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.