Would you be interested in this company

[SaulR80683]

Would you be interested in investing in this medium-small SaaS company?

Last quarter it had Revenue of $140 million, which was up 53% yoy.

But HERE COMES the interesting stuff:

It had adj operating income of $63 million, which was 45% of revenue!!! Yes, that was 45% of revenue!!! Have you heard of any other companies with adjusted operating income at 45% of revenue??? And growing at 53%?

Its operating cash flow of $67 million was 48% of revenue! Yes, you heard me right!

Its adj free cash flow of $77 million was 55% of revenue!!! That gave it a Rule of 40 of 53+55=108!!! Did you ever hear of a score on the Rule of 40 of 108? Or free cash flow of 55%?

Now let’s look how they did for the Full-Year:

Revenue of $477 million, was up 62%,

Adj operating income of $226 million was 47% of revenue

Op cash flow of $170 million was 36% of revenue

Adj free cash flow of $244 million was 51% of revenue. (That’s a Rule of 40 of 113, and is positively indecent).

They closed the year with over 20,000 customers, including more than 850 $100k customers.

Forrester Wave rated them highest in what they do. There are two axes with Current Offering going up and Stronger Strategy going right, so the idea is to be in the top right corner of the graph. Well on Current Offering they were a little higher than anyone else, which is good, but on Stronger Strategy they were way better than anyone else, which is even better, pressed against the right hand edge of the graph. (I’m not sure I’ve ever seen a company pressed against the edge or the top before).

Their CEO is a co-founder, and was recognized in 40 Best CEO’s Under 40, and in another Best Twenty CEO’s.

The only softer point is that they only had an annual net retention rate of 108, presumably because they only had one platform which they sold up front. Now they have released more bells and whistles and an entirely new companion platform.

Okay, are you interested? Do you want to know who they are?

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Okay, the company is ZoomInfo (ZI). I suggest you learn what they do from their website and from Burt Hochfeld’s current article on Seeking Alpha (currently public), which I won’t bother repeating now that I have your interest. https://seekingalpha.com/article/4419018-zoominfo-technologi…

I’d also suggest you subscribe to Bert’s newsletter (Ticker Target). One recommendation like this is worth at least 20 years of subscription cost.

Saul

[Lemat]

Dear Saul,

Did you check long-term debt on ZoomInfo’s most recent balance sheet? AFAIR it was ~$0.75B (5x larger than trailing cash from operations).

Best wishes,
Lemat

[SaulR80683]

Hi Lemat,

Something about their long term debt bothers you, but for the life of me I can’t figure out what it could be. I’m just not sure what your concern is.

First of all, they are obviously not adding to their debt, as they are about the most profitable company you or I has ever seen. Their gross margins are 81% and they are obviously not a high capex company. Possibly the debt came from the early years of starting the business. Maybe they wanted to do it all themselves and not take money from venture capitalists. Or maybe the present company bought it from prior owners. I don’t know because it hasn’t seemed of any importance to me.

Think of it this way, their long term debt at the end of 2019 was $1200 million, and at the end of 2020 was $750 million so they have reduced it by $450 million over the past year.

But what is much more important is that, over time, the long term debt will stay the same or gradually decrease, while the revenue, operating income, and free cash flow will keep growing by leaps and bounds until any remaining long term debt becomes insignificant and irrelevant, considering the size of the business.

So again, I don’t see your concern, but I will ask Bert Hochfeld if he knows where the debt came from, as I’m now curious about that, even though it will fade away as time goes on.

Best wishes,

Saul

[Phoolio18]

On the balance sheet, ZI also has $300M in cash and is obviously generating cash at astronomically high levels. The debt is completely irrelevant at this point except that one could argue it might not be a bad idea to borrow even more given the returns the business generates. I have not seen anything like it before.

NRR in 2020 was 108% as Saul mentioned. Here is some additional info.

ZI used to report NRR by customer cohorts of employees greater than 1,000, between 1,000 and 100 and less than 100.

For 2018, NRR of the cohorts respectively was 125%, 105% and 78%. Total NRR was 102%.

For 2019, NRR of the cohorts was 127%, 112% and 87%. The total was 109%.

2020 was likely impacted by Covid, but the overall NRR held steady. This will be a number to watch, but it has improved from 2018 pretty significantly.

Finally, they aren’t clear on gross margins from my limited research. I have them calculated at over 88% when removing stock based compensation and amortization.

This is a very interesting opportunity based on the incredible margins they generate and potentially accelerating revenue growth. We will see on the revenue growth. Last quarter was 53% and an average beat for this coming quarter would be 51% growth.

A.J.

[fireblade909]

Lemat,

I think if I were to pick 1 gripe with the company it would be valuation rather than their debt levels, which seem to be manageable by any account. Bert also addresses the question regarding their high valuation but he tempers this concern by pointing to the level of FCF margins generated.

I have traded this name successfully in the past as they seem to fall in and out of favor with the market since IPO, thereby creating interesting buying points. This should be a long term hold however

Thanks Saul for bringing ZI to the board

[Fooledbydesign]

It would be good to see how our criteria are all playing out for ZI.

Purchase Criteria

• 40% Revenue growth

• Special niche, something special
• Moat
• Big future
• Rule breaker
• Recurrent Revenue, and expanding. (software, saas, not sell THINGS/Hardware, Not capital intensive, not cyclical boom/bust stocks like mining, drilling, natural resources, restaurant chains)
• High Gross Margin, Rising Margins.
• Rapidly improving metrics (rapidly dropping losses as a percent of revenue, or increasing profits if they are already profitable, increasing gross margins, rapid customer acquisition, improving cash flow, dropping operating expenses as a percent of revenue, or justified slowness )
• Dollar-based retention rate over 110%, 120%. 130% is very good. High Net Promoter Score if available.
• Positive and growing Free Cash Flow (FCF), or progress in that direction
• Lot of cash and little or no debt.
• Founder led
• Substantial insider ownership
• Not huge customer concentration
• How well the price matches its prospects
• Company has a long way to grow - the total addressable market (TAM) is so big, and there is a lot of room in that for the company to triple/quadruple.
• Management must be interested in making a profit (unlike amazon, but opportunity cost available elsewhere)
• A degree of switching costs
• If worried about high EV/S, Look at Oomph Factor (About, Calculation)

[Lemat]

Dear Saul,

Thank you for your valuable comments!

I’ve to admit that I wanted to start a position some time ago. There was (and is) a lot to like (e.g., a revenue growth, an operating margin, already profitable business, the founder-CEO with good reviews on Glassdoor and with skin in the game), but I like to look beyond the operating metrics and to see the compelling story to select my investments as I prefer to have a very strong conviction in the future potential of a business.
I remember that the long-term debt of ZoomInfo (ZI) was the red flag for me. There were also some other issues I came across, e.g., scrapping (private) information and reselling it sounds… a bit risky? Is it a secular trend I would like to be exposed to?
I decided to pass and focus more on companies with my highest conviction like CRWD. Looking at the chart it was not a bad decision so far.

However, I still remember how exciting(!) on so many metrics ZI was (incl. looking at the Rule of 40 chart) so I thank you for bringing ZI to the board and for a thorough discussion of ZI as a possible investment.

Best wishes,
Lemat

PS Having my major background in software engineering, I am more than happy to listen to the arguments of the authorities on this board I follow (Saul, Bear, GauchoRico, Stocknovice, Muji, WillO2028 and many incredible people) with much more financial expertise even if I’m perhaps more careful in case of this particular stock.
Last but not least - thank you so much for creating this incredible community with an approach to investment that fits me so well.

[SaulR80683]

Here are the prepared remarks by the CEO, Henry Schuck, in the Conference Call. Sounds inspiring to me, and what we are looking for, but who knows, I could be wrong so make your own decisions. For full disclosure, I took a moderate sized position in this company last week.
Saul

"As it did for many companies, 2020 presented a unique set of operating circumstances for ZoomInfo. Our team managed past headwinds and tailwinds, stay-at-home orders and virtual work mandates, and through it all, we adapted, moved fast, defined new possibles and stepped up to deliver the strongest fourth quarter and the strongest year in our Company’s history. During the quarter, we set company growth records for new sales, new customers added, customers over $100 thousand in ACV, efficiency metrics such as LTV to CAC, and we saw broad- based strength across all areas of the business – a truly impressive end to our first year in the public markets.

At ZoomInfo we are building the modern go-to-market platform from the foundational level up, starting with a market-leading robust and accurate data layer that fuels a suite of next generation workflow software. This is delivered across a purpose-built interface that powers go-to-market efforts for companies of all sizes, in all industries, all over the world.

Our vision to fully digitize go-to-market is resonating more today than ever before and is reflected in the momentum we see in every aspect of our business - from new customer acquisition to customer retention to end- user engagement and new product adoption."

[draj]

Think of it this way, their long term debt at the end of 2019 was $1200 million, and at the end of 2020 was $750 million so they have reduced it by $450 million over the past year.

IMHO being able to pay down a third of a huge debt in one year is in itself an endorsement.

cheers

draj

[draj]

I think if I were to pick 1 gripe with the company it would be valuation rather than their debt levels, which seem to be manageable by any account. Bert also addresses the question regarding their high valuation but he tempers this concern by pointing to the level of FCF margins generated.

Bert initial discussion of ZI was sometime during the middle of last year. I recall the writeup was very positive but he had concerns about valuation. At the time ZI did not seem to me to be superior to other available issues.

In his most recent writeup he points to improved valuations and to the spectacular profitability. Clearly the case for ZI has strengthened.

cheers

draj

[12x]

I initially passed on ZI when it went public in June 2020 because a lot of their growth was due to acquisitions at the time, making growth numbers very high.

However we have a more clear picture from the company today.

Q3: revenue up 53% YOY, 10% sequentially. Organic growth up 41% YOY.

Q4: revenue up 53% YOY, 13% sequentially. organic revenue up 12% sequentially. I can’t find yoy organic growth. Nor have I looked into when the acquisitions lapse.

[SaulR80683]

Here’s Bert’s explanation of the debt:

Basically, what is now ZI bought its principal competitor as you can see below. To finance the transaction, it issued debt. Here is the relevant information from the 10k.

ZoomInfo was originally founded as DiscoverOrg in 2007 by Henry Schuck and Kirk Brown. It operated as DiscoverOrg until February 2019, when it acquired its competitor Zoom Information, Inc. and subsequently rebranded as ZoomInfo. Zoom Information was originally established in 2000 as Eliyon Technologies by founders Yonatan Stern and Michel Decary, and in August 2017 was acquired by Great Hill Partners, a private equity firm, for $240 million in cash. The company acquired RainKing in 2017 and NeverBounce in 2018, and, following the rebrand, Komiko in 2019 and both Clickagy and EverString Technology in 2020.

It is the rebrand of what was DiscoverOrg to ZoomInfo that is a bit confusing. But that is why they needed the funding.

Saul

[assiduous]

Interesting discussion on ZoomInfo (ZI)in this YouTube video. The balance sheet is discussed at the ~ 11:11 minute mark. https://www.youtube.com/watch?v=2RWx4-yEZPo

[covediver]

Zoominfo raised $1b thru IPO to pay down the debt. They still have $744m long term debt. The debt will expire at Feb 1, 2026.

the Company also acquired Clickaway and Everstring for a total of $71.7m in 2020. I felt the company is growing up with a series of significant acquitsition. The goodwill in the balance sheet balloon to $1b. The growth through acquisition is not the way I like to see.

Also, I am not sure if selling contact informations obey the privacy regulation in USA. should it be a concern?

[WillO2028]

Hi Covediver,

When you said I am not sure if selling contact informations obey the privacy regulation in USA. should it be a concern?
It reminded me of what Lamat said earlier,…scrapping (private) information and reselling it sounds… a bit risky?
I too feel similarly. I don’t want to spend a lot of my time following a company I don’t believe is doing the right thing, legality aside.

After reading a few more articles on ZI, I came across one from a writer on Seeking Alpha, he wrote a sell piece:
Gary Alexander-
ZoomInfo’s base of competitors is so broad it’s difficult to know if ZoomInfo will ever be a clear dominant force in this lead generation/database space. Uplead, LeadIQ, D&B Hoovers, and even LinkedIn - there are plenty of companies vying for this space, in part because the barriers to entry are fairly low.
I was almost thinking pass on this one. Then I re-read Bert Hotchfield’s write up he wrote on his service Tickertarget.com last week and is now appearing in SA:
Bert
The management of ZoomInfo Technologies has suggested that its addressable market has continued to grow. Last quarter, during the course of its conference call, the company used an addressable market estimate of $30 billion. Adding the recruiting engine to the stack is going to add billions to the estimated TAM. No more than DocuSign is a company about e-signatures, ZI is a company that has been able to take a relatively mundane set of data-a compilation of contacts-and create an automated go-to-market framework. A business will spend lots of money for a workflow/sales process framework and not so much for a list of prospects. .

Bert’s first hand knowledge base prior to investing was Sales in the tech space. I’ve subscribed to his service for years. I’ve always appreciated his transparency when discussing his thought processes. I’m planning to initiate a try it out position on Monday.

Jason

[wheelzofsteel]

I’ve looked into this business in the past and concluded it’s not for me. My primary concerns are, and continue to be, the data collection practices and the sustainability of the business.

The business, as I understand it, is essentially data harvesting. It’s collecting data from mostly unwilling participants for use by third parties for sales and marketing. I see this as a spam enabler. The company even has an automated sales dialer feature which allows users to “build dialing lists” and “leave prerecorded emails”. That sounds a lot like robocalls, and there doesn’t seem to be any policies aimed at users who abuse or misuse the product, just best practices the company recommends.

The company does have an opt-out. In a March press release, they highlighted a global notice and choice program where people are given notice and provided an opportunity to remove or update their information in the database. But it sounds a lot better in the press release than in practice.

I found numerous university IT departments identifying these emails as spam and warning students, faculty, and staff about them.

One went as far to say, “We believe that this opting out process is to give them a bare minimum defence for any legal action individuals may bring against the company for ‘scraping’ this information and selling it.”

https://uwaterloo.ca/arts-computing/news/zoominfo-spam
https://ccit.clemson.edu/cybersecurity/cybersecurity-alerts/……
https://security.virginia.edu/node/4656

As we move to a world where data collection practices are more scrutinized, this is the kind of business that will be in the crosshairs. Changes in regulation and data privacy practices are a major risk as is reputation. Will this negative attention scale as Zoominfo scales?

As for the sales workflow/process point, isn’t that what Salesforce provides? I see that Zoominfo integrates with Salesforce and is often used that way, and I have hard time believing the true value is in the platform. Zoominfo even characterizes this integration as the syncing of “data source” with “CRM”. I don’t see much of a moat here. Most of the data is publicly available for collection or purchase. The company lists Salesforce and Microsoft/LinkedIn as potential competitors, and both appear well situated to provide a competing solution. LinkedIn, as Bert mentions in his article, already has an edge in recruiting and is moving into sales.

Personally, I just can’t get behind a company that reports billions of automated calls as a metric. Sounds a lot like billions of minutes of busy professionals being wasted. That certainly has been my experience.

[SaulR80683]

The business, as I understand it, is essentially data harvesting. It’s collecting data from mostly unwilling participants for use by third parties for sales and marketing. I see this as a spam enabler. The company even has an automated sales dialer feature which allows users to “build dialing lists” and “leave prerecorded emails”. That sounds a lot like robocalls…

Hi wheelzofsteel,

You may be correct and I may be wrong, but I think that you misunderstand the sophisticated process that this company does.

Forrester Wave rated ZoomInfo far and away the Leader in B2B Marketing Data Provider, especially in strongest strategy where there was no room to place it further. Here’s what Forrester wrote:

“In our 24-criterion evaluation of B2B marketing data providers, [Forrester] identified the 11 most significant vendors — Data Axle, Dun & Bradstreet, Enlyft, Global Database, InsideView, Leadspace, Oracle, SMARTe, Spiceworks Ziff Davis, TechTarget, and ZoomInfo Technologies — and researched, analyzed, and scored them. This report shows how each provider measures up and helps B2B marketing professionals select the right one for their needs.”

“Since our evaluation of this market in 2018, ZoomInfo has transformed its business and continues to expand aggressively. DiscoverOrg bought ZoomInfo in 2019, taking on the acquired company’s brand, and has bolstered its capabilities with acquisitions such as EverString to extend the breadth of its company and contact data and Clickagy to add its proprietary source of behavioral/intent data.”

“ZoomInfo is a best fit for organizations looking for a comprehensive data solution with an expanding array of complementary applications built on a shared data foundation.”

Does that sound like a little robocall company to you? Automatic calls is just one optional feature in their comprehensive platform.

Here’s a link to see the Forrester Wave Leader Graph
https://www.zoominfo.com/resources/forrester-wave-b2b-market…

It’s not just Forrester that rates them like that:

“We continue to see broad-based momentum and positive feedback from customers and independent ratings firms as we invest in our product. For example, in G2’s Winter 2021 Grid Report released in December, ZoomInfo appeared on 37 Grids, our highest number ever, while also receiving 22 number one rankings (on those 37 grids), including new number one rankings in the Enterprise category for Account Data Management, and Lead Capture. This shows that not only are we building products that span a wide spectrum of go-to-market pain points, we are doing it with best-in-class products.”

Does that sound like a little robocall company to you?

Their CEO, Henry Schuck, made the list of 40 under 40 that is published by Fortune.

Does that sound like a little robocall company to you?

Their customers include companies like Marathon Oil, Toyota, Honeywell, Pitney Bowes, Stanley Black and Decker, SAP, etc

Does that sound like a little robocall company to you?

"In 2020, we shared a vision with our customers around being able to take a signal - a funding event, a new technology added to a company’s stack, a spending initiative in the works, or a spike in a relevant intent topic; and cross-reference that signal against an ideal customer profile - say - companies with more than 100 employees who use NetSuite and who are not current customers; and mapping that to their ideal prospect profiles; and then instantly activating a campaign targeting that audience. Our vision is a fully automated go-to-market motion from signal to action.

This capability is more than sales automation or marketing automation - it is true go-to-market automation - and is now fully available with our Workflows suite. Today, the Workflows suite which is available within our Elite package, includes a re-imagined interface that turns natural language statements into go-to-market workflows that integrate with a broad range of CRM, sales automation, marketing automation, and advertising platforms. We’ve also added contextual access to create workflows throughout the ZoomInfo platform and the ability to enable every user with this automation capability."

Just read that through!

Does that sound like a little robocall company? Or a company way ahead in moving towards a sophisticated complex marketing platform.

But look, I’ve been wrong before. Do your own analysis.

Saul

[Tamhas]

Saul, I can see the point that a company which uses highly sophisticated methods to identify who to call … or e-mail or whatever … but in the end the delivered action is to call, may not just be a robocall company, but they are delivering robocalls. I can understand not wanting to be associated with that activity, no matter how sophisticated* the operation behind it.

• unlike the e-mail I got this morning suggesting that I serve as a middleman in a crude oil supply contract … and to the e-mail I use for wine-related communications at that.

[HermanPotter]

Not a professional salesman, but leads provided by ZoomInfo are just that. A salesperson completes the process by personally emailing/calling, the prospective client, right?

It’s not like Glengarry Glen Ross.

HP

[BLancaster]

HermanPotter:
A salesperson completes the process by personally emailing/calling, the prospective client, right?

A salesperson may be behind curating/managing the list of calls to make, but Zoom Info does have an automatic sales dialer feature:
https://engage.zoominfo.com/solutions/sales-dialer/

So technically that seems to fall into the category of robocalls, but it seems less egregious than purely random, unrelated, scatter-shot junk calls, as it seems that the list comprises those who’ve already expressed some interest or buying intent as determined by the sales force.

BLancaster