed a three-year contract in 2022, they're coming up for renewal in 2025, what does the health of that renewal base look like, especially in a world with AI, without AI? There is workforce reductions happening. And as you overlay your AI upsell on top of that, what are the opportunities for the company to -- upon the renewal to attach itself and its impressive list of AI products so as to ensure that you're able to grow to meet your goals? That's it for me. Carl Eschenbach -- Chief Executive Officer Yeah. Thank you, Kash, and thank you for the question. Yes, we do have good visibility for the next many years on the renewal opportunity we have here at Workday. That being said, as you know, we do not wait for the renewal opportunity to sell back into our customer base. For example, we highlighted again for the second consecutive quarter that we were able to sell an AI SKU back into our customer base more than 30% of those transactions, which is the second quarter in a row. And specifically, the uptake we're seeing on our Recruiter Agent and Extend Pro allow us to sell back into that customer base. Both of them almost doubled quarter over quarter. So, we have great visibility in our existing customer base, the renewals. But more importantly, Kash, as we've been doing in the last couple of years, we're not waiting for renewal to sell back into the customer base the products and SKUs we have today. We also know that we have a number of new AI agent SKUs that we'll be rolling out over the next six to 12 months. And they also give us a great opportunity to sell back into that customer base. So, we're excited about the customer base, which is now more than 6,100 customers. And we're excited about how we're selling to them today and what the future looks like with all of our new agents that we're bringing to market. Zane Rowe -- Chief Financial Officer Hey, Kash, it's Zane. I'll just add. If you look at that renewal opportunity, just that baseline opportunity that Carl is going to leverage off, the growth in the upcoming year is very similar to what we saw in the prior year. So, there's obviously some variability quarter to quarter, but we feel good about the growth and the opportunity heading into FY '26 as well. And that was part of the reason you attributed to the strong cRPO as well. Obviously, it's that go-to-market motion and how we're selling back into the base and growing from that. Carl Eschenbach -- Chief Executive Officer The other thing I should probably highlight, Zane, is the fact that our create and close momentum in the quarter where we did not see an opportunity in the pipeline that we ended up selling back into our customer base was the strongest we've seen all year. So, that was another good selling motion, and I was really proud of how the team executed on creating opportunities in a given quarter and closing them at the same time. Kash Rangan -- Analyst A good proxy for SMB business, I take it. Thank you so much. The next question is from Kirk Materne from Evercore ISI. Please go ahead. Kirk Materne -- Analyst Yeah. Thanks very much, and congrats on the nice finish to the year. I think this one is probably for Zane. Zane, obviously, your guidance for the year sort of infers a little bit of acceleration from the first half to the second half. You went through some of the reasons why. Just two -- sort of two-part question around that. I guess, one, in the back half of the year, are you guys expecting much contribution from some of the agent revenue or some of the agents that you put out over the last six months? And I guess secondly, you had a strong fourth quarter. Do you feel better about that sort of opportunity or sort of the -- just the visibility, I guess, into the back half of the year today versus three months? I know 4Q is a big bookings quarter for you. So, I think that your visibility is perhaps a little bit better today than it was then. You guys just reiterated guidance, so that would infer that. But I was wondering if you could just put a little bit more color around that. Thanks. Zane Rowe -- Chief Financial Officer Of course, Kirk. I'll start. Then I think Carl probably want to add to it. I mean, as you point out, we are very pleased with the strength in Q4 in a variety of areas, most notably some of the newer opportunities that we have, in particular around AI. As it relates to your first question on agents, we haven't built in, I'd say, a meaningful amount of dollars tied to agents just as we expect to roll them out through the course of the year. So, there's not a meaningful amount attributed to agents. I also called out the fact that we've got a little bit more headwind related to FX. And we updated you last quarter. We had incorporated that into that visibility and into that forecast. Obviously, now we've taken that into account, the additional -- I think I called out about $20 million in my prepared remarks. So, we see a little bit of pressure there, but the underlying business was really strong in the fourth quarter. And as you point out, we've got better visibility as we look at FY '26 in a number of key growth areas that are well supporting the outlook we have. In addition to that, while it's not always tightly correlated, we feel very good about the cRPO that we've built, and it's that aggregate level that we focus on. Carl Eschenbach -- Chief Executive Officer Yeah. And as it relates to AI and its contribution, we're already seeing the contribution from our Recruiter Agent, and things like Extend Pro, which I indicated earlier, have grown now 100% quarter over quarter. But we're also seeing early evidence in something like Evisort, Talent Optimization. We have a new agent out called Talent Mobility Agent. And then we did announce four new agents at our Agent System of Record event two weeks ago that will not be available to the second half of the year. They were the Policy Agent, Contract Agent, Financial audit Agent, and Payroll Agent. And we don't see them attributing a whole lot to the current guidance we have for FY '26 because they'll be in early access at Rising later this year. Next question is from Brad Sills from Bank of America. Please go ahead. Brad Sills -- Analyst Wonderful. Thank you so much. I wanted to ask a question about international. We haven't heard from a lot of companies that Europe was a source of strength this quarter, and I know it's been a focus area for you. So, I would love to get some color as to where you're seeing strength in Europe. How do you feel about the feet on the street that you have over there? Which countries are working nicely in the go-to-market and some of the progress, and which ones would we expect to see more progress from going forward? Thank you. Carl Eschenbach -- Chief Executive Officer Yeah. Thanks, Brad. As you know, we've called out for the last couple of years, we have a significant opportunity internationally. You guys know the math. 75% of our revenue comes from the U.S. and only 25% outside of the U.S. Yet more than 50% of our addressable market is outside of the U.S., and that hasn't changed. Specifically, as we think about EMEA, I think for the entire year, we've called out that it was more of a headwind than a tailwind compared to the years past. And that was, quite honestly, no different for us in Q4. That being said, the teams had a really strong finish to the year in Europe. Specifically in two of the biggest markets, both the U.K. and Germany delivered really solid results. Now, we wouldn't say one quarter of strength is a trend. So, we expect more of the same in FY '26. But we do expect to continue to invest in the business internationally because of the size of the market we have to go after. And we expect when customers do ultimately make a decision to move forward with a large transformation project, they always go, or should I say, most of the time, go with Workday. And two examples of that we're in our -- one of our biggest competitors' backyard. I called them out in my prepared remarks. In Germany, we closed two large HCM opportunities with Henkel and Bayer. And they were out there for many quarters, and they finally decided to move forward and selected us. So, that's just an example of the momentum when someone does make a decision that we have around our solution and the value we're bringing to our customers and prospects. Zane Rowe -- Chief Financial Officer Hey, Brad, and just to tie that to our forecast as we look at FY '26, we're not considering any meaningful change in the environment, at least from the macro perspective in Europe. So, we're still very pleased with the product that we're continuing to build there, the team we have on the go-to-market side, and our deliverables. But we're not having -- we're not expecting any material change, at least from the environment. Brad Sills -- Analyst Understood. Wonderful. Thanks so much, Zane and Carl. The next question is from Raimo Lenschow from Barclays. Please go ahead. Raimo Lenschow -- Analyst Hey, perfect. Congrats from me as well. Any expectations for a change in go-to-market now with Rob Enslin kind of finally coming on board? And I'm thinking more international as well. Since you have that success, is there any change? Or do you -- are you doubling down on that one the way you do it? Thank you. Carl Eschenbach -- Chief Executive Officer Hi, Raimo. Thanks for the question. First, I just want to again thank Doug Robinson for 14 years of service here at Workday. He was an incredible asset, and I think we all get to sit here at Workday because of his success. So, I just want to thank him again. And I actually think between Rob now on board for three months and Doug, we've had a seamless and smooth transition. Rob, obviously, has a tremendous amount of experience, especially internationally. And he's already spent time around both Europe, and he's been in Japan already, and he'll be traveling more over the next coming months in international markets to help us expand and take advantage of the opportunity we have but also the deep network that he has across customers as well as partner communities. So, that being said, not a lot of changes. As you saw from our Q4 performance, I think the go-to-market engine is working really well under the leadership of Patrick, who's our Chief Revenue Officer. And I think Rob will just make tweaks or refinements to the go-to-market motion to only improve it from here, but no major changes at this time. The next question is from Michael Turrin from Wells Fargo. Please go ahead. Michael Turrin -- Analyst Hey, great. Thanks very much. I appreciate you taking the question. Zane, I just want to go back to the margin potential relative to the guidance and how you're thinking about that. It's clear there are product areas you can reinvest in, so I don't think we would have expected all of the leverage from the head count reduction potentially flow into the initial guide for the upcoming year. But can you just kind of speak to the trade-offs you're evaluating currently and then how we should think about those in the context of the overall margin potential of Workday from here? Thank you. Zane Rowe -- Chief Financial Officer Yeah. Michael, we've obviously laid out a midterm plan to get to 30% plus through FY '27. And what we've put out this year, moving it up incrementally to 28% allows us to get there. Candidly, as Carl mentioned earlier, we see tremendous opportunity in AI. So, we're, I think, doing a good job balancing those investments. We've got David here and his team leaning as heavily as they ever have into our AI investments and our strategy surrounding AI. And concurrently, while we do that, seeing opportunities to continue to scale the business. Obviously, as you grow in the mid-teens, it allows you and affords you that opportunity to continuously think about balancing investments with margin appreciation. And that's what we're focused on, and we're literally looking at every part of the organization on how we scale, how we think of efficiencies, and at the same time, how we continue to invest both organically and inorganically. So, I think we've got a good balance here. We've got a lot of focus across the company and ensuring that we achieve our objectives. And as you saw, where we see some opportunities you saw with this year, we'll give it back and provide some upside to the margins. But we've got a good balance there. We think we still got a tremendous opportunity ahead to invest into. Next question is from Brent Thill from Jefferies. Please go ahead. Brent Thill -- Analyst Thanks. Carl, on federal, you've mentioned some good wins, and you feel the momentum there. I think there's been also some concerns could things kind of go a little sideways until they figure out the exact direction where they're going with the new administration. I'm just curious if you could lay out how you think that plays out for you over the next year. Carl Eschenbach -- Chief Executive Officer Yeah. Thanks, Brent. As you know, over the last 18 months, we've started to lean into the federal business and opportunity more aggressively than we've historically done. And the reason for that is if you look at the federal government, while they spend a tremendous amount of money on technology, the systems they have, specifically ERP, HCM, or financial systems, are very antiquated. In fact, the majority of them are still on-premise, which means they're inefficient. And as we think about DOGE and what that could potentially do going forward, if you want to drive efficiency in the government, you have to upgrade your systems. And we find that as a really rich opportunity. And in the last year, we've laid the groundwork with a couple of significant wins, for example, at the Department of Energy and the DIA, to allow us to springboard our momentum in the federal market moving forward. So, yes, there's some uncertainty, but there's still tremendous opportunity. And if you want to drive efficiencies across the government, there is a starting point called on-premises solution, getting them to the cloud. And as we speak to the customers, all of them are looking to leverage Workday and what we have in our best-of-breed platform and applications to better service them more efficiently. The next question is from Alex Zukin from Wolfe Research. Please go ahead. Alex Zukin -- Analyst Hey, guys, congrats on a solid end to the year. I guess maybe just a two-parter for me. Maybe first, Carl. On the agentic front, we're all trying to kind of grapple with what this means from a TAM expansion point for the systems of record. I'm curious how you guys are framing it in terms of the ability to really monetize and add a tremendous level of new value to your existing customer relationships. And then maybe, Zane, what -- it felt like -- was there a change in calculus that accompanied the RIF in terms of freeing -- like seeing something that maybe you want to move faster to free up more? Or was that always kind of in the cards for the previous margin guidance? Thank you, guys. Carl Eschenbach -- Chief Executive Officer Yeah, sure. Maybe I'll start. So, we are quite excited about the opportunity to bring agents, and specifically role-based agents, into the enterprise. To do that, you need to bring them in very similar to you bringing your human workforce today, which no one is better at than Workday. We're taking that same framework to securely onboard, right, new agents and digital workers in the same way we have done with human workers in the past. So, if there's ever a shift from human workers to digital workers, we're going to still be able to capture the revenue for that as they land on our Workday Agent System of Record. So, we think the monetization opportunity we have for both our own role-based agents as well as, David said earlier, new agents, either that our customers are building, our partners, or even in some cases our competitors, they have to somehow come into the enterprise. And they're going to do that through a system of record, and we believe we're uniquely positioned with our gateway to onboard all agents into the enterprise, and we will be able to monetize that. It's also important to note that we have multiple ways to monetize AI. Today, we're monetizing in the platform because we have a lot of functionality around AI in the platform itself. We're monetizing it through some of the things we rolled out in the last year, the Recruiter Agent, Extend Pro. We have things like Evisort. And all of these new agents now we're bringing to market is another way for us to monetize it, and it's both seat-based and consumption-based. So, we have lots of opportunity to monetize it, and we're excited about what the future looks like, specifically after our last two quarters of performance around AI. Zane Rowe -- Chief Financial Officer Alex, and I'll just add as it relates to the margin profile, there's no change in thought and in process. We have our parameters. And obviously, we have a framework that we work by. Carl's talked about the opportunity that we have in AI. And we've always talked about growing our top line as well as our operating margin in order to get there, and we see this as a tremendous opportunity to not only invest in the company but also think about different ways that we can scale the business and obviously become more efficient in a variety of areas. So, I'd say no balance there -- sorry, no change there in how we think about that balance not only for the next year but in the years beyond. The next question is from John DiFucci from Guggenheim. Please go ahead. John Difucci -- Analyst Thank you. I think my question has sort of been touched on, guys, but it's something that I struggled with the last couple of years, actually. And we all know that the last couple of years have been challenging not just for you but for everybody. But we've always thought of Workday as a good house in a tough neighborhood. Your core business of large transformational deals just hasn't been prioritized in recent years. But you've done a good job, we think, anyway, of doing a lot of things like to offset that like leaning in the partners in a way you never did, going down market, and Doug will have a big part of that, too, and continued selling back into the base. I guess my question, and I think it's just a general question, but are we now at a point where the numbers are doable? And if when things improve, meaning things you don't have control over, you'll come out of this actually stronger than you were during the post-COVID sort of Mardi Gras period. Carl Eschenbach -- Chief Executive Officer Hi, John. Thanks for the question. I think you touched on what we're seeing in the market and the opportunity for us going forward. If you just look at some of the areas we've invested in the last few years, we focus on driving our AI solutions back into our customer base. And that motion is working and not just for AI SKUs but many of our other SKUs like our financial SKUs, whether it's sourcing, whether it's planning, whether it's accounting center. Or a second area of focus is to drive our FINS business back into our customer base. That's working really well. The other motion that's working is we are focused on selling a full-suite solution into the market. And we talked about more than 30% of our new business in the quarter was full suite. And if you look at some of our key industries where we focus, whether it's state and local government, higher ed, and healthcare, it was greater than 50% of new wins included full suite. So, that motion is working, and that investment in financials has paid off. And then this quarter, we had record impact from our partners where they contributed greater than 15% to our new ACV in the quarter. So, all of these areas that we've been focused on and we're leaning into, we're starting to see pay off. Now, we've got to keep that going as we go into FY '26, but we're pretty optimistic about the investments we've made, the results we're seeing, and the momentum we carry into the new year. John Difucci -- Analyst Carl, is Global Payroll Connect, is that part of what's happening, too? Are you seeing benefit from that yet? Or is that just still too early? Carl Eschenbach -- Chief Executive Officer Yeah, we are. We have more than 150 partners now part of Global Partner Connect already today. David Somers -- Chief Product Officer Yeah, real quickly. Since October, when we launched that -- this is David, by the way. Global Payroll Connect has been in 150 deals since we launched back in October. We now have well over 22 partners now leveraging and building on top of GPC already as well, and there's a whole slew in the pipe that are looking to build on top of that capability as well. Carl Eschenbach -- Chief Executive Officer Yeah. And the other thing, David, we're doing is on the platform side. Workday Wellness has momentum, where benefits providers can now build into the platform. We see momentum around, obviously, Workday Extend and Extend Pro. And the Built on Workday platform, we have many of our partners now building and innovating on top of the platform. So, our platform approach is clearly paying off as people look to consolidate on Workday. David Somers -- Chief Product Officer Yeah. I was going to say the exact same thing. I mean, I think what we are seeing is we're still early days, but you're seeing a lot of the investment that we've done over the past few years on the platform itself start to actually pay dividends, and a lot of things we've been talking about, including as we look at AI and what other agents that we think we're going to build. And we've got lots of plans to build more there as well. We will now take two more questions. The next question is from Karl Keirstead from UBS. Please go ahead. Karl Keirstead -- Analyst OK. Great. I just wanted to go back to the point around your decision to reinvest what appears to be most of the savings from the head count cuts, and in particular, maybe to get a little bit of better understanding on how your spending mix is changing. So, maybe what areas are you trimming as a result of the RIF, whether it's focused on functional areas or geos that you're downsizing? And then conversely, where are those new dollars being freed up to invest in? It sounds certainly like AI, but are there any other new investment areas that you'll direct the funds to? Maybe an uptick in certain sales rep capacity? So, maybe you could describe what's getting cut, what's getting increased to help us understand how the spending mix is changing as a result of the head count cut. Yeah. Sure, Karl. I'll start. And then, Zane, obviously, add anything on the investment or margin front there. So, I would expect that this time next year, we will have more head count at Workday than we did prior to the restructuring, which shows you that we are continuing to invest in the business. And there's probably multiple areas we're looking to invest. Yes, it's in AI, in the product and technology organization as we expand our Agent System of Record, and we bring more and more role-based agents into the market. We continue to invest internationally. And when I say invest internationally, it's not just in go-to-market, but it's on the product side. And it's also to build out more capacities in locations like India and Costa Rica as we look to service a more global footprint of customers. And then two more areas of focus. We're going to continue, under Rob and Patrick, continue to build out go-to-market capacity from a sales perspective. And then as you've seen, the momentum we have around our partner ecosystem is something we want to continue to invest in because we're already seeing great uptick like 15% of our new ACV this quarter coming from our partners. So, they are the key areas that we're focusing our investments on, and we are going to lean heavily into the opportunity and the TAM that we see in front of us. Zane Rowe -- Chief Financial Officer Yeah, Karl. I would just add, it's not like it's sort of binary as far as there are a number of areas that we were always investing in. And obviously, what you see here is more of a mix shift into AI and into some of those growth elements. And at the same time, across -- really across the company, we're all looking at how we scale, how we build in efficiencies as well as invest in both people, process, and systems to continue to drive that next leg of growth. So, a lot of these investments are investments that also scale and will enable us to grow our margin beyond just FY '27. So, we feel good about the balance. We're also becoming more global. And with that, we'd expect to see more Workmates around the globe to balance that out as well. The next question is from Keith Weiss from Morgan Stanley. Please go ahead. Chris Quintero -- Morgan Stanley -- Analyst Hey, Carl. Hey, Zane. This is Chris Quintero on for Keith here. I actually want to go back to the agent partnership you announced at Salesforce last year, which is super interesting. But I didn't hear you call it out in the prepared remarks. So, just curious to hear maybe how that integration has gone. And has it contributed at all to potentially better win rates at all? Carl Eschenbach -- Chief Executive Officer David, do you want to take the partnership with Salesforce? David Somers -- Chief Product Officer Sure. I'll jump on that. Yeah. And Chris, good talking to you. Yes, I mean, we continue to work on that partnership with Salesforce. As a matter of fact, I'd say we -- a lot of what we've done there early days was cutting our teeth and has actually, I think, been instrumental in some of the innovation that we just recently announced in terms of Agent System of Record and actually understanding and working with them through issues like how do you get an agent from Salesforce to talk to an agent on the Workday side. So, we're still progressing with Workday -- or sorry, with Salesforce on that. I would say the partnership is going really well. It still, once again, continues to be early days in that partnership. Ladies and gentlemen, thank you for your participation in today's conference. I'll now turn it over to Mr. Eschenbach for final comments. Carl Eschenbach -- Chief Executive Officer Thank you, operator. And again, thank you all for joining today's call. To close, Q4 was another solid quarter, capping off a really good year for Workday. Our results, especially our customer momentum across industries and geographies, demonstrate the diversity and durability of our business and the increasing relevance of Workday's platform. And with our Illuminate AI strategy, our new agent, and most importantly, our new Agent System of Record, we're unleashing new innovation across our platform that will continue to drive exceptional outcomes for our customers and partners and continue to fuel our growth. With that said, I'll turn the call back over to the operator to close out today's call.

DigitalOcean (DOCN) Q4 2024 Earnings Call Transcript | The Motley Fool

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to DigitalOcean's fourth-quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you. I would now like to turn the conference over to Melanie Strate, head of investor relations. Melanie, you may begin. Melanie Strate -- Head of Investor Relations Thank you, and good morning. Thank you, all, for joining us today to review DigitalOcean's fourth-quarter and full-year 2024 financial results. Joining me on the call today are Paddy Srinivasan, our chief executive officer; and Matt Steinfort, our chief financial officer. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. Our actual results may differ materially from those projected in these forward-looking statements, including our financial outlook. I direct your attention to the risk factors contained in our filings with the SEC, including our most recent annual report on Form 10-K filed today, as well as those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call, and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as in our investor presentation that outlines the financial discussion on today's call. A webcast of today's call is also available in the IR section of our website. And with that, I will turn the call over to Paddy. Paddy Srinivasan -- Chief Executive Officer Thank you, Melanie. Good morning, everyone, and thank you for joining us today as we review our fourth-quarter and full-year 2024 results. We concluded the year with strong momentum and continue to successfully execute on the initiatives we laid out at the beginning of the year. Our accomplishments included, building out our executive and senior leadership teams, significantly improving the pace of product innovation, augmenting our product-led sales motion with new strategic go-to-market enhancements, and continuing to accelerate the early success of our AI/ML platform, all of which together positioned us with momentum heading into 2025. In my comments today, I will briefly recap our fourth-quarter and full-year results, reiterate our strategy and priorities, share several product innovation and customer use cases across both core cloud and AI/ML that demonstrate the progress we are making against our priorities. First, I will briefly summarize our fourth-quarter and full-year 2024 financial results. Revenue growth accelerated in the fourth quarter to 13% year over year to 205 million with one of our biggest growth levers, net dollar retention improving to 99% from 96% in Q4 of the prior year. Our efforts to improve growth and NDR in 2024 are evident in our Q4 results as NDR with our traditional cloud services reached 100% in Q4 for the first time since June of 2023 on the back of our rapid product road map execution in our investments in several strategic go-to-market motions. From these efforts, we saw increased expansion from our higher spend customers as we continue to focus both our product go-to-market effort on these top customers. Our higher-spend customers, which has traditionally included our builder and Scaler cohorts, now represent 88% of total revenue and grew 16% year over year in Q4. We have now further disaggregated our Scalers and are disclosing our highest spend customer cohort, Scalers+, which are customers who were at 100k-plus annual run rate during the quarter. These Scaler+ customers who are critical to our growth trajectory increased in count by 17% year over year and were 22% of the total company revenue in Q4. We reached over 500 of these customers for the first time in the company's history. And more importantly, we saw a 37% year-over-year increase in revenue from Scalers+ customers, which is clear evidence of both the wallet share opportunity we have with these customers and our demonstrated ability to scale with them. We also made material progress on our other major growth lever, our AI/ML platform, and closed the year with continued momentum, exceeding the three points of overall growth contribution from our AI/ML platform that we had guided for 2024, with Q4 just north of 160% ARR growth while staying true to our AI strategy and pursuing durable AI revenue. We are very encouraged with the rapid growth and customer adoption of our newly launched AI products, and I'll talk about them later in my comments. On top of the encouraging growth signals, profitability remained strong as we delivered healthy 42% adjusted EBITDA margin, both Q4 and for the full year, maintaining our cost discipline while we continue to invest to fuel future growth. Looking forward, our 2025 guidance reflects this ongoing momentum with full-year revenue growth at low to mid-teens and high teens free cash flow margins above our preliminary 15% to 17% indication. We continue to prioritize and rebalance our investments, driving improved operational efficiencies while shifting resources toward our top growth initiatives. Our upcoming Atlanta data center is a good example of both these priorities, as the upfront investment in that facility, which will come online in Q1, not only provides us with incremental capacity for both AI and our core cloud offerings, but also gives us a lower cost facility and is part of our longer-term data center optimization strategy. Matt will walk you through more detail on our financial results and guidance later in the call. In my first year at DigitalOcean, we had several very clear priorities as we sought to accelerate growth. We needed to double down on product innovation to address key gaps in our core cloud platform, better address the needs of our larger customers, return net dollar retention to a tailwind rather than a headwind, and build the foundation for our longer-term AI growth strategy. We made material progress on each of these objectives and continue to deliver on our promise of making complex cloud and AI technologies simple. We also made substantial progress on making our platform even more scalable enhancing our ability to meet the needs of larger customers. And finally, we doubled down on our heritage of being the most approachable public cloud provider by continuing to invest in support of open-source AI models and even hosting our developer conference deploy in January. Let me now give you some updates on the core cloud computing platform. In Q4, we continue to accelerate the pace of innovation as we released 49 new products and features throughout the quarter, which is more than four times what we released in Q4 of the previous year. Most of these products and feature enhancements directly address the needs of our larger-spend customers as we continue to remove blockers and implement the capabilities that they need to further scale on our platform. I will highlight several of these product releases that we have made to help our customers grow their businesses using DigitalOcean. Given that our larger customers run significant global workloads, they need the ability to securely connect different parts of their network so that their systems and applications in separate environments in various data centers in different countries can securely communicate without using the public Internet to improve speed and efficiency while keeping their data secure. To address this need, in Q4, we announced Virtual Private Cloud Peering, or VPC Peering for short, which is now generally available for all our customers. VPC Peering enables customers to connect their separate private clouds and establish seamless communication between resources hosted in these clouds using private IP addresses keeping their information safe by traversing through the DigitalOcean backbone rather than through the public Internet. Our larger customers also need the ability to distribute traffic across resources while still keeping it within a secure private network. To support this, we introduced a new feature called internal load balancer, which enhances security by ensuring that internal workloads remain isolated from public Internet, making it ideal for applications that require highly scalable private communications. We also have several large customers with volatile traffic patterns, that need mechanisms to handle these massive spikes in volume very smoothly while still optimizing costs and scaling them down when the demand is lower. To address this, we announced the general availability of Droplet Autoscale Pools to ensure that the right resources are available to handle application workloads during the surges in traffic, scaling up automatically to meet demand, while also helping minimize costs by scaling them back down when the traffic surge is over. We also introduced flexible management capabilities to our app platform, which is our platform as a service offering for more granular life cycle management, including archive and restore functionality and maintenance mode during the application's full life cycle. Next, customers of Spaces, which is our fast-growing S3-compatible object storage service, have long asked for the ability to grant granular permissions to different users or teams without exposing full accountwide credentials. In response, we launched per bucket access keys for Spaces. This highly sought-after feature provides customers with identity-based bucket level control over access permissions, helping enhance their data security and ultimately simplifying management overhead. Complementing this accelerated pace of product delivery of sophisticated capabilities was one of our new go-to-market motions where we bolstered our engagement with our top 1,500 customers. By helping take these new innovations to our customers and tightly orchestrating a closed loop between the various DigitalOcean teams in our top customers, this motion increased awareness and adoption of our new product capabilities, facilitating migration of cloud workloads from other clouds to DO and serving as a catalyst for both our improved NDR and faster growth rate of Scalers+ customers. Our higher-spend customers have quickly started adopting many of these features that I just talked about that we released over the back half of 2024. Over 50% of our top 100 customers have adopted at least one of the features that we released in Q3, and we anticipate similar adoption levels for our Q4 features over time. Together, the breadth of these new features and the pace at which we are executing our product road map is enabling our higher-spend customers to grow on digital ocean and is enabling us to win more of their workloads that today reside on other hyperscaler clouds. As we discussed last quarter, we've been focused on helping our customers seamlessly migrate more workloads to us and scale efficiently on DO. One example of this is a customer called Digital Platform, a strategic software solutions development company that was experiencing high cost and latency issues with the cloud that they were leveraging, which was impacting their application performance. Through our customer-facing teams, we were able to fully migrate their workloads to DigitalOcean, leveraging our optimized database infrastructure to improve their performance while providing them with substantial cost savings. Another example is Hudu, a provider of enhanced IT documentation with features and tools made for assisting managed service providers in IT departments. Hudu has been a DO customer since 2019, and they continue to scale and grow on our platform. Hudu was an early adopter of our Kubernetes, managed databases, SnapShooter, and premium support products. As a result of the ease of use of our platform, they've been able to focus on their own scalability and have grown as a business over 870% since 2021. Another example of our customers' ability to scale with DigitalOcean is Moments, a fitness and wellness platform that manages bookings, communications, and memberships. Moments needed a larger instance to house their database to meet the requirements of their rapidly growing customer base and continue leveraging our platform. The DigitalOcean team was able to provide architectural guidance by crafting a solution with existing DO products while delivering a new product they requested, a 48vCPU storage-optimized droplet with scalable storage. Let me now switch gears and give you a quick update on our AI initiatives. We remain committed to and are executing well against our AI strategy that we articulated last year. In that context, I'm very encouraged by the emerging innovations in this space like DeepSeek that drives down the cost of AI adoption and improve the quality of open-source model, which will ultimately enable more customers to use AI. We see innovations such as DeepSeek and even reports of some hyperscalers potentially moderating their data center commitments as reinforcing our conviction that while a lot of action to date has been at the infrastructure layer, that innovation and value creation will occur at the platform and application layers where we are highly differentiated and well positioned to grow as we democratize AI for our customers. Our prudent approach to AI investments also allows us to ramp investment where we see customer demand. And as a case in point, we are increasing our allocation of our GPU capacity for our GPU droplets, where we quickly ran out of capacity after launching at the beginning of Q4. Each of these three layers, infrastructure, platform, and AI applications, have their purpose and very distinct customer targets. And although most of the action is still in the infrastructure layer, we are now starting to see more narratives in the market around the higher layers of the stack in platforms and Agentic applications, which is a good validation of our AI strategy that we laid out last year. We've been making excellent progress enhancing our AI infrastructure offerings as well as innovating at the GenAI platform and Agentic application layers as we build toward our goal of a democratizing AI by enabling our customers to quickly experiment and build AI into their real-world applications. On the infrastructure side, we are seeing strong adoption of GPU droplets, which we made generally available to all our customers in October. As a reminder, GPU droplets allow DigitalOcean customers to leverage on-demand and fractional access to GPUs in a self-service way in just a few minutes, vastly simplifying a very complex series of steps. Let me now give you a couple of real-world examples. Prodia, a company specializing in integrating generative AI into their own applications, leverages DigitalOcean's GPU infrastructure globally to efficiently manage their own products. Prodia accelerates generation speeds, offering an easy-to-use API for AI-powered image generation. Another example of an AI/ML infrastructure company is Commodity Weather Group, a company that provides advanced weather model forecast to their clients and runs AI-based weather models to enhance decision-making with additional insights. They also leverage DigitalOcean's AI infrastructure for its scalability and ease of use. These are just a few examples of how our customers are leveraging our infrastructure to develop and sustain data-intensive software to be able to meet the needs of their own customers, all while leveraging the simplicity of DigitalOcean's AI/ML infrastructure. Moving up the stack, I'm very excited about our GenAI Platform, which is now in public beta. The DigitalOcean GenAI Platform is one of the simplest platforms to create, deploy, and integrate AI agents into real-world applications. Tipping back for a second, AI agents are software applications designed to autonomously perform multistep tasks that involve reasoning and decision-making leveraging AI and ML. Our new GenAI Platform gives customers everything they need to build AI into their own applications without the need for advanced expertise in AI or machine learning. Customers can easily and quickly build AI agents leveraging DO's infrastructure by adding their data to their pretrained third-party GenAI models and can seamlessly integrate those agents into their own application via secure endpoints or chatbot plug-ins. In the four weeks since we made the GenAI Platform beta public, we have seen well over 1,000 agents created on the platform, with the most encouraging fact being that roughly 90% of these agents were created by existing DO customers, which is further validation of our belief that our typical DO customer wants to leverage AI into their software stack and are willing to do it if you make it very, very simple and integrated with the rest of our cloud platform. In our latest version of the DigitalOcean Currents, a customer trend report that we published earlier this month, we found that almost 80% of our target customers are interested in leveraging AI, but over 70% of them said that costs and lack of expertise are the two major impediments to AI adoption. Our GenAI Platform makes it very simple by abstracting out most of this complexity associated with creating AI agents by having templatized agents, click-through wizards and so on, and by providing easy access to a variety of open-source models, including LLaMA, DeepSeek and Mistral. At the application layer, we introduced cloud-based Copilot in public beta, which is a suite of AI solutions designed to bring intelligent managed hosting to small and medium businesses, starting with AI-powered diagnostics to give customers recommendations and alerts to fix issues before they become problems. This helps our customers automate tasks, monitor performance, and provide them with insights to keep their websites up and running smoothly. One such example is ClickIT, a web design and development agency, which is already leveraging the newly announced cloud-based copilot and AI. ClickIT is finding a 4x reduction in the time spent manually handling issues and taking care of web servers. We also started using GenAI agents for our own internal DigitalOcean cloud operations. For a variety of operational incidents, GenAI agents are invoked, which analyze our service logs to determine the root causes. This has resulted in a 39% improvement in our time to resolution and is one of the most sophisticated users of GenAI agents in the industry today. We are building these agents and using them not just to improve our own operations but also to deeply understand the pain points and complexities of building AI agents so that we can incorporate these learnings into our GenAI Platform and making it even more simpler for our customers to use. Beyond our product and customer progress, another recent highlight was the deploy conference we hosted in January in Austin, Texas. This event brought together customers, partners, and some DigitalOcean employees, amplifying our presence in the developer and AI/ML space and building out on our strong position as the most approachable public cloud. At Deploy, we introduced a slew of new product capabilities, launched an AI variant of our popular start-up incubator program called Hatch, and hosted many of our technology and channel partners. At Deploy, we also launched a new migrations program designed to seamlessly transition cloud workloads from the hyperscalers to DigitalOcean. This program will eliminate migration-related complexity, deliver lower operational costs, and provide seamless technology assistance through our partner ecosystem and a newly formed digital ocean team of solution architects skilled at migrating cloud workloads. To recap, as I close my prepared remarks, we entered 2025 with increasing momentum. In Q4 alone, we released more than four times as many products and features we did in the previous year, increased net dollar retention to 99%, grew revenue 13% year over year, and delivered 18% adjusted free cash flow margin. Our focused efforts on our higher-spend customers and our continued traction in AI drove quarterly revenue for our top 500-plus customers, representing 22% of our total revenue, to grow at 37% year over year. This shows clear progress on our strategy and builds on our leading position as the simple, scalable, and approachable cloud. Before I turn the call over to Matt, I'm very excited for our upcoming investor day, which we will be hosting at the New York Stock Exchange on April 4th, starting at 9:00 a.m. Eastern Time. During this investor day, we will share more on our longer-term strategy, including more details on our progress and key metrics, and we'll share a view of our long-term financial outlook. I will now hand it over to Matt, who will provide some additional detail on our recent financial results and our outlook for Q1 and full year 2025. Over to you, Matt. Matt Steinfort -- Chief Financial Officer Thanks, Paddy. Good morning, everyone, and thanks for joining us today. As Paddy discussed, we delivered a solid Q4 and full-year 2024 on all financial metrics and made meaningful progress on the key initiatives and goals we set in place at the beginning of the year. In my comments, I will review our Q4 results in detail and cover the full-year 2024 financial highlights before sharing updated first-quarter and full-year 2025 financial outlook. Revenue in the fourth quarter was 205 million, up 13% year over year. Annual run rate revenue, or ARR, in the fourth quarter was 820 million as we added 26 million of incremental ARR in the quarter, up from 24 million in new ARR in Q3. Of note, we made a methodology change to how we report ARR, where we now calculate ARR by multiplying the quarterly revenue times four rather than the final month of the quarter times 12. We decided to use aggregate quarterly revenue to calculate ARR to reduce potential volatility in this metric given the project-based nature of some of the training workloads customers are running on our AI/ML platform. More details on this as well as a reconciliation between the old and new methodologies can be found in our Form 10-K. Revenue from our builders and scalers, which are our highest-spending customer cohorts and represent 88% of total revenue, grew 16% year over year, and customer count increased 6% year over year. This quarter, we also began to disclose further disaggregation within our scalers cohort and are now separately disclosing our largest spending customer cohort or Scalers+ or customers that monthly spend is more than 8,333 per month during the quarter, which is more than 100,000 on an annualized run rate or ARR basis. In Q4, revenue from Scalers+, who represent 22% of overall revenue, grew 37% year over year, driven by a 17% year-over-year increase in Scaler+ customer count, coupled with their expanded usage of our core cloud services and continued growth of our AI-related solutions. The net expansion increase we saw from our top customers drove our Q4 net dollar retention rate up to 99%, up from 97% for the first three quarters of 2024. The increases we are seeing in our net expansion levels, coupled with churn that has remained stable for the last two years, is moving us closer to reaching and exceeding 100% NDR and shifting NDR from a growth headwind to a tailwind. Within this overall improvement in NDR, we saw the NDR rate of our traditional cloud services reach 100% in the first quarter for the first time since June of 2023. All of this progress is despite the fact that we are still lapping a few headwinds from our managed hosting products that we've spoken about previously. And this progress gives us confidence in our baseline growth rate heading into 2025. Turning to the P&L. Gross margin for the quarter was 62%, which was 300 basis points higher than the prior quarter and 500 basis points higher than the prior year. The increase in gross margin quarter over quarter and year over year is primarily driven by the increase in revenue as well as the change in the useful life for our servers from five to six years as we've been able to extend the utilization of our equipment. More details on this change in useful life can be found in our Form 10-K. Adjusted EBITDA was 86 million, an increase of 17% year over year. Adjusted EBITDA margin was 42% in the fourth quarter, approximately 200 basis points less than the prior quarter but 100 basis points higher than the prior year. We feel confident in our ongoing ability to appropriately balance our growth investments with our efforts to improve operating efficiency as is evidenced by our continued delivery of healthy adjusted EBITDA margins. Q4 adjusted free cash flow was 37 million or 18% of revenue. This is higher than Q3 by approximately 500 basis points due to timing of capital investment payments, which will continue to create core variations in adjusted free cash flow margins. Finally, non-GAAP diluted net income per share was $0.49, 11% increase year over year. This increase is a direct result of our ability to increase our per share profitability levels by continuing to drive operating leverage while mitigating dilution through share buybacks. For 2024, total revenue increased 13% year over year to 781 million. This growth came primarily from continued strength in our durable customer acquisition engine, which in 2024 was augmented by new customer revenue on our AI platform and from growth in our highest spend customer cohorts. Given our 98% NDR in 2024, the vast majority of our revenue growth in 2024 came from customer acquisition and new customers, including those that consumed our newly launched AI services, which delivered north of 160% ARR growth in Q4. Despite the NDR headwind in 2024, our Scaler and Scaler+ customer cohorts collectively contributed approximately 445 million and 57% of total revenue in 2024 and grew revenue 18% year over year. Turning to the P&L. Our gross margin for the year was 60%, which was 300 basis points higher than the prior year, which I noted earlier in my comments, is primarily driven by revenue growth that is faster than our growth in COGS as we delivered further operating leverage. On the profitability front, we delivered healthy adjusted EBITDA margins in 2024 at 42%, up 200 basis points from 2023. We generated 17% adjusted free cash flow margin in 2024, down as we had planned going into the year, 500 basis points from 2023 margins as we ramped our investment in our compelling AI growth opportunity. On our customer metrics, as I mentioned previously, this quarter, we are now disclosing further disaggregation of our Scaler customer cohort into Scalers and Scalers+, as these higher-spend customers are the focus of our investments and their performance is key to our growth strategy. In Q4, the number of Scalers+ grew 17% year over year, and the revenue growth from Scalers+ grew 37% year over year. We are also seeing an increase in average spend within Scalers+, where average revenue per user, or ARPU, grew 18% year over year. The traction we are seeing with our highest-spending customers is the result of our continued efforts across product development, targeted customer success and account management motions, and new go-to-market investments that are all focused on these customers. And this is an encouraging sign of our ability to drive future growth. Our balance sheet remains very strong as we ended the quarter with 428 million of cash and cash equivalents. We continue to execute against our share repurchase program in the quarter with 28 million of repurchases in Q4 bringing total share repurchases to 57 million in fiscal year 2024 and bringing our cumulative share repurchases since IPO to 1.5 billion and 32.6 million shares through December 31st 2024. With our healthy cash position and ongoing free cash flow generation, we are well positioned to continue investment in both organic growth and share repurchases while maintaining appropriate flexibility to address our 2026 convertible note at the appropriate time, which is likely before it goes current at the end of this year. Moving on to guidance. I will now share our financial outlook for the first quarter of 2025 and for the full year. For the first quarter of 2025, we expect revenue to be in the range of 207 million to 209 million, representing approximately 13% year-over-year growth at the midpoint of our guidance range. For the full year 2025, we expect revenue to be in the range of 870 million to 890 million, also representing approximately 13% at the midpoint of our range. As was the case with our 2024 guidance, our 2025 guidance is underpinned by our baseline growth foundation as we entered the new year. Our primary 2025 growth levers are bolstering customer acquisition and continuing to drive customer expansion. Customer acquisition includes revenue from any new customer, including new AI/ML customers, who are within their first 12 months on our platform. We anticipate customer acquisition and revenue from new customers to again contribute the majority of our growth in 2025. But by continuing to improve NDR in 2025 and by expanding usage by our existing AI customers that will soon have been on our platform for more than a year, we expect customer expansion to improve and to have a neutral to slightly positive impact in 2025, where it was a headwind in 2024. For the first quarter of 2025, we expect our adjusted EBITDA margins to be in the range of 38% to 40%. For the full year, we expect adjusted EBITDA margins to be in the range of 37% to 40%. For the first quarter of 2025, we expect non-GAAP diluted earnings per share to be $0.41 to $0.46 based on approximately 103 million to 104 million in weighted average fully diluted shares outstanding. For the full year 2025, we expect non-GAAP diluted earnings per share to be $1.85 to $1.95 based on approximately 104 million to 105 million in weighted average fully diluted shares outstanding. On adjusted free cash flow, we expect adjusted free cash flow margins for the full year to be in the range of 16% to 18%, slightly ahead of the preliminary indication for 2025 that we provided last quarter. Consistent with our historical guidance practice, we are not providing adjusted free cash flow guidance on a quarter-by-quarter basis given it's heavily influenced by working capital time. However, we would like to highlight that our 2025 expenditures will be front-end loaded, which is driven by additional AI-related capital expense as we scale those services, one-time start-up costs to get our Atlanta data center online, and the usual Q1 cash expense events, including bonus payments and higher payroll taxes. Given this front-end loaded investment and expense, Q1 adjusted free cash flow margin will decline from Q4 levels, but we will quickly return to higher adjusted cash flow margins in Q2 and across the balance of the year. And we remain very confident in our ability to deliver the 16% to 18% full-year adjusted free cash flow margin in our guide. That concludes our prepared remarks, and we will now open the call to Q&A. Operator Thank you. We will now begin the question-and-answer session. [Operator instructions] We also ask that you limit yourself to one question. For any additional questions, please requeue. Your first question comes from Josh Baer with Morgan Stanley. Please go ahead. Josh Baer -- Analyst Great. Thanks for the question. At your recent Deploy conference, you talked about several customers that were disappointed with their experience at the hyperscalers and ended up migrating to DigitalOcean's platform. I was hoping you could expand on that and touch on what types of customers you are targeting, what types of workloads. Yeah. Thank you, Josh, for the question. So, yeah. What we highlighted during the conference was a handful of customers that are looking at alternatives, primarily for two reasons. One is the simplicity of running a fairly sophisticated workload on a hyperscaler, it's not an easy undertaking. You need specialists for many of the nuances like storage and networking and compute and so forth. And also, the total cost of ownership, especially if you have spiky workloads and you're unwilling or unable to commit to really long-term contracts at a substantial amount of minimum commitment, that it becomes a really onerous thing to keep running your workloads on some of these hyperscaler clouds. So, what we are offering as part of the Migrations program that I was just talking about is a couple of things. One is the ability to get our partner ecosystem involved to facilitate smooth transition of the workloads but, more importantly, provide a super compelling scalable platform, which is far easier for most of the mainstream workloads to run and operate on DigitalOcean's platform. So, we're seeing all kinds of customers, Josh. And we are staying true to our target customer segments, which is tech-native, digital-native cloud application software companies that are running globally distributed workloads that are typically network and bandwidth intensive. Some of them require very bursty spikes in their traffic pattern. So, that needs to be supported in a very elastic manner. And what attracts them to us is our -- our core value proposition of being simple yet scalable, but most importantly, a very approachable cloud that really cares about them. Josh Baer -- Analyst Thanks, Paddy. And just wondering on the EBITDA guidance. I mean, initial EBITDA guidance for this year was 36% to 38%. You ended at 42%. I was hoping you could kind of provide a just high level of the main drivers of that degree of outperformance and then how we should think about that level of conservatism in the initial '25 guide for EBITDA. Thank you. Matt Steinfort -- Chief Financial Officer Great question, Josh. So, I think we said this publicly last quarter, that with all the new executives that come on and with the acknowledgment that we needed to accelerate the product road map, we built in some cushion in Q4 for the R&D team, in particular, to surge resources if they wanted to bring in contractors, etc. And what we were able to do was we took a real hard look at the spend that we have, and we were able to reallocate resources. And Bratin and team did a phenomenal job of prioritizing on the top initiatives and getting the key products out. And so, we didn't need that surge. You'll note that from a full year and even for first quarter, the guide is still pretty wide on EBITDA. And so, what we're signaling is a little bit of -- don't get super fixated on what EBITDA is one quarter versus the next because we may be pulling expenses ahead or we find efficiencies that we don't need to. But what I would focus on is our commitment. We raised the free cash flow guide from our preliminary indication to -- from 15 to 17 to 16 to 18, and that's what we're managing more aggressively toward. And I view EBITDA as a -- it will be a little bit more -- it will move a little bit more, but we're very committed to driving improvements in gross margin. We're very committed to driving operating efficiencies and improving the leverage we have in the business. But at the same time, if we see an opportunity to accelerate our product capability that drives revenue, we'll do that. And that might have a near-term impact on EBITDA margins, which is why we provided a wide guide in the fourth quarter and why we provided a wide guidance for 2025. Operator Your next question comes from the line of Gabriela Borges with Goldman Sachs. Please go ahead. Gabriela Borges -- Analyst Hey, good morning. Great to see the NDR. And thanks for taking my question. Paddy and Matt, I wanted to follow up on the math you've given us in prior quarter on how much ARR you're able to capture per dollar of GP-related capex. Maybe just refresh us, as you move up the stack from IaaS to PaaS, are you able to generate more revenue per dollar of capex? And, Matt, maybe you can comment on the gross margin profile of the AI services business as you move into more differentiated services. Thank you. Matt Steinfort -- Chief Financial Officer Yes. Both great questions, Gabriel. And yes. So, the -- what we found is, in particular, if you think of the GenAI product, and this has been a great learning for us and also very, very supportive of our strategy. Somebody comes in and they want to build a chatbot, and they build -- they come in with their knowledge base and they come in and they want to look up with another model. They can certainly take advantage of our GenAI capabilities. And the GenAI capabilities have way higher margins on their own than do our -- the bare metal or more the infrastructure layer. But the thing that is probably most compelling to us is how much other revenue that will drive through of cloud services. Because for every chatbot, you have -- you need somewhere to store your knowledge base, so you need storage. You need bandwidth to get that to communicate with the models. And you need a lot of our other database infrastructure. So, we think that the amount of pull-through revenue that we're going to get from the GenAI services is kind of orders of magnitude more than the actual GenAI revenue itself. And so, that's very, very compelling. The margins, again, on the infrastructure layer, as we've said and is very clear in the market, that margins aren't spectacular, gross margins on just core GPU as a service and very price transparent in the industry. There's a lot of competition to get kind of initial workloads and the cost, even though there are new entrants, AMD is out with new capabilities and a lot of others are working on capabilities in addition to NVIDIA, it's still a fairly one vendor-dominated industry. And the costs are super high. So, we expect that to come down over time. And we expect to be able to leverage more of that infrastructure for inferencing over time, which will drive more consistent and higher-margin revenue. But I think that the path that we're on is toward more of our revenue coming from the higher platform, higher-layer services. And those higher-layer services, not only on their own have better margins, but they pull through higher margin cloud revenue as well. Your next question comes from the line of Mike Cikos with Needham and Company. Please go ahead. Mike Cikos -- Analyst Great. Thanks for taking the questions, guys, and great to see the improvement in the NDR that you're talking to as well. I guess, first question I had for you was related to the AI/ML. Great to see the growth there still remaining triple digits, north of 160%. Is there any way to give us a little bit more as far as the size of that AI/ML ARR base today, what it represents as a percentage of the total ARR? And then the second piece on that point would be, how do we think about the ARR composition today? Is the vast majority of that coming from the Scalers+ cohort? I know, we have these new disclosures and you guys are seeing broad-based adoption. But just interested where the revenue dollars specifically are coming from for that piece. Matt Steinfort -- Chief Financial Officer Yeah. On the first question, Mike -- and thanks for the questions. We're not disclosing the specific ARR for AI for very clear reason on our side. The revenue is kind of intermingled with -- like I was speaking to Gabriela, when we get a little bit of GenAI revenue, we're getting a lot of pull-through revenue in other parts of the business. And we also don't manage the business as a -- like there's AI product group, and there's other product groups. It's kind of commingled in terms of whether it's compute or some of the other capabilities. So, we believe that like we have Infrastructure as a Service, and we have Platform-as-a-Service, and we have managed hosting. AI is just another one of our products. And so, we're not going to disaggregate at the product level. In terms of the amount of AI that's with the Scalers, recall that when we acquired Paperspace several years ago, it came with a lot of customers. It was like 15,000 customers or something like that. And they had a run rate that was largely small customers that looked a whole lot like the DigitalOcean customer base. So, we have a pretty deep set of customers that are smaller. They're on the AI platform, a lot of them leveraging the legacy Paperspace, kind of notebooks capability. And a lot of the new customers that are coming on -- in that Paddy talked about, 90% of the customers that adopted the GenAI product out of the gate are existing customers. And their mix looks a lot like our existing customers. So, I'd say there's a healthy chunk of the AI that's in the Scalers+, but it's not all of it. And it's not -- the vast majority of it is not in that yet. But there is a healthy jump. Mike Cikos -- Analyst Thank you for that. Can I just tack on maybe one more on the gross margin? Just -- I know that we have the Atlanta data center coming online in Q1, which we're all looking forward to. But can you help us think about how gross margins are likely to move through the course of the year with that Atlanta data center? And then we obviously have the news that the useful server lives are being extended a year. How do we put those two pieces together when we think about how calendar '25 looks? Thank you. Matt Steinfort -- Chief Financial Officer It's actually not going to move a ton. It will be a little bit of a -- probably see a little bit of a dip in gross margin in the beginning of the year, and then it will pick back up, which is very consistent to what we -- what happened before with the -- when we did Sydney. You get -- it's some upfront expenses. We haven't fully ramped it clearly with revenue yet. So, you'll see a little bit of a gross margin dip, but we don't see a fundamental shift in kind of the range of gross margin that we're in right now. And in fact, Bratin and the teams are working aggressively to drive gross margin improvement over the multiyear period as we continue our data center optimization strategy, and we just look for ways to better utilize the infrastructure that we have. So, I think gross margin, you'll see a little bit of a drop in the beginning of the year. It will come back, and I'll keep pointing back to. But again, we're very confident in our 16% to 18% free cash flow margins for the year. So, it will all kind of wash out to better margins as we get gross margins -- sorry, better free cash flow margins as we get through the year. Operator Your next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead. Patrick Walravens -- Analyst Great. Thank you. So, Paddy, you've been here a year, right? What has gone better than you thought it would, and what has proved a little more difficult? Paddy Srinivasan -- Chief Executive Officer Hello, Patrick. Good morning, and thank you for the question. Yes, super early for you, appreciate you dialing in. What has gone better than I expected? I think our product innovation and our ability to really understand what our customers need at a deep level has been growing better than I expected in the sense that when we look at the adoption, the reception from our customers, and our hypothesis that our customers really, really want to stay with us. And we were saying that now, we have green shoots to prove that it is the case. If we take care of them, they're going to expand with us. So, I think that has been really awesome. The thing -- I wouldn't -- so, the whole AI landscape, the way it is unfolding has been really interesting. And I'm super encouraged by the fact that we are staying very disciplined to our AI strategy, not getting caught up with deploying too much capacity and running after the GPU forms business model and things like that. It has been a really good learning experience for us. And slowly but surely our -- some of our hypothesis in the AI space have also started bearing out in the sense that the cost of -- so, the two biggest impediments as I talked about in my remarks where, one, it is too complex, and number two, it is too expensive for our customers, right? So, we can really help with the complexity by making it super simple, especially with open-source models, it gives us a lot of degrees of freedom to make it even more easier for our customers. And then number two is make it super affordable. And that's exactly what we have started doing with the on-demand fractional access to GPUs and also our token-based serverless endpoints with the GenAI platform, especially with the open-source model. So, that has also started growing really well for us. So, I would say those were the two key learnings for me over the last year. Operator Your next question comes from the line of Wamsi Mohan with Bank of America. Please go ahead. Ruplu Bhattacharya -- Analyst Hi. Thanks for taking my questions. It's Ruplu filling in for Wamsi today. I have two. First one for Paddy. You launched a lot of products in 2024. Paddy, can you talk about the areas of investment in 2025? And thanks for disaggregating the Scalers+ at 22% of revenue. How do you see that percent, that cohort growing in 2025? And to do that, are you happy with the go-to-market investments you've made? Or do you need to hire more salespeople? And I have a follow-up for Matt. Paddy Srinivasan -- Chief Executive Officer OK, thanks. Great question. So, I'll try to go very fast. So, what are our product priorities for this year? So, I'll break it down into core cloud and AI. On core cloud, we will continue our journey in terms of meeting our larger customers where they are in terms of their more sophisticated needs in terms of whether it is more management capabilities or security capabilities or networking, richer variety of droplets that are very specific, single-purpose droplets, and things like that. So, we still have some amount of work to do to meet our -- meet the needs of our larger customers and pave the way for larger workloads to move to DigitalOcean from other clouds. From an AI perspective, we'll continue to fortify our infrastructure layer, which is honestly quite robust and very scalable and highly appreciated by our customers now. GenAI platform is where we are going to have a lot of innovation to make it super, super simple for everyday software application company to consume and build agents into their applications. And finally, on the Agentic layer, we have announced or we have launched in the last couple of months the site reliability engineering copilot through cloud-based first and then we'll make it available more generally. And it is our intention to keep pumping out more AI agents that solve real business problems, rather than just doing things for R&D sake, we want to solve real-world customer problems for our customers. And in terms of go-to-market, as I mentioned in my prepared remarks, we have already bolstered our -- the way we do customer engagement with our customers. And as we go through the remainder of the year, I'll give you more updates in terms of additional go-to-market motions that we are standing up. The good news for us is, we have tens of thousands, if not hundreds of thousands of customers that we can go and merchandise our expanding product platform capabilities and get a bigger chunk of the share of wallet. So, as much as it is important to keep hunting for new logos for which we have a very efficient self-service product-led growth funnel, a lot of our go-to-market efforts are intended or aimed at expanding the share of wallets with our customers, which is a very different, more -- significantly more efficient go-to-market motion than trying to find a bunch of new logos. So, we'll do a combination of both, and I'll keep reporting our progress throughout the rest of the year. Ruplu Bhattacharya -- Analyst Thanks for all the details there, Paddy. Matt, just a quick follow-up. On payables, it looks like sequentially, it was up meaningfully. Is that because of the Atlanta data center investments? Or do you get a new contract that is driving that up? And what would ARR be under the old method in fiscal 4Q? Thanks for taking my questions. Matt Steinfort -- Chief Financial Officer Sure. So, from a payable standpoint, it's definitely a function of us getting ready for Q1 for the Atlanta data center. Bratin and team did a phenomenal job of being able to accelerate some of the -- the readiness of some of the services. And so, we bought a bit more equipment earlier than what we had expected. And so, we were able to -- and still able to do that within the confines of our free cash flow that we delivered. So, it was all about getting Atlanta ready to go and off to a good start. And from an ARR standpoint, I don't have the numbers specifically in front of me. It's in the reconciliations in the 10-K. It would have been higher in fourth quarter had we reported December times 12, if we had not changed the approach. What we think is, again, we're -- remember, we're a consumption-based business. In a lot of cases, our -- even our AI is consumption basis -- based. It's not like committed contracts. And so, if you measure the consumption at any given time and you multiply it by a number, you're going to get oscillations and variations based on whatever is going on at that period in time. So, it's a more, I'd say, steady metric if you just average it over the quarter. And so, despite the fact that it made us look like we had lower ARR, that's, I think, the right thing to do for the market to give you a metric that's, I think, more steady and less volatile, and that's why we did it. Operator Ladies and gentlemen, as a reminder, please limit yourself to one question. Your next question comes from the line of Mark Zhang with Citigroup. Please go ahead. Mark Zhang -- Citi -- Analyst Great. Good morning, team. Thanks for taking our questions. Maybe just -- thanks for the additional disclosure on the Scalers. But how should we think of the behaviors of the Scalers+ versus the non-plus in terms of the pace of upsell or cross-sell going forward? And why aren't we really seeing a more accelerated pace of growth in the non-plus Scaler cohort just given the product and go-to-market efforts you guys have already implemented? And what can drive the -- at least like pass the -- or outpace the growth of Builders? Thanks. Matt Steinfort -- Chief Financial Officer Thanks, Mark, for the question. The reason that we broke out the Scalers+ and the 100k-plus customers is that the single biggest question we got from whether it was analysts or direct conversations with investors is, do we have a graduation problem? Like do our largest customers leave us, and those are your most valuable customers, and you got a leaky bucket that's leaking from the most valuable part of the customer base. And there was -- I'd say there was an element of truth to that in that what we certainly were struggling with those customers over the past several years, not meeting their needs as well as we could have or should have. And that was causing a lot of the depression in NDR driving us below 100. With Paddy's arrival, with Bratin's arrival, with the pace of product innovation that we have, it's very, very squarely focused on those large, large customers for us. Again, a large customer for us is probably not a named account for the hyperscalers, but it's material for us. And what we've done is we said we're going to focus on that cohort. We're going to make sure we're listening to them. We're going to rapidly give them the capabilities they need to scale in our platform, and we've done that. And the response has been very, very positive, where now, we're talking about migrations for those customers bringing workloads either back to us or to us for the first time from the hyperscalers. And so, it's been a dramatic turnaround. And we'll talk more about this at investor day in April. But if you look at the NDR improvement, if you look at the year-over-year revenue growth improvement, it's been dramatic within those top customers. And as Paddy and I have said, we think we have a tremendous wallet share opportunity with our customers. And clearly, as you pointed out, well, the Scalers, the customers below that 100k-plus aren't growing as fast. OK, well, we haven't gotten there yet. And some of those were trying to -- with our new go-to-market motions, how do we pick and find the ones in that -- the customers in that cohort that have the highest propensity to spend, where we've got the lowest wallet share and how do we go after those in a scalable way. I'd say what you're seeing right now is, I'd say, not low-hanging fruit because it's very been difficult, and it's requiring a lot of effort and these are important customers, but we're going after the biggest rocks first. The biggest rock was the top-spending customers, and we're getting to the other layers as we progress through the year. Paddy Srinivasan -- Chief Executive Officer And the only thing I'll add is the Scalers and Scalers+, they all look the same. These are the very similar-looking customers. So, that's the best news because now we can go and get -- and start working on the Scalers, as Matt just talked about and get many of them graduated into Scalers+ and keep expanding their share of wallet. And as we've been maintaining Mark, there's a tremendous wallet share opportunity because they're all running substantial workloads, just not on us. So, that's a great opportunity for us to go earn the trust of these customers and get more of their workloads. Operator Your next question comes from the line of Raimo Lenschow with Barclays. Please go ahead. Raimo Lenschow -- Analyst Hey, thanks for squeezing me in. One simple one at the end. How does the -- what do you see out in the market in terms of end demand, etc.? And how is that helping you for this year? Thank you. Matt Steinfort -- Chief Financial Officer I'm sorry. Could you repeat the question? I didn't catch that. Raimo Lenschow -- Analyst I was just asking for what are you seeing in terms of end demand. Like if I look at the small business index, etc., that all starts looking better. Does that help you? Do you see help coming there from that one, or is that all neutral for you? Thank you. Paddy Srinivasan -- Chief Executive Officer Yeah. So, Raimo, thanks, and nice to hear from you. From an end-user demand perspective, we have not modeled any major variation in our guidance or our plans. So, we are expecting it to be stable and just like how it has been over the last few quarters. And from our NDR improvement perspective, we -- I mean, obviously, there is a lot that we have done to control our own destiny and earn the right to keep our customers and keep them expanding on our platform. But hopefully, the macro and the end user demand stays neutral to even positive, but we have not baked any of that into our projections. And, ladies and gentlemen, that does conclude our question-and-answer session. And with that, that does conclude today's conference call. [Operator signoff]

Intuit (INTU) Q2 2025 Earnings Call Transcript | The Motley Fool

Good afternoon. My name is Angela, and I will be your conference operator. At this time, I would like to welcome everyone to Intuit's second quarter fiscal year 2025 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] With that, I will now turn the call over to Kim Watkins, Intuit's vice president of investor relations. Ms. Watkins? Kim A. Watkins -- Vice President, Investor Relations Thanks, Angela. Good afternoon, and welcome to Intuit's second quarter fiscal 2025 conference call. I'm here with Intuit CEO, Sasan Goodarzi; and our CFO, Sandeep Aujla. Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2024, and our other SEC filings. All of those documents are available on the investor relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in these remarks are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior-year period, and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. Great. Thanks, Kim, and thanks to all of you for joining us today. We delivered very strong results in Q2 with revenue growth of 17%, and we're off to a great start in tax. We have strong momentum this year as we execute our global AI-driven expert platform strategy, powering prosperity for consumers and businesses. We are confident in delivering double-digit revenue growth and expanding margin this year, and we're reiterating our full year guidance. Today. I will focus on three areas: revolutionizing speed to benefit by delivering done-for-you experiences with expertise, winning in tax, and mid-market. We're making strong progress across our platform with our data and AI investments to deliver done-for-you experiences with AI-powered human expertise. Our focus is on automating tasks, end-to-end workflows, and entire functions, connecting customers to one of our more than 12,000 AI-powered human experts for the last mile or to complete all of the work. This is Intuit Assist, the combination of AI and AI-powered human experts, digitizing everything for customers and fueling their success. Let me share one example to demonstrate our progress. On our business platform, Intuit Assist delivers done-for-you experiences, automating workflows using AI agents. It automatically turns emails, electronic documents, and handwritten notes into estimates, invoices, or bills while doing the accounting in the background. It spots potential cash flow shortages in real time and suggests personalized solutions like applying for a line of credit through QuickBooks Capital. With these capabilities, we're seeing a 10% higher payment conversion rate on overdue invoices when customers use AI-generated invoice reminders versus those that don't. We're also connecting customers to our AI-powered experts at their point of need through QuickBooks live, up 2.5x in Q2, with 20-point higher ecosystem attach rate than the rest of the QBO base. Repeat engagement with our done-for-you invoicing experience continues to grow and has increased more than 50% since November. As we continue to scale these experiences, we're encouraged by new customers converting and adoption of platform offerings, such as payments and QuickBooks Live. This is Intuit Assist working at scale, fueling the success of our customers. Turning to tax, we're off to a great start. Our strategy is to win as an AI-driven expert platform by delivering the best experience, speed to money, and best price for customers. As one consumer platform with a seamless customer experience across TurboTax and Credit Karma, we have incredible scale to win in the DIY and assisted categories. We've made significant progress with Intuit Assist, which is fueled by our data, data services, and AI investments, delivering done-for-you tax experiences. We have transformed the shopping experience, helping guide customers to the offering that is best for them, which is driving higher starts. For those that choose to do their own taxes, we're delivering an AI-driven, highly personalized product experience. This includes easy data in from over 200 partners now covering 90% of our customers, most common tax documents, up from 68% last year. And with the intelligent application of data to personalize navigation, customers can complete their taxes more quickly with higher levels of confidence. When customers choose us to do their taxes for them, we match them with the best expert on our AI-driven expert platform within seconds and share the expert's qualifications while automatically uploading the customer's data, making the first interaction a wow experience; an AI-powered human expert that completes the customer's return in less than two hours, offering proactive and personalized assistance and providing the opportunity for customers to access their money immediately, all the while on the go or in the comfort of their home. The experience is resonating, and the TurboTax Live Full Service has a product recommendation score of 84 season to date, one of the highest at Intuit. This is an unmatched experience at scale, delivering delight and speed to money at the best price. With the scale of our data and AI capabilities, Intuit Assist is the control tower, automating tasks and workflows, with human experts engaging where needed to deliver done-for-you experiences for our customers. Let's shift to our durable go-to-market approach. We have reinvented our marketing campaigns focused on experience, speed to money, and price. We've strengthened our overall AI-driven personalized lineup and monetization capabilities. We are seeing great traction early in the season in DIY across simple and complex customers with strong monetization driven by benefits such as early access to refunds and AI-powered human experts. In the assisted category, with the significant improvement in experience, speed to money, and our beat your price campaign, our early full service funnel is strong. This is driven by marketing that started in the fall and improvements in local search for those looking for a pro near them. We estimate that our local experts in 130-plus designated market areas will give us access to approximately 80% of the nationwide assisted filers, and we found that filers are historically 5x more likely to convert when given a local option. We are also seeing more than 3x higher starts on the Credit Karma platform, driven by an increase in availability of seamless zero click login to TurboTax, from 5% last season to 70% this season. In summary, we're off to a strong start in tax. We're seeing strong growth across simple and more complex returns as the season progresses and strong overall average revenue per filer. We're also pleased with the power of one consumer platform, given the seamless experiences across TurboTax and Credit Karma. Let me now turn to the business platform and the progress we're making serving mid-market customers, which represent an $89 billion TAM. We are focused on winning as an AI-driven expert platform to fuel the success of customers with QBO Advanced, Intuit Enterprise Suite, and our ecosystem of services. Our go-to-market and product investments are fueling accelerated progress. With the QBO Advanced platform, we are delivering strong ARPC across our broader ecosystem of services with payroll and payments penetration exceeding QBO Core by 12 points and 9 points respectively at the end of the quarter. With Intuit Enterprise Suite, we are seeing growing momentum week to week. This includes the number of contracts we signed in January, which are up 2x versus November. IES is resonating with larger businesses and accountants across our ecosystem, particularly those with over 10 million in revenue where win rates are trending nearly 2x higher versus smaller customers. And the efficiency of our sales funnel continues to improve with sales productivity up more than 60% over the last two months. We are winning because of the valuable benefits of our platform, ease of adoption, price, and total cost of ownership. With IES, we're able to boost customers productivity by saving them time and providing deeper insights across the platform to fuel their growth. We are seeing traction with mid-market customers extending across multiple industries, including construction, IT services, legal services, management consulting, finance, and insurance. I'll share two examples that highlight our excitement in fueling customer success and Intuit growth. We recently signed a financial services firm with five entities that chose IES over other competing solutions to optimize its financial operations, marketing, and sales with AI, all in one place. The firm is using Mailchimp, an integral part of IES to optimize sales and marketing by leveraging the insights from dimensional reporting to assess product mix and view profitability by product type. The marketing and sales teams tell us they are obsessed with the insights which enable them to get the most out of Mailchimp with more targeted customer engagement to fuel their growth. We also signed a deal with a large professional services and accounting firm, which serves clients across 13 industries, including construction, dental, government contracting, real estate, and technology. This firm was looking to standardize solutions and consolidate across vendors, and our disruptive price and ease of use was key to their purchasing decision. They migrated several clients, including some using competitive solutions, to IES in a deal worth six figures annually, and we are partnering with them to bring many more clients onto IES. Wrapping up, with our progress and momentum, we are well-positioned to win as an end-to-end platform with done-for-you experiences that fuel the success of consumers, small and mid-market businesses, and accountants. Now, let me hand it over to Sandeep. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Thanks, Sasan. We delivered a strong second quarter of fiscal 2025 across the company. Our second quarter results include revenue of 4 billion, up 17%; GAAP operating income of 593 million versus 369 million last year, up 61%; non-GAAP operating income of 1.3 billion versus 1 billion last year, up 26%; GAAP diluted earnings per share of $1.67 versus $1.25 a year ago, up 34%; and non-GAAP diluted earnings per share of $3.32 versus $2.63 last year, up 26%. Now, let me turn to our business segments, starting with our global business solutions group. Our business platform helps customers to run and grow their business end to end. Global business solutions group revenue grew 19% during Q2, driven by online ecosystem revenue growth of 21%, or 25% excluding Mailchimp. The momentum in our online ecosystem is demonstrating the power of our business platform and the mission-critical nature of our offerings as customers look to grow their business and improve cash flow in any economic environment. QuickBooks Online accounting revenue grew 22% in Q2, driven by higher effective prices, customer growth, and mix shift. We continue to prioritize disrupting the mid-market through ongoing focus on both go-to-market motions and product innovations, which we expect to drive ARPC growth. Online services revenue grew 19% in Q2, or 30% excluding Mailchimp. Growth in Q2 was driven by money, which includes payments, capital and bill pay, payroll, and Mailchimp. Within money, revenue growth in the quarter reflects payments revenue growth, which was driven by customer growth and increase in total payment volume per customer and higher effective prices and QuickBooks capital revenue growth. Total online payment volume growth in Q2 was 18%. Within payroll, the revenue growth in the quarter reflects customer growth, mix shift, and higher effective prices. Within Mailchimp, revenue growth in the quarter was driven by higher effective prices and paid customer growth. We are making early progress with product improvements but continue to expect it to take several quarters to deliver improved outcomes at scale. As a reminder, in Q2, we began lapping the price changes we made in Q2 of last year, which drove a deceleration in growth this quarter versus Q1. We remain confident in and are executing on our vision of an end-to-end business platform that integrates the power of Mailchimp and QuickBooks. This is enabling our customers to both run and grow their business all in one place. Third, we are executing our international strategy, which includes leading with our connected business platform in our established markets and leading with Mailchimp in all other markets. As we continue to execute on a localized product and lineup. On a constant currency basis, total international online ecosystem revenue grew 9% in Q2, or 19% excluding Mailchimp. As we have previously shared, we win as a platform company. Our online ecosystem revenue growth reflects the progress we are making with our strategy of serving both small and midsized businesses with more complex needs. This represents an addressable market of over $180 billion, roughly half of which is mid-market. In Q2, online ecosystem revenue grew 21%, including approximately 40% growth in online ecosystem revenue for QBO Advanced and Intuit Enterprise Suite that serves mid-market. Online ecosystem revenue for small businesses and the rest of the base grew a strong 18%. We are excited about our progress in serving mid-market customers while continuing to focus on smaller businesses. Looking ahead, we continue to expect online ecosystem revenue in total to grow approximately 20% in fiscal 2025. Turning to desktop, during Q2, desktop ecosystem revenue grew 14%, and desktop enterprise revenue grew in the high teens. As a reminder, quarterly desktop ecosystem revenue growth trends in fiscal 2025 reflect the offering changes we made in early fiscal 2024 to complete the transition to a recurring subscription model, including more frequent product updates. We continue to expect desktop ecosystem revenue to grow in the low single digits in fiscal 2025. Turning to our consumer platform, our consumer platform is helping customers make smart money decisions, take steps to improve their financial health year round, achieve their best tax outcome, and get their tax refund faster. Consumer group revenue grew 3%, ahead of our guidance for a low single-digit decline in Q2. Our strategy is to win as an AI-driven expert platform by delivering the best experience, speed to money, and best price for customers. As one consumer platform with a seamless customer experience across TurboTax and Credit Karma, we have incredible scale to win in the DIY and assisted tax categories. We are off to a strong start in tax this season and are reiterating our guidance for consumer group of 7% to 8% revenue growth in fiscal 2025. Turning to the pro tax group, the revenue was $272 million in Q2, down 1%. Shifting to Credit Karma. Credit Karma revenue growth accelerated again this quarter to 36%, reflecting strength in credit cards, personal loans, and auto insurance. On a product basis, credit cards accounted for 15 points of growth, personal loans accounted for 14 points, and auto insurance accounted for 6 points. As a reminder, starting in Q3, we are lapping the strong growth in auto insurance that began a year ago. We are pleased with our early results this tax season as we execute on our vision for one consumer platform with a seamless customer experience across TurboTax and Credit Karma. Let me now touch briefly on our investments in AI and how they are benefiting our operations. In addition to the AI-driven experiences we are delivering for our customers to fuel their success that Sasan spoke to earlier, we are also leveraging AI to operate more efficiently and increase productivity internally. Within our customer success organization, our investments in AI capabilities have delivered nearly $90 million in annualized efficiencies in the first half of the year. That's because we are leveraging AI for expert training, matching customers to experts, automating workforce operations, and eliminating data entry. We're using AI agents to deliver done-for-you experiences, and this has contributed to a 20% reduction in the contact rate for TurboTax product support year to date. This is Intuit Assist working at scale. We're also seeing improved coding productivity with up to 40% faster coding using AI code assistants, driving faster innovation for our customers. In summary, I am pleased with our momentum this fiscal year and our opportunities ahead. Shifting to our balance sheet and capital allocation. Our financial principles guide our decisions, they remain our long-term commitment and are unchanged. We finished the quarter with approximately 2.5 billion in cash and investments and 6.3 billion in debt on our balance sheet. We recently entered into a 4.5 billion revolving credit facility that we are using to fund our five-day early refund offering. This facility expires on April 30, 2025. We repurchased 721 million of stock during the second quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter to offset dilution from share-based compensation over a three-year period. The board approved a quarterly dividend of $1.04 per share payable on April 18th, 2025. This represents a 16% increase per share versus last year. Moving on to guidance. We are reaffirming our fiscal 2025 guidance. This includes total company revenue growth of 12% to 13%, GAAP operating income growth of 28% to 30%, non-GAAP operating income growth of 13% to 14%, GAAP diluted earnings-per-share growth of 18% to 20%, and non-GAAP diluted earnings-per-share growth of 13% to 14%. Our guidance for the third quarter of fiscal 2025 includes total company revenue growth of 12% to 13%, GAAP earnings per share of $9.22 to $9.28, and non-GAAP earnings per share of $10.89 to $10.95. Building on our strong Q2 results and robust Q3 guidance, we are highly confident in the continued strength and positive trajectory of our business through Q4 and beyond. With the majority of the tax season still ahead, we are well-positioned to deliver strong results and look forward to sharing an updated full year outlook on our next earnings call, in line with our usual practice. You can find our full fiscal 2025 and Q3 guidance details in our press release and on our fact sheet. With that, I'll turn it back over to Sasan. Sasan K. Goodarzi -- Chief Executive Officer and Director Great. Thank you, Sandeep. We're very confident in our long-term growth strategy, including double-digit revenue growth and operating income growing faster than revenue. We like our momentum in the first half of the fiscal year which sets us up for a solid second half. Looking ahead, we're confident in our momentum and the progress that we are seeing with Intuit Assist, delivering done-for-you experiences with AI-powered human experts, increasing our 5% penetration of a $300 billion total addressable market. We have an incredible runway ahead. With that, let's now open it up to your questions. Operator [Operator instructions] We'll go first to Siti Panigrahi with Mizuho. Your line is open. Please go ahead. Siti Panigrahi -- Analyst Great. Congratulations on a great quarter. Of course, now, this is a focus on taxes. And at this point, Sasan, what's driving your increasing confidence to deliver that 7% to 8%, you know, guidance for consumer? Any color on the trends that you are seeing in the assisted category since you started promotion this year early on in October? Also, if you could cover in the same -- you know, we hear some concern about those initiatives. Wondering how Intuit can drive efficiency for IRS? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, sure. Thanks for the question, Siti. You know, first of all, I'll just start with our strength is really across both DIY and the assisted category. We're actually seeing very strong traction with both simple and complex filers in DIY. And based on all of our innovation, actually, you know, monetization is very strong with, you know, things like access to expert help in the DIY category and access to money. So, our repositioning of the lineup has actually really helped us accelerate paid growth. So, we feel good in the DIY category. In assisted, you know, listen, it's really end to end, you know, all the work from reinventing our campaign, which is really resonating in terms of what it means to digitally get your taxes done from anywhere with the best experience, immediate access to your money and the best price. So, from really -- from campaign to all the work that we've done to begin to show up nearly 80% of the assisted filers and where they, you know, hold their homes, we're -- you know, we're within a short radius of their homes, all the way to the experience. We've completely revamped the experience. Just as a reminder, you know, when an expert connects to one of our customers, the conversion rate is 80%. And with all of our data and AI investments, we're able to use our algorithms to match customers to experts within seconds; immediately get the expert to engage with the customer; while they're engaging, upload all of their data so that the expert can deliver value immediately; and then, get their taxes done in less than two hours. But this is -- by the way, this is across consumer and business. And so, our funnel is strong from the campaigns that we started in the fall and all the work that we've done leveraging data and AI and with our experiences and given where we are. So, it's a combination of all of our choices and decisions all really powered by data and AI that gives us confidence, Siti, in our guidance. The second thing, you know, around DOGE, I would just reiterate, you know our ongoing and my personal ongoing engagement with the administration, even as late as just a couple of weeks ago. And they're very focused on significantly reducing waste, reducing fraud, and eliminating bureaucracy. And there's many areas where we're talking about, you know, contributing and helping them with their goals. And with that said, you know, their focus is to really drive that elimination of tax fraud, waste, overhead cost in IRS. And those are the actions that they're very focused on taking, and we are very focused on helping the administration in any way possible. And we don't see, by the way, any, you know, risk to the IRS providing services to consumers and businesses with some of the actions that have been taken. So, hopefully, that answers your question. We're quite excited about our progress and quite bullish about the rest of the season. Siti Panigrahi -- Analyst That's super helpful, Sasan. I'm going to stick to one question. Thank you. We'll go next to Kirk Materne with Evercore ISI. Your line is open. Please go ahead. Kirk Materne -- Analyst Hi. Yeah. Thanks very much and congrats on the good quarter. Sasan. just wondering if you could talk a little bit about just the SMB or the small business environment. I think we all came into this year, you know, hoping that we'd be seeing a little bit of green shoots in terms of the economic activity level. Has anything changed on that front in your view just given some of the macro, you know, dislocation, perhaps, you know, questions around tariffs, things like that? I was just kind of curious if you could give us a little bit of an update on what you're seeing on the small business side right now. Thanks. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah. Sure, Kirk. I would just say it remains very stable in terms of just the macro environment for businesses. If I give you a click down, the smaller businesses, you know, up to about 10 employees, sort of 2.5 million, 3 million in revenue. On our platform, you know, their profits and cash flows are up year over year. Of course, as you know, we're not overly concentrated in any particular industry. It differs a little bit by industry. But overall, that should be your takeaway for the smaller businesses. The larger businesses, sort of 3 million and above, 10 million, and to 50 million, 100 million-plus, the mid-market customers that we serve, they're actually very much looking toward digitization, looking toward being able to save time, finding ways to drive both their revenue growth and profitability. And I would say same goes for our accountant partners that also serve these businesses. And that's really where Intuit Enterprise Suite comes in and the power of Intuit Enterprise Suite because these larger businesses and based on the proof now that we have with customers using IES, they actually want to lean into it because they can see with our AI-powered experiences, they have a partner by their side, an assistant that can help them grow their business and are actually leading -- leaning into digitization because it leads into their growth. So, we're seeing even, you know, healthier environment the larger the businesses get. We'll go next to Keith Weiss with Morgan Stanley. Please go ahead. Keith Weiss -- Analyst Thank you, guys, for taking the question, and congratulations on a really solid quarter. Maybe one for Sandeep on the expense side of the equation. Coming into this year, you guys had made room for more aggressive investment to sort of get the skill sets needed on board for you guys to sort of progress on your plans on a go-forward basis. Thus far, in the first half and definitely in this quarter, we saw really impressive margin expansion, a lot of leverage showing up on that bottom line. Is that in any way due to maybe expense timing? Because -- are you guys still planning on basically like hiring back the same type of headcount levels that we were talking about when we came into the year? Or is there, perhaps, more sort of opportunity for drive and leverage than we're thinking about earlier? Sandeep Aujla -- Executive Vice President, Chief Financial Officer Hey, Keith. Thanks for that question. You know, the -- let me address the question both on the hiring aspect and then also on the margin aspect. On the hiring, we are -- we saw really good take rate on -- in terms of recruiting in the first two quarters of the year. In fact, it was ahead of even our internal expectations in terms of just the reputation the firm has and how many people we were able to attract to the company in a short order of time. In terms of our expectation for the year, consistent with what we have shared before, I expect it to be flat to slightly up for the year as we continue to lean into investing in areas that are key to our future growth and also using AI internally to drive efficiency in terms of our employees. In terms of the broader question around our expenses and our margin expansion, look, we are committed to driving margin expansion over the long term. And I feel super confident in our ability to deliver on the guidance that we've given for margin expansion this year. And really, the trends you've seen year to date come down to three things. One is day-in, day-out expense discipline we have across this company. And that shows up in every aspect of how we allocate our dollars and the ROI we expect from those dollars. Secondly, the efficiencies from implementation of AI in our customer success, that came in a bit earlier than what we had internally forecasted. So, that was a good trend that we saw. And lastly, with the slower start to the tax season, that also aided a bit in Q2. So, net-net, you should look at Q2 as further solidifying our confidence in our margin for this year and beyond. Keith Weiss -- Analyst Got it. And just to clarify on point number one, on the hiring, it sounds like you're hiring is going to plan, so there wasn't like an outperformance in Q2 margins that came from the late hiring in any sense. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Well, no. We -- you know, we had good hiring take rates, and we hired a little less than what we thought we would need just given the efficiencies we saw, such as 40% higher productivity of engineers using gen AI tools. So, stuff I talked about on AI implementation in CES where we saw 20% lower call volume from TurboTax just as we implemented done-for-you experiences. So, there are a plethora of things such as that that led to us needing fewer people than we thought we would need, but that should be the key areas that you should take away in terms of hiring trends. We'll go next to Brent Thill with Jefferies. Please go ahead. Brent Thill -- Analyst Thanks. Sasan, I know you launched some clever and innovative new marking early into the tax season. I'm curious if you've seen any early signs of different reaction or traction. What has been the response? And is it -- does it give you a little more confidence heading into this tax season based on what you're seeing from that? Any color would be helpful. Yeah, Brent. Thank you for the question. The short answer is yes. Based on where we are and what we've seen, it does give us just a lot of confidence in the flywheel that we're creating in the assisted segment. You know, to double click. it's really the combination of continuing to raise awareness in the market around really three benefits that matters a lot to those that spend over $35 billion, whether it's businesses or consumers, to get somebody else to get their taxes done for them. You know, one is about experience. It's from the ease of wherever you are virtually and the fact that we can get it done-for-you in less than a couple of hours -- some, by the way, in, you know, 30 minutes -- and with immediate access to your money at the best price. And just given our scale with all of the data and AI investments that we've made, and you think about us competing with, you know, a lot of, I would just say, smaller players because the majority of our competition is, you know, several hundred thousand, you know, very local tax firms and tax pros, the experience -- the scale in which we can deliver the experience, the price, and ultimately, immediate access to money is just really very attractive for both consumers and businesses. And, you know, the punchline is the accumulation of what we started in the fall around beat your price because we know that there is a segment of customers that actually make their decision in the fall to what we've carried through to where we sit today. Our funnel is actually quite strong. That's number one. Number two, our experience is significantly improved, given -- you know, the best way I would put it is when you hear us talk about experience improvement, we finally made the shift from being a software provider to disrupt the assisted segment to being a service provider, which means that, you know, we're not just leading with software where these customers have to do the work, we're doing all the work for them with the expert engaging customers right upfront. And we're just seeing the accumulation of all of that, given where we are in season, and are excited about the next six weeks. We'll go next to Steve Enders with Citi. Please go ahead. Steve Enders -- Analyst OK, great. Thanks for taking the questions here. I guess I wanted to ask just on the strength that maybe you're seeing in the advanced and the enterprise suite side of the equation. Just how are you thinking about, you know, the productivity rates of the sales force that you've built out, how you're thinking about further investments and just kind of how you're viewing that opportunity to move up market further and invest behind the, you know, the strength you're seeing there? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah. Well, a couple of things I would say. You know, one, you know, every day that passes our sales folks are getting more productive because of just the timing of, you know, when we hired them, the timing of when we launched Intuit Enterprise Suite. You know, it was just, you know, literally last fall that we launched it, you know, and went GA. And, of course, prior to that we were hiring and ramping up our sales folks. So, you know, as we touched on earlier, we've actually seen a 60% productivity improvement in the last couple of months just with our sales folks, which is just sort of a natural progression. But I would also say, in many ways, I don't want to downplay it, but it's an easier sell because of the experience, because of the total cost of ownership, and because of how competitive it is on price. I think the big shift that we are now accelerating is really coverage of our large accountant partners. You know, we initially started really focusing on talking to the businesses. We are now accelerating and shifting to making sure that our large accountant partners can actually play around with Intuit Enterprise Suite because they are -- it's going viral. They're hearing about it. So, giving them a sandbox to do that, you know, coming up with a pricing framework because, you know, these large accounting firms may have up to 15 different practices, from real estate to construction, to manufacturing, to technology, to IT services, and just having really a framework to focus by practice to, in essence, offer Intuit Enterprise Suite to their customers. And that's the area where I would say we're accelerating our coverage. But the productivity is significantly improving, and it's something that that we watch for. You know, this is a business where we don't want to overly focus on optimization because we're scaling it, and the growth is exciting. But at the same time, the productivity of the sales folks is really important. Steve, a couple of points I would add is that what we look at internally is that we want to make sure that each cohort of salespeople coming in is more productive than the prior, and each cohort is laddering up faster than the prior cohort in terms of their productivity. Secondly, when we look at these investments, we also want to make sure that we're investing in the right industry specialization, as well as product specialization, because we see better close rate when we bring in people with those specializations. And lastly, let me touch on AI because AI also is a big contributor here to driving productivity. What we are able to do with implementing AI across our sales desk is we are able to give them the next best action based on where they are in the sales process. We're able to give them the right talk track to address the customer's need or to address what competitive solution they are using aka what the battle card could be for the product offering. So, there are multiple areas that we look at to drive efficiency. And the stats that we are looking at, we're being disciplined and feeling really good about the improvements we are seeing in our productivity. Steve Enders -- Analyst OK. Great to hear. Thanks for taking the questions here. We'll go next to Kash Rangan with Goldman Sachs. Please go ahead. Kash Rangan -- Analyst Hi. Thank you very much, and congratulations on the results. And, Sasan, I can always count on you to be the beacon of hope for SMBs. So, I know that you have been progressively feeling better and better about the SMB spending environment. If you take a step back, online ecosystem was barely a blip on your income statement. Now, it's a multi-billion dollar business unit, right? So, near term, longer term, how should we think about the online ecosystem revenue? And within that, QBO Advanced certainly seems to be off to a good start. What is your dream scenario? What would make you ecstatic as to the outcome of QBO Advanced? How big of a business could that be? And although it's a little bit too early, but if you dream the dream, how big of a business could IES be within the confines of Intuit? Thank you so much. Sasan K. Goodarzi -- Chief Executive Officer and Director Well, Kash, thanks for your question. We love the dream, and we love to execute. So, I love the nature of your question. You know, a couple of things I would say. One, if you just look at the size and scale of our business group, well north of, you know, 11 billion in terms of the way we've guided this year, we expect the business group to continue to grow overall between 15% to 20%. And, you know, the majority of that is really driven by online growth because, you know, we continue to expect that, you know, desktop will be very, very low single digits as you think about the future. So, that's the first takeaway is look at this franchise as growing 15% to 20%, which means that the online portion, which is the largest portion, should continue to grow at a healthy rate. I think to answer your question, when you look at the total size of the addressable market, which, for the business group is nearly 200 billion, half of that is mid-market. And it's the way we've defined mid-market today, which does not mean it will stand as is. And what I mean by that is today, you know, really anything north of 3 million in revenue in terms of a business, all the way up to a couple of hundred million, the other way to look at it is up to like a couple of hundred employees, is the way we've defined mid-market. And that's about 100 billion in TAM, and that's where QBO Advanced, Intuit Enterprise Suite, and all the services truly as a platform, you know, come in. You know, we believe mid-market one day will be bigger than the entire business group. That's why we started talking about the growth rate of mid-market separately because it's an area where we're getting great traction. It's an area where we have actually more confidence today than even five years ago when we declared disrupting mid-market, given our expansion of our innovation on the platform but also our go-to-market. And -- and we're not going to stop at a couple of hundred million in revenue. We believe we have so much more room. And we just have so much more confidence sitting here today than even, you know, last fall because we're in market with Intuit Enterprise Suite. And we can see how we're winning on experience total cost of ownership and price. And by the way, there's still a lot that we're adding to the platform. There's still areas where we have work to do, which actually excites us based on the progress that we're seeing and then what's possible. So, you know, we think, you know, mid-market is just, you know, for the next 10 years is going to be a significant growth driver. And we believe it will be the largest over-time driver of growth for the business group, while we continue, by the way, to serve those that are new entrants in the business market because we want to grow with them. So, the dream is it will be far bigger than the business group is today, and we're excited about our potential. Kash Rangan -- Analyst Love the dream, love the execution even more. Thank you. Hey. This is Patrick on for Alex. Can you help us contextualize the result in Credit Karma as it's the second quarter in a row with a pretty large outperformance relative to consensus? What are you seeing there that's providing such strength in the segment? And then given the first half of the year, was there any consideration to update the annual guidance? If not, why not? Thank you. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, sure. So, first of all, I would just start by reminding everyone, you know, our strategy is really about the one consumer platform and winning is one consumer platform, which is all of the, I would say, great execution of the team with the integration of Credit Karma and TurboTax because our goal is from helping you build credit to helping you build wealth and, in the middle, helping you manage your money and get your taxes done. So, that's ultimately what we're focused on with one consumer platform. And all of our innovation is one consumer platform at particularly all of it sitting on top of all of our data and AI investments, where we've dramatically improved, you know, the shopping experience for members where we, in essence, help you make buying decisions, whether it's insurance, whether it's personal loans, whether it's credit cards, whether it's connecting you to taxes. And so, when you look at, you know, our accelerated growth rate, probably 40% is macro, things are just better versus last year, 60% is execution. And we love our trajectory. More importantly, we love the integration that we've done with TurboTax because for us, everything is about helping customers manage their money and helping them get their taxes done. And lastly, I would just say that, you know, this is a segment in the long run that we would expect to grow 10% to 15%. Overall, we would expect our consumer platform, right, the combination of TurboTax and Credit Karma to grow double digits. And that's the purpose, you know, that it serves. And as you heard, Sandeep touched on this, and I'll then turn it over to him for any additional insights, given where we are in the year, we'll look at updating our guidance after Q3. Sandeep Aujla -- Executive Vice President, Chief Financial Officer OK, Patrick. The only couple of things I would add is in addition to the partner confidence we are seeing and the better together experience across our consumer platform, we are also seeing the AI experiences we embedded across Credit Karma, drive better shopping experiences, and better ARPC. So, that's also aiding in the trends you're seeing there. And lastly, as you look ahead and model out the rest of the year, just keep in mind that last year, Credit Karma started with a negative 5% growth rate in Q1 and exited at plus 14 in Q4. So, the comps in the back half of the year for Credit Karma do get more challenging. So, please do take that into account as you model out the rest of the year. Oh, great. Thank you so much. I wanted to ask a question on tax. As we're heading into the tax season here, you've talked about the effort to advertise to the full service filer in that CPA segment. Wanted to get any perspective on how that might be tracking. Are there any leading indicators that suggest you're seeing the traction there in the full service segment as a result of some of the ads we've all seen on TV? And just general outlook for full service as we head into the season. Thank you. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, sure. Thank you for your question. You know, a couple of things I would just say, this is the strength of that we are seeing in the funnel and and really how we're feeling about the rest of the year is really a combination of reinventing our end to end, from campaign to the experience, focused on three things. One is the best experience that you could have virtually, the second is immediate access to your money, third is the best price. And really, our campaign of showing how taxes are different virtually where you can get immediate access to your money and get your taxes done faster than anybody else can do it has really had -- that coupled with our campaign that started in the fall has really had a positive impact on building out our funnel. Plus, we really have revamped our full service experience. You know, one of the things I mentioned earlier was that, you know, the big change, the big from-to in our experience this year is we shifted from a software company to a services company as it relates to disrupting the assisted segment. And what that really means is, even last year, we were still having full service customers do a lot of the work, as if they're doing it themselves. This year, we now, within seconds, match an expert with a customer in the background. We are ingesting all of their data. And within minutes, the expert is delivering real insights to the customer and, while the customer is on the go, getting their taxes done in sometimes as little as 30 minutes. So, just from campaign to the experience and being disruptive in our price, we're seeing strength in the funnel. We're quite bullish about the rest of the year. And I'll just end with, for us, it's about the assisted category. It's about the experiences across do-it-with-me and full service where we're seeing end-to-end strength. We'll go next to Alex Markgraf with KeyBanc Capital Markets. Alex Markgraff -- Analyst Hey, everyone. Thanks for taking my question. Sandeep, could you maybe just talk about the consumer group result. As you noted, better than guided. Just curious kind of what surprised particularly in the context of a slower start to the season. Thank you. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Yeah. Thanks for the question, Alex. A couple of things, did better than expectation on our consumer group. One is we just saw, as Sasan pointed out, a strong start to the year in terms of TurboTax Online, as well as the average revenue per return. As more customers engage with an expert and as they added on offerings, including getting, you know, audit defense and faster access to their refund, that was a key driver in terms of both the units, as well as the ARPR that we experienced that drove the results better than what we had guided you all to. Alex Markgraff -- Analyst And just to clarify, no sort of change in expected seasonality as you're modeling the business. Is that a fair statement? Sandeep Aujla -- Executive Vice President, Chief Financial Officer No expected seasonality. If you're referring to -- I mean, you know, the IRS opened on the 27th. I'm assuming you're taking that into account in terms of the seasonality. But we don't expect any seasonality. And even some of the questions we get around the unfortunate events in L.A. with the fires, we expect that to be nonmaterial impact to our Q3. Yeah. Hi. Thanks so much for taking my question. Maybe I'll ask on the online services business because I think you said that that accelerated to 30% growth excluding Mailchimp, which is really solid. So, when we think about the growth potential of online services in the second half, can you just unpack that a little bit more? So, is the acceleration, you know, really being driven maybe by scaling in the AP payments business? Is it possible, as that continues, you know, we continue -- we could continue to see 30% plus growth potential? And then, maybe just as like the offset with Mailchimp, I think you mentioned that we're going to be lapping some pricing changes. So, is it possible that we start to see some declines in that business? Thanks. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah. Maybe, Taylor, I'll kick us off and tag team with Sandeep. I think the strength that you're seeing is really the strength of the platform with all of our money offerings, whether it's payments, with estimates and invoicing, to AP with bill pay, to line a credit, right? All -- we now have instant deposit. We now have, really, a very large set of money offerings that our businesses can leverage to be able to manage their cash flow and manage their business. And I would also say, you know, we're starting to see our AI-driven experiences fuel what's possible when it comes to our money growth. So, that's sort of number one. But number two is also payroll. We're seeing, you know, great mix in payroll, great strength in payroll. And again, it all comes down to the strength of our platform. And particularly, as we look at mid-market, you know, one of the things we touched on earlier with QBO Advanced and Intuit Enterprise Suite, which serves the mid-market, particularly with QBO Advanced, the attach of payroll and payments is 12 points and 9 points, respectively, higher than QBO Core. So, that's the strength of that that you are seeing across all of our services. And on Mailchimp, as you know, we talked about earlier, there are price increases that we're lapping. And we also just wanted to really call out the strength of our services minus Mailchimp while we bring Mailchimp to the level of growth that we expect. Sandeep, would you add anything? Sandeep Aujla -- Executive Vice President, Chief Financial Officer You know, Taylor, the only thing I would add on the payment and the payroll side is this is finally us engaging with the customer and across those offerings as a holistic money offering and a holistic workforce solution offering. And this is what happens when you get the product teams and the go-to-market teams actually engaging as a one holistic portfolio. So, that's really driving the strength, and that shows up, as you noted that -- as we shared that payment volume was up 18% this quarter. And as you recall, it was 17% last quarter. So, it's starting to show up in the results. And looking forward, as Sasan shared, mid-market should be an increasing contributor to this. Not just because of the higher tax rate he mentioned, but these customers are larger so they're also bringing more volume onto our platform. We'll go next to Rishi Jaluria with RBC Capital Markets. Rishi Jaluria -- Analyst Oh, wonderful. Thanks so much for taking my questions. Nice to see continued success in the business. I just wanted to ask a follow-up on is IES. Really nice to see the traction here. Maybe if you were to think about some of the early customer wins that you highlighted during your prepared remarks, are you typically landing greenfield with a lot of these opportunities? Or are there some wins that you have where you're consolidating budget and displacing a number of different point solutions? And maybe alongside that, when we think about early customer feedback, have there been any push points on additional functionality that customers are looking for that informs your future roadmap with IES? Thanks. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah. Tanks for the question, and I'll try to hit on all the different elements that you asked about. You know, first of all, I'll start with, this is a $90 billion, you know, total addressable market that we are going after. And we have about 800,000 of these customers already in our base, and these -- they have -- these 800,000 have the characteristics of larger businesses, over 2.5 million revenue, multi-entity that have a need for either QBO Advanced and/or Intuit Enterprise suite? So, you know, first and foremost, where we've started has been really focused on our own base and focused on our accountant partners. And that's where we've seen, you know, the momentum and the acceleration. And in those cases, we have, in fact, displaced point solutions for sure because the power of Intuit Enterprise Suite from the lens of the customer is when all of their -- the work that they do, from estimate to invoicing to payments to bill pay to payroll to time tracking, depending on the type of business, when it's all in one place, we then can leverage all of our AI capabilities to actually make recommendations to the customer that can help them make growth decisions to resource reallocate based on how different segments are performing. So, the customer is actually motivated to switch from all their point solutions to Intuit Enterprise Suite. That's really number one. Number two, they see significant cost savings and time savings when they do that because, generally, although they will pay more than they pay us today, if they are an existing customer, they'll pay significantly more with Intuit Enterprise Suite. They actually end up saving money when they go from different point solutions into an enterprise suite. And what we're starting to see is actually accountants and businesses that are on competitive solutions come to us and want to switch to Enterprise Suite just because of, again, the ease of experience, it's very user friendly, the total cost of ownership, and ultimately, the price. So, with all of that said, you know, the majority has been just focused on our own base, but we are beginning to shift to not only going after those that are greenfield. And greenfield, by the way, means that you're just using a bunch of different apps. None of the apps talk to each other. You're spending a lot of money, but you don't really know how your business is performing. So, switching to one digital platform. We consider that nonconsumption in greenfield, and that's where the majority of the money is spent in the TAM, and that's where the majority of our opportunity will come from as we sort of look at the next several years. And our last question today comes from Scott Schneeberger with Oppenheimer. Please go ahead. Scott Schneeberger -- Analyst Thanks very much. Yeah, it's a tax question essentially, too, revenue per return in spirit. The first part, Sasan, you changed your TurboTax Live Full Service pricing to the traditional tiers that you've used with other products, more to form-based pricing. And you noted a very high customer experience for in full service. Just curious how that's being received. Do you think it's the right formula now for that product? And then, the follow-up question is, 1099 case this year, now that we're about a month into the tax season, are you seeing the pickup there with the lower threshold for those to go out? And how might that have an impact on revenue per return in this tax season if, in fact, you are seeing that significant volume pick up? Thanks so much. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, Scott. Thanks for your question. Let me make one -- a couple of broader points. You know, one of the things that we've done this year based on all of our investments in data and AI is we actually have AI-driven personalized lineup experiences. So, that, you know, for instance, if you go on our any of our front doors and look to see what our lineup is, and if Sandeep and I go, we're all going to see very different things. And so, the days of the past where there was a lineup, and everybody sees the same lineup, no longer exists. And it's important for you to know that because, you know, we've gotten a lot of questions like, for instance, on our standard SKU. The reality is many people don't even see our standard SKU. It's customers with certain situations where our data and AI platform will land them in the right experience. That's partly why we're actually getting, you know, I would say very strong traction with both simple and complex filers on how we're monetizing because we're really putting customers in the right experiences. And that really -- that comment transcends into the assisted segment, which is why I wanted to start there. And to answer your question, I mean I think the product recommendation score says a lot. An 85 product recommendation score is just one of the highest in any industry. And our experience, our price, and access to money is very much resonating with full service customers, and we're actually quite excited about, you know, the rest of the season. And that, by the way, includes small businesses. We're seeing nice uptake with small businesses that are using full service, not just consumers. And last thing is just both the comment that Sandeep made earlier because we've gotten questions on it in 1099. The unfortunate situation in L.A., 1099, we just think it's immaterial. We may see a lot of uptake the rest of the season, but we -- we don't -- we view both of them as immaterial. Scott Schneeberger -- Analyst All right. Thanks for sharing that. Congrats on the quarter. This does conclude today's question-and-answer period. I will now turn the call back over to our presenters for any additional or closing remarks. Sasan K. Goodarzi -- Chief Executive Officer and Director Awesome. Well, thank you so much for all the great questions. And be safe out there, and we look forward to seeing you next quarter. Bye, everybody. Operator Ladies and gentlemen, thank you for participating. [Operator signoff]

Zeta Global (ZETA) Q4 2024 Earnings Call Transcript

Greetings, and welcome to the Zeta fourth-quarter 2024 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Pfau, Senior Vice President of Investor Relations. Thank you, sir. Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's fourth-quarter and full-year 2024 conference call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com, where you will also find links to our SEC filings, along with other information about Zeta. Joining me today on the call are David Steinberg, Zeta's co-founder, chairman, and chief executive officer; and Chris Greiner, Zeta's chief financial officer. Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition, revenues of our products, and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to and not as a substitute for our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website as well as our earnings release and our other filings with the SEC. With that, I will now turn the call over to David. David Steinberg -- Co-Founder and Chief Executive Officer Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. 2024 was a record year for Zeta, capped by a strong fourth quarter, where we once again exceeded expectations. Marketing is at the front lines of the AI revolution, driving an unprecedented replacement cycle across the marketing technology ecosystem. At Zeta, we've consistently skated to where the puck is going. Our early investments in AI and first-party data are resonating with customers and prospects, fueling our record fourth-quarter results, and contributing to our market share gains. We believe these investments will propel us to over $2 billion in annual revenue by 2028 as outlined in our Zeta 2028 plan. In the fourth quarter of 2024, we generated record revenue of $315 million, up 50% year over year with record adjusted EBITDA of $70 million, up 57% year over year, both well ahead of our guidance. For 2025, we are guiding to our sixth consecutive year of 20-plus percent growth, alongside another year of free cash flow margin expansion. Our Zeta 2028 plan forecasts a similar trajectory, 20% organic revenue CAGR between 2024 and 2028, adjusted EBITDA margin improvement of 580 basis points to at least a 25% margin and free cash flow margin expansion of 700 basis points to at least 16% over this time frame. 2024 was an exceptional year for Zeta, and as we enter 2025, our momentum is accelerating. The business has never been stronger, and the opportunity has never been bigger. Our vision of an all-in-one marketing platform with AI and data at its core is resonating more than ever. While most AI products either drive efficiency or drive revenue gains, we believe Zeta's AI does both, creating a powerful competitive advantage and delivering measurable impact. In Q4, the dollar value of our RFPs reached a record high, up close to 40% year over year with the total pipeline growth of almost 60%. Our U.S. NPS score increased 8 points year over year to 55. We saw significant traction with our One Zeta initiative, which focuses on expanding customer use cases, extending our solutions to become more indispensable. A prime example is a Fortune 500 retailer who is an existing retention-based CDP client that added a customer acquisition use case, which should more than double their investment with us. Now let's talk about AI and agentic AI adoption across our platform. As a reminder, our GenAI products empower customers in 3 ways: productivity, automating marketing tasks with intelligent AI agents; personalization, enhancing customer experiences with AI-driven audience insights; and precision, enabling marketers to interact conversationally with Zeta's marketing platform for faster, more complete answers. But AI isn't just a tool. It's an extension of the marketing team. Our agentic AI performs specialized roles within an enterprise, seamlessly integrating into workflows to drive efficiency and superior performance. For example, operations specialist agents. We are working with multiple financial institutions to automate their quality assurance processes for marketing campaigns. These AI-driven QA agents replace a manual 10-step process, integrating with QA systems of record to track completion, agent ownership and results, ensuring compliance and improving efficiency. Your own virtual data scientist agents. Clients can bring their own predictive models into our platform, but aligning those models with ingested events and data structures can be complex. Our agents automate the data mapping process, ensuring seamless integration by intelligently matching fields, normalizing formats, and resolving discrepancies. This removes manual effort and accelerates time to value for clients. Creative agents. Our Visual Composer acts like a world-class creative director, helping marketers to go from a blank slate to a fully designed campaign in minutes. It leverages existing templates and uses AI to generate images, body content, subject lines, and content blocks, reducing iteration cycles and accelerating campaign deployment. While for some companies, AI is just a press release or an add-on, for Zeta, it is foundational to our platform. We have been investing in AI for more than 7 years, not 7 months, and we have the results to prove it. In 2024, AI adoption across our platform surged. 126 brands adopted our Data Cloud AI within its first year of launch. AI agent usage grew nearly 200% sequentially in Q4 as more enterprises embedded automation. Over 1,000 behavioral taxonomies were created using AI alone, doubling the number of taxonomies in our platform. We are truly shaping the future of AI-powered marketing. Rather than charging separate fees, we monetize our AI products through increased consumption, accelerating adoption across our customer base. Although we are still early in AI adoption across our platform, we saw a meaningful impact to our consumption revenue, which increased over 40% in 2024, a significant acceleration from 2023. And unlike other software companies, we do not need to pivot our business model to monetize our AI innovations. We are already doing so as evidenced by our 2024 results. Zeta's leadership in AI continues to attract top-tier talent. Pam Lord recently joined us as President of CRM from Oracle, where she ran their B2B and B2C marketing cloud businesses. Ed See, our new Chief Growth Officer, was previously a partner at McKinsey & Company's marketing and sales practice. We also continue to enhance both our team and our platform. We are happy to report that we completed the LiveIntent integration in early January, well ahead of our schedule, and it's already delivering incremental value to our customers. We have already launched our first synergistic product from the acquisition, Zeta Direct. This solution combines LiveIntent's premium publisher network with the Zeta Data Cloud, enabling marketers to deliver personalized ads directly within newsletter emails. This innovation enhances publisher monetization while driving a higher ROI for marketers and Zeta, a true win-win-win. As I reflect on nearly 4 years as a public company, Zeta's trajectory has never been clearer. We have beat and raised guidance for 14 consecutive quarters, outperformed our Zeta 2025 plan a year ahead of schedule and strengthened our AI data leadership. We remain confident in our ability to be a Rule of 40 business for many years to come. We are truly building a one-of-a-kind company. As always, I would sincerely like to thank our customers, our partners, team Zeta and all of our shareholders for their ongoing support of our vision. Now let me turn it over to Chris to discuss our results in greater detail. Chris? Chris Greiner -- Chief Financial Officer Thank you, David, and good afternoon, everyone. We have a lot of exciting information to share on our 2024 results and Zeta 2028 plan. But before I get into the details, I wanna lead with 3 main themes: first, consistency. Zeta has been incredibly consistent, beating and raising guidance for 14 consecutive quarters and increasing revenue 20% or greater while also expanding our free cash flow margin for 4 straight years as a public company; second, momentum. Our investment in an all-in-one marketing platform with AI and data at its core is creating accelerating momentum in our business, driving our fourth-quarter record results, and positioning us to target continuing to increase revenue at a 20% organic compound annual growth rate over the next 4 years; and third, rarity. There are over 500 public U.S. technology companies. Of those, only 23 are expected to increase revenue 20% or greater annually from 2021 to 2025. Of those 23, only 8 are expected to also expand their free cash flow margin annually from 2021 to 2025. Zeta is 1 of those 8, next to other great companies like Cloudflare, GitLab and Samsara included in this list. And as you will see with our Zeta 2028 plan, we expect to continue to do this for the next 4 years. Let's get into the fourth-quarter and full-year results. In 4Q, we delivered revenue of $315 million, up 50% year to year or 31% excluding LiveIntent and political candidate revenue. The full-year revenue was just above $1 billion, up 38% year over year or 30% excluding LiveIntent and political candidate revenue. This exceeded our initial 2024 guide of $875 million by $131 million or 15%. Total scaled customer count grew to 527 as of December 31, 2024, up 17% year over year and 52 sequentially. LiveIntent added 34 customers to our scaled customer count, and excluding this contribution, our scaled customer count increased 9% year over year. Super-scaled customers of 148 as of year-end were up 13% year over year and up 4% sequentially. LiveIntent added 3 customers to our super-scaled customer count. And as a reminder, we count each customer spending at least $1 million with us over the trailing 12 months as 1 super-scaled customer regardless of how many brands they are using us for. The number of brands spending at least $1 million with us over the trailing 12 months increased 28% year over year. Although customers using us for multiple brands does not benefit customer count, it does have a positive impact on ARPU. Scalable customer quarterly ARPU of $577,000 increased 27% year over year as reported and 32% when removing the impact of LiveIntent. Net revenue retention for the year was 114%, at the high end of our 110% to 115% range, an increase from 111% in 2023 and our highest level as a public company. From an industry perspective, in 2024, 7 of our top 10 industries grew faster than 20% year over year with automotive, consumer and retail, insurance, political and advocacy, and technology and media growing the fastest. We ended the year with 180 quota carriers, an increase of 32% year over year, partly driven by our LiveIntent acquisition. Excluding LiveIntent, quota-carrying reps increased 20% year over year. Our direct mix in the fourth quarter climbed to 74%, up from 70% in the third quarter and slightly higher than 73% in the fourth quarter of 2023. For the full year, our direct revenue mix was 70%. Our GAAP cost of revenue in the quarter was 40%, a 20 basis point improvement from the fourth quarter of 2023 and up 60 basis points from the third quarter of 2024. For the full year, GAAP cost of revenue was 39.7%, up 210 basis points from 2023, mostly driven by a higher mix of integrated revenue due to our agencies initially adopting the social channel prior to increasing spend to direct channels over time. Leverage in other areas of our operating expenses resulted in our 16th straight quarter of expanding adjusted EBITDA margins year over year. In the fourth quarter, we generated $70.4 million of adjusted EBITDA at a margin of 22.4%, 110 basis points higher year over year and $4.5 million better than the midpoint of our guidance. We exceeded our adjusted EBITDA guidance despite incurring $2 million of additional expenses related to defending against the short seller report. To this point, our Audit Committee oversaw a review of the allegations, which involved engaging an independent forensic accounting firm to evaluate our shared customer and vendor accounting practices and internal controls. Additionally, we hired a leading data and privacy firm to assess our data and privacy practices. The reviews corroborated that our accounting practices were consistent with U.S. GAAP and that the data and privacy allegations in the short seller report were without merit. Additionally, the findings reinforced the strength of Zeta's internal controls and data privacy practices. For 2024, adjusted EBITDA was $193 million, representing a margin of 19.2% and a 49% increase year over year. In the fourth quarter, we achieved positive GAAP net income for the first time as a public company. Our fourth-quarter GAAP net income was $15.2 million, which translated to earnings per diluted share of $0.06 in the quarter and a loss of $0.38 per share for the full year. Finally, fourth-quarter cash from operating activities was $44 million, up 62% year to year with free cash flow of $32 million, up 74% and representing a margin of 10%. This translated to a free cash flow to adjusted EBITDA ratio of 45%. It's worth noting this includes a $22 million working capital headwind driven by growth with agencies and the industry's longer payment cycles. Absent this, cash flow conversion would have been 76%. This dynamic can be seen on Slide 26 in our earnings supplemental. For 2024, our free cash flow was $92 million at a margin of 9.2% and up 69% year over year. Now let's get into the details of our Zeta 2028 plan and 2025 guidance. I'll start with the Zeta 2028 plan, as many of the growth drivers and margin levers we will discuss for our medium-term plan are also applicable to 2025. Slides 15 through 20 in our earnings supplemental provide additional details. For revenue, we're targeting over $2.1 billion, which equates to at least a 20% organic revenue CAGR over the next 4 years. To put this in perspective, our revenue CAGR between 2021 and 2024 was 30%. Importantly, there's more than enough runway in our core business to achieve this target as we estimate we only have about 1% of our existing customers' marketing and advertising spend, and there's room to increase this penetration to 5% to 15% or more over time. We also have multiple new growth levers, some of which include creating new GenAI capabilities. More GenAI features should drive additional usage of our platform, which we monetize through our consumption revenue as highlighted by David earlier. Leveraging the Publisher Cloud. This provides us with an opportunity to better monetize our extensive publisher relationships. Introducing new channels. We're still very early in mobile and plan to continue to enhance the product while also introducing new channels. Extending our vertical expertise. Through vertical-specific functionality, we can better penetrate verticals we're underrepresented today, such as CPG, healthcare, commerce, and travel. And expanding our partnership ecosystem. We believe this will drive pipeline growth and be beneficial for margins. The KPIs to achieve our 2028 plan look very similar to our previous midterm plan. We're targeting scaled customer count growth of 4% to 8% versus our 3-year CAGR of 14%. The biggest factor influencing this metric is our agency business, where we expect agencies to continue to add brands to our platform. However, regardless of how many brands and agency is leveraging Zeta for, it's only counted as one customer. From a brand count perspective, our growth will likely be around our historical scaled count trend. For scaled customer ARPU, we're expecting growth of 12% to 16%, in line with our 3-year CAGR of 15%. Our One Zeta initiative should positively impact channel and use case expansion, aiding ARPU growth. Further, the aforementioned agency dynamic will also have a positive impact on ARPU. We continue to expect net revenue retention to be in the range of 110% to 115%, in line with the 111% to 114% range that we achieved since 2021. And we expect our direct revenue mix to be 70% to 75%, roughly in line with the 70% to 77% annual range we've been in since 2021. Much like our initial medium-term plan, we're targeting significant margin improvement with our Zeta 2028 plan. Our 2028 adjusted EBITDA target of at least $525 million implies a 25% margin, an increase of 580 basis points or an average of 145 basis points per year. We expect to leverage across all areas of our business. Cost of revenue should improve by 100 to 300 basis points. We believe this will mostly be driven by a higher mix of direct revenue, which carries a lower cost of revenue as compared to integrated revenue. This should be driven by agencies ramping usage of direct channels, our One Zeta initiative driving more adoption of direct channels, and higher margins from GenAI products and consumption scaling faster over time. Across our other operating expense lines, we anticipate 280 to 480 basis points of margin improvement. One key point of leverage for Zeta has been growing headcount significantly slower than revenue and adding a higher percentage of headcount outside of the U.S. Over the past 3 years, our revenue has increased at a CAGR of 30%, while total headcount has only grown at a CAGR of 15% with U.S. headcount growth even slower. Implementing AI internally should enable us to gain further headcount efficiencies. Expanding our partnership ecosystem will also create a margin tailwind. We expect future partners to take on some of the professional services we provide customers today, taking additional costs out of our business. From a free cash flow perspective, we're targeting $340 million plus in 2028, which equates to a CAGR of 39% from 2024. This represents a margin of 16%, an improvement of 700 basis points from 2024. In addition to the aforementioned margin levers, there are 2 additional factors driving our free cash flow margin improvement. First, we expect capex to grow materially slower than revenue. Our capital expenditures and capitalized software development was 4.2% of revenue in 2024, a significant improvement from 5.8% in 2021. Second, the impact of agencies on free cash flow should lessen over time as that business' growth comes more in line with Zeta's overall growth. Moving on to 2025 guidance. We're guiding to the midpoint of full-year 2025 revenue to be $1.24 billion or growth of 23%. This includes LiveIntent revenue of $96 million. Adjusting for the impact of LiveIntent and political candidate revenue in the year-to-year comps, our excluding LiveIntent and political growth rate is 21%. A bridge is provided on Slide 25 in the earnings supplemental. As expected, our 2025 revenue guidance assumes there is no political candidate revenue. However, we are modeling for advocacy revenue to be between $20 million and $25 million as compared to $36 million in 2024 and $13 million in 2023. We're guiding to adjusted EBITDA at the midpoint of full-year 2025 to be $256.5 million or a margin of 20.7%, a 150 basis point expansion year over year. We're guiding full-year free cash flow to be $129.5 million at the midpoint, representing a margin of 10.4%, a 120 basis point improvement year over year and growth of 40%. Finally, on Slide 24 in the earnings supplemental, we've included quarterly 2025 guidance for revenue and adjusted EBITDA, a practice consistent with prior years. I'd like to conclude with this reflection. Anyone can issue a multiyear plan, but executing against it is another story. At Zeta, not only are we set to materially surpass our original Zeta 2025 plan, but we exceeded one of the key targets, revenue, an entire year ahead of schedule. For our Zeta 2028 plan, we kept the same KPIs and fine-tuned them to the most realistic path to achieve our goals. Just like with our original 2025 plan, we put extensive thought and diligence into our Zeta 2028 plan, which the entire company is focused on executing against and accountable for. With that, let me hand the call back over to the operator for David and me to take your questions. Operator? Thank you. At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Matt Swanson with RBC. Please proceed with your question. Matt Swanson -- Analyst Yeah. Thank you guys so much for taking my question, and congratulations on the quarter. Chris, you covered a lot of ground there going through those three sets of guidance. Maybe pulling in the zoom lens a little bit. Can you just talk a little bit about what you're kind of thinking through from a macro environment, maybe a more like demand-centric spending environment for both Q1 and for 2025? Chris Greiner -- Chief Financial Officer Yes. Look, our approach and the simplest way to put it is we've followed how we've done it historically, which means that it requires the low end of each of our KPIs to get to our guide, which gives us the same level of flexibility we've gone into future years in terms of our guide as well as future long-term models. Given where we are in the first 2 months of the quarter, we've got very good visibility into obviously Q1. We've leveraged our Zeta economic insight data to be able to anticipate macro trends. As I think about the verticals that have contributed to the strong growth we saw in 2024, I would expect those to be on the higher end of performers as well into 2025. And we're obviously very aware of the macro. We're aware of the inflationary backdrop. We're aware of tariffs. We're aware of other items, but we feel like we've put appropriate conservatism into our guide to account for that. David, anything you'd add? David Steinberg -- Co-Founder and Chief Executive Officer Yes. And Matt, let me just say that we're not seeing any challenges from any clients at this point. So we're feeling very good about where we are versus the macro environment as it exists today. Matt Swanson -- Analyst I appreciate that. And then, David, great to hear that you already have LiveIntent integrated as quickly as January. Can you just talk a little bit more about kind of what you're hearing from customers in terms of their initial use cases and initial adoption? And then to broaden it out, in the 2028 plan, we have some new verticals and new products that are some of those other up drivers. What do you see from when you launch new products that gives you confidence in that long-term ARPU expansion just in customers' desire, I guess, to take more from Zeta? David Steinberg -- Co-Founder and Chief Executive Officer Yes. And to be clear, we've been experiencing that type of ARPU growth. So we don't need to grow our ARPU growth as a percentage to hit this plan. We can just continue to do what we're doing as we did to get to the 2025 plan from a revenue perspective by the end of 2024. But Zeta Direct is a really cool product, Matt. What we did was we took their inventory, which embeds into newsletters, which was traditionally served based on the content the consumer was consuming. So you're getting this newsletter from this publisher, might be a daily update from The New York Times. It might be an automotive update from The Washington Post or so on and so forth. We added our Data Cloud on top of that, and we can now directly target to a deterministic individual in addition to the content they're consuming. That has already shown an increased return on investment for the marketer and higher revenue to the publisher with us sitting in the middle of the transaction. So we garner higher revenue as a percentage of that. So it really is a win-win-win, and I think it's a perfect example of taking 1 plus 1 and equaling 4. We, once again, Matt, feel very good about where we are with our existing customers. And if you look at the agency business, which has been among our fastest growing, their ARPUs are going up dramatically because they keep adding more brands, and it just counts as one super-scaled customer. Operator Our next question comes from DJ Hynes with Canaccord Genuity. Please proceed with your question. DJ Hynes -- Analyst Hey. Good evening, guys. Nice set of results. David, maybe I could have you expound on that last point, which is the agency business. Clearly, the ARPU gains suggest there's lots of momentum there. Maybe just talk about what you're hearing from those folks? What kind of visibility you have into the pipelines that they have for pulling in new brands? How are you thinking about the growth opportunity with the agencies for '25 and beyond? David Steinberg -- Co-Founder and Chief Executive Officer Thank you so much, DJ. I appreciate the compliment. What I would tell you is that right now, one of the reasons I think we are drinking out of the fire hose in our agency business is because something that most people don't, I think, understand is we are the most profitable partner on average that the agencies work with bar none because most of our competitors who have had some challenges over the last number of months, they're charging a meaningful upcharge to data expense. We bundle the data in as a part of the activation and are generally lowering the cost to the agency or increasing their profit depending on how they book it by 25%. So what we're seeing is the agencies are moving more and more brands and more and more volume to us. What we're seeing out of agreements that have already been executed as minimum amounts for this year gives us a tremendous amount of comfort in the projections that we're putting out there. DJ Hynes -- Analyst Yes. Makes sense. Maybe a follow-up to that. It was interesting, one of the agents you called out was kind of a push into creatives. And I'm curious, like how deep does Zeta wanna go into creative? Does that create any channel conflict with these agency customers? Are they asking you to do that? Just talk about the opportunity there and whether that's meaningful to Zeta. David Steinberg -- Co-Founder and Chief Executive Officer Yes. So let me be clear. We do not wanna compete with the agencies as it relates to creative. That is not in our road map. What we are doing is taking their creative and optimizing it for any screen size, would be a perfect example. So you're opening it on an iPhone, an Android device, an iPad, a laptop, a TV commercial. The dynamic agent is able to optimize that creative for that. Now we have some enterprise clients that are using very basic creative tools versus they might not have an agency. But any time we're working with an agency, and we are not putting out as a stand-alone product a creative product, we very much wanna support the creative assets of the agencies, and we wanna utilize our tools to help optimize that creative, look at what has the highest conversion rates by creative and the best return on investment for the client. Operator Our next question comes from Jason Kreyer with Craig-Hallum. Please proceed with your question. Jason Kreyer -- Analyst Hey. Thanks, guys, and congrats on another strong quarter. So look, you guys are working with some of the largest marketing companies. You talked about 44% of the Fortune 500. You're just running at a scaled customer ARPU of $2 million today. So what are the key elements of the strategy that help you increase wallet share, so it's not $2 million but $20 million or $40 million or $80 million over time? David Steinberg -- Co-Founder and Chief Executive Officer So great question, Jason. Well, I mean, first, let's start with One Zeta, which is consolidating all of our use cases into one sale, and we're starting to see more and more Zeta one customers. It's interesting because, today, the scaled customers we have spent over $100 billion a year in marketing, and in the last year, we captured 1% of that spend. As we look forward to the next few years, our goal is to get to 2% of that spend. It's not -- we don't have to get to 5% or 10%. But what I would tell you is we have a number of enterprise clients where we are above 5% of their wallet share, which gives us a road map for how to move other clients up. And as you move the top of the range up, you bring the mean up. And as you bring that mean up, you can move from 1% last year to 1.25% or 1.3% this year and then go up from there to 200 basis points by 2028. Chris Greiner -- Chief Financial Officer You can -- Jason, you can see this really clearly in the earnings supplemental on Slide 10, where if you look at our greater than 1 million scaled customers, which on a brand basis grew 28% year over year, but on an ARPU basis, to your question, those greater than $1 million customers on average are already spending almost $7 million. Now if you compare that to our $100,000 to $1 million customers, the amount of leverage we have, there, call it, just shy of $500,000 per, we see a substantial growth and ramping as they spend more time on the platform. And then if you reference Slide 11, which is a slide that we produce annually, you'll see we continue to make significant inroads within scaling those customers within the first year, almost now at $1 million per compared to around $600,000, $700,000 in last couple of years in that first year. Jason Kreyer -- Analyst Perfect. And then just a follow-up to kind of something we talked about in December. But you spent a lot of time with your biggest customers over the last handful of months here. Just wondering how those conversations continue to progress. And what is it about those conversations that drive them to wanna do more with Zeta? David Steinberg -- Co-Founder and Chief Executive Officer I think a lot of it goes back to efficiency and effectiveness and superior revenue growth, right? So when you think about artificial intelligence, the vast majority of enterprises that are out there are using it for efficiency and automation, which, of course, we're doing as well. But the ability to drive meaningful revenue growth per dollar invested into the Zeta Marketing Platform is causing them to move budget from other partners to us. And we're seeing that in the results, right? We grew the business 50% in the fourth quarter, 40% excluding political. And we're really seeing the AI's implementations. We also talked about a 200% sequential growth in AI adoption from Q3 into Q4. That's also flowing through the results. It's driving more efficiency, and it's driving superior revenue growth to our competitors. Operator Our next question comes from Ryan MacDonald with Needham & Company. Please proceed with your question. Ryan MacDonald -- Analyst Hi. Thanks for taking my question, and congrats on a great close to 2024. David, you talked about this concept of One Zeta, where you're consolidating all of your use cases into one sale. Can you just talk about the challenges of sort of that concept given that you're now integrating sales forces on new products that you've recently acquired, adding in generative AI to that? And then are you seeing early signs of the benefits of that on, say, like the RFP flow in terms of just larger or more comprehensive RFPs as you mature in that motion? David Steinberg -- Co-Founder and Chief Executive Officer First of all, thank you, Ryan. We're super proud of the quarter and the year. The answer is absolutely yes. So we're starting, for the first time, to see meaningful RFPs coming in as One Zeta. And I will tell you, the addition of Pam and the addition of Ed are gonna be really game changing for our ability to do that with the relationships they both have and the ability to cross sell across the entire company with one group. Whereas in the past, as I think you know, we had been siloed, where you would have to create a sale, then you would come in. You try to upsell. You'd have -- the hunter would close the deal and then the farmers would try to spawn out. What we're doing now is we're leading with the One Zeta. And it's been very, very exciting to break through those silos. Chris Greiner -- Chief Financial Officer If you look inside the sales pipeline, Ryan, just as a point of evidence, what we're seeing is that the average deal size is up 35% year to year, so your point of bringing all 3 of those use cases together. Ryan MacDonald -- Analyst Appreciate all the color on that. And then obviously given all the success that the company has had, it's obviously gonna, I think, bring in new competition into the market. We've recently seen sort of reports about Meta trying to go to the agencies to do more on AI-based advertising. Can you just talk about what you're seeing maybe in terms of newer movement or any changes competitively and whether or not some of this moves from the walled gardens creates any concern in the near term? David Steinberg -- Co-Founder and Chief Executive Officer Yes. Thank you, Ryan. No, we're not seeing any competition from guys like that. In fact, we continue to grow our business with Meta pretty materially and have a very deep and meaningful relationship with them. They tend to focus on very few, very large partners. You are seeing Google and Meta going at it a little bit against each other. But that has, in no way, shape or form affected us. Quite frankly, I think that it's, in some ways, benefited us. Because we're such good partners with Meta, we've been able to drive more business and build a deeper and more meaningful relationship. I would also comment on the fact that we haven't seen any small up and comers either. And I think a lot of that has been the inability for start-ups outside of pure AI to get financing over the last 3 to 4 years. So in a normal world, you would get to our scale and our growth rate and our size, you would have some new start-ups coming after you. We have not seen that either. So it's been a really unique opportunity as we've brought everything together where you would traditionally need upwards of 17 different vendors to put together what the Zeta Marketing Platform can deliver. We're not seeing any one organization trying to replicate that at this point. Operator Our next question comes from Terry Tillman with Truist Securities. Please proceed with your question. Terry Tillman -- Analyst Yeah. Congratulations from me as well. Hi, David, Chris, and Matt. First question might be a multiparter, and then I had a follow-up. But you all provided some interesting stats in terms of the pipeline and the value of the pipeline kind of ending the year. What I'm curious about is how do we think about timing of that converting into like meaningful or material revenue. And if some of these are kind of One Zeta deals, does it take a little bit longer before we start seeing that in the model in '25? And then I had a follow-up. Chris Greiner -- Chief Financial Officer Yes, we're not seeing any change in our deal cycles, and that's been something that we've been saying now for, frankly, years. So without a doubt, some of the bigger deals that come in through the RFP process will be, call it, 7 to 12 months, in that range. And they can move much faster than that by the way. But still the vast majority of the deals we're closing, and it doesn't mean that's to take a long amount of time, are still pilots and proof of concepts. That can be on all 3 use cases. So it doesn't necessarily stop us from having deals in the pipeline take longer if you will. I don't expect the conversion of the pipeline to be any different in '25 than we've seen in '24 or 2023. David Steinberg -- Co-Founder and Chief Executive Officer And remember, Terry, that 7 or 8 months, many of those guys entered our pipeline 7 or 8 months ago. So you're actually seeing a consistent movement from what I would say is the pipeline to RFPs and pilots to converted to clients to the ability to scale to scaled clients and then ultimately super-scaled clients. So I think that if you look at our confidence in our business, putting forth a 2028 plan that continues to show a minimum of a 20% organic CAGR, we're feeling very bullish about where the business is right now. Terry Tillman -- Analyst Yes, that's definitely clear, David. I guess it seems like forever ago, but it really wasn't that long ago in Zeta Live. So much has happened since then, but there was a lot on the mobile side. So just maybe a quick update on that. And potentially could this start becoming meaningful in '25 in terms of a key revenue channel? David Steinberg -- Co-Founder and Chief Executive Officer We've always said we thought mobile would be a big driver into 2026 and beyond, and it could happen in 2025. We have a number of clients who have adopted it, and we're very, very proud of the product we've built, and it's doing quite well. I mean it's growing at a massive rate, but off a 0 base, right? So the one challenge about getting bigger and bigger is it's harder for new products to really drive the needle. But if you look at products like connected television, they're still growing above 100% a year. So now that that's a meaningful revenue, it's starting to really impact what we're seeing as a business. I expect mobile to do that in the years to come. Chris Greiner -- Chief Financial Officer It's a very natural selling motion for our sellers, right? It's not as though they have to learn a new capability. It's really an extension of how they're selling today as a new channel. Operator Our next question comes from Arjun Bhatia with William Blair. Please proceed with your question. Arjun Bhatia -- Analyst Perfect. Thank you, guys. Congrats on the strong close to the year here. Maybe if I can switch back to agencies for a second. Chris, I'm curious what role you see agencies contemplating in that 2028 model. We know they're kind of on the upward part of the S curve in terms of growth right now. But kind of how are you anticipating the growth might shape out over the next couple of years? And then the other piece just in terms of mix, like where are you thinking the agencies are in the pace of adopting digital channel -- or, sorry, direct channels? Is that -- are you starting to see that pick up in late '24, early '25 here? And just how do you think that might trend over the coming years? Chris Greiner -- Chief Financial Officer Yes. So we think of the agency first off, which reached, call it, right around 20% of revenue this year, which was obviously expected and substantial growth to be an even bigger part of the pie as we go into -- deeper into 2028. But we see it as part of the core being able to get to that growth plan by itself just by accessing more and more wallet share. And the brand strategy and the brand go to market is one of the fastest ways that we can do that. Obviously, we highlighted a number of other growth drivers incremental to the core that, frankly, could drive us north of the $2.1 billion, which is why we said it's an at least. In terms of where we are on getting direct mix, we made really exciting improvements this year. We're still not quite at like roughly 50% direct to 50% integrated, so there's still upside there. And I think as those agencies continue to grow in brands, grow in their channel adoption toward direct mix that that's also gonna be accretive to our gross margins in addition to the work we're doing on One Zeta. And obviously, as more and more of our consumption-based revenues generated by our generative AI, that also brings with it higher margin profile business as well. Arjun Bhatia -- Analyst OK. Understood. And then just a quick one to put a finer point on it. I know we talked about this a little bit late in 2024, but kind of the fallout from -- or the customer conversations that you've had following up with some of your customers post the short report, has there been any impact or any change in those conversations since that's happened? How are your customers reacting? And what are you seeing from them post some of the events late last year? David Steinberg -- Co-Founder and Chief Executive Officer Well, I think if we had seen material changes, Arjun, we wouldn't have grown by 50%. What I would tell you is no. We have seen no material changes from the last update we gave, which was we have not lost any client directly over this, and we continue to see that. I was super excited that we were able to announce that our Audit Committee had done a full review. They brought in a full forensic accounting firm that went through every single one of the transactions that could be deemed a client and a vendor and found no issues whatsoever in there. And then we brought in a law firm that is one of the top data experts in the country. They vetted everything that was in the report, and they found no merit whatsoever in it, and they reported that to our Audit Committee, which was very happy to put this issue behind us. Operator Our next question comes from Kelly Valentini with Goldman Sachs. Please proceed with your question. Unknown speaker -- -- Analyst Hi. Thank you for taking my questions, and congrats on the quarter. Wanted to walk through the comments you made on getting those budget penetration to 5% to 15%. Curious like in the typical customer you see that expansion, how much of that would you expect to be taking share from walled garden versus taking share from other technology providers? David Steinberg -- Co-Founder and Chief Executive Officer Thank you, Kelly. I appreciate the compliment, and it's a great question. We don't traditionally take business from the walled gardens. We traditionally partner with them. So what we're able to do by using our data, we're able to build an attribution model that can go into a walled garden, or it can go outside of a walled garden. So we see the walled gardens more as our partner than our competitor. Now there are a number of companies out there that obviously we're taking meaningful market share from. Hard to grow the business at these rates if we weren't. They're traditionally, I would say, last-generation marketing clouds or last-generation DSPs, where they haven't fully integrated data and AI as native to the application layer. So because of their tech debt, they're not able to get to the type of speed to intelligence that our platform can, which allows for substantially superior return on investment. So if the market itself is growing 10%, 15%, and we grew 40%, not including political, that would infer everything above that would have been taking market share from competitors. Unknown speaker -- -- Analyst That makes sense. And then as a follow-up, just curious, anything you can give on what assumptions you're making on AI revenue growth and kind of the 2025 and 2028 targets? Chris Greiner -- Chief Financial Officer Yes. We didn't -- we haven't broken it out in the 2028 in a line item fashion. We did say it will be 1 of the 5 new levers we feel like we have in addition to the core growth business. But I think if you look toward 2024 and our consumption-based revenue, which accelerated by north of 40% year over year, and that's, call it, roughly half of Zeta's revenue, and that was an acceleration from 2023, certainly, a portion of that is driven by our early stage generative AI products, which are intended to drive higher outcomes, which then drive more usage, which then drive more spend with the brand annually over time. David Steinberg -- Co-Founder and Chief Executive Officer And what we're seeing, Kelly, is the ability to meaningfully drive consumption is a substantially better return on investment for us as a company than charging an all you can eat or putting sort of a small price on the AI, although we will be rolling out AI products in the near term that will be have to be paid for as it relates to sitting on top of the Zeta Marketing Platform. Operator Our next question comes from Elizabeth Porter with Morgan Stanley. Please proceed with your question. Katie Keyser -- Morgan Stanley -- Analyst Great. Thank you so much. This is Katie on for Elizabeth Porter this afternoon. Wanted to hit on the verticalization piece here. Zeta has had a lot of success given kind of diversification of the business across industries. And some of those key verticals you called out in commerce and CPG do have some kind of vertical-specific competitors in there. So what gives Zeta the right to win in these verticals where you're more kind of underpenetrated today? And when can we expect that vertical expansion contribution to layer into the model? Chris Greiner -- Chief Financial Officer Yes. No problem, Katie. Thanks for the question. We've already started to build. In fact, in a lot of our virtual demos that we'll do with investors, we showcase a CPG real-world demo today, where we're actually using customers and being able to show them what their customers are spending on with their brand as well as with their competitors. So it comes down to in each one of those verticals where we think we're underrepresented today, where there's a massive TAM and amount of marketing and advertising spend, all comes down to the type of data that we can put in front of the marketer and how actionable we can make it for them in a totally different way than what our competitors can do. So it all starts with the data and then the software and the analysis that we put on top of it and the recommendations that they can then perform on the platform coming out of it. David Steinberg -- Co-Founder and Chief Executive Officer And by the way, a lot of the "vertical competitors" really are more vertically focused from a sales perspective than they are from a platform perspective. So we've invested over the last year pretty heavily in our sales force, as you've seen, growing to 180 quota carriers, easy for me to say. And we're expanding out into new verticals with salespeople that we think will really benefit us this year and the years to come. Katie Keyser -- Morgan Stanley -- Analyst Helpful. And then just one quick follow-up on the NRR. In the long-term model, not looking to inflect too materially from the 114% today. Obviously, that's a pretty impressive stat already. But maybe just expand on the different drivers there. Is there any limitation on the upper bound to NRR around expansion activity as you kind of land with these higher ARPU customers? David Steinberg -- Co-Founder and Chief Executive Officer Well, there's no limitation on where it can go, although we continue to guide to 110% to 115%, which has been where we have. We've been sort of between 111% and 114%. What I would say is, first, you've got the agency holdcos, which as their ARPU grows dramatically, that's a big benefit to NRR. And we just don't lose a lot of customers, which is also a very good thing, right? So I think we can continue to keep it in that range. And then in the years to come, I think we can begin to look at getting it above that range. But in the short run, we feel very comfortable with 110% to 115%. Chris Greiner -- Chief Financial Officer And I think there's a really good -- Katie, on Slide 11 in the earnings supplemental, we show the life of the cohorting of a customer set. And if you look at those that are spending -- that have been on the platform less than a year, they're spending an average of $900,000, which is up from $600,000 last year. That 1- to 3-year cohort continues to accelerate to $1.2 million. And then those customers that are with us 3 or more years, they're continuing to grow. They're now at an average of $2.6 million compared to $2.1 million last year. So we feel like that 110% to 115% is rooted in deep analysis by cohort. And it's also consistent with our growth algorithm, which has historically been about half of our growth coming from our existing customers and half from new. Operator Our next question comes from Jackson Ader with KeyBanc Capital Markets. Please proceed with your question. Jack Nichols -- Analyst Hey, guys. This is Jack on for Jackson Ader. Wanted to ask on what your political revenue assumptions are implied in your outlook. And do you expect to gain market share with political campaigns? Chris Greiner -- Chief Financial Officer So there's two pieces -- thanks, Jack. Two pieces of the answer there. There's political candidate revenue, which was, call it, $44 million in 2024. And the reason why we broke that out throughout the year in our guide and in our reported results was it's always been our expectation that, in 2025, there shouldn't be any political candidate revenue of any materiality certainly. Then there's the advocacy portion, which is where Zeta is working with political action groups as well as NGOs. In 2024, that was in line with our expectations. It was $36 million. For that piece of our business, which we're putting more quota carriers into, building new capabilities, leveraging relationships that come out of the political cycle, our expectation is that business goes to $20 million to $25 million in 2025. Now if you compare the -- how that was in an off political year back in 2023, that's up considerably from around $13 million. So that's how we think about the contribution of political candidate and advocacy in 2025. Jack Nichols -- Analyst Got it. Very helpful. And as a follow-up, how much revenue today is coming from the marketing cloud? And how much do you expect that to be in 2028 as it progresses? David Steinberg -- Co-Founder and Chief Executive Officer I mean all of it? All our revenue goes through the marketing cloud, so it's -- I don't -- maybe you could fine-tune that question. Yes. Well, I mean we're gonna talk in a bit. But literally, Jack, all of our revenue goes through the marketing cloud at this point. So when we consolidated that a few years ago, everything now goes through one user interface with one reporting infrastructure, and everything is totally integrated. Operator Our next question comes from Koji Ikeda with Bank of America. Please proceed with your question. Koji Ikeda -- Analyst Yeah. Hey, guys. Thanks so much for taking the questions. Maybe this one's for Chris. And so Chris, when I look at the third-quarter transcripts, I recall that you said you were very comfortable with 2025 consensus revenue growth of 17%. And so I know that was supposed to be without LiveIntent, and that got us to a number that is a couple of millions below the $1.144 million -- $1.144 billion that you're guiding to today without LiveIntent. But if I use that $1.144 billion number and then compare it to where you ended up at 2024, that implies 14% organic growth versus the third quarter when you said 17%. And I know on the Slide 24, it says 21% growth. And so I just wanna make sure I'm comparing apples to apples here with that original 17% comment from the third-quarter call. Chris Greiner -- Chief Financial Officer Yes. And that 17% comment, when we very carefully walked through what we were presuming, that should have gotten most analysts and The Street to around, call it, $1.2 billion in revenue compared to the $1.24 billion that we're at today. So obviously, you back out $17 million of LiveIntent from the $1.6 billion in revenue we did in 2024 and you back out $44 million of political candidate revenue, you get to a normalized base of $944 million. You then do the same on 2025. You remove $96 million from LiveIntent -- for LiveIntent, which is what we'd expect that business, and that's a 20% growth rate consistent with what we talked about when we made the acquisition. You get to, call it, $1.44 billion. So it's a 21% growth rate, so roughly 4 points higher than that 17% that we had talked about earlier. We went through the task also on Slide 24 to kind of clearly break out this in steps by quarter, and what you'll find is that for each quarter of 2025, growth is effectively between 20% and 22% when you exclude LiveIntent and exclude political candidate revenue itself. David Steinberg -- Co-Founder and Chief Executive Officer And I think, Koji, it's important because we've got to exclude those 2 things to get to the 21%. But you really have to exclude the revenue we picked up from LiveIntent in the fourth quarter, right? So even if you just wanted to do apples to apples, you would pull that inorganic revenue out. If -- you can't pull it out of 2025 without pulling it out of 2024. Koji Ikeda -- Analyst Got it. And maybe just a quick follow-up. I did wanna ask if -- the conservatism in the guidance or any sort of consideration in the guide this year, just thinking about all the macro and regulatory and tariff noise that's out there, is there any additional conservatism that you pulled with the guidance this year? Chris Greiner -- Chief Financial Officer We tried to be consistent with our historical approach, which is to build in ample conservatism so that we don't need the midpoint or even the high end of our metrics to get to our guidance. As I said kind of earlier in the Q&A, we can get to guidance at the low end of each one of our -- one of our metrics call for. And we obviously made that call based upon our awareness of what's going on in the macro backdrop. David, anything you'd add? David Steinberg -- Co-Founder and Chief Executive Officer Yes. I would say, Koji, just we've known each other for a while now. We've beat and raised 14 quarters in a row. Our goal is to be here the same time next year and saying we've now beat and raised 18 times in a row. And we feel we've put the right guidance out to do that. Our next question comes from Brian Schwartz with Oppenheimer. Please proceed with your question. I'm on mute. Sorry about that, everyone. A couple of questions from me. Chris, I just wanted to ask you on the decel in the 1Q guide. I know the comp is a few points harder here and there's political spending headwinds on the comparable. But is there anything else that you're contemplating in that guide to see that type of organic deceleration beyond those items? Having 1 less day, is that also an impact in terms of the 1Q guide? And then I have a follow-up. Chris Greiner -- Chief Financial Officer No, no, that wouldn't be any kind of material impact. As you said, it's 30% all in. The guide is 20% if you adjust for effectively LiveIntent because there really wasn't any political candidate revenue in the first quarter. And just -- it's our conservatism. We're trying to be consistent with what we've done in the past and just build multiple ways to get to the number and feel like if we do that, we'll be in the same place we've been in the past in terms of what our traditional beats are. Brian Schwartz -- Analyst OK. And then the follow-up question I had on the 2028 guide. I know there was some discussion earlier about the agency business, which is doing really well for you. Is it your expectation, Chris, that, that business could double in terms of its percentage of the revenue mix as we fast forward to 2028. Chris Greiner -- Chief Financial Officer So the base will keep growing, right? So I think doubling in size, I mean, it's not without -- it's not outside the realm of possibility. I think it will be a bigger and bigger piece of the pie. Like I said, today, it's about 20% of revenue. I think doubling, there are certainly cases for that, but I wouldn't count on it as we sit here today. David Steinberg -- Co-Founder and Chief Executive Officer Yes, nor would I, Brian. I think it's gonna double as a business. I don't think it's gonna double as a percentage. Operator Our next question comes from Zach Cummins with B. Riley Securities. Please proceed with your question. Zach Cummins -- Analyst Hi. Good afternoon, and just adding on my congratulations for the quarter. Just double clicking a little bit more on the agency opportunity. I mean, David, can you speak to just the growth opportunity that you have with the top 5 global holding companies versus maybe your aspirations to expand into the mid-market on the agency side? David Steinberg -- Co-Founder and Chief Executive Officer Yes. I mean we are adding mid-market agencies faster than I think we could have even expected. And they're all on platform. So that's a really nice thing for margin in the long term. But what I would say, Zach, is that the opportunity with the 5 large agency holdcos we work with is very, very large. We continue to be their most profitable partner. We tend to be more flexible than our competitors, and we have built deep and meaningful relationships with them. I would expect us to continue to meaningfully grow those businesses and continue to meaningfully grow brands. And if you look at our sort of projections out through 2028, as Chris, I think, has said a few times, we can be at the low end of our metrics and still beat those numbers. Zach Cummins -- Analyst Understood. And just my one follow-up toward Chris. Can you talk about your plans for quota carrying hiring for Zeta 2028? Obviously, much larger sales force than 3 years ago but just curious of any sales efficiency gains that you're baking into that versus necessary capacity to execute on those targets. Chris Greiner -- Chief Financial Officer Yes. Slide 17 in the supplemental lays out what our compound growth rates have been through the first -- if you will, the first long-term plan. The quota carrier compound annual growth rate was 22% from 2021 to 2024. We are baking in some efficiency that we, frankly, had been seeing as of late to where it's our expectation that we can grow the quota carrier base between 10% and 15%. What we found, though, is we don't want a growth number to force us down the path of just quantity, what we've continued to do well, and this allows for us to focus on that quality element over just throwing bodies at sales. Operator Our next question comes from Richard Baldry with ROTH Capital Partners. Please proceed with your question. Richard Baldry -- Analyst Thanks. Maybe switching gears. I wanted to look at the balance sheet. You repurchased $31 million worth of shares in the quarter. That's 3 times what you've done the rest of the year combined and almost matched your free cash flow. Sort of curious your thought process around the buyback on a go forward. Do you think you'll run it at a higher percent of the free cash flow? Do you think you'd be opportunistic and ever like look at taking the actual cash balances down to pursue it more aggressively? Just to give us a backdrop for the year ahead. David Steinberg -- Co-Founder and Chief Executive Officer I think, listen, Rich, the stock we thought dropped to a stupid place. So we massively accelerated buying the stock. We still think it's very low, and we'll continue to buy it at an accelerated pace. I don't see any better use for our cash right now than buying our shares back. And yes, we used about 100% of free cash flow. We expect to drive meaningful free cash flow this year. You could see us do, I would say, at least half and potentially much higher as a percentage of free cash flow as we look at buying the stock back because, once again, it right now is the best investment for us for our cash in the current environment. Richard Baldry -- Analyst And the follow-up for me would be, it looks like we probably have a better M&A environment with an administration that might let more things go through. So how are you thinking about growth, the inorganic growth opportunities now and as you look ahead to sort of broaden offerings, get into new markets, etc.? David Steinberg -- Co-Founder and Chief Executive Officer Yes. We are seeing more deals now than we have in many years. What I would say, it's still gonna be hard to find deals that match our 4 M&A pillars. If we can find deals that match our 4 M&A pillars, we will act on them. We have meaningful cash. We have meaningful capacity, and we're in a very unique position with the type of free cash flow we expect to generate to be able to do very opportunistic deals. I will say what I say to you whenever we're together. I believe transformative deals transform both companies for the worse, so we won't be doing anything that "is transformative". But we will continue to be very, very opportunistic and look at opportunities where we can take 1 plus 1 and equal 4. Operator Our next question comes from Ryan MacWilliams with Barclays. Eamon Coughlin -- Analyst Hey, David and Chris. This is Eamon on for Ryan. Thanks for the question, and appreciate all the detail today. Can you help us understand the key levers for the free cash flow and EBITDA margin expansion highlighted by your 2028 guide? Chris Greiner -- Chief Financial Officer Yes, certainly. So we talked about getting anywhere from 100 to 300 basis points, we think, from cost of revenue, and that really being driven by 3 different initiatives. The first being our One Zeta, where we're being more and more successful at bringing all 3 use cases together, which gives us good synergies and higher margin profile, continuing to drive more and more direct channel usage across the platform, in particular, with agencies. And then as our generative AI and our consumption-based revenue, which tends to have also a higher margin to it, scales, that should be a lever toward the COGS line. We think we can continue to get great leverage out of the opex line. And that, I think, is really well represented in the supplemental deck where we show that we've had a 30% compound annual growth rate on revenue over the last several years as compared to only 15% compound growth rate in headcount, in U.S. headcount even being at a rate well below that. In addition to those levers, you see we'll eventually start to make up that working capital deficit that we have with the agency as that growth starts to catch up. That's a significant lever. I mean, this year's -- just the fourth quarter, for example, if we had a neutral working capital position, which we didn't, it was a $22 million gap, would have been a 76% free cash flow conversion. So I think that's a key driver. And then over time, and again, this year's results evidenced it, less and less as a percentage of revenue of capex will be in the business. So I think we'll get efficiencies from there as well, which puts that 65% conversion out in 2028 really nicely within reach of us. In fact, already there really on a normalized basis. Eamon Coughlin -- Analyst Perfect. And then as a follow-up, have you seen any changes in the environment post U.S. election as it relates to customers' willingness to spend? David Steinberg -- Co-Founder and Chief Executive Officer We really haven't, Eamon. We've been working with our customers. And as you know, we're very, very close to our customers. I think people always discount what a large percentage of our business we have done when we enter the year. We already have incredible visibility into what we put out. And as Chris has said a couple of times, we've tried to be incredibly conservative in the projections that we put forth. So we have not had any clients pull back. And thus far, we continue to be full speed ahead. Operator There are no further questions at this time. I would now like to turn the floor back over to David Steinberg for closing comments. David Steinberg -- Co-Founder and Chief Executive Officer I could not be prouder of this team to have worked through the turbulence that we've seen over the last quarter and put up the type of results that we've put up as an organization. I think it really shows that our strategy of putting AI and data as foundational to our platform, bringing in the world's best people and letting them do their jobs really can ultimately drive to financial results that show how strong our platform is in the marketplace. And we believe we're gonna organically double this business again over the next 4 years. I could not be more proud of our Zeta people, and I am incredibly proud to be running this company.

Salesforce (CRM) Q4 2025 Earnings Call Transcript | The Motley Fool

Good day, everyone. Welcome to Salesforce's fourth quarter and full year fiscal 2025 results conference call. [Operator instructions] Also, this call is being recorded. I would now like to hand the conference over to your speaker, Mike Spencer, executive vice president of finance and strategy and investor relations. Good afternoon, and thanks for joining us today on our fiscal 2025 fourth quarter results conference call. Our press release, SEC filings, and a replay of today's call can be found on our website. Joining me on the call today is Marc Benioff, chair and CEO; Amy Weaver, president and chief financial officer; Brian Millham, president and chief operating officer. In addition, we also have Robin Washington, our board member and incoming chief operating and financial officer here with us today. As a reminder, our commentary today will include non-GAAP measures. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings materials and press release. Some of our comments today may contain forward-looking statements that are subject to risks, uncertainties and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual results could differ materially from these forward-looking statements. A description of these risks, uncertainties and assumptions, and other factors that could affect our financial results is included in our SEC filings, including our most recent report on Form 10-K and 10-Q and any other SEC filings. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. And with that, let me hand the call to Marc. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Well, hey, thanks so much, Mike, and you know, I'm so excited about this call and reading the script with you because this was just the best quarter we've ever had. And I think you're going to see that as we kind of unfold what's happening here. And I'm sitting here with with Amy and Brian and Mike, and Sabastian is also on the table. And our new MOFO -- I mean, COFO, Robin Washington is here. So, welcome, Robin. We're thrilled to have you here as well. And look, I'm really excited about this. I really think that we have something incredible to talk about. And obviously, this was the quarter of Agentforce. We're going to talk about that. But it was really just another incredible quarter. And really, it's been another incredible year of growth and innovation. I'm sure you all can see. We've had a really strong performance across all of our key metrics on revenue, on margin, EPS, cash flow, CRPO. We've passed some amazing milestones, including more than $60 billion in RPO. And this has been the highest cash flow in our company history. You can see we exceeded our cash flow guidance. I think Amy did about 12.9 billion last quarter, but I think we delivered 13.1-ish. And that was just incredible for the quarter. And then, we're giving guidance. I think it's around 14.5 billion in guidance for next year on the cash flow guidance. So, just awesome cash production. Few enterprise software companies have really ever delivered these kind of numbers and, I guess, only a couple have ever delivered guidance in the 40 billions, which is where we are. And our two newest major products are Data Cloud and Agentforce. AI product line now, we can see, is a multi-billion dollar product line. So, we're excited to be, you know, in that kind of rarefied air of delivering a multi-billion dollar AI product line. We ended this year with 900 million in Data Cloud and AI ARR. It grew 120% year over year. We've never seen products grow at these levels, especially Agentforce. And Data Cloud and AI Agentforce, this is now going to be incredible coming into fiscal year '26. As we begin this year and, well, since our founding, I couldn't be more excited about what's ahead. It's -- this is a moment like we've just never seen before. And in just a few months, we've seen this addressable market go from hundreds of billions of dollars. And I'm sure you saw those ARC slides that got released over the weekend where she said that she thought this digital labor revolution, which is really kind of what we're in here now. This digital labor revolution, this looks like it's anywhere from a few trillion to 12 trillion. I mean, I kind of agree with her. I think this is much, much bigger than software. I mean for the last 25 years we've been doing, you know, software to help our customers manage their data. That's very exciting. I think building software that kind of prints and deploys digital workers is more exciting, and you're going to hear some of these incredible stories in a second. Our formula now really for our customers is this idea that we have these incredible Customer 360 apps. We have this incredible Data Cloud. You know, this -- this -- and this incredible agentic platform. These are the three layers. But it's this -- that it is a deeply unified platform. It's a deeply unified platform. You know, it's just one piece of code. That's what makes it so unique in this market. And that is why customers are having so great success with it. It's not a collection of disjointed parts you have to kind of self-assemble, DIY it, you know, all kinds of how do you get the security running, how do you do this, how do you do that. It's this idea that it's a deeply unified platform with one piece of code all wrapped in a beautiful layer of trust. And that's what gives Agentforce this incredible accuracy that we're seeing. I'm going to talk about even what we've seen at Salesforce with that is amazing. And I'll tell you that our customers are just seeing some great success with it. And that's why just 90 days after it went live, we've already have 3,000 paying Agentforce customers who are experiencing unprecedented levels of productivity, efficiency, and cost savings. No one else is delivering at this level of capability, and we're really seeing a level of integration, simplicity, intelligence, power. I mean, customers are really telling us that we're light years ahead of other providers, and their feedback really speaks volumes. So, exciting to go on the web and see Agentforce delivering labor for companies like Equinox, OpenTable, Jacuzzi, and others. I mean, I go to their sites. I'm going to their, you know, to their X feeds, their, you know, social media presence, and you see Agentforce running. And look, a lot of other vendors are talking about their agent capabilities, but few are able to show that they've got this really running at scale. And as you're about to hear from Brian, we're seeing some amazing results on Salesforce as Customer Zero for Agentforce. Our digital labor force is resolving tens of thousands of customer service inquiries, you know, freeing our human employees to focus on the most nuanced issues and customer relationships. We're seeing tremendous momentum and success stories emerge as we execute our vision to make every company, every single company, every customer of ours an Agentforce company. That is we want every customer to be an Agentforce customer. We want every trailblazer to be an agent blazer. And I want to share some of these amazing stories with you today. But first, let's hit a couple of these incredible numbers. We closed out fiscal year '25 with 10 billion in revenue. That's amazing, our first 10 billion quarter. I remember, we had our first 10 billion year. Kind of amazing, 10 billion quarter, up 8% year over year, 9% in constant currency. And I think we even lost, Amy, is that right, like a couple hundred million dollars in foreign exchange for the year as well. In Q4, we closed more than 400 deals over a million. All of our top 10 wins included data and AI. Brian, 400 deals over $1 million? Pretty awesome. And we also continued phenomenal growth with Data Cloud this year, which is at the heart Agentforce. Data Cloud is the fuel that powers Agentforce and our customers are investing in it. And Data Cloud surpassed 50 trillion, that's trillion with a T, records, doubling year over year as customers increase their consumption and investment in our data platform. And that is just becoming critical and essential part of our solution. Because as customers turn on AI and Agentforce, if they don't have the data -- we've been talking about this, I guess, for almost two years. If you don't have the data, you're not going to get the AI that you so badly want. And nearly, a quarter of those 50 trillion records, that's trillion with a T, were ingested from outside of Salesforce through our Zero Copy Partner Network, which is amazing. We'll see increased investments in software to build an agentic layer as AI continues to advance and handle a higher percentage of workloads, and we're taking advantage of the huge investments that these infrastructure companies. We just -- you know, we'll work with -- of course, we have you know, two substrates, you know ,live, where we have Amazon, and we have Alibaba. You know, both companies are making huge investments in infrastructure. And the third one, Google is making a huge infrastructure investment. We're really getting great prices, you know, from these companies our deployment. Our ability to deploy at a really low cost is just awesome. And it's just driving down our cost for our customers, so that's so exciting. Look, for the full year, we delivered 37.9 billion in revenue, It's up 9% year over year. Operating cash flow reaching 13.1 billion, up 28% year over year. It's really one of the best performances I think of any software company. And with our continued disciplined approach to margin expansion, our non-GAAP operating margin closed at 33%. That was 250 basis points for fiscal year '25. I think it's 50 basis points higher than we even gave you guidance for a year ago. Is that right, Amy? Yeah. And that's awesome. But we also passed an incredible milestone with more than 60 billion in RPO. That, I don't think we could have expected. So, this is -- this milestone isn't just a number. It's a clear signal that our customers are trusting us, deploying us, getting great value from us, and continuing to invest in our vision for digital labor. I mean, I think it's going to be that digital labor vision, that revelation that we're able to provide digital labor at scale with this trinity of apps, data, and agents that is going to drive this fiscal year '26 success. We expect to deliver fiscal year '26 subscription and support revenue of 9% year over year in constant currency. We remain deeply, deeply committed to profitable growth and expect fiscal year '26 non-GAAP operating margin of 34%. We're going to deliver another 100 basis points of expansion, following two years where we expanded more than 1,000 basis points. The pace of change; the focus on productivity, profitability; the speed of innovation, the trinity of apps, data, and agents, it's all coming together. As I mentioned, we're seeing customers deploy Agentforce across every industry. Let's talk about a couple of examples. We've been working with Lennar, the nation's largest home builder. And most of you know, Lennar is really an incredible company. And they've been a customer of ours for about eight years. They came to Dreamforce. And when they came to Dreamforce, they obviously got their hands like many of you did on Agentforce. Got super excited, went back to Miami, talked to their co-CEOs. You probably know Stuart Miller, Jon Jaffe, amazing CEOs. And those co-CEOs called me and said, "Listen, these guys have done a hackathon around Agentforce. We've got five use cases. We see incredible opportunities on our margin, incredible opportunities in our revenue. And do you have our back if we're going to deploy this?" And we said, "Absolutely, we deploy it ourselves," which is the best evidence that this is real. And they are just incredible, their vision as a home builder, providing 24/7 support, sales leads through all their digital channels. They're able to sell all kinds of new products. I think they're going to sell mortgages and insurance and all kinds of things to their customers. And, you know, the cool thing is they're using our sales product, our service product, marketing, MuleSoft, Slack, Tableau, they use everything. But they are able to leverage it all together by realizing that just by turning it on, they get this incredible Agentforce capability. All right, I want to tell you another story, not just about Lennar and transforming a home builder, but I don't know how many of you know about Pandora. You've been to a shopping center, you see the Pandora store. You walk in. They have this gorgeous jewelry. They have these cool charm bracelets. They have amazing, amazing products. And, you know, their CEO, Alex, he's absolutely phenomenal. I think he's based over in Amsterdam, or he's in the Netherlands. I can't remember where it is, but one of the northern European countries. Incredible CEO. Time actually just gave them an award as one of the most sustainable companies in the world. Great company. You know, they're in 100 countries. They employ 37,000 people worldwide. And Alex has this great vision to augment their employees with digital labor. And this idea that whether you're on their website or in their store or whatever it is that they're going to be able to do so much more with Agentforce. They already used -- first of all, they used Commerce Cloud. So, if you've been to pandora.com and bought their products and, you know, if you have it, by the way, it's completely worthwhile. It's great. And you can experience our Commerce Cloud. But it's deeply integrated with our Service Cloud with Data Cloud. It's the one unified platform approach. And now, they're just flipping the switch, turning agents on, and they're planning to deliver 30% to 60% of their service cases with Agentforce. That is awesome. And I really love Alex's vision of what's possible. And then, the last customer I really want to hit on, which I'm so excited about is Pfizer. And, you know, Albert is an incredible CEO. They are doing unbelievable things. They've been a tremendous customer, but now they're really going all in on our Life Sciences Cloud. We're seeing so many, you know, I was in The Business Council last week in Washington, D.C., met with hundreds of CEOs. And so many of the CEOs of the life sciences industry are going with our Life Sciences Cloud. It was incredible. And you can see why because it's just a natural upgrade of what they're already doing with us. And then, this idea that our Life Sciences Cloud becomes this highly differentiated capability from everything currently available in the market and then allows these pharma medtech companies, so many, to be able to streamline not just their clinical operations, all their customer-facing, even the ones who want to go to direct to consumer, even the ones who want to do clinical trials. And this idea that agents are going to make all of that so much better. And with Agentforce sales agents, for example, with Pfizer, you know, that's -- they've got 20,000 customer-facing employees and customer-facing folks. You know, that is just a radical extension for them with agents. And I'll have to slot in one last one because I'll tell you, I'm sure a lot of you are like "I have flown in Singapore Air. You know what, it's a great airline." The CEO, Goh, is amazing. And he has a huge vision that also came out of Dreamforce where they've already delivered the probably the best service of any airline in the world. They want to deliver it through agents. So, whether you're doing it with service or sales or marketing or commerce or all the different things that Singapore Air is doing with us, you're going to be able to do this right on Singapore Air. All right, well I know all of you want to see this in person, talk to these customers yourself. You know you can go to help.salesforce.com. Brian's going to talk about that when you hear the numbers we delivered in the quarter there. You're not going to believe it. And listen, a lot of people say to me, "Hey, how are you different from these other agent companies?" Number one, go to those other vendors, go to their sites. Are they running their ancient technology? You've all been on help.salesforce.com. You all know this incredible capability that we're delivering. You've seen it deployed by these other customers like Equinox and Remarkable and others. You've got your hands on it. Do you see the other scaled vendors delivering this capability, or are they just using the word agent? I think you got to beware -- beware of the false agent because the false agent is out there where people can use the word agent or they kind of -- you know, they're trying to whitewash all the agent, the thing, everywhere. But the reality is there is the real agents and there are the false agents, and we're very fortunate to have the real stuff going on here. So, we've got a lot more groundbreaking AI innovation coming. I can't wait for you to see it at our TrailheadDX event next week, and that's going to be March 5th and 6th in San Francisco. Looking forward to seeing all of you there and showing you that -- and I'll tell you, while you're there, and I didn't hit it, you've got to see this new product we've just built, which is Tableau Next. I'm sure a lot of you know Tableau. You probably use it every day. When you see what we have built, which is the new Tableau built with Agentforce on the Data Cloud and how it's deeply integrated into our product line, it is going to blow your mind. It is incredible. You've got to make sure you get a demo of Tableau Next. You won't believe it, you're going to see the new Slack. You're going to see the new Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, the platform, Agentforce, all the products, this new field service product which is incredible. You might get a glimpse of the new ITSM product that's coming if you look hard. But the big thing that I'm excited about, OK, the big thing that I'm really excited about is Tableau Next because that's about to deploy to customers at scale. And I think people are going to be absolutely blown away. All right, now, before I do that, I have to get out the Kleenex because I have to say goodbye to Brian and Amy, who, you know, it's kind of a moment in time here where Brian has been here for, I think, 25 years, 26 years. He's just wearing one of the many watches that I've given him to recognize his performance. And Amy is here as well. She's not wearing one of her watches, but she has them at home probably in her jewelry case or safe or something. And, you know, Amy's -- how long has it been, Amy? Twelve years? Eleven years with Amy. And, you know, we're going through a little bit of a transition of our management team between fiscal year '25 and '26, and we want to say goodbye and thank you. We want to say mahalo, and we want to say goodbye, which is a hui hou. And thank you so much for everything. And we're going to let them talk and also say their goodbyes. But we're so grateful to everything that you've done for us every single day over the last 25 and 11 years, and it's been great to have you part of our management team, and you're welcome back any time. So, if you get lonely out there on the golf course or -- I know Amy's got some big plans that she's not ready to announce yet in the NGO world. But I'll tell you that, you know, if you guys get lonely or you're missing the thrill of the hunt, come back and see us because we're going to be ready for you to come back. OK. I really appreciate it. It's been a privilege of a lifetime to work here for more than 25 years. Very few people get to start at a company that has zero revenue and helps it grow to 38 billion. The journey has been remarkable, and this year was certainly the capstone. As you heard from Mark, in just one quarter, Agentforce has been deployed by thousands of brands worldwide, becoming an incredible lever for productivity, growth, and efficiency. It's happened faster than we ever expected. With our deeply unified platform seamlessly integrating our Customer 360 apps, Data Cloud, and Agentforce, we're leading the digital labor revolution. Customers of every size across every industry are seeing immediate and substantial value with Agentforce. We're setting new standards in the industry. OpenTable is a great example of how Agentforce is having an immediate impact. In just three weeks, it's handling 73% of all restaurant web queries, a 50% improvement over their previous tool. And they're not alone. The Futurum Group surveyed customers and found that Agentforce can achieve ROI fast five times faster than DIY while lowering costs by 20%. And technology analyst firm, Valoir, found Agentforce delivers autonomous AI agents 16 times faster versus DIY approaches with 75% increased accuracy. We continue to see significant increase in large multi-cloud transactions as companies look to accelerate faster time to value, efficiency, and growth. Goodyear is partnering with us on their transformation, using Agentforce to automate and increase the effectiveness of their sales efforts. With Agentforce for field service, Goodyear. will be able to reduce repair time by assisting technicians with answers to vehicle-related questions and autonomously scheduling field tech appointments. We also continue to embed an agentic layer across our own business. Today, we're live on Agentforce across service and sales, our business technology organization, customer support, and more, and the results are phenomenal. Since launching on our Salesforce help portal in October, Agentforce has autonomously handled 380,000 service requests, achieving an incredible 84% resolution rate. And only 2% of the requests require human escalation. And we're using Agentforce for quoting, accelerating our quoting cycles by more than 75%. In Q4, We increased our AE capacity while still driving productivity, up 7% year over year. Agentforce is transforming how we do outbound prospecting, already engaging more than 50 leads per day, with personalized outreach and timely follow-ups, freeing up our teams to focus on high-value conversation. Our reps are participating in thousands of sales coaching training sessions each month. Data Cloud has a powerful network effect. As usage expands, the platform becomes more intelligent and more valuable. And that's why we're seeing companies around the world, including Maserati, Bell Canada, Dolce Gabbana, continue to invest in Data Cloud and to build the foundation to implement agents at scale. CaixaBank, which happens to be Spain's leading bank, is using Data Cloud to create a robust data infrastructure that supports its agentic transformation and enables them to drive faster and more consistent customer experiences. As you know, the true value of AI is in the data. Nearly half of the Fortune 100 are both AI and Data Cloud customers. And all of our top 10 wins in Q4 included Data Cloud and AI. Agentforce revolutionized revolutionizing how our customers work by bringing AI-powered insights and actions directly into the workflows across the Customer 360 applications. This is driving strong growth across our portfolio. Sales Cloud and Service Cloud both achieved double-digit growth again in Q4. We're seeing fantastic momentum with Slack with customers like ZoomInfo, Remarkable, and MIMIT Health using Agentforce and Slack to boost productivity. Once again, Slack was included in over a third of our deals over $1 million, and its contribution to the overall deal size increased double digits year over year. With nearly 5 billion messages sent weekly, Slack is central to how people work going forward. We're confident Slack will be the place where every company brings digital labor to all of their employees, enabling collaboration with Agentforce to get work done. Tableau and MuleSoft are mission critical to our customers with each featured in nearly half of our greater than $1 million deals. Tableau, now integrated with Data Cloud and Agentforce on the Salesforce core platform will transform how customers like EchoStar, Goosehead Insurance, and Keller Williams Realty take action on their data. Customers can now unlock actionable insights from conversational analytics, manage and analyze data using AI assistance, and build analytical agents with integrated workflows. Similarly, MuleSoft is transforming how industry leaders like Banco Bradesco, Fujitsu and Sony Honda Mobility approach enterprise integration. With agent-driven integration and out-of-the-box connectors for every major system, customers simply describe their needs in natural language, and our AI automatically builds the solution. Agentforce is also enabling us to deliver truly transformative solutions for every industry and region. In Q4, nearly half of our top 100 wins were international, including wins with companies like One New Zealand, LG Electronics and Versace. Our industry business, along with public sector and dot-org finished the year at an incredible 5.7 billion in ARR, up 20% year over year. All of our top 10 deals and nearly 75% of our top 100 deals included industry cloud. To meet this demand, we pre-built over 170 specialized Agentforce industry skills and a team of 400 specialists supporting transformations across sectors and geographies. Our new channels and partner ecosystem, anchored by our amazing -- sorry, 19 million trailblazers are unlocking customer spend and driving Agentforce adoption. And we're leaning into our ecosystem. In fact, partners were involved in 50% of our Agentforce wins and 70% of our Agentforce activations in Q4. We're also working with our partners to become Agentforce companies themselves. Accenture is using Agentforce Sales Coach, which provides personalized coaching and recommendations for sales teams, which is expected to lead to higher win rates. And Deloitte is projecting significant productivity gains and save workforce hours as they roll out Agentforce over the next few years. Over 127,000 system integrated employees have completed Agentforce training, and more than a thousand ISE and technology partners are building and selling agents. Our Agentforce Partner Network allows customers to deploy prebuilt agents and use agent actions from partners like AWS, Google, IBM, Workday, and more. Earlier this week, we announced an expanded partnership with Google, as Marc mentioned, to empower customers to use Agentforce with Gemini, their multimodal model, and to deploy Salesforce on Google Cloud. AWS is a huge growth engine for us, helping us close a number of large deals. In fact, in Q4, we closed 25 transactions over $1 million, including three that were more than 10 million. We're starting off FY '26 in an incredible position with a highly accomplished and technical leadership team ready to guide us through this pivotal moment in AI and agents. I'm incredibly grateful for the opportunity and to all the leaders who have gotten us here, especially Marc and Amy. It's been an honor to work alongside both of you. Thank you to our employees, customers, partners, and shareholders. I couldn't be more proud of what we've accomplished or more excited about what's ahead for Salesforce. And with that, I'll turn it over to you, Amy. Amy E. Weaver -- President and Chief Financial Officer Great. Thanks, Brian. I wanted to start also by expressing my gratitude to Marc and Brian for their partnership and for their deep friendship over many, many years. It's been an incredible journey, and I'm truly thankful for the opportunity. I am also absolutely thrilled to welcome Robin to the team as our new chief operating and financial officer. Fiscal year '25 was a year of incredible change, with new innovation beyond anything we could have expected just 12 months ago, requiring persistence and urgency in our execution. Q4 is a reflection of that focus across the business, and you can see it in our results. Let's start with revenue. For the full year, revenue was 37.9 billion, up 9% year over year in both nominal and constant currency. Subscription and support revenue grew just over 10% in constant currency. Q4 revenue was 10 billion, up 8% year over year in nominal. This includes approximately 75 million of incremental FX headwinds since our last guidance, resulting in 9% growth year over year in constant currency. Subscription and support revenue grew 9% year over year in constant, driven by stability in sales, service, and platform, partially offset by MuleSoft and Tableau who had very tough prior-year compares. From a geographic perspective, Americas revenue grew 8% in nominal and constant currency. EMEA grew 6%, or 7% in constant currency. And APAC grew 10%, or 14% in constant currency. We saw strong new business growth in Latam, Japan, and Canada, while parts of EMEA remain constrained. Of note, the United States saw some stabilization in the quarter. From an industry perspective, in Q4, health and life sciences, communications and media both performed well, while tech and manufacturing, automotive and energy were more measured. And as you heard from Brian, our multi-cloud momentum continues as customers turn to our deeply unified platform. That's why our top 100 deals in the quarter averaged six clouds. And all of our top 10 wins included AI, Data Cloud, service, platform, and industry clouds. Our data and AI momentum continues as we move toward a world where AI is ubiquitous and embedded in everyday workflows. Our investments in this space have been deliberate and focused, and we are now starting to yield strong returns. In the -- we ended the year with 900 million in Data Cloud and AI annual recurring revenue, growing nearly 120% year over year. As Marc shared, we closed more than 3,000 paid Agentforce deals in the quarter. As customers continue to harness the value of AI deeply embedded across our unified platform, it is no surprise that these customers averaged nearly four clouds. And these customers came from a diverse set of industries with more than half in technology, manufacturing, financial services, and HLS. Q4 revenue attrition ended the quarter slightly above 8%, in line with recent quarters. Q4 non-GAAP operating margin was 33.1%, up 170 basis points year over year, driven by top-line outperformance and disciplined expense management. GAAP operating margin was 18.2%, up 70 basis points year over year. And for the full year, I am very pleased with our non-GAAP operating margin of 33%, up another 250 basis points year over year. GAAP operating margin was 19%, up 460 basis points year over year, inclusive of incremental restructuring charges we incurred in Q4. Q4 operating cash flow was nearly 4 billion, up 17% year over year. Q4 free cash flow was 3.8 billion, also up 17% year over year. And for the full year, operating cash flow was a record 13.1 billion, up 28% year over year. And that's inclusive of a predicted 10-point cash tax headwind. And as we said, driving strong free cash flow remains a key component of our profitable growth strategy. Fiscal year '25 free cash flow was 12.4 billion, up 31% year over year. Turning to remaining performance obligations, RPO, which represents all future revenue under contract, we passed 60 billion for the first time in company history. Q4 finished at an incredible 63.4 billion, up 11% year over year, representing our customers long-term commitment to Salesforce and the durability of our business model. Current RPO, or CRPO, ended at 30.2 billion, an increase of 9% year over year in nominal currency. This includes a $300 million FX headwind which resulted in 11% year-over-year growth in constant currency, driven by strong performance in Data Cloud and AI and Slack. Q4 CRPO also benefited significantly from strong early renewals. Within our bookings this quarter, we again saw continued stabilization in our transactional businesses, including Create and Close and SMB. On capital return, in fiscal '25, we executed 7.8 billion in share repurchases and issued 1.5 billion in dividends. Through our capital return program, we more than fully offset dilution from FY '25 stock-based compensation. And since the inception of our capital return program, we have now returned more than 21 billion to shareholders. Now, let's turn to guidance. Starting with full fiscal year '26, we expect revenue of 40.5 billion to 40.9 billion, growth of approximately 7% to 8% year over year in nominal and constant currency. And for subscription and support revenue, we expect growth of approximately 9% year over year in constant currency. Now, I want to pause and give a few important notes on this guidance. First, on foreign exchange, as Marc noted, we've seen the U.S. dollar strengthen considerably. And even since our last earnings call, that movement has driven an incremental $200 million headwind to fiscal '26 revenue. Our revenue guidance now incorporates an approximately 0.5 point year-over-year headwind. Second, as we experienced in fiscal '25, we continue to expect our professional services business to be a headwind to growth this year, which is reflected in our guidance for total revenue. Know that as part of our overall implementation strategy, we are leaning more on our partner ecosystem. As you heard from Brian, partners were involved in 50% of our Agentforce wins and 70% of Agentforce activations in Q4. Third, we expect subscription and support revenue to be lifted by momentum in Data Cloud and some contribution from Agentforce this year, partially offset by weakness in marketing and commerce, and slower growth in our exploration base in FY '26. Finally, on Agentforce, we are incredibly excited about the customer momentum we are seeing. However, the adoption cycle is still early as we focus on deployment with our customers. As a result, we are assuming a modest contribution to revenue in fiscal '26. We expect the momentum to build throughout the year, driving a more meaningful contribution in fiscal '27. And on attrition, we expect attrition to remain consistent and slightly above 8% for the full year. Now, turning to profitability and cash flow. On margins, I want to reiterate that the company remains committed to ongoing expansion. The company has laid a strong foundation for continued margin progression, efficiency, and disciplined investments. Fiscal year '26 non-GAAP operating margin is expected to be 34%, representing another 100 basis points of expansion year over year. This incorporates intentional investments in high-growth opportunities, most notably in Agentforce and Data Cloud. And I'd like to call out that from a pace perspective, we do expect a ramp in margins throughout the year. Stock-based compensation is expected to stay relatively flat year over year as a percent of revenue. We expect fiscal year '26 GAAP operating margin of 21.6%, representing more than 250 basis points of improvement year over year. We expect fiscal year '26 GAAP diluted EPS of $6.95 to $7.03. Non-GAAP diluted EPS is expected to be $11.09 to $11.17. As we've mentioned over the last few years, we remain focused on driving durable cash flow growth. We expect fiscal year '26 operating cash flow growth of approximately 10% to 11%, and we are not expecting a material headwind from cash taxes this year. We expect capex for the fiscal year to be approximately 2% of revenue again. This results in free cash flow growth of approximately 9% to 10% for the fiscal year. Now, to guidance for Q1. On revenue, we expect 9.71 billion to 9.76 billion, up 6% to 7% year over year in nominal and 7% in constant currency. As a reminder, we are lapping the 1 point leap year benefit we noted last Q1, as well as the benefit from license revenue timing. CRPO growth for Q1 is expected to be approximately 10% year over year in nominal, including a $100 million FX headwind, resulting in slightly above 10% in constant currency. For Q1, we expect GAAP EPS of $1.49 to $1.51 and non-GAAP EPS of $2.53 to $2.55. In closing, I'm very pleased with our strong finish to the year and the foundation we have set in place for continued success, and I want to thank our employees for their dedication and execution throughout the year. I also want to extend my gratitude to our shareholder and investment community for your continued support. It has really been a privilege working with all of you. Now, Mike, do you want to open up the call for questions? Michael Spencer -- Executive Vice President, Investor Relations Thanks. Operator, we're ready to take questions now. As a reminder, we ask everyone to limit to one question. And we'll take the first question now. Operator Thank you, sir. And the first question today comes from Keith Weiss, Morgan Stanley. Keith Weiss -- Analyst Excellent. Thank you, guys, for taking the question, and congratulations on a really strong end to FY '25. I wanted to dig into the Agentforce opportunities. Some really big numbers there in terms of the number of deals signed and really good revenue momentum there. Investors are asking me a lot and have a lot of questions on how the pricing model -- The first part of your question -- yeah, I can hear you now. The first part of your question cut out. So, could you start over please? Keith Weiss -- Analyst Sure thing. So, congratulations on the very strong quarter, a lot of focus on Agentforce and a lot of big numbers there. Investors are asking me a lot of questions about the changing pricing model dynamics, going from a seat-based model to one that includes consumptive elements and how that nets out. So, I was wondering if you can give us some color in terms of what you guys are seeing thus far when you're doing these Agentforce contracts. Is it expanding the overall contract size? What kind of expansions are you seeing if you are seeing expansions? And does the math net to be a good positive for Salesforce as we move to a more consumptive model? Are there any bumps in the road that we should be aware of? Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer OK, well, I'd love to address that directly and then I'm going to ask Brian to come in with some specifics and examples because I think it's so exciting. You know, I think -- of course, you know, we've kind of started the company out with the per-user pricing model, and, you know, that's about humans. We price per human. So, you -- kind of pricing per human. And then, we have products that are also in the consumption world as well. And, of course, those started in the early days, things like our sandboxes. You know, even things like our Commerce Cloud, even our email marketing product, our Marketing Cloud. You know, these are consumption-based products we've had for years. And it's always been a mix of, you know, products that we have for humans and then products that we have for computers. Now, we have, you know these kind of products that are for agents also. And agents are also a consumption model. So, when we look at our Data Cloud, for example, that's a consumption product. Agentforce is a consumption product. But it's going to be a mix. It's going to be a mix between what's going on with our customers with how many humans do they have and then how many agents are they deploying. I think in one example that I can personally tell you about in the quarter, you know, we did a large transaction with a large telecommunications company. It's incredible. And when I was talking to their CEO, she was asking me how are we going to price the transaction and so forth. And I can't remember the exact number of the deal. I think it was -- Brian, maybe it was about $20 million in ACV, something like that for the year, maybe $60 million TCV transaction. And then, as part of that transaction, it's a mix of, you know, we're rebuilding this telecommunications company. So, it's Sales Cloud, it's Service Cloud, it's Marketing Cloud, it's all of our core clouds. But then, also, it's Agentforce. And the Agentforce component, I think, was maybe $7 million in the transaction. So, she was buying $7 million of Agentforce. She bought $13 million in our products for humans. And I think that was about 20 million in total. These are about approximate numbers. I think that's kind of the idea that you're going to see us be able to deliver, you know, the right package for the right customer. Even if you look at Salesforce, as I mentioned, here we are, you know, working in this world, and kind of Brian has hit on it, we did what, 360,000 transactions in the quarter with Agentforce, you know, in help.salesforce.com. Three hundred eighty. And then, what do you have, about, you know, several thousand, you know, customer support reps? And so, we have our Service Cloud running, we have Agentforce running, we have our different products running. Then, our -- of course, our Service Cloud is deeply integrated with our service -- Sales Cloud and other products. So, it's going to be a mix. And I think that the mix is the most exciting thing. I don't know any company that's 100% agents. I don't know of any company that doesn't need automation for its humans. I don't know any company that doesn't need a data cloud where it needs a consistent common data repository for all of its agents to gain their intelligence. And I don't know any company that's not going to need an agentic layer. And that idea of having apps, data, and agents, I think, is going to be the winning combination. You want to actually give the real details, Brian? Brian Millham -- President and Chief Operating Officer No, that's exactly right. This trinity, as you called it, Marc, CRM plus data plus agents is really what our customers are coming to us for. Our objective is how do we serve the customers and focus on customer success, how do we give them what they need to go drive their business forward, both from a productivity and from an efficiency perspective. The pricing models will change over time. There's no doubt about it. The nice thing that we've seen with our customers is they really understand the ROI associated with digital labor. What we're able to provide with agents is really driving the velocity of transactions that we've seen. Marc mentioned the 3,000 transactions that we closed in the fourth quarter, really driven on our ROI model that people understand that they can get a tremendous amount of benefit from agents. We will probably move into the near future from conversations as we price most of our initial deals to universal credit that will allow our customers far more flexibility in the way they transact with us. But we see this as significantly upside to our pricing structures going forward. And that's what we've seen in the early days with our engagement with customers. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer To correctly address, like, here's a transaction that you're doing. Let's say a customer comes in, they're very interested in building an agentic layer on their company. You know, is that bringing other human-based clouds along with it? Brian Millham -- President and Chief Operating Officer No doubt. And I think what we've seen is that we have incremental strength in our core technology, the CRM core technology. You saw in the quarter, we had some good performance, both Sales and Service Cloud, both above 10% growth in the quarter. And so, we are seeing people leverage our core technology, the named pricing models with our core apps and agents together to go drive the efficiencies that they're looking for. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Yep, I think you're going to really play it out. And when you do come to TrailheaDX and you do see that new Tableau Next, I think what you're going to see is a Tableau that was only built for humans before but now is deeply integrated into Data Cloud and has a deep agentic layer as well. So, you're going to be able to come to your own conclusions, get your hands on these products, talk to the customers. What an exciting moment. Michael Spencer -- Executive Vice President, Investor Relations OK. Thanks, Keith. Operator, we'll take the next question, please. Operator Thank you, sir. And our next question comes from Kirk Materne, Evercore ISI. Kirk Materne -- Analyst Hi. Yes, thanks very much for taking the question. Brian and Marc, I was wondering if you just talk about -- you referred to it a little bit, but, you know, as Agentforce builds, obviously, not every company is going to be ready to potentially go agentic today. But is Agentforce having a bit of a halo effect around some of your other products? Meaning as we are on the journey to get more monetization from Agentforce, are you seeing pickups or at least higher activity levels in some of your other products that, you know, Brian, to your point, you know, sort of form this holy trinity? Thanks. Brian Millham -- President and Chief Operating Officer You're exactly right. And we're seeing it in the way that our customers are using our technology, new ideas, new workflows, new engagements. We talked about Lennar as an example. Their ability to handle leads after hours that they weren't able to get back to or respond to in a quick time frame are now able to touch and engage with those leads. And then, that, of course, flows into Salesforce automation system. And so, we are seeing this halo effect with our core technology. It is making every single one of our core apps better as they deliver intelligence underpinning these applications. And so, it is the message that we're delivering this trinity of apps, data, and agents that are -- is really compelling to our customers. Thanks, Kirk. Operator, we'll take the next question, please. Hey, perfect. Congrats from me as well. And Marc, like, with Amy and Brian, you lose some very experienced people on the team. What was the thinking in terms of combining those two roles? And how do you see that playing out going forward? Thank you. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Well, I'm so excited, you know, to have Robin come in as our new COFO. And I really think it's exciting because Robin really has this kind of unique capability to deliver the chief operating officer position and chief financial officer position. And I'll tell you, as we did the search, one of the really top candidates that we saw come through held this position in another company. And I think as Robin and I were talking about that, you know, the leverage of having a COFO, this idea that the financial officer and the chief operating officer really come together as this incredible, you know, partnership to deliver, you know, this capability. It just was a perfect match for us. I was thinking about going with it on the -- with this outside candidate, and that's where I was fortunate to be able to convince Robin to take the job. And, Robin, would you like to just say something and just kind of come in here and just tell us about how excited you are to be part of the management team? Robin Washington -- Board Member and Incoming Chief Operating and Financial Officer Sure, Marc. As you've heard Brian, Amy, and Marc talk about it, it is an exciting opportunity for us right now with Agentforce, so I am elated to be able to join forces with the operating team. It's an exciting time in our industry as well. And as you've heard us talk about the trinity and our deeply unified platform, I think we clearly are able to have something that's going to support our customers' growth and productivity in this new area -- in this new era, I should say, with the result of sustainable and profitable revenue growth for Salesforce long term. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Yeah. And I just want to also -- I should also really thank -- Miguel Milano, as you probably know, came back as our chief revenue officer about a year ago. And, you know, he decided to rejoin us after some cajoling. And I've asked him to work directly for me, you know, running our worldwide sales organization. And so, I've been so thrilled about that. And I also have to thank Srini, who was our chief engineering officer, who's now our chief engineering and services officer who's taken on customer service and support. And it's been a rebalancing of our management team. So, we have this amazing new executive with Robin. I couldn't be more excited to have her by my side. And just as a little side note, Robin will tell you, I've been trying to convince her to join the company for over a decade. And so, I finally got her and after a lot of selling. So, we're thrilled to have Robin with us and joining us, you know, at direct operating executive from the board. And then, having Miguel is so exciting. Of course, having Parker with me as well is so critical. And also, as I mentioned, Srini is running services and engineering, and Steve Fisher, being promoted recently to our chief product officer -- or actually, our chief technology officer, running products; and our chief product officer, David Schmaier, also with expanded responsibilities working directly for me. David is now our chief product and impact officer. And this is -- I couldn't be more thrilled. I also have a great chief of staff, Kendall, and a whole team around me with so many incredible functions and capabilities. And, of course, smiling and waving at me across the table is Sabastian Niles, my chief legal officer, who has done an unbelievable job since joining the company. So, I don't think I've ever had a better management team. I mean, it's hard to beat Amy and Brian, but I think maybe we did it. We're really thrilled. So, sorry, Amy and Brian, to see you go, a hui ho, but welcome to the new management team. And we're so thrilled to have them with us, and we're so excited to start fiscal year '26 with an absolute bang. And, Robin, did you want to end with any parting comments? Robin Washington -- Board Member and Incoming Chief Operating and Financial Officer All right, very good. She's ready for the next question. Michael Spencer -- Executive Vice President, Investor Relations Thanks, Raimo. Let's go to the next question, please, operator. Thanks. Marc, just on DOGE and the impact of what the federal and state has been. I'm curious if you could discuss your role and what you think this means for Salesforce. Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Well, I don't have any role. I'm -- you know, I think I'm -- you know, of course, I'm coming at this with a beginner's mind like I'm sure all of us are that, you know, we want to see what they are able to deliver with the new administration or -- you know, huge fans of the United States of America. We want us to be a successful country as we possibly can be. And that also includes having something that I think is critically important for us, which is a balanced budget, something I've, you know, encouraged every president that I've worked with for, you know, quite a few administrations to achieve. We're thrilled with our relationship with the government. You know that we have so many agencies that depend on us from providing support for veterans through our Veterans Administration and so many other groups. And I think even DOGE is using Slack to manage their communication and coordination. So, you know, we'll work closely with the government. We'll do anything we can to help them succeed. And we wish them only the best, and we're here to help at every step of the way. And we want the U.S. to be, you know, as successful as it possibly can. Michael Spencer -- Executive Vice President, Investor Relations Thanks, Brent. Operator, we'll go to the next question, please. Thank you so much. Marc, you had mentioned this labor arbitrage and that jobs are going to evolve. When you think through the scale of that kind of an opportunity, how much labor do you think you can augment or replace? For instance, you know, could a company with a thousand employees slow its hiring or stop hiring and, you know, just layer in a couple hundred agents for spots and maybe accelerate its growth. And then, you know, further to Brent's point, can we apply that concept to federal government agencies? If they have 3 million workers and some of them are going to leave voluntarily, could they layer in, you know, hundreds of thousands of these Agentforce bots and see some greater efficiency? Marc Russell Benioff -- Co-Founder, Chairman, and Chief Executive Officer Well, I think that, you know, I could wave you away and say I don't really know yet. But I will tell you that since I'm the CEO of a 75,000-person company -- or how many employees do we have now? Seventy-five, 76,000. So, you know, let's just look at us. You know, so we have, what, 9,000 support agents. We really are seeing tremendous efficiency with help.salesforce.com, so we may see the opportunity to rebalance some of those folks into sales and marketing and other functions. We're really excited about that. I would say that we're definitely have seen a lot of efficiency with engineering and with some of the new tools that I've seen, especially some of these high-performance coding tools. One of the key members of my staff who's here in the room with us just showed me one of his new, you know, examples of what we're able to do with these coding tools. It's pretty awesome. And we're not going to hire any new engineers this year. We're seeing 30% productivity increase on engineering, and we're going to really continue to ride that up. And we're going to grow sales pretty dramatically this year. Brian has got a big vision for how to grow the sales organization probably another 10% to 20%, I hope, this year because we're seeing incredible levels of demand. I think every company who is our customer or prospect wants us to come in and start talking about what we're going to do with them and how we're going to transform them. Everybody sees the opportunity. I think that, you know, the big message I have for a lot of CEOs that I meet with is, "Hey, you know, we're the last generation of CEOs to only manage humans." You know, I think every CEO going forward is going to manage, you know, humans and agents together. I know that's what I'm doing. So, this is what I have to think about every single day as a CEO. And I think everyone is going to have to start to think about that. It's definitely starting because as I mentioned, I was with a large CEO group last week, and it was a topic of conversation in every single person that I met with, and with whether it's those life sciences CEOs that we mentioned or financial services CEOs or manufacturing CEOs. And every example, they can see how agents are going to be able to augment their workforce. And I think you can see it also in the global economy that, I think, productivity is going to rise without additions to more human labor, which is good because human labor is not increasing in the global workforce. So, you have a stagnant human workforce worldwide. So, if you want productivity to go up, and you want GDP to grow up, and you want growth, I think that digital labor is going to be one of the catalysts to make that happen. And I was talking with a significant economist and economic leader last week. And I think that, you know, they -- I think everyone's on the same page that we could see something really dramatic. And this is our main focus as a company. We aren't, you know, building huge, you know, $10 billion, $20 billion, $30 billion, $100 billion data centers. We're not, you know, doing some of these kind of engineering efforts that may or may not have some kind of huge payoff but is going to take down all of our cash and all of our margin for the next several years. We're like augmenting our existing product line with artificial intelligence, taking advantage of these incredible investments that are being made, you know, in infrastructure by others. And we're going to deliver the digital labor revolution. This is our goal. Our goal is to be the No. 1 provider of digital labor in the world. That's it. I don't think there really is another goal. You know, you can say we're the No. 1 AI CRM, which we already are. But when you're the No. 1 AI CRM, you're also going to lead the digital labor revolution. And that is going to be the focus of fiscal year '26. As I said, this is the year of digital labor, and it is going to be the year where every trailblazer is going to become an agent blazer. Michael Spencer -- Executive Vice President, Investor Relations Great. Thanks. Operator, we'll take our last question now, please. Operator And that question comes from Kash Rangan, Goldman Sachs. Kash Rangan -- Analyst Hey, thank you very much. We'll miss you, Brian and Amy. Congratulations, Robin. One for you, Marc. There's a lot of talk about how we're moving from model building and training to the inference layer. And also, as part of that shift to agentic technology, there's been a lot of debate about the SaaS technology and the business model. Can the SaaS tech stack that you built and pioneered, how does that fit into the agentic world? Is there a risk that SaaS just becomes a CRUD database? I know it sounds really terrible, but I'm sure you have an opinion. I'd love to hear it. OK, well, Kash, I really appreciate that. And, you know, look, I've heard that Microsoft narrative, too. So, you know, I watched the podcast you watched, and that's a very interesting idea. You know, here's the -- here's how I look at it, which is I believe there is kind of a holy trinity here of AI CRM, which is the apps, the data, and the agents. And these three things have to kind of work together. And I kind of put my money where our mouth is where we kind of built it and we delivered it. And you can see the 380,000, you know, conversations that we had as point of evidence here in the last 90 days on our service and with a very high resolution rate of 84%. Now, you can go to our -- you can go to help.salesforce.com and you can see that today. Now, Microsoft has had Copilot available for, I think, about two years or more than two years, and they are -- I know that they're the reseller of OpenAI and they've invested their -- kind of repackaged this, you know, ChatGPT or whatever. But where on their site are they delivering agents? Where in their company have they done this? Where -- are they a best practice? Because I think that while they can say such a thing, do they have humans and agents working together to create customer success? Are they rebalancing their workforce with humans and agents? I think that it's a very interesting point that, yes, the agentic layer is very important, but it doesn't operate by itself. It operates with data with a data cloud that has to be federated through your company to all your data sources. And humans, we're still here. I'm here. I just knocked on the table. In case anybody wants to know, this is not an agent. And I mean, I guess we're not very long, is that actually going to be a good test? But just know that I am here, and you could call me or text me, Kash. And, you know, I am using those apps, too. Like I said I've got -- the new Tableau is amazing, the Sales Cloud, the Service Cloud I use. I use all of our products. Slack, I was just on. And that idea that our apps and our Data Cloud and our agentic layer, all integrated deliver -- integrated together right now and delivering value right now to our No. 1 Customer Zero, Salesforce. Wow, here we go. And are other vendors really doing that? Beware of the false agent. Go out there and take a look who's really talking about it and who's really delivering. And this is a lot of engineering that has to get done to make this really work for a large enterprise like us. And Salesforce has done it. We are the No. 1 AI CRM. We are the leader of the digital labor revolution. You can see it now with over 3,000 paid customers. And as you can see, you know, the tens of trillions of transactions that happen in our Data Cloud, incredible. So, thank you very much for a great fiscal year '25. Thank you to Amy and Brian. It's amazing. And welcome to Robin onto the management team. And to all of our new executives, congratulations on their promotions. And we're ready for a great fiscal year '26. This is going to be the absolute year of Agentforce. Michael Spencer -- Executive Vice President, Investor Relations Thanks, Marc. Thanks, Kash. Thank you, everyone, for joining the call today, and we look forward to seeing everyone over the coming weeks. Operator Once again, that does conclude today's conference. Thank you all for your participation. [Operator signoff]

ZoomInfo Technologies (ZI) Q4 2024 Earnings Call Transcript | The Motley Fool

Good day, and thank you for standing by. Welcome to the ZoomInfo fourth quarter and full year 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jerry Sisitsky, vice president of investor relations. Please go ahead. Jerry Sisitsky -- Investor Relations Thanks, Lauren. Welcome to ZoomInfo's financial results conference call for the fourth quarter and full year 2024. With me on the call today are Henry Schuck, founder and CEO of ZoomInfo; and Graham O'Brien, our interim CFO. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance, and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate, and believe, and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors sections of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the forward-looking statements in the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. Thank you, Jerry, and welcome, everyone. ZoomInfo is making meaningful progress, and I believe we are better positioned today than ever before. In Q2, we took a number of steps to set up the company for long-term growth and success. In Q3, we stabilized the business. And in Q4, we drove growth across all of our key operating metrics, which resulted in better-than-expected financial results achieved faster than we had anticipated. As a result, GAAP revenue for the fourth quarter was $309 million and adjusted operating income was $116 million, a margin of 37%, both above the high end of guidance. The results in Q4 represent the culmination of changes to sales, product, and other operations that we enacted over the past two years. Our execution caught up to our innovation, leading to happier and more engaged customers. With our data and platform, our customers are winning in two key ways. They are winning with Copilot by leveraging the best go-to-market data, AI applications, and agents throughout their go-to-market teams. Copilot again exceeded expectations and now has over $150 million in ACV. And our customers are winning with ZoomInfo Operations, the data foundation that enriches and strengthens their internal systems and powers their systems of record, data warehouses, and AI initiatives. Operations is the fastest-growing area of our business, driving accelerating growth and in Q4 was up 27% year over year. With the continued success and momentum of our data and operations solutions, we are well on our way to becoming the de facto provider of data and AI in the enterprise. We think of our market in two ways: upmarket and down-market. And this is a framework that we will be using to talk about the business consistently moving forward. Upmarket includes our enterprise and mid-market businesses, where we are resourcing against the large and growing opportunity of companies with greater than 100 employees. For our upmarket customer base, we continue to add more reps and develop more data sets, features, and functionality for the platform. We have also expanded our trial motion flexibility, rebalanced account loads, and doubled down on services to delight the customer and drive their success. Upmarket is more than two-thirds of our business, grew 2% in 2024 and is on a path to growing mid-single digits, and has significantly higher margins than down-market, primarily due to the difference in customer lifetime value. We expect our continued shift upmarket to drive profitability improvement as well. We define down-market as businesses with fewer than 100 employees. In this cohort, we are disqualifying more risky small business, requiring upfront prepayment and onboarding customers efficiently through a digital-first approach. Down-market comprises less than one-third of our business, declined 9% in 2024, and shows signs of stabilizing to a smaller and healthier portion of the business. We expect to report on this upmarket/down-market split going forward while sharing relative size and growth rates. But I think it is important to reiterate that more than two-thirds of our business is upmarket and strong and growing. Our investments upmarket continue paying off, and we see opportunities to drive upside to our upmarket growth while we are aggressively managing the contribution of the lower end of the market. The lower end of the market is going to continue to decrease as a percentage of the business. And while it will be smaller, it will be healthier, and we will discount its contribution to guidance so that we can minimize the potential impact of this transition. And we're already seeing our investments upmarket paying off. We see it in our $100,000 customers, our $1 million-plus customers, and in net revenue retention. We now have 1,867 customers with more than $100,000 in ACV, a sequential increase of 58 customers and a year-over-year increase of 47 customers. We also drove sequential and year-over-year growth in both the ACV and the number of customers in our $1 million cohort. And net revenue retention increased to 87% in the fourth quarter, the first sequential increase in NRR since Q1 of 2022. Improving our customers' perception of us and staying aligned with our customers' go-to-market needs has been a key focus for us this year. As part of that effort, we recently conducted a brand survey of more than 400 marketing and sales leaders. The survey found that 99% of respondents said their perception of ZoomInfo has improved or stayed the same in the last six months, with the majority of those saying it improved. During the quarter, we closed transactions with CoStar, Athenahealth, CareerBuilder, Heidrick & Struggles, Cox Media, Getty Images, Highgate Hotels, and the AICPA. We partnered with Lumen Technologies, a global telecommunications company to equip 1,000 of their sales and customer support reps with Copilot to improve retention and upsell. Copilot is being deployed to drive sales productivity, combat competitive pressures, and drive revenue growth. The company also plans to leverage ZoomInfo Labs, our white glove services arm to prioritize leads within their marketing team and deliver them directly to sellers within Copilot. We partnered with a leading digital marketing company to completely transform the way they go to market. As they transition from product-led growth to sales-led growth and move more upmarket, we are providing them with the complete ZoomInfo go-to-market intelligence platform. From our marketing solution and call recording and transcription to enriching data and using Copilot, we are helping them execute account-based marketing strategies for new logo acquisition and driving cross-sell and upsell as they expand upmarket. We also used our newly released trial motion for Copilot to grow a 100-seat proof of concept at one of the largest job search engines more than tenfold. Our successful trial allowed us to prove that we could deliver more connects, build more pipeline, and drive better conversion for their reps. One of the key drivers of this quarter's success started two years ago when we embarked on a journey to up-level our product organization with AI and platform leaders who have dramatically accelerated our pace of innovation. From listening to thousands of client calls and meeting with hundreds of customers, it is clear that go-to-market leaders are all looking for success across four key areas. They want to grow new logos, expand their customer base, improve rep productivity, and leverage AI so that they do not fall behind. To deliver on that for our clients, we start with the highest quality B2B data in the world. In Q4, we created new data products that get our customers in front of prospects precisely when they're in-market for their products and services. We enhanced our intent solution by introducing persona-level website identification, allowing sellers to pinpoint high-intent buyers within specific roles. Expanding beyond account-level indicators to person-level data has led to a 15% lift in action rates. Our Copilot interface allowed us to activate this data innovation directly into the workflows of tens of thousands of users. In the quarter, we generated proprietary signals and accelerated deals for more than two-thirds of active opportunities for our upmarket customers. Those customers would have missed out on two-thirds of the deals in their pipeline without ZoomInfo. We continued our pace of innovation by expanding our Copilot AI agents that automate core parts of a seller's workflow. By synthesizing live buyer interactions, our agents create dynamic, always up-to-date account plans that capture relevant signals the moment they surface. These AI agents automatically identify deal risks and recommend ways to expand buying groups. All of this runs on our enterprise-grade AI governance and customization framework already deployed within some of the largest go-to-market organizations in the world, ensuring they can adapt these capabilities to highly complex and specialized sales motions. We're also expanding key use cases beyond sales development representatives and other top-of-the-funnel prospecting use cases. We're now gaining traction among account executives, account managers, and customer success managers, a user base more than three times larger than SDR. Account executives and account management teams are adopting Copilot for automated account planning, account expansion, and deal acceleration. We have seen strong product market fit with Copilot activating the first cohorts of AEs and AMs at utilization levels comparable to our core SDR user base. I'm confident we'll continue to automate and move an increasing share of mission-critical go-to-market workflows onto the ZoomInfo platform. I would also like to take a moment to thank Ali Dasdan, our former chief technology officer, who is transitioning engineering leadership to our senior VP of engineering, Philip Popovic. Ali played an important role in helping us build enterprise processes and infrastructure here, and we wish him all the best in his next endeavors. We're excited about Philip's expanded role and are confident that he will continue to accelerate our pace of innovation and serve as a strong partner to our customers and his internal counterparts throughout the company. I also want to thank Patrick McCarter, who after nearly eight years of partnership and board directorship is moving on from the ZoomInfo board. Patrick is someone that I respect deeply and who has been at the table for every strategic decision over nearly a decade. His knowledge, engagement, and experience will be missed, and we wish him the best as well. I'm also excited about the recent additions of Katie Rooney and Rob Giulio to our board of directors. Katie has decades of experience in finance, operations, strategy, and corporate development. She was recently named CFO at Maven, the world's largest virtual health platform for women and families. Rob is currently chief customer officer at Canva and previously was chief customer officer at HubSpot and chief marketing officer at DocuSign. At HubSpot, he oversaw the flywheel organization, the marketing, sales, services, and revenue operations team. Rob also spent 11 years in senior marketing and sales leadership roles at Adobe. We are incredibly excited about the fresh perspective and long history of successful operating experience we add to the boardroom with these additions. In closing, we have always had a history of disciplined financial and operational execution. And now more than ever, our innovation engine is creating a tailwind on top of our data moat. We have taken the necessary steps to drive improved operating performance and set the company on a path to growth while driving industry-leading profitability, expanding free cash flow per share, and defining the future of go-to-market with innovative solutions that drive customer delight. We have a large untapped addressable market, a strong innovation, and data moat, and we are winning the opportunity to be the go-to-market data and AI partner for upmarket customers. With that, I'll turn the call over to Graham. Graham O'Brien -- Vice President, Financial Planning and Analysis Thanks, Henry. In Q4, we delivered $309 million in revenue and adjusted operating income of $116 million, a margin of 37%. Our investments moving upmarket are yielding results as we delivered meaningfully better-than-expected performance, resulting in sequential revenue growth of 1.8%. The business risk model deployed in Q2 is working as intended, resulting in improving write-off and collection trends. With the new risk model in place and the additional operational improvements we've implemented, we are able to onboard better-quality customers, continue our move upmarket, and focus more on delivering customer success and value, which resulted in a two-point sequential improvement in net revenue retention, ending the year at 87%. With more and more companies realizing they need a strong data foundation to take advantage of AI, we saw demand for our operations as business increased again. As a result, in the fourth quarter, our operations business increased 27% year over year, five points higher than last quarter. Taken together with our success driving Copilot, advanced functionality increased to 44% of the overall business, up more than 10 points since the start of the year. As of today, Copilot is more than $150 million in ACV, and we continue to see similar uplift levels on a per-seat basis in Q4 as we have historically. The majority of Copilot ACV is coming from new to the franchise customers, though with our recently released functionality that allows existing customers to trial Copilot on a team-by-team or user-by-user basis, we expect to drive a larger volume of migrations over the course of 2025 and 2026. Turning to share repurchases. For the full year, we retired 46.8 million shares at an average cost of $12, representing more than 12% of total shares outstanding. And as of year-end, there were 342 million shares outstanding. In Q1, the board approved an additional $500 million share repurchase authorization on top of the $138 million remaining in existing authorizations entering 2025. We look at repurchases as a meaningful way to drive shareholder value, and we will continue to opportunistically take advantage of dislocations in share price balanced with our cash generation and cash on hand. Operating cash flow was $109 million in Q4 and unlevered free cash flow for the quarter was $94 million, a margin of 30%. We also remain committed to driving shareholder value by growing levered free cash flow per share. To that end, unlevered free cash flow for 2024 was $447 million, a margin of 37%, and cash interest for 2024 was $44 million. We delivered significantly more than $1 in levered free cash flow per share for the full year based on 377 million diluted weighted average shares outstanding, and we expect to grow that meaningfully over the long term. We ended the year with $140 million in cash and cash equivalents, and we carried $1.24 billion in gross debt. Our net leverage ratio is 2.4 times trailing 12 months adjusted EBITDA and 2.2 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of the year was $478 million, and remaining performance obligations, or RPO, were $1.16 billion, of which $850 million are expected to be delivered in the next 12 months. Before I jump into guidance, let me share some additional context. Q1 2025 has two fewer days than Q4 2024 and one fewer day than Q1 2024, which should be considered when comparing sequential and year-over-year revenue growth and AOI margins. Also, Q1 margins are impacted by payroll tax and other benefit resets. Additionally, 2024 is not a good proxy for 2025 seasonality due to the operational improvements we introduced in Q2 2024 and the change in accounting estimates in that same period. In 2025, we expect adjusted operating income and AOI margins to increase sequentially as we move through the year. Q4 2024 was more weighted to upmarket customers, and we expect Q1 2025 to have a seasonally lower mix of upmarket expirations. We are discounting down-market contributions to our guidance. However, we are on a path back to durable growth faster than expected, and we are optimistic about our momentum heading into 2025. With that, let me turn to guidance for Q1. We expect GAAP revenue in the range of $294 million to $297 million. We expect adjusted operating income in the range of $96 million to $99 million and non-GAAP net income in the range of $0.22 to $0.23 per share. For the full year 2025, we expect to deliver GAAP revenue in the range of $1.185 billion to $1.205 billion, representing negative 1.6% annual growth at the midpoint of guidance and adjusted operating income in the range of $426 million to $436 million, representing a 36% margin at the midpoint of guidance. We expect non-GAAP net income in the range of $0.95 to $0.97 per share based on 362 million weighted average diluted shares outstanding. And we expect unlevered free cash flow in the range of $420 million to $440 million. And for modeling purposes, for the year, we would expect capex in the range of 5% of revenue and the non-GAAP tax rate to be approximately 13%. Now, I will turn it over to the operator to open the call for questions. Operator Thank you. At this time, we will conduct the question-and-answer session. [Operator instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Alex Zukin with Wolfe Research. Hey, guys, congrats on a solid quarter. I guess maybe just, Henry, first one for you. Just a sense for trends in both the SMB and the enterprise as we kind of exit the year and the pipelines that you're seeing, maybe tech sales hiring? And also, maybe just from a financial perspective, how we should think about the growth rates of the two segments embedded in the guide differently for the coming year? Henry Schuck -- Founder and Chief Executive Officer I'll let Graham take the second part. I think the first part is we're seeing strength in the upmarket, particularly as we go in and sell our operations and Copilot products into the upmarket. In the SMB, we saw stabilization in the SMB, and that group in the down-market. That group of customers is becoming a healthier but smaller portion of our business. And we are discounting its contribution to our growth and our guidance going forward. We expect that we -- that where can be upside, it will be in our execution in the upmarket, where we're seeing good demand, great product market fit within Copilot and our operations business. And I'll pass it over to Graham for the second part of that. Graham O'Brien -- Vice President, Financial Planning and Analysis Sure. The growth trajectories that we are modeling for 2025 and the guidance, I think we mentioned earlier in the call, upmarket mid-single-digit growth. We're on the path of that. And then down-market, we were down 9% in 2024. So, we did see signs of stabilization there in Q3 and Q4. We're discounting that stabilization. We're expecting that 9% to be a little bit worse in 2025. And while we still believe down-market is a quality business, we're just not going to rely on growth in the down-market to hit our targets. We're discounting the down-market contribution to our guidance, reallocating the resources upmarket, which provides us the flexibility to accelerate our shift upmarket. Henry Schuck -- Founder and Chief Executive Officer I should just add that we think there's an opportunity here for us to become the de facto partner for enterprise data and AI in the upmarket with our customers and on go-to-market team. And that's why we're resourcing there. Alex Zukin -- Analyst And Henry, maybe on that, I mean, with everybody talking about AI agents, particularly on the go-to-market side, I think you guys talked about how it led to increase in close rates for you. Maybe just give us your perspective on kind of the state of the world right now, and how key role you play in that ecosystem increasingly as we see here. Henry Schuck -- Founder and Chief Executive Officer Yes. I think the key thing about AI agents and building AI for go-to-market is it's very different than when you build AI for support or services, where if you're building an AI agent for support, all of the data that you need for the AI to understand lives inside your knowledge base, it lives inside the customer support tickets that you already have. It's all first-party data and you only need first-party data to build a great AI agent for customer support. That is completely different when you're trying to build an AI agent for go-to-market teams. That relies first on third-party data. It needs your first-party data. But in order for a go-to-market AI agent to be successful, it needs data, it needs accurate data on companies. It needs accurate data on contacts. Those data points are constantly changing. And then it needs to be surrounded with a tremendous amount of signal data, who's growing, who's shrinking, who's hiring, who's laying people off, who's researching certain solutions in the market, who's on your website. These signals are critical, and they don't live anywhere inside of your first-party data. So, when we think about the success of go-to-market B2B AI agents, our data asset that we've built is a necessary component to that. I think that's why we're seeing more uptake on our operations business. That's why we're seeing customers come to us with their first-party data and say, this is not enough for us to build AI and go to market with AI and go-to-market. We need this to be married to and surrounded by third-party data for us to be successful. So, I think we are a keen input into any go-to-market AI agent build. Thank you. Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open. Elizabeth Porter -- Analyst Great. Thank you so much. First, I wanted to ask on the Copilot ACV. I think you mentioned a lot about new customer side and the focus to transitioning the installed base over is going to come more in fiscal '25 and '26. So, I was wondering if you could just help us understand kind of that path to migration. Will these be more pushed upgrades at renewal or opt-in in upgrades? Just anything to help us get a sense for how quickly the installed base can start moving over to the new platform. Thanks. Henry Schuck -- Founder and Chief Executive Officer We are in the midst of migrating our customers over to Copilot. We are doing it off-cycle. So, outside of a renewal date. We're also doing it at renewal time. We're still seeing a strong double-digit growth on migration when we move those customers over. We want to drive pricing discipline on our teams as they migrate over to Copilot. We released this quarter our customer impact report that shows that our customers, particularly when they're in copilot are getting a tremendous ROI and value out of the solution. And we're happy to stand behind a pilot. And so, in one of the examples that I talked about, we took a 100-person pilot to over-1,000-person deployment at one of the largest job search engines in the world. And we're comfortable letting our customers try copilot, see the value, and then monetizing that value and ROI, either as part of a renewal or as part of an off-cycle upsell. We are going at it in both ways, but we want to maintain pricing discipline for the value that we're delivering our customers with Copilot. Elizabeth Porter -- Analyst Got it. And then just as a follow-up, I wanted to touch on the NRR improvement. Really encouraging to see that tick up to 87% from 85% over the last couple of quarters. Could you just unpack some of the drivers from the growth retention side versus the expansion side and how we could think about that playing out in calendar '25 as we start to get the benefit from migrations and lapping the new business risk model? Thank you. Graham O'Brien -- Vice President, Financial Planning and Analysis Sure. Yeah. I'll talk about some of the inputs to the retention improvement. Just as a reminder, we had retention was stable at 85% for the last three quarters. We saw the two-point sequential improvement in Q4. That was our first sequential improvement since Q1 of 2022. Our growth retention has held in pretty well over that period. I'll put this up into kind of upmarket and down-market statement. Upmarket, churn is about the same, but we've had a significant improvement in shifting back into an upsell opportunity instead of kind of more of a defensive downsell opportunity. And then in the down-market, we saw retention step down, certainly during the first two quarters in 2024. We saw that stabilize in Q3 and Q4. But beyond that, it's really been a mitigating downsell, lots more opportunity to upsell upmarket. Thank you. Our next question comes from the line of Tyler Radke with Citi. Your line is now open. Unknown speaker -- Citi -- Analyst Hi. Thanks for the question. This is Ashely on for Tyler. I just wanted to ask about the uptick in 1000 customer count. Could you provide a little bit more color on what drove the uptick and maybe comment on the mix of new lens versus expansion? And do you expect this pace of addition to be sustained going forward? Henry Schuck -- Founder and Chief Executive Officer Yeah, I can cover that one. So, really, there's four ways that the logo count in that cohort can change. We can go out and acquire new customers at a price point above $100,000. We can upsell customers spending below $100,000, up above $100,000. And then to lose customers, we can -- customers that are spending $100,000 downsell or full churn. We don't -- even in those years, plus where we saw a sequential decrease in that cohort, it usually wasn't a full-on churn. So, what we're really seeing is improvement in the other three areas. We've got opportunity to upsell and much more success upselling existing customers up and above $100,000. We are losing way more -- way fewer customers down below that $100,000 cohort from a downsell. And then we're being -- we're much more successful going out and actually acquiring upmarket customers at that $100,000 or above level. So, really, it's customer acquisition, renewed upsell opportunity, and less downsell exposure than we had seen previously. Thank you. One moment for our next question. Our next question comes from the line of Brian Peterson with Raymond James. Your line is now open. Johnathan McCary -- Raymond James -- Analyst Hey, thanks for taking the question. This is Johnathan McCary on for Brian. So, I guess, just getting into the 2025 guide another way, I know you gave some commentary on the interval already here. But what do you have built in the outlook there? How much of that is still reliant on mid-market as the primary swing factor for NRR versus potential upside for migrations? Henry Schuck -- Founder and Chief Executive Officer Yeah. No, the way we're thinking about upmarket growth is that we're going to -- we're on a path back to mid-single-digit growth. And as a reminder, mid-market is our enterprise plus our mid-market segment. Last year, we had talked about mid-market kind of being a drag on growth, specifically with the software vertical that experienced a couple of years of downsell pressure. So, I think the framework within the upmarket is that we are accelerating our enterprise opportunity and that we're kind of on the upswing after in mid-market after we had headwinds there for a couple of years. Johnathan McCary -- Raymond James -- Analyst Got it. And then on the Copilot uptake, it's good to hear the new commentary on the ACV there. What are you seeing in terms of penetration with new lands as you've said that's mostly new customers. How close is that to 100% attach rates when you land a new deal? Henry Schuck -- Founder and Chief Executive Officer Yeah, I can take that one, too. The vast majority of our new customer ACV is on Copilot. So, I think early on, we went up to about 90%. I think that's the right number that it's about 90%-plus of ACV that is new to franchise is coming on Copilot. Thank you. Our next question comes from the line of Parker Lane with Stifel. Your line is now open. Jack McShane -- Stifel Financial Corp. -- Analyst Yeah. Good afternoon, guys. You've got Jack McShane on for Parker. I'd be curious to hear your guys' thoughts on DeepSeek's potential impact to your business. It was reported that you guys are leveraging the R1 model within Copilot. So, I'd be curious to hear how that may change things either on the cost side of the equation or maybe some potential performance improvements as a result. Henry Schuck -- Founder and Chief Executive Officer Yeah. First, it wasn't reported that we were using it inside of Copilot. We have tested DeepSeek internally. And I think that what we're most excited about with DeepSeek and the ecosystem is its potential to drive price down across other LLM providers. We have always had a model internally at ZoomInfo, where we use the model with the highest efficacy and the lowest price, and we're constantly testing different models for outcomes. What we expect DeepSeek to do in this ecosystem is continue to drive down prices with the model providers. And what we've seen to date is an exponential decrease in cost across the models that we're using across Copilots, but DeepSeek is not a production LLM that we're using. Jack McShane -- Stifel Financial Corp. -- Analyst Got it. Understood. And then one more quick one. I'd be curious to hear the characteristics of the $100,000 cohort. And when I'm kind of parsing upsell versus maybe you see growth. How does that $100,000-plus cohort kind of compared to the rest of your guys' customers? Henry Schuck -- Founder and Chief Executive Officer Yeah, good question. It's heavily upmarket as you would imagine. And when we talk about vectors to take existing customers and expand them into that cohort. We've got feed opportunities, not just in our kind of more traditional space, but we've got expansion opportunities into AE, AM, CSM, RevOps use cases with Copilot. We've got cross-sell additional functionality. So, operations, OS, selling that to Copilot and legacy sales customers. So, we do have feet product, price levers to upsell into the $100,000 cohort. Thank you. Our next question comes from the line of Michael Berg with Wells Fargo. Your line is now open. Michael Berg -- Analyst Hey, thanks for taking my question. Michael Berg on for Michael Turrin here. I just want to double-click on the NRR, in particular with regards to the seat dynamic. You talked a lot about upselling ops and Copilot. How is the seat environment looking? And I guess, in particular, if there's any difference in the upmarket versus down-market as part of that equation? Thanks. Henry Schuck -- Founder and Chief Executive Officer Well, I think, first, in the down-market, if you think about a customer that has, call it, 25 employees and five salespeople, we're going to be 100% penetrated across that seat count. As you move upmarket, we're much less penetrated. And so, in an enterprise customer with 10,000 employees and 5,000 salespeople, we might be only penetrated across 1,000 of those sales reps. And so, there continues to be a large seat expansion opportunity in the upmarket. I think the thing that we're most excited about as it relates to Copilot is our ability to sell outside of personas where we have historically sold. And so, instead of only selling the top-of-the-funnel prospectors, we've now expanded into account managers, customer success managers who are using Copilot to get in front of risk turn risk to no signals happening in their accounts to know when the right time is to call in to upsell to know to build an account plan on the fly and to have all of that data at their fingertips that they can be making better decisions. And so, that persona expansion expand how many seats we can sell into. But across the enterprise, it's very rare that we're fully penetrated across all of the sales seats that we can sell to. Thank you. Our next question comes from the line of Brent Bracelin with Piper Sandler. Your line is now open. Brent Bracelin -- Analyst Thank you. Good afternoon. Henry, I wanted to go back to kind of the $100,000 cohort customer. I think you added net new customers this quarter. That's the most we've seen in two years. One read outside looking in is that maybe the worst of the churn for those software traditional customers is behind you. Is that a fair characterization? And I say that because a small software company could actually spend well north of $100,000 on the data because there's such a dependency around landing new customers. So, walk us through that outside looking in thesis. Is that correct? Or how would you frame the momentum you're seeing on that new? Henry Schuck -- Founder and Chief Executive Officer Look, I think that across our $100,000 cohort, the vast majority of customers in that $100,000 cohort are in our upmarket segment. And so, I think where we've gotten in trouble in the past is when you take a small customer in a ZIRP environment and they spend $100,000 on ZoomInfo, where that might be the right decision in a ZIRP environment, not the right decision today. And we've been really prescriptive about making sure that our customers in a down-market and in the upmarket are getting the right packages for their business. And so, you're not seeing sort of a small software company spend upwards of $100,000 with ZoomInfo. You're seeing the vast, vast majority of our upmarket of the $100,000 cohort in our upmarket business. Brent Bracelin -- Analyst Helpful color. Last question for me is on pricing. Any delta relative to pricing in upmarket versus pricing in the SMB, just wondering, I know SMB's pricing has been aggressive for a while. Are you seeing some of the aggressive pricing lead into mid-market, or that's just not happening? Henry Schuck -- Founder and Chief Executive Officer I would view them separately. I think in the down-market, we view that as an efficient customer acquisition play. And then upmarket, like I said earlier, we've got a few different pricing models. And we have -- the nature of our pricing the market hasn't really changed. Operator Thank you. One moment for our next question. Our next question comes from the line of Jackson Ader with KeyBanc Capital Markets. Your line is now open. Kyle Diehl -- KeyBanc Capital Markets -- Analyst Great. Thanks. This is Kyle Diehl on for Jackson Ader. Maybe just two quick ones. When we think about the competition upmarket, are there any different puts and takes you guys I could call out that you're seeing further and further upmarket versus even maybe the mid-market and particularly with those Copilot first deals? Henry Schuck -- Founder and Chief Executive Officer As we move upmarket, what we're seeing is that our product market fit and our differentiation is meaningfully stronger upmarket than what you see down-market. And so, we're in an incredible place to compete and win upmarket much differently much differently than down-market. We have great product market fit. We're resourced properly. We have the right products, and that market segment presents the largest growth opportunity for us. When I think about the durable competitive advantage that we have, there are several aspects that combine to form that advantage. The first, the breadth, depth, and accuracy of our data, the velocity of updates to that data are highly value-additive data types like intent data that directly drive revenue outcomes in the upmarket, our industry-leading regulatory and compliance posture is incredibly important. And then our pace of innovation around AI and go-to-market, that's what's driving our wins upmarket, and it's also what's driving our durable competitive advantage as well. OK. Great. And then Graham, maybe one for you. I think that you've kind of called out a couple of times here at the discounting of down-market for the '25 in the guide. What about as we think about '25, just overall, maybe how the fourth quarter play out from a macro perspective? And kind of what you're anticipating when you're putting together the guide from a macro perspective with more attention toward the mid-market and enterprise? Graham O'Brien -- Vice President, Financial Planning and Analysis Yeah. Good question. I don't think we saw the macro change in Q4 from where it was prior. And I don't really think we have an expectation that it gets better or worse in the guide. Q4 was a really strong quarter for us, and we're pretty optimistic about carrying that momentum into 2025. Thank you. One moment for our next question. Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Your line is now open. Chris Fountain -- Analyst Hi. This is Chris Fountain on for Rishi. I wanted to ask about the down-market disqualification of new business policies that you implemented I believe in the past, you mentioned it was leading to a $2 million-a-month headwind. Has that amount changed from Q3? And are you expecting any changes to that level in 2025? Henry Schuck -- Founder and Chief Executive Officer That hasn't changed. We don't anticipate any changes to that. Thank you. One moment for our next question. Our next question comes from the line of Patrick Walravens with Citizens Bank. Your line is now open. Austin Cole -- Citizens Bank -- Analyst Hey there. This is Austin Cole on for Pat Walravens. I just wanted to ask, I guess, related to the upmarket we've seen just kind of some continued layoffs out there in the market in Q1. Just given your commentary of being on that path to mid-single digits, can you just give us kind of a sense of the durability of that path and kind of what gives you confidence? And then as a quick follow-up, just what might kind of accelerate that growth kind of even further beyond and strengthening that upmarket to maybe kind of double digits? What are the drivers there? Thank you. Henry Schuck -- Founder and Chief Executive Officer Look, I think what you're seeing in our enterprise -- in our upmarket growth is slow and steady and focused execution on that segment. We have resourced it for growth. We have driven product innovation for that segment. We have continued to stay focused on that segment from a services perspective. And so, I don't view this as one timing or that it all sort of came at once. This has been a steady drumbeat of getting a little bit better and a little bit better and a little bit better in the enterprise. And I think as a result, we're seeing improvement across all of the metrics in the upmarket, and we think that is momentum that's going to continue into 2025. I think when you think about how do you accelerate that growth, I think it's a couple of things. It's Copilot, and it's our operations business. And with Copilot, our sellers are becoming more and more enabled to take Copilot to their customers. They're more and more confident because they're using Copilot internally for their own operations. They now have a persona expansion opportunity within their large accounts. And so, there's a lot of confidence that we'll be able to accelerate the growth of both Copilot and operations within the enterprise. Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program.

EPAM Systems (EPAM) Q4 2024 Earnings Call Transcript | The Motley Fool

Good day and welcome to the fourth quarter and full year 2024 EPAM Systems earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Mike Rowshandel, head of investor relations, to begin the conference. Mike, over to you. Mike Rowshandel -- Head of Investor Relations Good morning, everyone, and thank you for joining us today. As the operator just mentioned, I'm Mike Rowshandel, head of investor relations. By now, you should have received your copy of the earnings release for the company's fourth quarter and full year 2024 results. If you have not, a copy is available on epam.com in the investor relations section. With me on today's call are Arkadiy Dobkin, CEO and president; and Jason Peterson, chief financial officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risks and uncertainties, as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the investor relations section of our website. Thank you, Mike. Good morning, everyone. Thank you for joining us today. It's good to share that our fourth quarter results came in better than expected. It was another quarter of strong execution, thanks to our core engineering differentiation and relevance of our advanced capabilities and service offerings across our new and existing client portfolios. Many of the encouraging themes we shared last quarter have carried through into this quarter. Before discussing our Q4 results and some thoughts on 2025, I would like to step back and reflect on the full year 2024, which was a year of uneven demand, improved stabilization, and building some sequential momentum. There are three key points I would like to highlight on our performance over the past year. Number one, we were successfully executing our global business strategy while simultaneously addressing many challenges we have accumulated during the last few years. We've done this both organically and through acquisitions, with a continuous focus on becoming the most globally geo-balanced talent company in the world for AI-native digital business services. The two most recent acquisitions, NEORIS and First Derivative or FD, are good examples of how we are investing to accelerate our strategy. They allowed us to meaningfully expand our existing global client relationship and further penetrate new markets and talent geo-hubs. While still early, we see encouraging progress across several net new opportunities, with more than a dozen joint pursuits that combine EPAM, NEORIS, and FD capabilities together. Number two, we are pleased to end the year with an underlying improvement on our stand-alone business, delivering better results than our expectations earlier in the year when we had to adjust our outlook for a weaker-than-expected H1. And finally, number three, exiting 2024, we feel good about the sequential momentum we've built over the past two quarters and see encouraging signs as we look ahead into 2025. While there is still plenty of caution in broad macro sensitivity, we believe we see some fundamental improvements in the business, which gives us optimism that 2025 will be a much more transformative and better year for us than 2024 was. Now, turning to our Q4 results. During Q4, we grew mid-single digits both year over year and sequentially, notably returning to organic revenue growth for the first time since Q1 of 2023. We continue to see improvements in client sentiment and engagement across all our verticals and geographies and particularly around our AI-related capabilities. Our performance in Q4 was driven by our ability to increase our clients' trust and reassure our continued superior quality execution in our key horizontal and vertical domains while simultaneously offering more globally diversified talent. On a stand-alone basis, excluding recent acquisitions, we saw four out of six verticals grow year over year, with five out of six growing sequentially, reflecting strong momentum from last quarter. Key verticals to call out include life science and healthcare, software and hi-tech, financial services, and emerging. Across geographies, we see a similar story to last quarter with Americas and APAC leading growth year over year, with Europe continuing to show organic succession revenue growth. Now, turning to demand. We are encouraged to see the modestly more positive demand environment compared to 90 days ago. Sentiment continues to improve across our existing and newly acquired client portfolios as clients rely on us for our core engineering DNA, as well as our advanced generic capabilities. In some cases, we are consolidating work from other suppliers as clients shift over to more engineering-led and scaled programs. In our most recent conversations across the C-suite, the underlying tone and buying signals are higher than they were last year. With further accumulation of technical and data debt over the past 12 months, we are seeing accelerated take up in most scaled and transformational AI programs. Based on the significant backlog of technical and data modernization, along with new AI-related demand, we believe that 2025 will be the year where we begin to see real generic first-mover advantages. While we're relatively optimistic about the midterm outlook, its more encouraging client-buying signals than 12 months back, we do still see multiple pockets of caution, driven by broad macro risks, policy-specific uncertainty due to a very dynamic geopolitical environment, and certain challenges in some of our clients and talent markets. Further, cost very much remains in focus and continues to be an important decision factor for many of our clients. So, based on these uncertainties in our current vantage point, we are balancing our optimism as clients continue to transition and modestly expand their discretionary spend. Moving into our global delivery approach. We demonstrated strong execution throughout the year as we continue to diversify our global talent pools and bring in more optionality to our clients across all four of our major delivery hubs in Europe, India, Latin America, and Western Central Asia. In Q4, we saw sequential improvements of net organic additions, which was broader than just India and included some of our traditional European locations. Europe remains core to us as a top talent pool, and we believe we will continue to grow in the region as discretionary spend returns to higher levels. Ukraine is an interesting example to share given the geopolitical environment. While production headcount remains mostly in line year over year, in Q4, we saw sequential net additions for the first time since the start of the Russian invasion. We believe this is a positive signal of our client's comfort level and desire to return to some of our traditional locations. In India, we hit an important milestone for the company as it now represents our largest single-country delivery location and second as a region. In just 10 years, EPAM has achieved 10X growth in India with now over 10,000 employees. This speaks to our ability to adapt to changing market conditions and our commitment to invest in a globally diverse and talented workforce, in line with EPAM work DNA. In Latin America, we significantly strengthened our footprint with new areas, making Latin America our third largest delivery region and a very important pillar in our global model. We believe we have now the right mix of talent focusing on delivery for North American clients, coupled with a deep local expertise and strong capabilities to engage and deliver in LatAm. In Western Central Asia, as we mentioned last quarter, we continue to progress quite nicely with our still relatively new delivery hub of over 7,300 people now. Back to the two acquisitions we closed in Q4. In overall, with new additions, we significantly increased our global footprint with the addition of nearly 6,000 people combined, primarily across Latin America, Canada, Spain, U.K., and Ireland. We remain committed to executing our global delivery strategy further. Now, shifting to gen AI. Even with all the recent noise, sometimes the significant level of confusion in debates, we are seeing indicators of positive change and growing impact. Overall, we continue to make significant traction across our client portfolio, with now 75% of our top country clients engaged on gen AI initiatives. Our early stage projects continue to show strong growth year over year, with hundreds of new vertical use cases emerging and turning into a agentic AI piles. Within our midsize AI projects, with more defined outcomes, we are beginning to see more volume, and we believe this speaks to the investment and traction clients are making in this space. These programs have a high probability of turning into agentic transformation plays in key horizontal and vertical domains. Finally, in our larger-scale AI factories, we manage the entire AI portfolio of agents and applications throughout the program life cycle and generate tens of millions of dollars in value by each such engagement. Our gen AI and AI-driven client engagement could also be presented in three major dimensions: dimension one, SDLC and other related areas of individual and team productivity improvements; dimension two, data in cloud engagements triggered by the need to enable AI-native program at scale; dimension three, scaled AI-native programs and platforms with a goal to drive value against proven business cases and when clients already solve their data in cloud infrastructure challenges. Let me expand a bit on this. Within dimension one, we are addressing the need of complex enterprise-level engagements to orchestrate individual efforts toward total productivity improvements at large teams and program levels via all the latest gen AI advances. Often to have real engagement impact, our hybrid client teams must have the same level of modern engineering maturity as purposely gen AI trained our own teams. That is why we are offering to client gen AI-enabled software development life cycle for SDLC transformational programs, utilizing market-leading tools and methodologies, along with the EPAM AI/RUN framework built on top of our own DIAL, EliteA, Codeme, and some other IP assets. It made a significant impact on large complex engagement and helps to advance the adoption of AI in large-scale enterprises by bringing measurable value through both cost optimization and the creation of new revenue streams. While I believe dimension two is very much self-explanatory, dimension three is our go-to-market business transformational programs natively enabled by gen AI and AI technologies. As we move into a more comprehensive agentic proposition, our AI-native engagement are starting to be picked up in volume and size. Compared to the first half of 2024 where we were generating single-digit millions of revenue from these AI-native programs, Q4 stands out by generating about $50 million in that category. Let me share two client examples to further illustrate how our efforts are driving client engagement and generating real pragmatic value. Let's start with Canadian Tire Corporation, the largest retail chain in Canada where we have embarked on a journey to standardize and modernize software delivery life cycle. With the combined power of CTC product engineering center of excellence and EPAM know-how, we are already driving initial results with very real optimization and efficiency savings. So far, EPAM has effectively deployed the EliteA platform across CTC delivery organization, trained more than 700 individuals, and includes comprehensive adoption of new modernized tools. This is a real example of how our approach amplifies organizational productivity, reduces cost, and improves in-team and cross-team collaboration and serves as a foundation for the next-generation agentic platform for SDLC. Another notable example of real progress at scale is our expanded engagement with Baker Hughes, one of the world's largest oilfield services, industrial, and energy technology companies. We are enabling Baker Hughes in building and offering to their clients large AI-native digital platforms by combining EPAM best-in-class product engineering capabilities with Baker Hughes' expertise in energy technology. Just a few weeks ago, Baker Hughes named EPAM as a key partner for digital and AI to transform the energy sector by leveraging advanced AI-native digital platform implementations at scale. We believe EPAM is one of the few AI-native service providers who can demonstrate scaled programs with proven AI ROI today. It is also well enabled by our growing global partnerships with cloud and data major providers with whom we are expanding our collaborations and focusing on general and agentic AI go to marketplace. Now, if we step back and look at the bigger picture more broadly for 2025 and beyond, our thesis remains unchanged. We believe the demand for advanced AI-native and agentic software and data engineering services will only increase as engineering productivity gains will be significantly outsized by incremental demand to build new and replace the legacies as clients quickly expand their focus to solve more complex tasks more efficiently. Further, the need for security modernization and managing enterprise data platforms will continue to demand skilled expertise that combines critical AI skills with modern engineering and data science capabilities, all areas in which EPAM excels. To conclude, we are pleased with our stronger-than-expected Q4 results and stabilization achieved during the last year. Our new AI-native capabilities, data, and core engineering differentiation remained evident, while we are more globally diversified today than ever before. We continue to see clients return to quality and reliable execution, and we believe that is putting us into a stronger competitive position today compared to last year. At the same time, we do believe 2025 will be still a challenging and transformative year for the industry, with a lot of pressure to navigate two opposite trends across our client base. One is still being driven by cost sensitivity, while another by the need to return to more discretionary spending and addressing accumulated during the last few years backlogs, which means also that EPAM will be performing during 2025 with continuous margin pressures triggered by necessity to invest across several important for us in 2025 areas such as critical skills and talent retention and development, agentic AI and gen AI IP and tooling advancements, integration efforts of our recent acquisitions, and go-to-market strategies. That should allow us to be in the right standing when discretionary demand environment will fully rebound. So, while we remain vigilant to potential headwinds, we believe our strategic positioning and ongoing initiative place us on the trajectory for sustainable performance and growth in 2025 and beyond. Let me now turn the call over to Jason, who will provide additional details on our Q4 results and 2025 outlook. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Thank you, Ark, and good morning, everyone. In the fourth quarter, EPAM generated revenues of 1.25 billion, a year-over-year increase of 7.9% on a reported basis, including revenues from recent acquisitions, NEORIS and First Derivative. On an organic constant currency basis, revenues grew 1% compared to the fourth quarter of 2023. In Q4, we were pleased to return to year-over-year organic revenue growth. Organic revenues exceeded our Q4 guidance due to higher-than-expected new project starts, indicating modestly improving client sentiment. Due to the quarter's significant inorganic revenue contribution, I will speak to both organic and inorganic revenues as I discuss industry vertical and geographic performance. Beginning with industry verticals, I want to echo Ark's comments that, in Q4, five out of six of our industry verticals delivered sequential organic revenue growth. Only the travel and consumer verticals declined Q3 to Q4. Financial services delivered very strong growth of 15.9% year over year, reflecting 4.3% organic and 11.6% inorganic growth, driven by continued strength in the banking, insurance, and payment sector. Life sciences and healthcare increased 8.6% on a year-over-year basis, reflecting 5.7% organic and 2.9% inorganic growth. Growth in the quarter was driven primarily by clients in life sciences, including some revenues derived from new logo accounts. Software and hi-tech increased 7.7% year over year, reflecting 6.4% organic and 1.3% inorganic growth. Consumer goods, retail, and travel decreased 3% year over year, reflecting a negative 5.7% organic and a positive 2.7% inorganic growth, largely due to declines in consumer products and retail, partially offset by growth in travel. Business information and media declined 3.9% year over year, reflecting negative 4.7% organic and positive 0.8% inorganic growth. Revenue in the quarter was impacted by the previously discussed ramp-down of the top 20 client. However, sequentially, we were encouraged to see the vertical return to strong growth as we continue to build momentum. And finally, our emerging verticals delivered very strong growth of 24.8%, reflecting 3% organic and 21.8% inorganic growth. Growth was primarily driven by clients in energy, manufacturing, and industrial materials, with significant contribution coming from NEORIS. From a geographic perspective, the Americas, our largest region, representing 60% of our Q4 revenues, increased 11.4% year over year, reflecting 2.7% organic and 8.7% inorganic growth. EMEA, representing 38% of our Q4 revenues, increased 3.1% year over year, reflecting negative 1.4% organic and positive 4.5% inorganic growth. In the quarter, the region continued to show sequential organic revenue improvement. And finally, APAC increased 4.3% year over year and represents 2% of our revenues. In Q4, revenues from our top 20 clients grew 4% year over year, while revenues from clients outside our top 20 increased 10%. Moving down the income statement. Our GAAP gross margin for the quarter was 30.4%, compared to 31.1% in Q4 of last year. Non-GAAP gross margin for the quarter was 32.2%, compared to 33% for the same quarter last year. Relative to Q4 2023, gross margin in Q4 2024 was negatively impacted by compensation increases, including those resulting from our 2024 promotion campaign, which we were not able to offset through pricing, as well as lower profitability of recent acquisitions. The compensation increases, along with lower profitability from acquisitions and negative foreign exchange impact, exceeded the benefits of improved utilization and the positive impact from the Polish R&D incentive. GAAP SG&A was 17.4% of revenue, compared to 18.5% in Q4 of last year. Non-GAAP SG&A came in at 14.4% of revenue, compared to 14.2% in the same period last year. SG&A measured as a percent of revenue is now higher in part due to our recent acquisitions running with higher SG&A levels compared to our stand-alone business. SG&A expense for Q4 2024 reflects SG&A associated with recent acquisitions, as well as higher variable compensation compared to Q4 2023. GAAP income from operations was 137 million or 10.9% of revenue in the quarter, compared to 122 million or 10.6% of revenue in Q4 of last year. Non-GAAP income from operations was 208 million or 16.7% of revenue in the quarter, compared to 200 million or 17.3% of revenue in Q4 of last year. Our GAAP effective tax rate for the quarter came in at 24.8%, and our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $1.80. Our non-GAAP diluted EPS was $2.84, reflecting an increase of $0.09 or 3.3% compared to the same quarter in 2023. In Q4, there were approximately 57.4 million diluted shares outstanding. Turning to our cash flow and balance sheet. Cash flow from operations for Q4 was 130 million, compared to 171 million in the same quarter of 2023. Free cash flow was 115 million, compared to free cash flow of 161 million in the same quarter of last year. We ended the quarter with approximately 1.3 billion in cash and cash equivalents, which is lower compared to the same quarter last year due to our recently completed acquisitions. At the end of Q4, DSO was 70 days, compared to 74 days in Q3 2024 and 71 days in the same quarter last year. Share repurchases in the fourth quarter were approximately 53,000 shares for $13 million at an average price of $241.99 per share. Moving on to a few operational metrics for the quarter. We ended Q4 with more than 55,100 consultants, designers, engineers, trainers, and architects, a growth of 16.3% compared to Q4 of 2023. This was a result of recent acquisitions, which contributed nearly 6,000 delivery professionals. In addition to solid organic growth, which contributed sequential net additions of around 1,500 employees in the quarter, our total headcount for the quarter was 61,200 employees. Utilization was 76.2%, compared to 74.4% in Q4 of last year and 76.4% in Q3 2024. Turning to our 2024 full year results. Revenues for the year were 473 billion, up 0.8% on a reported basis year over year. On an organic constant currency basis, revenues were down 1.7% year over year. GAAP income from operations was 545 million, an increase of 8.6% year over year, and represented 11.5% of revenue. GAAP income from operations benefited from the recognition of 69 million of incentives related to research and development activities performed in Poland and was negatively impacted by 31 million of severance-related costs. Our non-GAAP income from operations was 779 million, a growth of 1.8% compared to the prior year, and represented 16.5% of revenue. Our non-GAAP income from operations benefited from the recognition of 45 million of incentives related to research and development activities performed in Poland in 2024. Our GAAP effective tax rate for the year was 22.2%. Our non-GAAP effective tax rate was 24%. Diluted earnings per share on a GAAP basis was $7.84. Non-GAAP EPS, which excludes adjustments for stock-based compensation, acquisition-related costs, and certain other one-time items, including costs associated with our cost optimization programs, was $10.86, reflecting a 2.5% increase over fiscal 2023. In 2024, there were approximately 58 million weighted average diluted shares outstanding. Cash flow from operations was 559 million, compared to 563 million for 2023. And free cash flow was 527 million, reflecting an 83.7% adjusted net income conversion. And finally, shares repurchased in 2024 were approximately 1.854 million shares for $398 million at an average price of $214.65 per share. Now, let's turn to guidance. Before moving to the specifics of our 2025 and Q1 outlook, I would like to provide some thoughts to help frame our guidance. We have been pleased with the progress we are making on demand generation, and we'll continue to prioritize revenue growth into 2025. We see stability in client budgets and some degree of shift in spending toward growth and strategic programs. In 2025, we expect flat year-over-year organic revenue growth in Q1, followed by continued improvement throughout the year. In terms of profitability for 2025, we do expect to run the business at somewhat lower levels of profitability than we have in past years. As Ark mentioned, we are investing in retaining our top talent, as well as further accelerating investments in our advanced gen AI platforms and tools. Compensation increases to retain talent for future growth, combined with the limited ability to improve client pricing in the near term and additional pressure from dilutive impact of recent acquisitions, will continue to put pressure on profitability this year. However, we do expect to see improvement in our profitability levels from the first half to the second half of the year. Our guidance assumes that we will continue to be able to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2024. Now, starting with our full year outlook. Revenue growth will be in the range of 10% to 14%, with an inorganic contribution of approximately 10% for 2025. Foreign exchange is expected to have a negative impact of 0.9%. We expect GAAP income from operations to be in the range of 9% to 10% and non-GAAP income from operations to be in the range of 14.5% to 15.5%. We expect our GAAP effective tax rate to be approximately 24%. Our non-GAAP effective tax rate, which excludes excess tax benefits related to stock-based compensation, will also be 24%. Earnings per share. We expect the GAAP diluted EPS will be in the range of $6.78 to $7.08 for the full year and non-GAAP diluted EPS will be in the range of $10.45 to $10.75 for the full year. We expect weighted average share count of 58.1 million fully diluted shares outstanding. For Q1 of 2025, we expect revenues to be in the range of 1.275 billion to 1.290 billion, producing year-over-year growth of approximately 10%. Our guidance reflects an inorganic contribution of 11.4% with a 1.4% negative FX impact during the quarter. For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting Social Security caps, the negative impact of 2024 compensation increases which we were unable to offset with better pricing, dilution from recent acquisitions, and a slightly softer revenue in the month of January as clients in certain verticals finalize budgets. For the first quarter, we expect GAAP income from operations to be in the range of 6.5% to 7.5% and non-GAAP income from operations to be in the range of 12.5% to 13.5%. Our Q1 income from operations guide reflects the impact of resetting Social Security caps, the negative impact of 2024 compensation increases which we were unable to offset with better pricing, dilution from recent acquisitions, and slightly softer revenues in the month of January as clients in certain verticals finalize budgets. We expect a weighted average share count of 57.7 million diluted shares outstanding. Finally, a few key assumptions that support our GAAP to non-GAAP measurements for 2025. Stock-based compensation expense is expected to be approximately 194 million, with 50 million in Q1, 44 million in Q2, and 50 million in each remaining quarter. Amortization of intangibles is expected to be approximately 68 million for the year, with approximately 18 million in Q1 and 17 million in each remaining quarter. The impact of foreign exchange is expected to be approximately 1 million loss each quarter. Tax effect of non-GAAP adjustments is expected to be approximately 61 million for the year, with 17 million in Q1, 14 million in Q2, and 15 million in each remaining quarter. We expect excess tax benefits to be around 14 million for the full year, with approximately 7 million in Q1, 2 million in Q2, 1 million in Q3, and 3 million in Q4. Severance, driven by our 2024 cost optimization program, is expected to be 6 million in Q1 and 1 million in Q2. Finally, one more assumption outside of our GAAP to non-GAAP items. We maintain a significant level of cash and are generating a healthy level of interest income. However, based on the reduction in cash resulting from the recent acquisitions, we are expecting interest and other income to be smaller in 2025 compared to 2024, with around 18 million for the 2025 full year, with 4 million in Q1 and Q2 and 5 million in each remaining quarter. My thanks to all the EPAMers who made 2024 a successful year and will help us drive growth throughout 2025. Operator, let's open the call for questions. Operator [Operator instructions] Your first question comes from the line of Maggie Nolan with William Blair. Your line is open. Maggie Nolan -- Analyst Thank you. Jason, I was hoping you could elaborate a little bit on the expectations that are embedded in the top end and the low end of revenue guidance, both company-specific and from a macro perspective. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah. So, I think we've been fairly careful about our expectations for NEORIS and FD, who both, you know, generally delivered at the level of revenues that we expected in Q4. We have them both with some modest degree of growth as we go from 2024 to 2025. And then as I think we said in the prepared remarks is that we've got effectively kind of a 0% to 4% revenue growth for organic. And if you introduce the foreign exchange headwinds, you've got a 1% to 5% growth, again, using an organic constant currency. Right now, what we're seeing is a somewhat slow start in January, but we're seeing, you know, substantial program starts and clients beginning to really get started here in 2025 as we enter February and as we work through the month. If I were to talk about that -- and, Maggie, is this for revenue or is this for the revenue and -- the revenue? OK. So, what we would have is, you know, clearly some degree of sequential growth Q1 to Q2. We are seeing substantial sort of project starts in certain areas of our business, and we've got a couple of clients, one, particularly, in sort of hi-tech that we expect to show substantial growth in the year. Again, the 4%, you know, it's clearly some degree of sequential revenue growth in the back half. Yeah, you know, if you were to end up in the middle part of the range, it's kind of a softer sequential growth, so I'm not certain that helps too much. But what we are seeing is very strong sort of program starts and customer demand here in February despite the fact that we had sort of a slower start to January. Maggie Nolan -- Analyst Thank you. That's helpful. And then on the margin side, you know, Arkadiy, you mentioned some investments that you are clearly going to be making. I'd be particularly interested in some of the commentary around agentic AI and IP since IT services companies don't typically retain a significant amount of the IP that they generate. And then how are you thinking about balancing those investments with perhaps the need to drive some cost synergies in these acquisitions that you just onboarded? Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah. So, let me just do a quick bridge on adjusted IFO, and then I'll probably let Ark talk a little bit more about the importance of the investments in gen AI. OK. We've got 2024 at 16.5% adjusted IFO. At the midpoint of our guidance range for 2025, that would be 15%. We've talked about dilution due to the acquisition of FD and first -- and NEORIS. Both of them are accretive from an EPS standpoint, but they are dilutive from an adjusted IFO. And so, I think that our -- we've updated our assumption, and that's about a 60-basis-point dilution. So, 16.5. With a 60-basis-point dilutive impact of the acquisitions, we're down to 15.9. And then 15.9 compares to the 15%, which is the midpoint of the 14.5 to 15.5. And what we're seeing is some incremental investment in gen AI, which is causing both an increase in SG&A and a little bit of a decrease in gross margin. And then, Maggie, as we've kind of talked throughout 2024 and I think have also as we've talked about what we expected in 2025, we, you know, have been focused on retaining our top technical talent. And so, we have had some degree of cost increases or increases in compensation in 2024 in a year when it was very difficult to get rate increases. We still expect that this is a more challenging certainly in the first half of 2025. So, what we are expecting to have is our traditional promo campaign in the first half of 2025 with limited ability to offset those compensation increases with salary increases. We do expect the pricing environment to improve somewhat throughout the year. Clearly, we're focused on utilization and pyramids and that type of thing. But really, what is happening in the 15.9 to 15 is, you know, some amount of compression due to price sensitivity of clients. India still runs at better-than-average profitability. Ukraine still runs at high levels of profitability. So, we feel good about the business overall, but just the pricing environment still is kind of pressurizing our gross margin and ultimately our adjusted IFO. Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer I think I would add that this type of investment is not something new for us. Typically, when there is a visible transition in technology -- and we all understand that investment in gen AI is a lot of investment in training, changing the minds of our development team how our new software will be built, and on top of this, a number of accelerators and some IP as well, specifically in this transitional period when the market itself is not bringing too many stable solutions to build a new type of software. And we did it like when cloud conversion was happening, when mobile conversion was happening. And it was a significant investment. It was a better macro environment back then. But we do believe that we cannot miss this investment right now because as soon as gen AI, AI, agentic AI are starting to drive real transformation, we need to be ready to take advantage there. Operator Your next question comes from the line of Jamie Friedman with Susquehanna. Your line is open. Jamie Friedman -- Analyst Hi. Good morning. I just wanted to ask one question. In terms of your prepared remarks, Arkadiy, you say and I'm quoting, in 2025, clients will balance their cost focus with the need to accelerate their transformational gen AI journeys. That, to me, sounds like kind of a change of business versus run the business narrative. I'm just wondering, in the context of your pricing commentary, is the pricing -- do you have any exposure to the run the business opportunities? Is it all really the change the business transformational side, whether it's gen AI or otherwise? And is the pricing pressure that you're feeling on the new stuff or on the old stuff or both? Thank you. Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer So, we definitely have, during the last several years, exposure to run the business, and we have a number of engagements. And even this, we're trying to do it differently than traditionally it was executed, especially with everything that we see in very different level of automation, driven by gen AI progress. But the pressure -- pricing pressure coming still during the last several years, and there is a big kind of inertia to change it, and that's what we hope will be -- start happening in 2025 more visibly. But there is a pricing pressure across run and build as well and change as well until, again, the change will become much more common to more traditional levels of demand. Your next question comes from the line of Bryan Bergin with TD Cowen. Your line is open. Bryan Bergin -- Analyst Hi, guys. Good morning. Thank you. On demand, I was hoping you could dig in more on how the client spending behavior progressed through each month in 4Q. I'm really trying to dig into commentary on new clients versus existing clients. So, can you talk about that and any interesting bookings there or anything like that as you look at new versus existing? Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer So, I don't think I can give you like specific numbers, but definitely, we entered a good number of new clients. It's not becoming very large right away, but there are some clients which quickly go into the range of kind of annualized 10 mil. So, at the same time, there are a lot of new clients which are coming through gen AI kind of proof of concept and then started to scale. But I also would probably mention that, for us, right now, new clients. Sometimes, it's our old clients as well because, for the time when starting from the beginning of the war, it was a lot of declines. We are seeing a return of these clients, not fully, but visibly. And for example, what Jason mentioned, one of the big tech companies, so -- which almost went to zero, now starting to really scale. So, which we're considering, in some way, new clients that we proved again, and prove not only what we prove but that they come back to us because they need the quality level and understanding of the technology which we possess. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Hey, Bryan. So, I'm just going to introduce a couple of numbers here. So, you know, the guide was 1205 to 1215. NEORIS performed as expected. We said that we would do about $54 million with NEORIS. FD would have been incremental to that. And I can tell you that that was about $12 million, again, as we expected. So, if you added the FD to the guide, it would have been 1217 to 1227. And we landed 1248. And so, it clearly was in what we call our stand-alone business where we saw strength. We did see sequential growth in Europe. We did see improvement in financial services, including growth in some European financial institutions. And so, overall, it was quite a bit stronger quarter from a revenue growth standpoint than we had expected, particularly with, you know, good revenues in the month of November and December. Bryan Bergin -- Analyst OK. Very good. I appreciate all that detail. And then, Jason, actually, on the margin, too, for my follow-up here, so thank you for the bridge. Obviously, a lot of moving parts here with the R&D tax credit, but then the more -- you know, the acquisition margin profiles, incremental investment, and a different geo footprint. But as we kind of just think ahead, as demand ultimately normalizes, do you anticipate a return to profit levels where you've been before or is it too early to make that call? Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah, we are definitely expecting to see improved profitability in the second half of the year relative to the first half. And then clearly, we're looking to drive profitability back to what I would call more typical. I know some externally think about 17-plus. I've always sort of thought of us as a 16 to 17 company. And so, the focus on the -- on getting back to a 16% or better would certainly be a goal for the company. And again, with a slightly different environment, we think that's achievable. Your next question comes from the line of David Grossman with Stifel. Your line is open. David Grossman -- Analyst Hi. Thank you. Good morning. I'm wondering maybe if you could speak a little bit of, you know, your capacity and your ability to accelerate revenue growth once demand improves. And maybe in part of your response, you could help to dimension, you know, what the headwind we should expect from the build rate dynamic from geographic makeshift in '25 and how much that may be impacting the growth outlook. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer OK. So, in terms of our ability to grow revenue, you know, we have continued to sort of operate with a strong sort of talent capability. So, we feel good about our ability to grow in India. We feel good about, obviously, our ability to grow in our traditional Eastern Europe and our ability to grow in the Americas. We are beginning to see some return, and we are seeing a little bit of growth even in places like Ukraine. Obviously, depending on how things resolve themselves there, that could open up further demand for that geography. And so, I think, David, we feel good about the opportunity to kind of grow revenues across a broad range of geographies. I do think you are going to continue to see a little bit of this headwind that we talked about in 2024 where as we shift into, let's say, Latin America with kind of local-to-local kind of revenues with NEORIS, some further growth in India, and growth in places like [Inaudible] which is an attractive price point where you'll continue to see a little bit of compression -- you know, I don't want to say compression, but you'll continue to see some headwinds on the revenue per headcount number as we move through 2025 would be my expectation. David Grossman -- Analyst OK. And did you provide just some color into what you think the head mix shift headwind is to revenue growth in '25? Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer We did not -- you know, we talked about it last year. You know, this year, I think, clearly, it depends, and I think that the answer is that -- you know, what I would say is we are beginning to see somewhat broader demand. Clearly, you know, we continue to see more growth in India, but we are beginning to see demand for our more traditional kind of Eastern European geographies as well. So, you know, maybe I would say it's somewhat less of an impact than what I talked about in the middle of 2024, but I would say you'll continue to see some impact from that, but I haven't sized it. David Grossman -- Analyst OK. Great. Thank you for that. And then just in terms of the margins, I think you've already given a lot of color there. One thing you didn't mention was, again, any headwinds from diversifying your geographic capacity, and just wondering what impact, if any, that's having on the margins currently. And just curious whether there's anything unique about your specific ability to price versus wage increases versus your peers because I don't think your peers are saying quite as much compression as you may be experiencing currently -- or in 2024 and your expectation for '25. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah, I think one of the things is that we continue to focus on retaining talent, and our attrition continues to decline throughout 2024. So, our voluntary attrition right now is definitely in the single digits. You know, as I think Arkadiy could probably talk better than I could that, you know, we do think what has made us successful over time is really the ability to deliver base, you know, with very high-quality talent. We do want to make sure that we're able to retain that talent, particularly as we head toward the time where we think there is going to be more transformative programs. We are beginning to see certain clients come back to us where they've had either failures or fatigue with other providers. We still think that the quality of execution is important, and we do think that there's an opportunity to improve price over some period of time. But I'll let Ark talk about the talent. Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer Yeah, same, David. This is what we mentioned in our remarks. So, there is kind of double movements. And again, our exposure changes proportionally much higher than many of our peers. And I think we try to make sure that we have the right talent to come back when demand will be normalized. So -- and yes, there is pressure there. When we were relocating people, so we were relocating this to -- some of them to other countries in Central Europe, some of them to Western Central Asia, and there is a very different pricing points. We try to keep the right balance and create opportunity to grow in each of these locations. David Grossman -- Analyst Great. Thanks for that, Ark. Just any thoughts on the cadence that you said margins were better in the second half than the first half, and any other color you want to provide around that? Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah, I would just say, you know, probably Q1 to Q2, you wouldn't see a substantial improvement in gross margin, but we are taking the classic sort of steps to improve profitability throughout the year. That's all the things we've been talking about, you know, improving utilization, improvement in pyramid, and then some amount of scaling. And so, we do want to be prepared for us -- you know, we want to exit 2025 with an ability to drive closer or above that, you know, classic profitability target of 16% or above. So -- [Inaudible] This previous year where our profitability was increasing. Your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open. Jason Kupferberg -- Analyst Hey. Good morning, guys. Thanks for taking the questions. The first one is just on revenue. I wanted to dive in a little bit just in terms of what's embedded in terms of assumptions on further improvement in discretionary spending. Obviously, you've started to see some pickup, and I'm wondering if the slope of that line, if you will, does that need to improve to get to, say, the midpoint or the high end of the revenue guide. You know, what's the underlying assumption there that you've built in? Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer So, the -- what does it take to get the high end of the range and what's our assumption on improving discretionary environment. Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer So, we -- the growth portfolio we've seen, and this is what we were sharing like during the previous call, we're seeing some discretionary change, which is very different than 12 months ago. And we saw it in Q4, and we're seeing this right now in Q1. The challenge here is that the pricing environment is still challenging. Again, we mentioned this. And how it's going to change? We need to see. But on the positive side, this is exactly what we expect for the high range if this is starting to happen because there are already interesting proofs of business' advantages when they started to do early transformations, early scale. Most scaled programs are gen AI-related. So, that -- it will drive the others and pricing together with this. We note talent had a huge change, but we are counting on some more pragmatic views of the companies which would like to run change programs. And we saw already where the pricing was actually to the point in many programs where the vendors couldn't deliver. So, this is already built up as a very good argument to do it differently. Jason Kupferberg -- Analyst And just a follow-up on the margins. So, I guess wage inflation is eclipsing pricing this year. I think you said margins were down about 90 bps on an organic basis. I was curious just which countries are driving some of that wage inflation you mentioned, you know, as you're investing to retain the talent. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah, I would generally say it's probably more in what I would refer as the off-site kind of countries. Again, you -- you know, it would be hard for me to be specific on one country or another. What you're seeing is, you know, again, a focus on retaining top technical talent in an environment where it continues to be hard, as Ark said, to pass on price increases. So, again, I would generally view it as, you know, we've been fairly careful on the expense of on-site talent, but it really is more in the delivery locations outside of the U.S. And [Inaudible] talent specifically with the ability to understand what the new [Inaudible] to be, with the ability to work in this, enabled by gen AI and solutions enabled by gen AI. This is becoming very hot property. And again, we are trying to build a company which is prepared for this demand. That's retention, things which we need to focus on exactly right now. Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open. Darrin Peller -- Analyst Hey. Good morning. Thanks, guys. You know, when we exclude the couple of acquisitions, it does look like your organic head growth -- headcount growth inflected for the first time in some time. So, maybe a bit more color on your hiring plans for the year, geographies you plan to hire, any maybe specific skill sets. And then just as an attached question to that geopolitically, obviously no one knows where things are going from, you know, Ukraine and Russia standpoint, but if we were to see any change around the war and any change in terms of abilities for multinationals to operate in those areas more, your headcount is still -- I mean, you still have a decent headcount in Belarus and Ukraine. Just remind us the mix of where your headcount is going forward for this year and if that could impact you guys in any way from a margin or, you know, labor optimization standpoint of where you guys already have some headcount. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer OK. So, just as a reminder, we had net headcount additions that was organic in Q3 of this -- of 2024. That was, you know, somewhat less than a thousand but still, again, a decent number of additions. We're about 1,500, as I indicated, in Q4, again on an organic kind of basis. And of course, we had the incremental from FD and NEORIS. And then for Q1 of 2025, we're also expecting to be something -- you know, approaching a thousand, but probably a little bit below based on kind of the slower start to the January month. So, we are definitely adding headcount. As I think we've talked about, although I'm not going to be specific about which countries, is that we are beginning to see kind of, you know, demand return to certain geographies in Europe. We'll clearly still be growing in India. We'll clearly still be growing [Technical difficulty] We still -- you know, we have seen a declining headcount in Belarus on a year-over-year basis and a modest decline in headcount in Ukraine on a year-over-year basis. But actually, we did see a little bit of growth late in Q4 in Ukraine. And, you know, a resolution to the conflict, we think that could make clients more open to putting more projects or programs, particularly in the Ukraine. Darrin Peller -- Analyst OK. So, I guess we'll have to see how it goes. But I imagine, from a margin standpoint, some of those labor forces that you guys have could be helpful from -- just relative to the mix you have in other markets you've had to build out in. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Hey, let me just quickly, that's a very good point. Yes. OK. Ukraine has historically and continues to be one of our most profitable geographies. Darrin Peller -- Analyst OK. Thanks. Just a quick follow-up. I think you've seen somewhere around 400 basis points or 500 basis points improvement or increase in fixed contract percent, if I'm not mistaken, over the last couple of periods. It may be just the overall trend. If you could just give us a little bit more color on what you're seeing there and the driving [Inaudible] Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah. So, we've got probably three things. OK. One is that we are growing in the Middle East, which tends to be more of a fixed-fee environment. And so, a little bit of the mix shift there. OK. We are seeing some more consulting-led programs where there's, you know, more of a consulting engagement and then the tail associated with the build. Those, oftentimes, have kind of a fixed-fee component. And we probably have a little bit more kind of managed service or fixed monthly fee. And again, that would obviously contribute to the mix of fixed-fee business as well. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Our final question comes from the line of Jonathan Lee with Guggenheim Partners. Your line is open. Jonathan Lee -- Analyst Great. Thanks for taking our questions. Can you help us understand what's contemplated across your outlook range from a vertical perspective? Any verticals expected to accelerate versus decelerate throughout the year? Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer I think it's pretty much in line with what we saw during the last year and quarter. So, life science and, at this point, financial services are showing good dynamics. So -- and we're still not sure about retail, for example, and business information recovery because it was big hit by the client which we lost last year. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah. And then subcomponents of emerging, including energy, would probably be, you know, areas of growth as well. Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer In general, it seems like, across most of the verticals, we expect to see growth. Jason Peterson -- Senior Vice President, Chief Financial Officer, and Treasurer Yeah. And then I think the only other point is that we do expect to see an acceleration in tech, and we are certainly seeing an improvement there in Q4 and do expect to see an improvement in [Technical difficulty] Jonathan Lee -- Analyst Understood. And recognize that the pricing environment is somewhat challenging, but what in your view would catalyze a potential return to a better pricing environment? Arkadiy Dobkin -- Chairman, President, and Chief Executive Officer So, we're seeing some spots where clients are actually starting to focus more on change. And in these programs, they also understand that pricing should be changing. And we see in these examples. We just need broader of this. And again, that's the previous answer, what we're thinking about our high range to achieve this should be happening better. So, let's see what market will be showing right now. OK. Thanks, everyone, for joining us today. I think we're pretty satisfied with how we finished the year and each year starting from some new unknown because, by then, feeling much better what's going to happen. I think we have a pretty good -- we -- I would say feeling about how this year started from the client communications point of view. We are also trying to be very pragmatic with our annual guidance.

Unity Software (U) Q4 2024 Earnings Call Transcript

Welcome to Unity's fourth quarter 2024 earnings call. My name is Daniel Meyer, VP and head of investor relations. Our earnings press release and investor spreadsheet is now available on our website at investors.unity.com. Today, I'm joined by Matt Bromberg, our CEO; and by Jarrod Yahes, our CFO. But before we begin, I want to note that today's discussion contains forward-looking statements, including statements about goals, business outlook, industry trends, market opportunities, expectations for future financial performance, and similar items, all of which are subject to risks, uncertainties, and assumptions. And you can find more information about these risks and uncertainties in the Risk Factors section of our filings at SEC.gov. Actual results may differ and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A full reconciliation of GAAP to non-GAAP is available in our press release and on the SEC.gov website. Before we begin, please note that starting this quarter, we have made available on our Investor Relations section of our website a new investor-friendly spreadsheet that includes our quarterly and annual SEC financials, associated non-GAAP bridges, KPIs, as well as new disclosures with incremental details around revenue breakdown that we hope will be helpful. There will be more to come as we endeavor to further help investors understand the Unity investment story. Thanks, Daniel, and good morning everyone. On behalf of all the good people of Unity, I'd like to thank each of you very, very much for joining us today. On our prior calls, we've talked about the principles powering the transformation of Unity, how we're building a culture of execution and discipline, reestablishing trust with our customers and the community, and accelerating the pace of product innovation and quality. Although it's still early, we can clearly see how these principles are fundamentally changing the company and our optimism is increasing with each passing day. Unity's results on the fourth quarter reflect real progress meaningfully exceeding our guidance for both revenues and adjusted EBITDA. Revenue on our strategic portfolio grew at its fastest rate in four quarters and adjusted EBITDA beat the top end of our guidance by 26%. It's good for the company to get back to competing effectively, and we're proud of the team for delivering financial results in Q4 that demonstrates solid execution. But to be clear, it's not our aspiration merely to compete. We're here to spark rapid, sustained long-term growth. So I'd like to take a few minutes this morning to detail precisely how we're going about that. Let's start with our advertising business. Q4 results in our growth segment exceeded our expectations and were the best we've seen in the last year, driven by strong holiday demand and improved ROI for our customers. But although the results exceeded our expectations, they are clearly not enough to satisfy our ambitions. We firmly believe that we have the assets and the capabilities to grow much faster. And so today, we're excited to officially announce the migration of the Unity Ad Network to our new AI platform, which we're calling Unity Vector. The migration begins toward the end of Q1 with this first phase of work slated to be complete by the end of Q2 2025. Ongoing efforts to expand the scale and our quality of our offering will of course continue thereafter. Vector is designed to leverage data from across the Unity ecosystem, integrating self-learning artificial intelligence models that will provide deeper insights, optimize performance, and deliver better results for customers. Vector enhances targeting precision and increases audience scale through a sharper analysis of richer data sets, and it's also able to adapt in real time, helping customers navigate an increasingly competitive mobile marketing landscape. Although our enthusiasm around this planned transition is very high, we do want to highlight the iterative nature of the work and to caution some patience around the time we'll need to mature the product as it begins to operate at scale. Unity Vector is a significant undertaking, and we won't see the benefits immediately. The caution in our Q1 guide reflects imprudence with respect to this. With that as context, we remain confident that the introduction of Vector will establish Unity as a fundamentally stronger competitor in the years ahead. I also do want to note how proud we are that we've been able to move Unity Vector in production at this velocity and to thank everyone involved. It speaks to a significant enhancement in our operating capabilities as well as to the passion and dedication of the team. This same appetite for rapid change, increased growth, and delivering more product value is also very much present in our create business. So let's turn there now. Customers have responded immediately to the cancellation of the runtime fee and the launch of Unity 6, and we're now closing new deals and booking revenue -- booking renewals at a rapid pace. This is reflected in the 15% year-over-year increase in subscription revenues that we experienced in Q4. Unity 6 is being sampled at a higher volume than our other recent releases, and nearly 38& of our active users have already upgraded. Additionally, Unity 6 has already been downloaded 2.8 million times since launch. In 2024, Unity maintained its position as the top game engine in the world, with more successful games being built in Unity across more platforms than any other engine. Of note, about 70% of the top 1000 mobile games worldwide were made with Unity, including the top three grossing mobile games, and 30% of the top 1000 PC games on steam are made with Unity as well. As new kinds of devices are introduced, Unity continues to show strength and flexibility in its platform. For example, we are leading the way in mixed reality and spatial computing. Batman Arkham Shadow, a made with Unity title, launch exclusively on Meta Quest 3 in October and won the best AR VR game at the 2024 Game Awards. In fact, seven out of the top 10 AR games in 2024 were made with Unity. In Q4, we also announced a significant co-development partnership with Google that provides day one support of the new Android XR platform. This collaboration reinforces Unity's position as the leading real-time 3D development platform and highlights the growing investment in XR from major industry players. As XR grows, Unity will grow with it. And this growth will not just be limited to gaming. Beyond gaming, Unity adoption continues to accelerate across important markets like automotive and retail, where our cross-platform 3D visualization tools are very much in demand. We had a stellar quarter in our industry segment, with revenue growth of 50%, making it once again our fastest growing subscription business. We also recently announced several significant new customers, including Toyota who selected Unity to power all its next-generation human machine interface, enhancing the in-dash driving experience for all its customers and RTX company, Raytheon, who is using Unity to create 3D simulations for facilities planning and factory layouts. In conclusion, I'd like to thank all of our teams for their relentless effort as we continue to transform Unity and earn our customer's trust each day. Together, we're shaping the future of interactive content creation, building a new platform that will enable the next generation of developers to innovate and move from prototype to profitability faster and more efficiently than ever before. Unity is the only company we know of that can deliver value to developers of games and interactive experiences across the entire life cycle from prototyping to live service operation right through user acquisition and monetization. That capability and its connection to the 3 billion monthly downloads of applications created with Unity positions US well to become the global platform of choice for creators of interactive content. As the quality and the integration across our product portfolio continues to improve, AI continues to advance, and true platform advantages begin to manifest. We're confident we'll be able to deliver significantly more value to customers and in the process, transform our business. Thanks again for your time and attention this morning. I'd like now to extend a warm welcome to Jarrod Yahes, our new CFO. Jared is an outstanding addition to our leadership team, and we're all really looking forward to working closely with him. I'll turn it over to Jared now for an overview of our financial performance. Jared? Jarrod Yahes -- Chief Financial Officer Thanks. [Audio gap] be convinced of Unity's extraordinary potential based on our truly global scale and unique end-to-end customer value proposition. Unity [Audio gap] taking to our business in terms of how we're allocating capital and delivering returns for shareholders. We plan to focus R&D toward the highest impact initiatives in order to accelerate revenue growth, with the joint goal of capitalizing on the largest and fastest growing market opportunities while fulfilling the promise we make to customers and developers who use Unity every day. We intend to complement revenue growth with ongoing margin expansion and drive operating efficiencies over time. And we're committed to driving growth of adjusted EBITDA and free cash flow in order to maximize return for shareholders. Lastly, we expect to be prudent stewards of shareholder capital. We have a robust balance sheet with excess cash and solid free cash flow. Our near-term expected uses of capital will be to focus on organic innovation at the company and gradually de-lever to ensure a conservative balance sheet. Turning to the fourth quarter, I am pleased to report that Unity meaningfully exceeded our guidance for both revenue and adjusted EBITDA. Revenue from our strategic portfolio is 442 million, up 4% year over year, or 15 million above the high end of our guidance. Both businesses outperformed solidly. Create solutions revenue from our strategic portfolio was 139 million, up 9% year over year and up 6% sequentially. The year-over-year increase was driven by another quarter of strong 15% growth in subscriptions revenue, combined with accelerated growth in industry revenue of 50%. Investors should note that the strong fourth-quarter growth in subscription revenues does not yet reflect the positive impact from the recently announced price increases. Those price increases will roll in randomly from our pro and enterprise customer tiers over the course of 2025 and 2026. Gross solutions revenue from our strategic portfolio was 303 million, up 2% year over year and up 2% sequentially. This is the best quarter we've seen in the past year, and the solid results were driven by better execution combined with seasonal demand. Supporting the strong revenue results, Unity experienced sequential improvements in terms of both dollar based net expansion which improved by 2% to 96% and customers over $100,000, which improved to 1254 customers. During the fourth quarter, revenue from our non-strategic portfolio was 15 million, down 92% year over year as a result of our portfolio reset. We expect that in 2025 this revenue will be approximately $30 million for the full year and remain stable thereafter. With the hard work of winding down the non-strategic portfolio now behind us, going forward, we will report and guide to total revenues and provide total revenues for each of create and grow, simplifying our disclosures for investors. Turning from revenue to non-GAAP profitability, adjusted EBITDA for the quarter was 106 million, representing 23% margins. Adjusted EBITDA exceeded the top end of our guidance by 26%, and for the full year, Unity delivered adjusted EBITDA of $390 million at 21% margins. Adjusted EBITDA benefited from improving gross margins and operating leverage in the platform, combined with solid cost management across expense lines. Adjusted gross margins improved from 82% in 2023 to 83% in 2024, while adjusted G&A, sales and marketing, and R&D expenses were down by a combined $235 million in 2024. There is still untapped operating leverage in the platform and we are poised to improve profitability as we grow. Unity had exceptional free cash flow in the fourth quarter and for the full year. Free cash flow was $106 million in the fourth quarter, up 74% from $61 million in the prior year. Free cash flow for the full year was $286 million, up 60% from the prior year. Cash at the end of the quarter was $1.5 billion, and debt was $2.2 billion. With significant free cash flow generation in the past year, we took the opportunity to de-lever, repurchasing $415 million of debt while maintaining a robust cash balance. Based on our free cash flow profile and the excess cash on our balance sheet, Unity has a clear opportunity to gradually de-lever over the next several years. Going forward as we focus on per-share returns, we'll also aim to reduce shareholder dilution from stock-based compensation. Share count dilution from stock-based compensation has gone from just under 3% in 2023 to just under 2% in 2024, and we believe it has the potential to come down further. Stock-based compensation expense is also expected to fall by 30% in 2025 with the lapping of M&A-related vestings and a sharper focus on minimizing dilution. With that, I'd now like to turn to guidance for the first quarter. We're expecting total Q1 revenues of $405 million to $415 million and adjusted EBITDA of $60 million to $65 million. Revenue guidance takes into account our expectation for reduced revenues from our existing ad models in the first quarter and the gradual nature of our transition to Unity Vector. Our revenue guidance also takes into consideration seasonal demand and additional working days in the fourth quarter as compared to the first quarter. Our adjusted EBITDA guidance factors in our expectations around first quarter revenue as well as normal increases in payroll-related expenses and incremental cloud costs associated with ongoing investments in Unity Vector. One final note, while we have typically provided annual guidance during our fourth quarter call, we'll be transitioning to quarterly guidance in 2025 given the rapid change and transformation taking place in our ad business. With that, I'd like to thank you for joining us on Unity's first quarter 2025 conference, and let me turn the call over to Daniel so that we can take your questions. Daniel Amir -- Vice President, Investor Relations Thank you. And with that, we will open it up to questions. If you're interested in asking questions, please click on the raise hand button at the bottom of your screen. At that point, we will allow you to unmute the microphone. So we'll take a couple of seconds here. All right. So the first question is from Matt Cost at Morgan Stanley. Awesome. All right, good morning. Thank you for taking the questions. I guess I just want to start with with the guide just to make sure we can break down the pieces here. So I think it's a step down of $40 million to $50 million quarter on quarter. How much of that is reduction in the strategic revenue, which I think was 15 million in 4Q, and how much of that is driven by step downs and kind of the legacy ad products in Grow? And is there any offset in there from the new ad model stepping in? And then I have one follow-up. Thank you. Matthew Bromberg -- President and Chief Executive Officer Hey Matt, thanks very much for your question. I'll let Jarrod take most of this question, but I just want to reiterate where we opened, which is at the end of the day, most of this is just driven by some prudence about precisely the timing of the revenue lift we're going to get through this transition. It's a big product rollout and one that takes time to take root as we operate the models at scale, and that's really the principal driver. But I'll leave it to Jared to go into a little bit more detail. Jarrod Yahes -- Chief Financial Officer Yes, Matt. Just a couple comments. Number one, I think we gave some disclosures around our non-strategic revenue for the quarter, being $15 million for the fourth quarter. We'd expect that to roll forward. The majority of the prudence and the conservatism is really around the transformation that's taking place in the ad business. As you would have seen in the fourth quarter, you've seen great, strong growth in Create and the growth in our subscription business, we feel good about that. Our existing models performed well in the fourth quarter. We're proactively deciding to make a shift. We think this is a necessary shift where we can be more competitive and ultimately accelerate the revenue growth of the company. Matthew Cost -- Analyst Great, thank you. Then on the Create side, the 15% growth in subscription, and I think you called out no impact from the price increases that were announced in September. What are the drivers of that subscription growth? Are you seeing some step-up in seats? Is there some other pricing tailwind? What are the moving pieces to have 15% without those September price increases kicking in yet? Matthew Bromberg -- President and Chief Executive Officer Yes, Matt. You will remember that we had a prior round of price increases that have been flowing through and are reflected there. I'd say that the other main driver is just some real velocity and reconnection that we've had with our customers, not literally as much because we're seeing the pricing -- the new price increases flow through, but because we were effectively in a little bit of a frozen mode prior. As you recall, the looming price increases were tied to the upgrades to Unity 6 and had, again, had sort of frozen conversations that we had with folks, lots of ongoing conversations about new deals and expanding relationships. The reconnection we've had with the customers has just related more to deal velocity and put us in a much better place. Thank you, Matt. The next question is Gili Naftalovich from Goldman Sachs. Gili Naftalovich -- Analyst Hey, everyone, thanks for taking my question. I have two. One a little bit more on the border and then one that's a little bit more on the competitive landscape. So if I may on the first. You mentioned 38% of your new users moved to Unity 6 already or are part of the migration. I believe that's pacing well against your prior model updates. So I'm curious to know how that's tracking versus your initial expectations and maybe how that may affect the way you're pricing, maybe a more material contributor to growth in calendar '25. Matthew Bromberg -- President and Chief Executive Officer Absolutely. Well, hi, Gili. Nice to hear from you. Yes indeed, it is tracking really well, and we do think it's tracking more positively than prior new releases we've had, so we're really, really encouraged about it. You'll recall that when we launched Unity 6, again in addition to what we thought was more customer-friendly pricing, we also really helped our customers understand that we want to focus on core values that are really, really important to them, stability, performance, and ease of upgrade, and we want to really lean into those values while also, of course, pushing the binary forward and adding additional features, but really, really making sure that we're delivering on the core. And I think that message has really landed in a positive fashion for our customers, and again, keep in mind that our big live service customers could be operating on Unity 6 for many, many years, so making this transition in the right way and leaning into some core values that are going to make it easier and better for customers to use Unity than ever before is just really important, and we're seeing a lot of really positive velocity from it. Gili Naftalovich -- Analyst Understood, thank you. And a bit on that thread. The second question I had was a bit more on the competitive landscape. We've heard Microsoft launch its video gaming development offering yesterday and OpenAI has suggested that AI tools like Sora can be used for game creation in the future. While appreciating these are seemingly a lot more console and web based today, it'd be great to get more color around your initiatives on how you're taking this on and making sure that Unity is in the forefront of the innovation and market leadership with Unity 6 and maybe future releases beyond that. Matthew Bromberg -- President and Chief Executive Officer Yes. Absolutely. It's a great question. Here's the most important thing to remember and understand about Unity, we are a platform, and our greatest strength has always been our extensibility. So we're going to be the assembly point for building interactive experiences and deep systems around 3D assets. Those 3D assets can be created outside our tool, can be created inside our tool. As long as we can ingest those assets and then begin to build experiences and systems around them, we're going to be in really great shape. I have no doubt, and we're all really excited by the advances in generative AI that we're seeing across the world right now, but building a major live service game that's played by millions of players is not just about creating assets, it's creating deep online systems, optimization systems that engage players over the long term, and it's our position to want to be the platform that creates all those systems and to ingest any and all assets as we go. Hi. Thanks for taking my question. Just trying to get a sense of the fundamental rebuilt of Grow solutions and the timeline involved in that. You mentioned being a stronger competitor over the years ahead, but what is the expected timeline between where you are now and the new products hitting the market? It would also be great to hear what the key personnel are working on specifically. Hey, David. Nice to hear from you. As we've talked about before, over the past two quarters we've been doing the fundamental work of building out the Unity Vector system, and I think we talked about last quarter how we began testing on live data. Effectively, our progress in testing has been really rapid, and we were so pleased with the progress that we wanted to communicate the fact that we'll be beginning a full migration to our new system at the end of this quarter and that the first part of that work will be complete by the end of Q2. It's important to understand, I know you understand that this is an iterative process that's going to go on for some time. We're going to be building and scaling and creating more velocity and quality in the system forever, so this is just the first part of the work. The system is really based around improving three core attributes, or at least we should begin to feel the impact of real-time adaptive self-learning models most acutely in three areas. The first one is around better conversion, so the idea that we can more accurately predict what new game a player would like to play. Secondly, somewhat less importantly but still crucially, we want to be able to match the most valuable players with the right games. And finally, we want to enhance our ability to bid effectively into competitive auctions for those players. Those are the three significant pieces we've been working on, three significant core values of the system, and we're excited over time. We believe -- there's no reason not to believe that that's going to really enhance the ROI that we are delivering to our customers. David Mak -- Arete Research -- Analyst Thanks very much. And just a quick follow up if I may. You mentioned improving conversions. Am I right in thinking that user acquisition tools and demand side platform revenue is a relatively small part of growth solutions today? And so if you do launch an effective product, this is effectively a new business for you, and it would be more impactful to grow solutions as opposed to just a slightly higher growth rate over the years ahead. Hey, Dave, no, I wouldn't put it that way. We have a substantial user acquisition business today, but it's one that hasn't been as competitive as it needs to be. The way I think about this is that it's a good business today, but we hope and expect that over time, it will become a great business. Thank you, David. So next question is Parker Lane from Stifel. Great. Looking at some of those deals in the industries business, Toyota, Raytheon during the quarter and the overall growth rate seems like a lot of things are going well there. I wonder if you could talk about pipeline development and what you see for that business into 2025, and and how competitive are some of these large enterprise deals on the industry's business today? Matthew Bromberg -- President and Chief Executive Officer Hey, Parker, thanks for the question. Yes. we're really excited about the growth that we're seeing in our industry business, and really the continued growth in Q4 and what we expect -- and we expect that to continue. As I mentioned, it's our fastest growing subscription business, and for it to grow 50% year over year was really encouraging. Listen, all significant deals with major players are going to be competitive, and so we do see competition in the marketplace. But having said that, we have a pretty unique offering in the marketplace, so focusing on this 3D visualization and creation of interactive experiences around it, focusing really narrowly on that is starting to really show results for us. We're also focusing very hard on auto, retail, and manufacturing in particular. We've seen the benefits of focusing both on the product offering as well as in our go-to-market efforts. And we're very -- and we don't see lots of offerings that can really deliver the kinds of value that we can. The other thing we have going for us is a lot of our business historically has been pull rather than push, so because our tools are so popular across different industries, we often get groups of developers inside an entity adopting tools without even ever speaking to us, and then we become aware of it, they reach out to us, and we grow relationships that way. What we want to do is complement that with a more effective go-to-market mechanism, a kind of push mechanism, if you will, as well. We're working really hard to expand our partnerships with resellers and with other large system integrators so that we can really in high volume begin to close the scale and size of deals that you're starting to see now with much more effectiveness and efficiency. And we don't see any reason why that shouldn't happen, so we're feeling very good about it. Parker Lane -- Stifel Financial Corp. -- Analyst Got it. One quick circle back to Vector. It's a significant undertaking. It will be an iterative process through the years. Just wondering how much of the R&D groundwork has already been laid here versus some incremental investment that we're going to be seeing manifest in the model throughout '25? Matthew Bromberg -- President and Chief Executive Officer Yes, the vast majority of the R&D groundwork has been laid, to your point, so the investment you'll see going forward will likely mostly be in the cloud area, where we're continuing to train models as they expand, but even that should become more efficient over time and is something that's done more efficiently with our new models than was done with our old model, so we're feeling pretty good about how it will play out through our P&L over time. Thanks, Parker. Next question is Tom Champion from Piper Sandler. Thomas Champion -- Analyst Hey, good morning everyone. Matt, you've been very candid about competitive challenges and grow, so just curious how Vector addresses some of the issues with the ML stack deficiencies and data infrastructure. And then secondly, how should we think about the ion source network in the context of the transition to Vector? Thank you. Matthew Bromberg -- President and Chief Executive Officer Hey Tom, thanks for the question. Again, as we've talked about many times before, it was our view that in order to compete over the long term, we needed a fundamental change in our tech stack and how we're approaching this business. And I think when we first began talking about it a couple of quarters ago, it was maybe a sense of who knows, is this a science project, is this going to take years, how long is it going to be, is it going to have massive impacts on margins? I think what's really exciting about where we are now is that we're starting to see this come into the real world for us, and we're going to start seeing it have impacts. I'm really, really pleased and proud of the team for being in a position to do this build-out and make this major transition so quickly. To your point, we do expect it to put us in a better position competitively over time, but understanding that the work here is just beginning and that there is much of it still ahead of us. But having a new model that provides a more detailed and consistent understanding of the implicit preferences of gamers at the game level gives us a more granular view and a better prediction of what gamers will respond to. This is really important, and we do believe over time, it's going to create a lot of value. Our new models have fast input processing, they iterate more quickly and in a more timely way, they're more accurate. We've incorporated more real-time features so that the model can dynamically reflect gamers' preferences. These are all fundamental shifts. Then, again, lots of work to do, but put us in a position to be able to compete for the long term. Daniel Amir -- Vice President, Investor Relations Thanks, Tom. Next question is Andrew Boone from JMP Securities. Andrew Boone -- Analyst Thanks so much for taking my questions. I'll stick with advertising. Matt, can you talk about the opportunity to better integrate data sources into the ad stack? How much does Vector incorporate in terms of just taking additional information that you guys have available as Unity versus what was the previous model? And then looking at some of your competitors, there's been an expansion of the gaming advertising category into other verticals. Can you talk about that broader opportunity of what may e-commerce look like or other industries that may be available over time? Thanks so much. Matthew Bromberg -- President and Chief Executive Officer Yes, absolutely. Thanks for the question. Listen, as we've said before, we believe the Unity platform has some unique value and that ultimately our deep understanding of player behavior globally is an asset that, through incorporation into our data models, is going to have a meaningful impact. Keep in mind that we have nearly 5 million DAU of players that interact with our runtime globally, and historically, we have not leveraged this connection, this first party connection with players at all. That's a connection that dwarfs the size of other networks in the world. And we were working really hard to change this and to build these capabilities in a privacy-safe manner where we're getting opt-in permission wherever that's necessary. All the fundamental work we're doing is designed to create an environment where we can incorporate more and more of that data over time, so it's very much part of our plans and part of the work that we're doing. As it relates to e-commerce and other verticals, I'm really bullish on the opportunities that we have there. I think that what folks are waking up to is that the quality of the relationships that we and others have in this space and the scale of our audiences are going to be really valuable across other verticals and other ad types. That's because gamers are basically everyone, and to the extent we've developed a really detailed understanding of consumer behavior and really good systems, that's going to benefit us and the industry in lots of different ways. For us, we're focused primarily in the near term here in the gaming vertical and in fundamentally improving the way we address our core customers, but we're also really bullish over time that there is expansion there and exciting -- excited that the market is waking up to that. Daniel Amir -- Vice President, Investor Relations Thanks, Andrew. Next question is Ross Sandler from Barclays. Ross Sandler -- Analyst Great. Can't let Jarrod get off the hook here without asking a cost and margin question on his debut here. Jarrod, I guess the overall comments about improving margins in 2025 and beyond, you guys mentioned increased cloud costs for Vector model rebuild. Can you just put some numbers around that and maybe around your go-to-market once Vector is launched, and I guess broadly as we look out over the next couple years, if Vector revenue does start picking up, should we see the kind of high incremental margins that we see broadly in the digital ad market starting to show up here? Thanks a lot. Jarrod Yahes -- Chief Financial Officer Sure, Ross, and I really appreciate you not letting me off the hook on my first call. We have done a great job as a company in driving margin and really making sure that we have the right cost structure for where we are as a business today. If you look at the EBITDA margins of the business, EBITDA is up by a percent year on year. We've done a good job in bringing down G&A costs, we've done a good job in bringing down -- bringing up gross margins for the business, so we feel really good about what we've done, and we've done that all while making the requisite investments in Vector. If you look over the past couple quarters and you look at cost of goods sold, where a lot of our cloud costs reside, and you look at R&D costs, those have gone up by about $10 million a quarter over the past couple quarters, evidencing some of the investment that we've been making, so we've been at the same time driving margin expansion and making the requisite investments in Vector, which we think is the right thing to do for the business. This is a business with 80% plus adjusted gross margin. There is a lot of leveragability in our model and a lot of operating leverage in that model. And so as you would expect, it's going to become even easier for us to expand margins as our business starts to grow and as that acceleration takes place. So we're going to get that benefit of Vector both in terms of revenue growth but also in terms of operating leverage and margin expansion, and I think we look forward to that. Right now, our near-term priority is to make the required investments in Vector to get back to a pace of revenue growth that we're comfortable with and we're pleased with, so that's going to be the near term focus. But we think we can walk and chew gum. We think we can continue to drive margin plus also make those investments. Daniel Amir -- Vice President, Investor Relations Thanks, Ross. Next question is Chris Kuntarich from UBS. Chris Kuntarich -- Analyst Great, thanks for taking the question. I just want to touch on Vector here for a second and really focus around 2Q and the migration that's going to be unfolding here. How should we be thinking about this more tactically? Are certain advertisers going to be seeing this earlier in the quarter and it's going to be rolled out more so on a regional basis, or should we be thinking about some of this functionality and your ability improving around conversion and matching the right user with the right game, and the efficiency of your bids within the auctions just improving through the quarter and all advertisers will be seeing this really at the start of 2Q? Thanks. Matthew Bromberg -- President and Chief Executive Officer Yes, hey Chris, thanks for the question. The way to think about it is this. The integration first -- will take first iOS traffic, then later Android traffic, so there is two steps there. The first part of the work focuses really hard on our conversion models to create better conversion. The second part of the work, and that spins out over time, works on user value, so matching the most valuable players with the right games and the bidding models, and aiding us in effectively bidding in these competitive auctions for players. That's the sense in which we're kind of taking that one step at a time and why it grows over time. Thanks, Chris. Next question is Michael Funk from Bank of America. Michael Funk -- Analyst Yes, thank you for the questions, guys. First, a point of clarification on Vector and the timing of the rollout. You're now saying migration end of 1Q. I think previously you said midyear, that was the first part. Then second, the first quarter guidance, how much of that incorporates disruption to the Grow business due to the migration versus, say, seasonality? Matthew Bromberg -- President and Chief Executive Officer Yes, thanks for the question, Michael. We are -- the rollout has gone more quickly than we anticipated, so the work has gone really well, it's gone more efficiently, and we're really pleased to be doing it, to beginning the rollout about a quarter before we expected, although as I said, it's an iterative process, so you're right about that. As it relates to the prudence in our guide for the first quarter, it is anticipating some disruption in our existing ad business as we transition from one to the other. Michael Funk -- Analyst And can you share any performance comparison, new versus old model, maybe genres, geos, or devices what you're seeing? Matthew Bromberg -- President and Chief Executive Officer Yes, that work is kind of ongoing and not something we're talking about just yet. But at a high level, and this is brilliantly obvious, our goal is for the new models to outperform the old models over time. Great. And the last question will come from Clark Lampen from BTIG. Clark Lampen -- Analyst Thanks for taking the question. I just want to make -- clarify some of the questions and answers that we've gotten around the Vector transition. Essentially, what we're seeing happen right now is a consolidation of a couple of different operating assets previously. I guess if we're thinking about ironSource, Tapjoy, and Unity ads independently, they're getting consolidated down to one asset. And is the expectation now that maybe as part of that migration, some customers might not fully migrate budgets? I'm just curious if you're seeing -- one, if that's correct, and two, if you're seeing any evidence of either less than 100% migration or any sort of pause on a like-for-like basis along the way so far. Matthew Bromberg -- President and Chief Executive Officer Yes, thanks for the question. No, the work around Unity Vector is principally work that's being done around the Unity end network. We're excited and supportive and continue to be bullish about the opportunities we have for the ironSource ad network as well, and we will remain in the market very aggressively selling that network as well. But to your point, the overall in the migration, we are taking several assets we have, including Tapjoy and others, and consolidating the data around each of those, what had prior been vertical businesses, and migrating them into one central data source which we think improves all the products, but isn't the same as collapsing those products in. Clark Lampen -- Analyst Understood, understood. If I can just ask one more clarification around Create performance this quarter. I think Matt, at the top of the order, asked the question around what's embedded here. Maybe to put a finer point on that, was there a plus to pro migration benefit in 4Q, and as we're thinking about organic growth and the trajectory of the non-gaming editor business, any directional commentary you can give us for '25 or the contribution for the former item? Thank you, guys. Matthew Bromberg -- President and Chief Executive Officer Yes, it's my pleasure, thank you. Yes, there was some impact of the plus to pro migration, to your point. There was definitely impact. It increased velocity in our industry business, which we were really excited about, as well as the impact, as I said, of just resetting our relationships with our customer base and spending more positive time with customers. We think all three of those trends will continue and that we'll see in 2025, in addition to those three trends, is the beginning of the rolling in of the major price increases around our subscription business, which you'll see in addition over '25 and '26. Thanks, Clark. So with that we'll wrap up. So thank you for dialing in today. We look forward to seeing you at one of our upcoming investor conferences that we're going to have this quarter, and have a great day.