A closer look at Zoominfo (ZI)

From your monthly portfolio summaries, most of you have exited Zoominfo. I am on the fence on this one. I am looking forward to your comments and thoughts on Zomminfo.

ZI posted the following numbers this quarter on Aug. 1, 2022:

• GAAP Revenue of $267.1 million Grows 54% year-over-year and 42% yoy organic growth.
• GAAP Operating Margin of 15% and Adjusted Operating Income Margin of 40%
• Cash Flow from Operations of $106.2 million and Unlevered Free Cash Flow of $108.3 million
• Added 140 100K customers the total stands at 1763.
• Exceeded 30,000 customers
• RPO of 985 and a 52% yoy increase and a 7% qoq
• CRPO (to be realized in the next 12 months) is 764 a 51% yoy increase and a 7% qoq increase

ZI’s transition to RevOs

Around q2 of 2021 ZI started their pivot towards what today is call the revenue operating system (RevOS). Their goal is to create a go to market platform. They have since started introducing new features and acquiring companies and started stich all of these solutions together into the RevOS platform (for more information see https://ir.zoominfo.com/zoominfo-revos-modern-revenue-operat…). The RevOS is made of 4 modules namely salesOs, marketing OS, operations OS and talent OS (for more information see https://www.zoominfo.com/ ). It is easy to understand what sales OS and marketing OS does and how they are complementary to each other. However, I am not entirely sure what operations OS does. As I understand it is the glue that connects the sales OS and marketing OS. It helps automate the work flows necessary to create synergies between sales OS and marketing OS, but I might be wrong. I guess the marketing team at Zoominfo need to do a better job at communicating the value proposition of the operating OS. The talent OS seems like the odd one out and I have no clue why it should be a part of the RevOS. I am unable to see a direct link. Yes, one might reason no talent no revenue but the same can be said about many other things. Nevertheless, I see how they are using their core technology to enter new markets like recruitment which is good but bundling it with RevOS doesn’t make sense to me.

Despite the above quirks the move towards an integrated revenue operating system makes sense. It helps create several advantages:

  1. Drastically increases the total addressable market TAM from 24Bn to 70Bn (for more information see ZI_FinancialResultsSlides_2Q2021 (zoominfo.com)). Also, they are selling a product that addresses almost all businesses.

  2. Makes RevOS very sticky and mission critical. Which means customers are not cutting back on their spending. The management had the following to say about how mission critical their solutions are:
    “And so I would say one thing that every company cares about right now is making sure that they’re prioritizing investments in areas that drive sales growth and that get more out of the heads that they have on The Street.”

“And Brad, I would add one thing there, too. What you’ve heard from other companies that have already reported is that they’re looking to rationalize and reprioritize spend, but the one place where they’re continuing to look to invest is within sales and within go-to-market. I mean we are the best, most enterprise-grade platform to help go-to-market teams get better and better outcomes. And so, they’re not messing with this part of their business, the part of the business that drives demand and that closes that demand.”

Yet we see a drop in their revenue and organic revenue.

Revenue growth YoY
Year	Q1	Q2	Q3	Q4
2022	58%	54%	 	 
2021		57%	60%	59%

Revenue growth QoQ 
Year	Q1	Q2	Q3	Q4
2022	9%	11%		
2021	10%	14%	14%	13%
2020			11%	13%

Organic revenue growth YoY
Year	Q1	Q2	Q3	Q4
2022	49%	42%	 	 
2021	 	 	54%	52%

Similar deceleration can be observed in their RPO and CRPO numbers and 100K customer adds.

Remaining performance obligations 
Years	Q1	Q2	Q3	Q4
2022	918	985	 	 
2021		648,00	712	816

RPO to be realized in next 12 months
Years	Q1	Q2	Q3	Q4
2022	715	764	 	 
2021		505	552	672

100K Customers
Years	Q1	Q2	Q3	Q4
2022	1623	1763		 
2021	950	1100	1250	1452
2020		650	720	850

Their guidance for the next quarter was also noticeably lower. It could be that management is being very conservative here.

Guidance and  yoy increase in percent 
Year	Q1	Q2	Q3	Q4
2022	228	255	279	 
Percent	48.7%	46.6%	41.2%	 
2021	146	163	184	208
Percent		46.98%	49.11%	48.89%
2020			118	131

Guidance beat
Year	Q1	Q2	Q3	Q4
2022	6.01%	4.75%	 	 
2021	5.00%	6.75%	7.39%	6.88%
2020			4.58%	6.64%

Assuming a beat of about 4.5% on the low end and a 7% on the high end would lead to a revenue of 291.56 (47.56% growth) to 298.53 (51.08%) growth.

Moreover, the management had the following to say about the conditions they are facing.

“In short, we are executing well, and demand remains strong. We also continue to monitor the economic environment and look for signs of impact on our business. We listen to Chorus calls, we speak with our sales reps, and we hear directly from our customers. We have seen sales cycles that are somewhat extended relative to sales cycles in Q1, driven by incremental finance and procurement review, but deals are still closing.

While a more uncertain macroeconomic environment may create some elongating near-term sales cycles, our very efficient go-to-market motion and proven quick time to value for our customers will help insulate us.”

Given the macro-economic head winds, ZIs valuation, elongated sales cycle and almost all the companies we follow on this board are decelerating and are being very conservative with their guidance, I choose to believe what the management says and wait for next quarters results. However, ZI is on a tight leash and any rapid deceleration from here and I am going fold my position (45% or lower). Why 45 % or lower? The 45 % is completely arbitrary.

3.Consolidate the highly fragmented go to market sector and consolidation of spend. During the conference call the CEO said the following:

“ZoomInfo’s RevOS is the only platform that can holistically inform and automate the go-to-market motions of companies of all sizes. This integrated experience is what customers want and what all businesses will need to succeed going forward.”

The CEO claims to be the only integrated solution that enables the go to market strategy.
This means he is right on time to take advantage of the spending consolidation that we are expecting because of the recession. And based on the comments below it seems to be working.

“I think, number one, we have the only consolidation play in the market. And so our ability to go into an account and have them consolidate numerous different platforms on to the ZoomInfo RevOS platform, that is happening.”

“We saw it all across our SMB customers. We saw it across our enterprise customers, where they were consolidating either multiple sales intelligence vendors and a conversation intelligence vendor and a sales automation vendor into ZoomInfo’s RevOS. I think you see that with Engage going upmarket. We have 3x more deals in the mid-market and enterprise with Engage, our sales automation solution.”

“We’ve nearly tripled the growth rate of Chorus into our customer base, RingLead doubled, and those are all consolidation plays that we’re able to bring with our data foundation at its core.”

“……And then the second thing that they’re looking at is making sure that they’re working with strategic vendors and if there are opportunities to consolidate and repackage – and provide a package that makes consolidation lucrative, then I think that those – our customers are stepping up to that, and we provide a great opportunity for them to do so.”
“MarketingOS and TalentOS both added the most ACV ever in a single quarter, while nearly 50% of TalentOS customers are new to ZoomInfo.”

“Yes. And I’d actually add, Elizabeth, that in terms of the rate of change in terms of the growth rate of advanced functionality, it’s actually accelerated in the first half of this year relative to what we said at the end of last year. So that’s a really exciting thing that we’re focusing on is continuing to drive that advanced functionality that ultimately drives better retention with our customers. It delivers them more value, and it enables even more and more of those consolidation discussions throughout the base.”

The management is very consistent in their messaging that consolidation is happening, and they are the only play intown. Based on the above information I expect an increase in their NRR or even acceleration in their revenue.

However, NRR seems to be steady at 116% for the past three quarters. Which strikes me as odd…… what’s even more strange is they claim that customers are rapidly adopting advanced features. By advanced features I think they mean the other modules they have introduced (marketing os, etc.).

“Advanced functionality now represents 29% of ACV, and ACV from advanced functionality more than doubled over the past 12 months, an acceleration of growth compared to the end of last year.”

This shows that the customers are rapidly moving beyond the core functionality. This should logically show up in the NRR but it doesnt. What am I missing?

4.Makes the customers life incredibly easy by creating synergies between the marketing and sales teams, integrating the different customer touchpoints into a single platform, and creating integrated workflows so that customers don’t fall through the cracks, keeps the database up to date, etc.

Besides the macro-economic risks ZI has some very specific risks:

• ZI makes use of personal and search data and privacy laws and regulation could impact their ability to harvest and use the data. But they actively manage this risk by acquiring various certifications, they recently hired compliance officer, etc.

• Large tech companies especially the ones with CRM offerings could enter the market

• The CEO is a Non-tech founder and according to his own admission he was unable to build and scale a good engineering/ R&D team from scratch. He inherited the current tech team when he acquired Zoominfo (for more information see ZoomInfo: The Go-To-Market Platform | Colossus® (joincolossus.com). Since then, he has been strategically acquiring new companies to execute on the vision of rev OS. Acquiring new companies and trying to integrate them into ZI may not always work and could lead to a patch work of systems ultimately impacting the quality and user experience. Ideally, they would build out the Rev OS themselves instead of a patchwork of systems. I am not implying that ZI will not do it, but it is something to keep an eye on.

So, to conclude ZI is slowing down but not as abruptly as we saw in the case of mongo DB. They are experiencing longer sales cycles and extra scrutiny. In addition to the macroeconomic head winds, they also carry the above risks.

But they are the only consolidation play in town and highly innovative. They are consistently rated very high on the Gartner’s magic quadrant, and they are generating positive cash flow. Moreover, the management is executing well given the situation. They are scaling up while making a profit. All businesses that have something to sell can use their product.

Given the pros and cons I have decided to keep my position in ZI for now. Can’t wait for next quarter’s results

A word of gratitude and encouragement to Saul, board moderators and others who contribute meaningful analysis. You are doing an amazing job and keep up the good work. Thank you for weeding out the OT posts and maintaining sanity.