ZoomInfo reported 11/1/2021 and beat on both the top and bottom -line. Q3 sales increased 60% YoY to $198 million, which was also 8% above the Q3 consensus estimate of $184 million. The 60% YoY growth rate represented an acceleration from the 57% and 50% YoY growth rates in Q2 and Q1 2021, respectively. However, after adjusting for recent acquisitions, organic sales grew 54% YoY in Q3, which was static to the 54% YoY organic growth rate in Q2. Enterprise customer count and organic bookings growth also deaccelerated during the quarter, which has moved us to the sidelines. I touch on these trends in more detail below.
Continuing down the income statement, gross margin increased 250 bps YoY to 81% while adjusted operating margin fell YoY from 47% to 39%. A rapid 225% YoY increase in research and development expense drove the margin compression, as the company invests in new products such as conversational intelligence. On the Q3 call, CEO-Founder Henry Shuck explained that the company is investing heavily in conversational intelligence, a market that ZoomInfo believes can be an $18 billion opportunity. As shown below, recent acquisitions and expansion into new verticals such as conversational intelligence, recruiting, and training have expanded ZoomInfo’s total addressable market to $70 billion. Finally, adjusted Q3 EPS doubled YoY from $0.07 to $0.14 and also bested the consensus estimate of $0.12 by 2 cents.
During the quarter, management also cleaned up its corporate structure by eliminating its multi-class share structure, resulting in the same economic and voting interest for all shareholders. The improved corporate governance and reduced complexity is expected to enable the company to be included in stock indices, which should increase demand for its shares going forward. This event also created a taxable event as pre-IPO shareholders saw a step up in their cost basis. The company recorded a $4 billion tax asset and $3 billion tax liability as of Q3, with the net $1 billion tax asset lowering future cash taxes over time.
Increased Outlook and Strong Customer Metrics but a Slight Deacceleration in Growth
ZoomInfo’s topline beat also led to a rise in guidance. Management raised their FY2021 sales guide by 4% to $732 million (at the midpoint). The guide implies 54% YoY revenue growth, up from the prior guide of 48% and also implies an organic growth rate of 50%.
Given the recent challenges in the advertising market related to changes to IDFA, it is great to see that ZoomInfo continues to expect robust growth going forward. CEO-Founder Henry Shuck explained during the Q3 call that explained that “our continued investment in privacy is a competitive differentiator.” The company’s roll out of ‘privacy clusters’ in 2020 and its focus on B2B company data, rather than individual level data, has likely helped it navigate the changing market place around data and privacy.
Furthermore, the company’s focus on B2B data is a direct result of its strong growth with enterprise customers. Customers with over $100,000 in annual contract values (a proxy for enterprise customers) grew 74% YoY to 1,250 customers, an acceleration from the 69% YoY growth in Q3 and also outpaced the 60% YoY growth in Q3 sales. The growth was also robust on a sequential basis, as enterprise customers increased 14% QoQ, however this was a slight deceleration from the 16% QoQ increase in Q2, but faster than the 9% QoQ rise in organic sales (shown below).
The acceleration in enterprise customer growth is important as it helps support a premium multiple and highlights how ZoomInfo is increasingly becoming known as a category-defining company in B2B sales and marketing. However, the deacceleration on a sequential basis is something to note and may signal that growth will slowdown in the near term. Dollar based net retention remained static at 108%, which has room to improve as ZoomInfo has made a series of acquisitions that have expanded the amount of products that customers can expand into.
Finally, the company’s revenue quality has also improved, which also supports a premium multiple. We can measure revenue quality by observing trends in both accounts receivables and deferred revenue. Accounts receivables increased just 22% YoY, while deferred revenue increased 63% YoY during Q3, which outpaced the 60% YoY increase in Q3 sales. The relatively faster pace of growth for deferred revenue signals that ZoomInfo is collecting more cash from its sales than in prior years, a sign of strength.
Bookings were also strong during Q3, but did deaccelerate during the quarter. For instance, Q3 organic bookings increased 49% YoY in Q3, a deacceleration from the 71% and 65% growth rates reported in Q2 and Q1, respectively. Bookings can be lumpy, and management stated on the Q3 call that bookings “can be imprecise metrics to assess in-period activity and forward momentum”. Nevertheless, the deacceleration in bookings is something we will need to be mindful of going forward, especially considering ZoomInfo’s premium forward sales multiple of 29x.
The deacceleration in organic growth, sequential enterprise customer growth and organic bookings moved ZoomInfo to the ‘chopping block’ as the company was in our momentum portfolio and we did not want to hold the company if growth starts to slow.
In summary, ZoomInfo beat both top and bottom -line Q3 estimates and also raised its FY21 sales guide. During the quarter, ZoomInfo reorganized its corporate structure, which allows the company to be included in more indices going forward. The company has also been able to navigate the changes to the data privacy landscape well, evident by the robust growth in enterprise customers. The strong growth with enterprise customers provides support for future sales growth. However, organic sales growth slightly deaccelerated during the quarter (growth was static at 54%), as did sequential enterprise customer growth and YoY organic bookings, a trend we will need to be mindful of going forward, especially considering ZoomInfo’s premium multiple. Since we do not want to hold a company in our momentum portfolio that may be slowing down, we decided to cut our ZoomInfo holdings.
ZoomInfo, formally known as DiscoverOrg, was founded in 2007 and is the premier platform used for highly accurate sales and marketing intelligence. The company is a cloud-based platform that delivers intelligence and analytics to salespeople so they can better target their customers, shorten the sales cycle and increase win rates.
The company is the market leader in business to business (B2B) sales data and has recently reported an acceleration in growth, especially with enterprise customers. The company commands a dominate position, evident by its strong topline growth and cashflow generation. While there are risks, such as privacy concerns and changes to third party cookies, the company is positioned well to benefit from a market undergoing a fundamental shift, as enterprises increasingly modernize their sales processes. In the discussion that follows, I discuss ZoomInfo’s business and the fundamental shift underway in its core market, along with a discussion on its recent financial performance, valuation and key risks.
ZoomInfo’s opportunity
The core of what ZoomInfo does is to help sales professionals know what companies they should be engaging with, who makes the buying decisions and how to contact them.
The company’s B2B sales data is highly accurate as the firm employs a team of 400+ data scientists to train the company’s AI and ML models that constantly source and update ZoomInfo’s 95 million+ company profiles, 500+ million contact methods and 1.6 billion+ daily record events. ZoomInfo is known for having highly accurate information, and the company provides a guarantee that 95% of its data is accurate at any given time. The company provides buying intent data that helps source deals and up to date contact information on decision makers to help close deals.
ZoomInfo operates in a market undergoing a massive fundamental shift, which has only just begun. According to a Forrester report commissioned by the company, only 1.2% of enterprises utilize mature B2B intelligence practices and technology. The report also found that companies that have adopted some B2B intelligence practices and technology generate 35% more leads, resulting in higher revenues and faster growth. CEO-Founder Henry Schuck explained this trend during the Q2 Earnings Call:
“In our conversations with customers, we find companies are still in the early stages of modernizing how they go-to-market. They're just beginning to use data and insights instead of intuition and automated workflows instead of inconsistent one-off sales motion. This is a secular shift that we believe will accelerate.
We estimate that today, the market is only penetrated in the single-digits. And Gartner has indicated that by 2025, 60% of B2B sales organizations will transition from experience and intuition-based selling to data-driven selling, merging their sales processes, sales applications, sales data and sales analytics into a single operational practice.”
The below chart also illustrates how companies are modernizing their sales teams. According to a survey of enterprise CMOs by Gartner, marketing technology has become an increasingly larger part of the enterprise sales budget. Marketing tech has grown from ~22% of an enterprise’s sales budget in 2017 to ~27% of the budget in 2021, taking share from agencies and labor expense. Enterprises are shifting resources away from manual processes and towards tools that improve the efficiencies of sales and marketing teams.
Furthermore, B2B sales and marketing campaigns have evolved into complex projects that cost $100,000+, so having reliable data for highly focused campaigns is paramount. We can directly observe this trend with large enterprise software companies, such as Intuit, Palo Alto Networks and Splunk, each rapidly increasing their S&M expenditures in recent quarters. These companies spend millions on S&M expense per quarter to capture B2B sales.
The below chart illustrates how B2B S&M expenditures has recently accelerated. For instance, the aggregate quarterly S&M expense for the below sample of enterprise software providers increased 28% YOY in Q2 2021, an acceleration from the 11% and 26% growth rates in Q2 2020 and Q2 2019, respectively. The acceleration in B2B enterprise S&M expense adds support that ZoomInfo’s market opportunity is growing at an accelerated rate.
Another trend that supports ZoomInfo’s growth going forward is the rising trend of programmatic advertising, which is highly dependent on accurate data. This is a favorable trend for ZoomInfo, as its robust, high-quality data is critical for efficient programmatic ad-buying. Essentially, as programmatic budgets grow, the demand for accurate third-party data increases. ZoomInfo address this demand by providing targeted audience data and buyer intent data. As the fundamental shift of modernized B2B selling strengths along with a continued rise in B2B S&M expense and programmatic ad-buying, ZoomInfo should be able to continue to grow at an accelerated rate going forward. The company’s recent results also support the narrative that there is still plenty of runway ahead of the firm, which we discuss in greater detail next.
ZoomInfo’s recent results: accelerating enterprise growth and improving cashflows
ZoomInfo recently reported an acceleration in key metrics such as sales and enterprise customer growth, highlighting the firm’s position as the leader in its end market. For instance, Q2 2021 sales increased 57% YOY to $174 million, which beat estimates by $12 million. Q2 sales included a $4 million benefit from acquired companies, and absent this benefit, organic sales increased 54% YOY, which represented an acceleration from the 50% and 53% YOY growth rates in Q1 2021 and Q4 2020, respectively.
The strong topline beat also flowed into guidance, as management increased its FY2021 sales guide by $32 million (5%) to $705 million at the mid-point. The forward guide includes $10 million from newly acquired companies, and absent acquired sales, the guide still came in 3% above the Street’s initial estimate.
Further highlighting the strength in ZoomInfo’s results, enterprise customer growth also accelerated. For instance, customers with annual contract values (ACV) >$100,000 increased 69% YOY to 1,100, which was faster than the company’s 57% YOY topline growth rate. This trend is also evident when viewed on a sequential basis. As shown below, customers with ACV >$100,00) have grown faster than sales on a QoQ basis for the last three quarters.
Generally, enterprise customers are higher value relative to other customer cohorts because they are more likely to expand into new products and can support larger budgets. As a result, the strength in ZoomInfo’s enterprise customer growth improves the quality of recently reported topline growth and also supports a premium valuation.
Another important metric is ZoomInfo’s net retention ratio (NRR), which was static YOY at 108%. ZoomInfo’s NRR is below other tech peers with retention ratios in the 130%+ range. However, the company has made a series of acquisitions and CEO-Founder Henry Schuck explained on the Q2 Earnings Call that he expects these deals to become meaningful to sales in 2022 and 2023 than in 2021. In other words, NRR will likely improve going forward as recent acquisitions are fully integrated onto the platform and cross-selling ramps.
Continuing down the income statement, Q2 adjusted operating profit increased 38% YOY to $76 million, while adjusted operating margin fell YOY from 49% down to 43%. The decline in adjusted operating margin was due to a ramp in hiring, as ZoomInfo’s employee count increased from 1,300 in June 2020 to 2,100 as of August 2021. Adjusted EPS of $0.14 beat estimates of $0.12 by $0.02.
It is also noteworthy that ZoomInfo is well beyond the ‘rule of 40’, as its 57% topline growth rate and 43% operating margin (a proxy for cashflow margin) put it closer to the ‘rule of 100’. In fact, ZoomInfo provided the following slide during its Analyst Day presentation, which showed that the company was in the top quartile for CY21 revenue growth and operating margins.
Further confirming ZoomInfo’s strength is its cashflow performance. For instance, free cash flow conversion was 120% of adjusted operating income, meaning that ZoomInfo collects more cash than it reports as profits. ZoomInfo is able to do this because of its strong market position, as the company collects cash upfront from customers. The upfront collection of cash is a significant advantage for ZoomInfo as it is effectively an interest free loan from customers that helps support ZoomInfo future growth. The upfront collection of cash is also a sign of market dominance, showcasing that ZoomInfo has pricing power over its customers (customers generally want to pay later, and sellers want to be paid upfront). Being paid upfront also supports a premium multiple.
As mentioned above, ZoomInfo is in a dominate market position due to its first mover advantage and large, highly accurate industry specific data. This market dominance is also present in ZoomInfo’s financials, as the company is rapidly growing with enterprise customers and these customers are paying cash upfront. In the next section, we discuss the firm’s valuation and conclude with key risks that investors should be aware of.
Valuation
ZoomInfo claims to have no direct competition, rather it competes with niche operators. Due to the lack of directly comparable peers, it is best to compare ZoomInfo to other fast growing and highly profitable tech firms, such as Zoom Video, Snowflake, Adobe, Veeva and Shopify.
Against this peer set, ZoomInfo’s P/S multiple of 38x was 28% higher than its peers but its most recent growth rate of 57% was also higher than the peer median of 54%. Moreover, ZoomInfo’s forward growth rate of 49% YOY is well above the peer median of 31%. A faster growth rate helps support a premium multiple.
As discussed above, ZoomInfo also reported an acceleration in enterprise customer growth. Since enterprise customers have larger budgets and can pay more and expand into more products, they are higher value and support a premium multiple. Furthermore, the company has pricing power as its customers pay cash upfront, which helps support future growth and also supports a premium multiple.
Key risks and conclusion
Data protection is a major theme globally. The FTC is increasingly enforcing data privacy in the U.S, European Union enacted the General Data Protection Regulation (GDPR) in 2018, the U.K. has a Brexit-amended GDPR that went into effect in 2021 and California Consumer Privacy Act went into effect in 2020. These laws have added tremendous complexity and impose certain restrictions and obligations on companies such as ZoomInfo.
However, this data compliance complexity can actually work in ZoomInfo’s favor, as it provides a barrier to entry. New entrants must try and compete with ZoomInfo’s robust data and also comply with complicated compliance burdens, which could make the endeavor cost prohibitive.
ZoomInfo also takes privacy and compliance seriously and has a dedicated team to processing requests for deletion of contact information and also announced an expansion to its privacy team. The company’s goal is to build trust and the company has implemented a program for providing direct notifications to individuals that are in its databases.
There are also risks associated with third-party tracking cookies and the IDFA changes announced by Apple. These changes impact the way that data is collected by third-parties, and could limit ZoomInfo’s buyer intent data. However, ZoomInfo rolled out ‘privacy clusters’ in 2020 “which allow ZoomInfo to deliver B2B intent in a privacy-first way without the reliance on cookies or other Identifier For Advertisers (IDFA) or Personal Identifiable Information (PII) based tracking”. So while ZoomInfo will likely be impacted by the change in third-party tracking, its focus on B2B company data, rather than individual level data, should limit the impact on the firm going forward.
In conclusion, ZoomInfo is positioned well to benefit from a fundamental shift happening with B2B selling. Enterprises are looking for ways to scale their sales and marketing programs with repeatable processes, and ZoomInfo has the data platform to facilitate this trend. The company reported an acceleration in growth as well as an acceleration in enterprise customer growth, which supports a premium valuation. Moreover, the company gets paid upfront in cash, evident by its strong cashflows, which further highlights the company’s market dominance and also supports a premium valuation. While there are risks, such as privacy concerns and changes to third-party cookies, these trends may actually work out in ZoomInfo’s favor by increasing the barrier to entry. Looking forward, ZoomInfo can be expected to continue to grow at a robust rate as B2B sales increasingly modernize.
Technical Setup
By Knox Ridley
Zoom Info’s recent earnings report attracted a swarm of new buyer. This can be seen with the large spikes in volume, which propelled ZI to new highs. After breaking out of its IPO high at $64.40 (green on the chart), ZI has been consolidating above this breakout, which is historically a bullish sign. It has further formed a minor cup and handle pattern just below the $67.50 resistance zone (blue on the chart), which it is currently attempting to breakout from. If confirmed, we expect to see a nice move within our momentum portfolio.
Disclosure: The I/O Fund owns shares in ZoomInfo and does not have plans to change its position within the next 72 hours. You can access the I/O Fund’s positions herehere. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies
