My selling ZoomInfo was a big mistake

My selling ZoomInfo was a big mistake

When I was looking for money to take a position in Bill about a month ago, as well as to add to other companies that had sold off unreasonably huge amounts after good results, one of the things I did was sell out of my ZoomInfo position.

I had had a lot of confidence in ZoomInfo. I felt that almost nobody had ever heard of it yet, and that it was quite undervalued for a company with quite high growth and enormous cash flow, and was the undisputed leader in its field. So why did I sell? Good question! I had three reasons for doing so.

First, while other companies had sold off large amounts ZI hadn’t sold off as much, which made it a source of cash for me.

Second, while I focussed on the metrics which had shown some slowing and disappointed me, I had ignored those metrics which were doing very well indeed, and other news that the company had announced, like the acquisition of Chorus, and International expansion. (In my own defense, the situation was complicated by acquisitions and total revenue vs organic revenue, etc)

Third, while I had other companies which looked as if they could keep growing forever as data increased and customers moved to the Cloud, I felt that ZoomInfo’s total market was inherently somewhat limited, and might top out much sooner than those of other companies.

Some of my reasoning was correct, but it turns out that my decision to sell turned out to have been a bad decision as my other companies have continued to go down much more than ZoomInfo. I got too influenced by one or two metrics and my expectations that yoy revenue growth would continue to rise as it had for the previous three quarters (it only dropped 1%, but I responded stupidly). Oh yes, there was probably low guidance in there too, which I hardly look at but which may have affected my decision. It was, all in all, a questionable decision.

This is not a recommendation to buy ZoomInfo now. I think that when the market turns, companies that are growing at 90%, and are down 54% compared to ZoomInfo’s 34%, will probably come back much more rapidly. But what you do is up to you to decide.

Best,

Saul

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I’m with you here Saul!

I reduced from a 22% position all the way down to an 8% position for the same reasons you did (eg. to put into other companies blowing doors off on Revenue Growth), but I’ve also been thinking about that because, when I wrote my review, the ONLY negative thing I could come up with was hyper-analyzing the Q1 guide for revenue growth, but even if you look at their full year guide sans any news about 2022 M&A, it’s VERY strong relative to last year.

Here was my comprehensive review - https://discussion.fool.com/zoominfo-q421-my-thoughts-35053384.a…

Really every part of their Q4 report showed great health in the business and that they were executing very well with incorporating all of their recent acquisitions, Chorus in particular. That has showed up in the numbers but also practically speaking within the ZoomInfo application, as they’ve been quick to get Chorus natively built into the platform.

Here was a video they put out in September showing Chorus natively in ZoomInfo -
https://www.youtube.com/watch?v=ycz7J9cS-9M. The Momentum Insights feature in my view is pretty impressive when activated in a way as shown in the demo.

Take it with a grain of salt since this is their own promotional materials (page 6), but the unified platform they are building and the number of areas in which they are #1 in each category is pretty impressive - https://ir.zoominfo.com/static-files/55dcfb16-1fc2-491e-96ec….

Slide 10 shows how they’ve gone from a $24B TAM at IPO to now a $70B TAM with their platform expansion.

They are currently a $20B market cap company.

Hope this was helpful context to add to your post Saul.

-Chris

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Chris,

Not sure if you are long ZI, however doesn’t it cause you any concern that their MC is nearly 30% of their TAM (not SAM)? Or do you expect that their TAM will. Onto her to expand - I am not aware of any further M&A on the horizon

Best of luck to all here - trying times indeed!

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“doesn’t it cause you any concern that their MC is nearly 30% of their TAM (not SAM)? Or do you expect their TAM will expand?”

Hey fireblade909,

I filled in your quote above with what I think you meant to say (sans what appeared to be a TYPO).

To answer, no I’m not worried about that at all for several reasons:

  1. Organic TAM Growth - you can see this in the brief time ZI has been public, because they show the change from North America Intelligence and International Intelligence, and now they’ll also have point in time TAM compares with the other products they’ve added organically and via M&A. Hard to say exactly what that TAM growth will look like, but it will certainly grow. There’s probably some historical TAM data out there for ZI’s new products, but I haven’t dug that deep myself.
  2. Product Growth and Future Initiatives - we don’t exactly know what these look like either, but in the slide following they mention “select acquisitions to complement platform”, so we know there will be more to come when it makes sense for them to do so.

I don’t have a ton of data points at the ready to share with you (perhaps someone else does or can dig them up), but I don’t think an MC @ 30% of a current TAM for a growing company is high, in fact I think it’s probably quite the opposite, but it’s a fair point to scrutinize a bit further.

-Chris

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“doesn’t it cause you any concern that their MC is nearly 30% of their TAM (not SAM)? Or do you expect their TAM will expand?”

The ratio between market cap and TAM used to perplex me a few years back but I realised that I was being influenced by old economy business situations including: relatively low GM and low net margin businesses, stagnant, commoditising or shrinking addressable markets, excessive competitive forces and business entities and highly regulated situations.

Once you start to consider some of the TAMs associated with our software, SaaS and consumption based digital/cloud businesses and the nature of the business opportunities including fast growing TAMs, high margin, low competition and low regulation situations as well as the Amazon model of investing ahead of the growth curve then it changes the potential natural proportionality between TAM and Market Cap.

I do think though the ratio of TAM vs the revenue penetration or ARR to be a much more meaningful and significant ratio - and that is the “early stages of the innings” that most of the CEOs are referring to.

Ant

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Thank you, Saul, for bringing this up. I have been wrestling with this question ever since the ZI ER came out.

I had a 8% position at the start of this month but decided to sell earlier this week and add more to ZS, SNOW and BILL and restart a position in UPST. Your post made me question whether I made the right decision given how ZI has been relatively stronger these last few days (and throughout the last few months) than most of the companies discussed here. I decided to take another look at the numbers and reread the transcript in case I missed anything.

1 – Total revenue growth yoy looks like this

(Q1 → Q4)


2020	        42%     40%     41%     45%     
2021	        48%     56%     60%     59%   
2022            <i>__59%*__</i>

*Estimated assuming 7% beat which is the average beat in the last 3 quarters

Given how acquisitive they are, I was expecting them to continue accelerating but it seems they are stabilising around the high 50s. I fear the acquisitions they’ve made are still not big enough to counter the slowing organic growth (more on this later). Else we would have seen continued acceleration in the revenue. Also, since their full year guidance is so similar to last year’s initial guidance (36.5% this year vs 37% last year) and they ended last year at 56% growth, I suspect they’ll end this year around the same mark.

Here’s a snippet of the conference call that talks a bit about the inorganic side.

Unknown speaker – Barclays – Analyst
Hey. This is Frank out for Raimo. Congrats on a strong end to the year. Maybe just one for Cameron.
It was great to see the inflection in Chorus from a revenue perspective. So I guess with that, how should we think about the inorganic contribution to billings in the quarter?

Henry Schuck – Chief Executive Officer and Founder
So I would say that the inorganic contribution to billings is – obviously, you can see the revenue piece is around $10 million of revenue that came on the inorganic side. In terms of the unearned revenue change, I would say that it’s a similar percentage to the revenue contribution that comes from those entities. So I’d say it’s relatively small at the end of the day. But certainly, we don’t – we’ve bundled a lot of these deals together.
So the – we don’t break out the unearned revenue specifically.

2 – How about organic revenue growth? The last 2 quarters organic revenue has been growing 54% (Q3) and 52% (Q4). We do not have enough data to draw a conclusion on the overall trend. Not ideal though. The CFO was asked about organic growth going forward but he didn’t really answer the question. Maybe someone on the board can help interpret that?

Michael Turrin – Wells Fargo Securities – Analyst
Cameron, you mentioned 52% organic growth in Q4. Can you just expand on what you’re assuming there in the full year guide or remind us when you start to anniversary some of those contributions as well? Thank you.

Cameron Hyzer – Chief Financial Officer
Sure. Well, we certainly anniversaried the contributions from EverString and Clickagy in Q4. So that created a bigger base off which we were growing off of. As we look forward into 2022, I think we’re focused on continuing to grow the entire business.
I think realistically, you have a – we integrate our businesses very quickly. And therefore, there is a little bit of kind of mixing of the Chorus product or the RingLead product with our existing products when we’re going out and selling. So we don’t specifically make assumptions around those. But those will be anniversaried obviously for Chorus in July and for RingLead in September.

3 - NRR was 116% in 2021 and 108% in 2020. Good to see it accelerate but still quite low. Probably the lowest among the companies discussed on this board. Also, half of that was due to upsell and half due to improvements in retention. I was expecting upsell to be higher. Here’re a couple questions in the conference call that covered that:

Phil Winslow – Credit Suisse – Analyst
Hey. Thanks for taking my question and congrats on a great quarter. Just want to focus in on net revenue retention, obviously 116% versus 108% last year. Wondering if you could help us unpack that.
Are you seeing improvements in gross churn, acceleration in seat growth or, call it, upsell of these incremental modules? And how are you thinking about that in the coming year, particularly in sort of the – in the context of RevOS with expanded, let call it, specialized packages? And then just one follow-up to that.

Henry Schuck – Chief Executive Officer and Founder
Sure, Phil. So we’re really excited about what we’ve been able to do with our net revenue retention. A part of that, let’s call it, half is a part of that increase is related to the additional functionality that we’ve been able to roll out to customers over the past year. So we have seen that really help.
The other half is really related to the operational improvements that we’ve put in place, and we’ve been able to improve our gross retention as a result of those and a lower downsell than we saw in 2020, which at least partially related to that initial shock of COVID, but also to the operational improvements that we’ve put in place as well.
Going forward, I do think that the rates that we’ve established in 2021 are sustainable and something that we’ll look to improve upon as we look into next year and the following years.

Alex Zukin – Wolfe Research – Analyst
Hey, guys. Thanks for taking my question. Maybe Henry, first for you, I’m going to ask the dollar-based net expansion question a little bit differently. If you think about the 116% from 108% last year, obviously, a big improvement and a big jump versus kind of the movements you had been making previously.
How do we think about – like what’s the right aspirational rate that, that can be sustainable for the company? And what are the products that you feel like incrementally from here, assuming that you’ve kind of made a lot of improvements on the gross retention side and the incremental from here is going to be on the expansion, particularly on the enterprise. What’s the right way to think of what products are you most excited about to get you there?

Henry Schuck – Chief Executive Officer and Founder
Yeah. Thanks, Alex. I think when we look at the net retention rate today, we obviously feel like there’s room for improvement. It’s not a metric that we’re going to specifically guide to, but we do believe there’s room for improvement in that number.
One interesting stat is the average number of our products owned by customers who’ve been with us longer than a year grew by over 25% year over year and over 45% in our enterprise customers. And that’s being driven by the newly introduced products, our Streaming and custom Intent product, our Engage product, core – RingLead. And so I think that what I see going forward is still very similar. I think on one end of the spectrum, you have companies that are not fully utilizing our core product set.
And so we can expand the licenses, the seats across the sales enterprise, the use of enrichment and APIs across the marketing and revenue operations organization. But then additionally, our sellers are enabled now to sell Engage and Chorus and Recruiter into those companies as well. And so I would say, if you take a step back and you say where are our biggest opportunities, it is still in expanding our footprint across the enterprise, expanding our footprint internationally. But then we have this added arsenal of Chorus, Engage, RingLead, Chat that we’re able to sell in a cohesive way into those companies.
And so I think we have a sort of two-headed motion into the customer base that we think is going to be the backdrop of that improvement as we go forward.

4 – Gross margin percent was 89%. Gross margin has consistently been around 88-89%. One of the best among the companies discussed on this board.

5 – Operating margin was down both sequentially and year over year. Probably nothing to worry about. Still one of the highest among the companies discussed on this board.


2020	        47%       49%        47%       45%	           
2021	        43%       44%        40%       39%	

6 – Free cash flow margin, down quite a bit yoy and from the ATH of 64%, but probably not worrysome. Still one of the highest among the companies discussed on this board.


2020		53%       47%        48%       55%      	
2021		64%       53%        37%       38%

7 – Current RPO growth was down both sequentially and year over year. Given that its growing slower than revenue, it doesn’t look like we will see revenue accelerate. Admittedly, management claims this is not a good metric and we should instead focus on days adjusted q-q revenue growth.


2020	                  58%        60%       62%	           
2021	        56%       58%        58%       55%	

8 – Customers with greater than 100k ACV - Excellent numbers here. The increase in number of customers last quarter is very impressive.


Q4 2021 ->....-> Q2 2020
Customers       -     1452    1250    1100     950     850     720     650
Q-Q growth      -      202     150     150     100     130      70
Q-Q% increase   -      16%     14%     16%     12%     18%     11%
Y-Y increase    -      71%     74%     69%

To summarize,

  • Revenue growth stable/slightly decelerating (high 50s)
  • Operating and free cash flow margins dropping (still best in class) (both in high 30s)
  • Stable gross margin (best in class) (89%)
  • Customer growth great (70%)
  • NRR accelerating but still quite low (116%)
  • Current RPO decelerating (55%)

Some notes from the conference call:

  • At the time of acquisition, Chorus, was growing 100% year over year. Accelerated that growth in both the third and fourth quarters of 2021. Chorus grew 200% relative to year-end 2020.
  • In Q4, RingLead, added more than two times the amount of ACV than it did independently in Q3.
  • International revenue eclipsed the annual run rate of $100 million. And for the year, international revenue was up 91%.
  • Two different trillion dollar market cap companies are leveraging ZoomInfo across their sales team, both using the Data-as-a-Service offering to identify their total addressable markets and to score leads to power their outbound motion. Both are leveraging ZI APIs to update and enrich their customer data within their respective go-to-market systems as well.
  • MarketingOS…functionality has been incredibly well received with a nearly 30% increase in adoption from Q3 to Q4.
  • As a result of our investment in software, machine learning and infrastructure, grew international contact coverage by more than 20 million contacts in Q4, while international company coverage grew more than 100% year over year and by more than 2.5 million companies in Q4.
  • Ended the quarter with 1,452 customers with more than $100,000 in ACV, with revenue from those customers up 80% year over year.
  • Revenue on the Recruiter platform nearly doubled between Q3 and Q4. We now have close to 1,000 customers who are currently leveraging our RecruitingOS platform.
  • Management sounded very bullish. Some quotes:
    –“more demand within the enterprise than we’ve seen in our history.”
    –“we’re constantly looking at the data, the historical data. We look at win rates, funnel conversion, top of funnel activity. And we spent a real amount of time looking for anomalies that we could tie back to some relation to COVID. And we didn’t see anything that would believe that the current strong demand trends we’re seeing wouldn’t continue or were one-off or a pull forward.”
    –“first of all, there’s no better time in history to be selling a recruiting platform. And so we think timing into this space couldn’t have been better for our platform. That platform continues to have real momentum.”
    –“I think what we saw in December and January, we were testing this new packaging and pricing structures, was small. But we expect our – we expect the ASP lift to expand as we continue to roll that out to the full sales team.”

Lots of great things to take out of the conference call. Its great to see the strong performance of Chorus, RingLead, RecruiterOS. International growth as well.

I’d not be surprised if you saw all the above information and concluded that this was a company worth investing in.

All in all, a company doing quite well but maybe not as well as some of our other companies (in my eyes atleast). Given how much cheaper some of my favorite companies have become recently, I’d rather concentrate in those though. I don’t think I’d have Zoominfo in my top 8. If I had to invest in another company I’d first look at Crowdstrike given that its growing faster, despite its scale.

Best,
Zeecko
My portfolio - DDOG 20%, MNDY 17%, ZS 16%, BILL 13%, SNOW 13%, NET 11%, S 5%, UPST 5%

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