In the field of digital marketing hubs, which is dominated by mega-players Adobe, Oracle, and Salesforce.com, it’s not easy for smaller contenders to attract notice.
That doesn’t mean the smaller fry don’t have aspirations. One of them, Zeta Global, is more oriented toward bottom-line growth than most pre-IPO software companies, according to its CFO, Jarrod Yahes. That’s just one among several factors that make an initial public offering a likely exit for the company’s financing partners.
Yahes has been getting his feet wet, having joined Zeta in October 2016 from tax-planning firm Jackson Hewitt, where he was the finance chief. One thing that attracted him to the new job was that the company’s organic growth on the one hand, and the acquisitions it’s made on the other hand (including two major ones in the past year), were roughly equal factors in its overall growth. The company intends to maintain that balance going forward.
For 2017, Zeta — which was founded 10 years ago by CEO David A. Steinberg and former Apple and Pepsi-Cola CEO John Sculley — is currently showing a run rate exceeding $300 million, Yahes says. That’s a tiny fraction of the heft enjoyed by the leaders in omni-channel marketing software, yet the firm is taking direct aim at them by going after Fortune 1000 companies.
Jarrod Yahes, Zeta Global Digital marketing
Still, there are some key steps the company must make before it can go public, let alone have a real shot at catching those leading competitors. Yahes recently spoke with CFO about Zeta’s challenges and opportunities. An edited transcript of the conversation follows.
As you came into this new job, what did you identify that needed your attention right away?
Despite the company’s strong focus on both top-line and bottom-line growth, there has not been any focus on in-depth reporting of financial and nonfinancial metrics.
I expected to come in and see that we were on an ERP and had a traditional [business intelligence] tool on top of it, whether Hyperion, Cognos, Business Objects, or what have you. It was shocking that a company of this size was doing its budgeting, planning, forecasting, and financial reporting out of Excel.
So that’s an enormous priority for us. The good news is that since we don’t have significant sunk costs in legacy technology, it’s highly likely that we’ll make a quick jump to the cloud for both financial ERP and financial BI.
You mentioned nonfinancial metrics. What are some key ones?
The utilization rate for our digital marketing automation platform is extremely important. Ultimately it’s what drives our revenue — customers using it for marketing via email or social media, for example, and the [visibility] it gives them into what channels they’re using, what the volumes are, and the effectiveness and ROI they’re getting from each channel. We’ve really got to keep working on this.
On the financial side, you’ve said that the company is highly focused on the bottom line. What’s that about?
Yes, we’re quite evolved in terms of driving a P&L mentality throughout the business. David Steinberg, our CEO, and Steve Gerber, our chief operating officer, created what is effectively a “general manager” structure. They are big believers in variable compensation driven by the profitability contributions of the various business lines.
The leaders of the businesses have P&L ownership — they’re in charge of the top line, cost of goods sold, and overhead, and everybody sees where they stand in terms of the marginal contributions. That kind of focus is probably somewhat more difficult [to achieve] for other entrepreneurial software companies.
What is the reason for that approach?
Zeta has acquired four [customer relationship management] software businesses in the past few years, most recently the Axciom Impact business last September. Zeta started [in 2007] as a digital marketing company for the for-profit education space but since then has gone through a [significant] pivot into digital marketing hub technology.
Is an IPO the company’s clear goal?
It will probably make sense for us to go public at some point. We have a pretty blue-chip list of Fortune 1000 clients, which want the financial transparency and credibility that comes from working with a public company.
I also think that at the right time the public markets would be a great source of capital for us. There are tremendous acquisition opportunities out there. In fact, don’t be surprised if you see us continue to buy up CRM software assets before heading down the path of going public. We’d like to go public with even greater size and scale than we have today.
We’ll also need capital for organic growth. One of our big areas for investment right now is incorporating machine learning into our software platform. The idea is that as our clients execute on their marketing campaigns, our system sees their behaviors and gets smarter.
I don’t see us making an acquisition in that area, because the multiples are just too high. But we’re really starting to build out a very strong team in order to incorporate machine learning, and we could step that up if we became a public company.
Aside from implementing a financial reporting system, making more acquisitions, and of course getting your Sarbanes-Oxley controls in place, what else will be key for doing an IPO?
The other piece that’s extremely important is making sure we have very strong revenue visibility. Our visibility 12 months out is already probably greater than 70%, but it would be fantastic to go public in the ballpark of 80% to 90%. Acquiring more SaaS-based CRM businesses will really drive that.
The company is meaningfully EBITDA-positive, and I think we very well understand that investors are looking for lever-free cash-flow profitability from a public company.
