I have read most of the posts here about ZoomInfo and it has piqued my interest. I did a shallow dive into the company so I could better understand them for myself and came away with more concerns than I’d like, tipping me towards passing on this one. I am hoping that the board can either soundly refute each of my concerns or otherwise confirm my suspicions, giving me better confidence one way or another.
What is the moat here? It seems as if every company these days claims they have AI/ML proprietary engines fueling their respective businesses so it is hard for me to view this as a moat. ZoomInfo has developed a sophisticated web scrapper which I personally feel can be bested fairly easily. You could certainly make the argument that the AI/ML is growing and learning so they have an advantage there but they are not the first mover from what I understand and there already currently exists copious competition in this space.
2) Balance Sheet
People have brought up the debt and I agree, they have a lot of it. Someone once told me debt is really just bringing future growth into the present. Taking that view of things, I could certainly see a slowdown in the future because of the debt load. They recently restructured the debt to take advantage of more favorable terms and interest rates, but it also seems to be able to take on more debt.
From Q1 earnings call, referring to debt refinance: “There are a couple of benefits that we get from that. One is we did take advantage of a really strong rate environment in February. So we lowered our rate across the board between both the term loan and the new bond. Additionally, it gives us added flexibility going forward. So the unsecured bond obviously has fewer covenants and whatever else. It also enables us to take on more term loan debt if we needed it going forward for potential acquisitions or other growth initiatives. And then finally, we also increased the size of our revolver to $250 million, again, to give us more flexibility going forward until we find good opportunities for continued investment.”
That is long but I wanted to include the entire quote. This to me says they wanted to restructure so they can take on more debt. They said elsewhere on the call that they are planning more M&A. A company this small already pounding the M&A narrative with loads of debt gives me pause.
From Q1 earnings call, referring to M&A: “We think – we continue to believe that M&A is going to be a strong growth driver for us, particularly where we can find a solution that gets remarkably better with our data asset at the shared foundation that we can sell across all of our go-to-market teams. And so we do view M&A as a strategic differentiator for our business…I think you will see us continue to do M&A deals throughout 2021.”
A smaller thing on the balance sheet that bothers me is the percentage of intangibles (intangible assets & goodwill) to assets which is 53%. This might not be a problem to most but it is a small nitpick for me.
3) Business Model
Someone who knows better might be able to dash this concern quickly but I don’t like the idea of the business being based on congregating public information. This is in contrast to someone like Crowdstrike, Datadog, or Cloudflare where everything is their own. I recognize that their scraping tool is really the special sauce but the tool is worthless without the public data that it aggregates. The concern that this is a telemarketer has been pretty well wrapped up so don’t confuse what I am saying with that argument.
This might seem like a strange one but their numbers seem too good to be true. I don’t know if it is accounting wizardry or they may really just be that profitable, but it raises my BS meter. This could be completely wrong but it is difficult to see how a SaaS company can be this much more profitable than ALL the others given the stage they are at.
This is not meant to be a bear report or meant to deter anyone, but rather I am posting my concerns that I assume others have thought about as well. I am very impressed by their numbers and their customers who have put their trust in them so I would like to like them. Either way, thank you for bringing this company to the board as it certainly is an interesting one.