Not So Deep Dive: ZoomInfo Stock
(Ryan) What they do: “ZoomInfo is a leading go-to-market intelligence platform for sales and marketing teams.” In more layman's terms, they are a database of business information that sales organizations subscribe to get access to. Their goal is to give sales teams more accurate information to help generate better leads and shorten the sales cycle.
They collect data in a few ways. So they either purchase it, gather it from public sources or if you want to look at another company’s data for free on Zoominfo you’re required to put in a contact email with your name.
But they also help out along the sales process. Here’s a quote from the S-1, “paid users leverage our platform to identify the best target customers, pinpoint the right decision makers, obtain continually updated predictive lead and company scoring, monitor buying signals and other attributes of target companies, craft the right message, engage via automated sales tools, and track progress through the deal cycle.”
(Ryan) History: ZoomInfo was originally founded in 2007 by Henry Schuck. At the time it was known as DiscoverOrg and the focus was really on serving enterprise clients. And it actually stayed as DiscoverOrg until 2019, when it acquired ZoomInfo. ZoomInfo at the time was much better for SMB’s and combined they were able to kind of span the whole business spectrum.
But prior to the DiscoverOrg acquisition, ZoomInfo had made several acquisitions of their own. And it looks like they were able to blend the databases together to build one holistic platform for business information. And a year later they went public.
They estimate they have a $70 billion TAM
This seems a bit fishy to me, but either way, they are still only a small fraction of their addressable market with less than $1 billion in revenue
Direct competitors: None, according to the 10-K. However, there are tons of little product companies that offer some things that are adjacent to what ZoomInfo does, which they sometimes acquire
Potential competitors/frenemies: Microsoft (LinkedIn), Salesforce, Hubspot, Oracle
(Brad) Management and Ownership:
Co-Founder and CEO is Henry Schuck (84%)
A former professor at Washington State
Former founder and CEO of DiscoverOrg which he built to $350 million in ARR in and right out of college and seems to be a core piece of Zoom info as it acquired Zoom Info in 2019 and re-branded
Co-Founder Kirk Brown
Looks like he was with DiscoverOrg right up until the Zoom Info deal
Was a pro-caddie beforehand and a “sales representative at a Fortune 500 company”
Headed the R&D spend
CFO is Cameron Hyzer
There since 2018
Was the CFO at Benchmarking Partners for a year in 2004 and has been a board member since then
Former CFO of Eze Software Group (led it from $30 to $290 million in ARR) and led a successful exit with a sale to SS&C for $1.45 billion
COO is Chris Hays
A lot of experience with companies I have not heard of
Chief Product Officer is Hila Nir
With the company since 2011 when she started as the VP of marketing
Former senior Auditor at EY
Triple class share structure:
Shuck owns 1.3% of class A, 33.2% of class B, and none of class C for total voting power of 23%
Kirk Brown owned 28% of class B for 19.4% of the company
A lot of funds involved with well over 50% of the combined voting power
(fair warning: Market cap is different in a lot of places, it has a Dutch Bros feel to it)
Market cap $24.4 billion, ticker ZI
P/S of 36.7
P/OCF of 82.7 (very strong conversion from GP to CF while growing)
Just under 4 million RSUs/options outstanding vs. almost 400 million shares outstanding so not looking at much of a future headwind. However, they’ve employed some tricky tactics with dilution so it kind of feels like a risk
Q3 revenue of $197.6M, up 60% YoY
81% gross margins
This quarter they generated $73.3M in unlevered FCF
37% UFCF margin
But they do have interest payments on their debt, so should focus more on standard FCF
Closed this quarter with 25,000 customers and more than 1,250 customers with $100k or greater in annual contract volume.
(Brad) Balance sheet and liquidity:
Around $235 million in cash and short term investments
Another $75 million in net receivables and another $56 million in prepaid expenses
$1.23 billion in long term debt with $1.0 billion of that raised this year
$650 million in senior notes at a 3.875% interest rate
Used a lot of this to repay a first lien term loan with a higher interest expense and to lower the interest rate on this debt for the remaining principal outstanding
It also has another $250 million first-lien credit revolver
Interest expense 5.8% of sales over the first 9 months of the year and 6.8% this quarter as it rearranges its debt
(Ryan) I’ve been a cold calling intern before, and it would have been great if the company I worked for used ZI.
Future growth opportunities:
(Ryan) M&A. acquired RingLead and Chorus.ai recently, which has gotten lumped into their ZoomInfo Engage product. But the company was built on acquisitions, so I expect this to be a big part of growth moving forward. They tend to acquire the software items that their own sales team uses.
(Brett) ZoomInfo Engage. This is a relatively new product that is supposed to help your sales team engage with more prospects. Hard to understand as an outsider, but it has stuff like an automated dialer and email automation. They’ve cross-sold this to over 2k of their customers already, so it looks like a lot of people want to use it
(Brad) Macro. Things like school closures, stimulus checks, thriving stock indexes, and the creator economy are all lowering labor participation and pushing more wage inflation. That directly enhances the value proposition of its product and should be a good wave for the company to ride into 2022.
Highlights and lowlights:
(Ryan) Highlights: Since Schuck has always relied on debt to grow, they’ve always had a focus on profitability. 40% UFCF margins are really solid. And it seems like sales reps really get a lot of help out of the product. Also, in theory, the more the platform is used the better it gets. Lowlights: Most of their data is not 1st party if I’m not mistaken. Maybe that won’t be a big deal, but it feels like it presents some uncertainty.
(Brett) Highlights: Great profit margins, clear value proposition to the customer, and minimal competition from anyone large. What is more valuable: Salesforce or ZoomInfo to a sales rep in five years? Possibly ZoomInfo. Lowlights: Risks of data/cookies stuff going away and ruining the business, Microsoft/Oracle/Salesforce being able to replicate the product,
(Brad) I think this founder is a rock star. While he did go to Ohio State and I won’t hold that against him, he built a wildly successful company while in school and did so with both fantastic growth and capital discipline. Reaching but broader AI platforms like C3 and Palantir leverage their know-how to try and take a piece of this extremely promising space.
(Ryan) At a $25B market cap, I think you have to be forecasting out $1B or more in annual FCF within the next 5 years. That doesn’t seem impossible.
(Brett) Margins are proven out, so I think you need to see a path to $5 billion in annual revenue rather quickly.
(Brad) This becomes a de-facto productivity tool for enterprise sales teams. Much like slack/asana/Monday are becoming an integral part of workflows – this reaches ubiquity within sales and marketing
(Ryan) Competition leads to slower growth. The CEO doesn’t seem to be that worried about it, and frankly, I don’t know the industry that well, but it seems highly competitive. LinkedIn and Salesforce are the 2 that come to mind.
(Brett) Growth slows/multiple compression and/or data laws kill business entirely.
(Brad) A lot of the low-hanging fruit was pulled forward and devoured during the pandemic & now macro drama. Its margins erode and growth slows as it finds more difficulty with demand. Again, I am reaching here.
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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.