ZoomInfo - My Learnings

[blufftonchad]

I am a year into this board, and it is time that I attempt to contribute. I am challenging myself to really learn the companies I am invested in beyond the numbers. Essentially I want to understand at a deep level: what problem are they solving, why are they special, is the business model translating into results, what are the risks, and how do I determine my conviction level. Here we go.

What is ZoomInfo:

ZoomInfo is a leading go-to-market intelligence platform for sales and marketing teams. It was founded to develop a comprehensive and real time resource for information on companies and related information for sales & market personnel to maximize their efforts in obtaining business contacts.

What Problem Do they Solve:

How to achieve meaningful sales lead generation efficiently is the problem ZoomInfo solves, both in the effort it takes to generate it and also the accuracy of the information itself. ZoomInfo solves this problem by providing, as a subscription service, the most comprehensive and up to data resource for information on companies and related information for sales & market personnel to maximize their efforts in obtaining business contacts. It is real time accessible, and the company boasts a 95% accuracy rating.

Why is it Special:

The gamechanger is it’s massive, real time updated, contact database of organizations around the world. It can tell you who the decision makers are in an organization, and what the organization’s structure is. It has over 95 million contact record events each day that can either generate a new contact, or make an update to an existing contract (such as title, location, phone, and/or email change). All of this is searched for, analyzed and updated by AI/MI. LinkedIn’s Sales Navigator (owned by Microsoft) is the closest known competitor, but it relies on information posted by users and it is only as accurate as the last update. Other listed competitors are Dun & Bradstreet, TechTarget, Infogroup, and then smaller niche companies

Moat:

It is a product that does not displace another product. It’s runway is wide open, based on the value proposition of increased sales, and the increased efficiency of finding the right person to contact. No other competitor comes close to this on a global spectrum, though there are niche players. One of its strongest accomplishments is that no one company is responsible for more than one percent of their total sales.

But what about the big name Customer Relationship Management (CRM) companies? ZoomInfo does not see themselves as competitors to the Salesforce and Hubspot names, but rather an enhancer to those services. If the CRM’s are the water, ZoomInfo is the flavor enhancer (I personally love Mio flavor enhancer).

Initial Market and Expanding Market:

Both domestic and international intelligence (up to date contacts, org structures, etc.) created a TAM of 20Bn. There are now seven identified verticals, but the largest one is Conversation Intelligence (18Bn). This is an additional layer that goes beyond just finding contacts. It records and uses previous conversations, and learns from them. What worked, what didn’t work, and helps define the sales pitch to other clients. ZoomInfo’s acquisition of Chorus.ai is a major part of this layer as it gives ZoomInfo the ability to save call recordings, transcripts, interaction history, and other insights.

The most talked about new vertical I have seen is the Recruiter function. This leads to the debate of competition with the gorilla named LinkedIn. I say it’s a nice to have and not a business definer. ZoomInfo only lists the Recruiter TAM at 6Bn, so clearly the biggest growth opportunity is in Conversation Intelligence at 18Bn.

Are they Really Special?

They are consistently rated as the lead B2B marketing data provider & sales intelligence company. Forrester Wave B2B Marketing Data Provider – As far right and to the top as you can get on the quadrant. G2 Grid for Sales Intelligence – again to far right upper quadrant. Sales Intelligence Software Trust Map – no one even close to the frequency of research updating level that ZoomInfo achieves.

Where is the Market, Now and the Future?

Eight Nine percent of the market is domestic. What is meaningful here is that the value proposition is global, and there is literally and untapped market to generate sales from. This is their fastest growing market and they grew their international business by 80% last year alone.

What are the Risks?

I think that from an investment perspective, while they are the brand name, investors do not know the brand well. When I think recruiting, I think LinkedIn. I simply do not think sales leads generation because it does not apply to me personally. I think there is more work to do here.

They could be an acquisition target. I am reaching, but the thought process has precedence. Microsoft bought LinkedIn. It was far and away their largest acquisition. If Microsoft wanted this and wanted to make the single biggest recruiting and market intelligence platform, what is to stop them? I admit, I am no expert in acquisitions, but I have come across the scenario multiple times from my research. It makes sense from a business fit perspective. Is that good for us as investors? I do not know and I will leave that to the comment section.

Lastly, is it a must have. I see the value proposition and I think it can become a must have. I am not sure it is at this time.

How does this Translate into Numbers?

YoY Revenue accelerated the last two quarters from 50% to 57% and then 60% growth. Both quarters came in at QoQ of 14%

Adj Gross Margins had been 84% but dropped to 82% last quarter. Still high.

Adj Op Margin 39%, the highest of any company I own

Already profitable on Adj Net income basis at 50M last Quarter

High FCF relative to my other companies at 73M

NRR stated at 108% but will likely be 120ish% at next reporting (only publish annually from what I could find)

Cash/Equivalents: 239M

Currently is leveraged with 1Bn in Debt. ZoomInfo has made five acquisitions since its IPO and I have to believe that this is the cause.

Wrapping it up

I wanted to better know the company I am investing in. I want to know why they are special and the path to growth. I will admit that the space ZoomInfo is in does not excitement because I am not in sales. However, after my research beyond the numbers and beyond what I have learned on this board, they are amazing at what they do. I honestly can’t see how large companies can avoid tapping into this if NEW sales avenues are required. This will make it a must have. There is simply nothing else in its league. THAT excites me.

So what is my conviction level? Middle tier - I hold a 7.3% position. I see the product, I want to see it translate into a business must have. I think its well on its way to doing that.

I want to thank this board (found it a full year ago) for challenging me to learn to do this! I want to challenge others to do it beyond the vital few that do it on this board. They are the teachers, lets show them what we’ve learned (and are learning).

Chad

[jonwayne235]

Hi Chad, good post, however, could you explain how you came up with the following:

NRR stated at 108% but will likely be 120ish% at next reporting (only publish annually from what I could find)

In Q3 2020, they stated within their 10Q:
“The majority of revenue growth when comparing the three months ending September 30, 2020 to the three months ending September 30, 2019 was the result of new customers added over the last 12 months.”

“Allocated Combined Receipts for the three months ended September 30, 2020 was $123.6, which represented an increase of $36.2 million, or 41%, relative to the three months ended September 30, 2019. Allocated Combined Receipts for the nine months ended September 30, 2020 was $338.4 million, which represented an increase of $98.5 million, or 41%, relative to the nine months ended September 30, 2019. We consider this to be our organic growth, representative of the growth in receipts from customers allocated to the period of service delivery. This growth was primarily attributed to sales to new customers in the applicable and preceding periods, while incremental sales to existing customers were mostly offset by cancellations and reductions of subscriptions upon renewal.“

However, they stopped reporting Allocated Combined Receipts after Q3 2020. So that statement is not present in Q3 2021.

But the most concerning statement in Q3 2021 is this:
“The majority of revenue growth when comparing the three months ended September 30, 2021 to the three months ended September 30, 2020 was the result of new customers added over the last 12 months.”
This admission has not changed since Q3 2020!

None of these statements they have provided give me any confidence that their NRR, when reported next quarter, will accelerate from last year’s 108% (which was slightly down from 2019’s 109%).
They are admitting every quarter that the majority of organic revenue growth continues to depend upon new customer acquisitions, and any upsells are offset by churn/leaving customers.

Their low NRR, high debt, my perception of their lack of mission criticality, and massive venture capital share overhang (they are still going to be selling for months, this is an opportunity cost problem to me: see here http://openinsider.com/ZI) keeps me away from a position in ZI.

They just don’t make the cut of the ‘best of breed’ hypergrowth stocks for my portfolio.

[SaulR80683]

I am a year into this board, and it is time that I attempt to contribute. I am challenging myself to really learn the companies I am invested in beyond the numbers. Essentially I want to understand at a deep level: what problem are they solving, why are they special, is the business model translating into results, what are the risks, and how do I determine my conviction level. Here we go.

Excellent write-up Chad. I really like your effort to try to understand the companies you invest in. One suggestion though would be to look a little further back on Revenue.

For instance, the last eight quarters revenue growth look like this: 42%, 40%, 41% (bouncing around in the low 40’s). And then they caught fire: 46%, 48%, 57%, 60%, so they have really been accelerating.

Sequential gives a similar picture: 8, 7, 11, 13, 10, 14, 14.

Best,

Saul

[SaulR80683]

Hi Jon, this gives a somewhat different picture of their NRR:

1,000 or more employees was 127% in 2019, up from 125% in 2018

100 to 999 employees, was 112% in 2019, up from 105% in 2018

under 100 employees, was 87% in 2019, up from 78% in 2018.

Saul

[blufftonchad]

Saul,

Thank you for the feedback and I will take that back into my learnings.

Jonwayne,

Here is how they answered it in Q2:

We do report our net retention on an annual basis, given that it’s an annual calculation kind of starting at the end of the year, going to the end of the next year. What we do look at is the retention activity that we see. So, those customers that are renewing within a quarter and the upsells that we’re generating within a quarter, and we have seen that Q2 was the best quarter we’ve ever had from a retention activity perspective, and I think that gives us confidence that we will see higher net retention in 2021 than we saw in 2020. Certainly, as we see more and more of our customers take on advanced functionality or add-on features like Engage or other things, that certainly helps the retention as well.

My take is that the intelligence layer was largely in place with existing customers, and that the engagement layer will be the up sale.

More takeaways from Q3:

Growth is coming both from expansions of existing customers and landing new customers above the 100,000 threshold, with customers taking up more and more products at the point of initial sale.
We see growth from a user and seat expansion across the enterprise. And that just fits into our land and expand motion where we can land in one sort of business unit of an enterprise customer and then expand as that business unit see success. And then the other is, we are selling an expanding product set into the enterprise. And so where we may land with the intelligence layer, we end up selling the engagement layer in or we sell our chat functionality, our engage functionality, the Chorus functionality.

When we’re talking to customers about conversation intelligence, it’s a largely evangelistic sale. It’s technology that they didn’t know what’s available to them or available to go-to-market teams. And we see a big opportunity to continue to drive growth in nation across that product set.

My take: This is groundbreaking technology that goes beyond finding the contact. It also analyzes what works and what does not work, enabling you to learn from it and also deploy it at the corporate level. I infer that no one even thought of this when they were buying into the contact side. If you are already landed, why would you not want to go the extra mile to enhance it to the highest level?

Jonwayne, where I messed up was putting a number to the future NRR. I believe it will be higher but I cannot tell you how much higher. Thanks for challenging me to dive even deeper.

Chad

[wsm007]

Hi Chad, great post, thanks. I especially liked the insights around how they are in a league of their own vs competition and are competing in a classic “blue ocean” space. If anything this has increased my confidence.

However, I would like to challenge you about your hesitation about how essential their product is. I’ve been in a sales-driven multinational (mobile telco), and when the going got tough and cost cutting had to be done, it was back-office, marketing and other functions that had to bear the brunt. Even sacred engineering. Sales, never.

Without sales no company can exist. It is the most important, most essential part of any company. (queue angry reply from people in IT/technology/product!) Great product plus no sales is a disaster. Great sales and poor product is much better.

And they are the clear, undisputed leader in that space for the work-from-home, digital-first, post covid world. On this board we have a lot of people who are IT types, solo professionals, finance people. And probably few sales professionals.

And I believe a lot of them misunderstand and under-appreciate the product and company because of that. I’ve said so a number of times previously in my month-end write-ups. Also, the fact that it is not that well known to them is because of who ZI’s target market is. IT profs are irrelevant to ZI as prospects unless they are IT profs in sales. Few sales professionals will know about Datadog, Okta, Cloudflare, Snowflake and the like. But sales professionals, the target market of ZI, know about Zoominfo as is clear from their rapid growth.

So I believe they are essential, and my confidence is higher due the company being a bit misunderstood.

Jon, about NRR.

I’ve made the point, as Chad has above, many times that NRR is already substantially higher than the 108% that everyone seems to keep on fixating on. They just haven’t published it yet. I re-iterate. The 108% is the spending of the customers signed up until Dec 2019 (so six months before they IPO’d) - in 2020 vs 2019. In 2019 they had 580 customers generating >$100k. In Q3 of this year they had 1250, more than double. So we’re talking about the behaviour of large customers that represent (assuming they all stayed) less than half of the large customers they now have. Also, in 2019 they made a transformational acquisition - of Zoominfo. They were Discoverorg up till then. This is a very interesting podcast to listen to as it tells their story; I summarised it here: https://discussion.fool.com/it39s-the-same-podcast-that-broadway…

I’m going to quote a couple of analysts questions from conf calls since the end of 2020, to show how irrelevant the NRR of 2020 is. I.e. what the pre-IPO, pre combination of Zoominfo and DiscoverOrg customers spent in 2020, the year of COVID, vs 2019. I also link my write-ups of the quarters. These are analyst questions, not the company speaking:

Q1: https://discussion.fool.com/it-was-an-exceptional-set-of-results…

“My question here, what’s changed over the last six to nine months where the expected growth rate of your business would improve from what 27% consensus us to now 41% that is a material change last time I checked it, and we’re still on a global pandemic. So it feels like a lot of small things seem to be working. Maybe it’s just the power of the platform that’s resonating. I don’t know. But any additional colors you can give us here because the magnitude of the pace of change in the growth rate certainly seems much, much stronger than anyone’s thinking just nine months ago?”

Q2: https://discussion.fool.com/there-are-a-couple-of-additional-thi…

“At a very high level, when you look across all the results, certainly, all the growth metrics are accelerating up and to the right. Is it fair to say that there’s a fundamental shift that’s happening right now and that shift is actually accelerating in its pace and you guys are really seeing the benefit flow through your growth numbers?”

Q3: https://discussion.fool.com/zoominfo-q3-my-thoughts-and-notes-34…

“And then, I guess if we put into context some of the enterprise metrics or those customers over $100,000, the sequential add was pretty staggering, I would say, in that metric as well as, I think, some of the outperformance you saw versus your own guidance for Chorus which came in and almost triple the amount you thought it would. Is there anything to read into at least early on in terms of the Chorus traction within those larger ACV accounts.”

I also replied to ExponentialDave when he raised the low NRR here: https://discussion.fool.com/a-few-quick-notes-about-my-watch-lis… . The gist of that post is that, given that larger customers have much higher NRR, as larger customers become a bigger piece of their customer base, NRR should accelerate.

If they end up with only a 110%-ish NRR for this year I will have to eat my hat and post a link to the youtube vid where I perform said act.

-WSM

(Long ZI 10%)

[blufftonchad]

This may be off topic, but I want to share with you what I got out of today’s exercise. It is far more than just the ZoomInfo story, but more about how to interpret the story. Furthermore, it is about contributing what I can, hoping it helps someone, and then in return, they test it, accept it, reject it, or (like today) add a ton to it. THAT is the power of the board.

Specifically, this is what I walked away with today:

Original stance: ZoomInfo is growing nicely today, just look at the last two quarters of acceleration.

From Saul: The last eight quarters revenue growth look like this: 42%, 40%, 41% (bouncing around in the low 40’s). And then they caught fire: 46%, 48%, 57%, 60%, so they have really been accelerating.

Key Learning: Fully appreciate the whole picture. The pie that has been baking for a while is now out of the oven. That wonderful smell is spreading throughout the house. Fully appreciate that!

Original stance: Amazing product with nothing remotely close to it in its lane … but I am not sure if this is a business “must have” today.

From wsm007: Great product plus no sales is a disaster. Great sales and poor product is much better.

Key Learning: My own bias with a supply chain and operations background clouded my view on how immune sales functions can be from the devastating cuts many businesses took during the COVID era. Put another way, wsm007, you covered my 6 and expanded my horizon.

Original stance: NRR will likely to jump to 120.

From Jonwayne: Back that up

Key Learning: I gleaned my original position from many different spots, but I said it like I knew the number. I didn’t, and I need to say it differently. I will say that I am glad that I did it though, because I dug even deeper, which proved personally fruitful.

Original stance: They have a lot more debt than I see with any of my other companies. I really do not know how to factor it into my conviction level.

TimX94/tuisona/Saul/ Eric Przybylski: They chose to fund the business through low interest debt rather than dilute equity, and they have the FCF to make that play. Long term, it is better for us as investors and it does not materially impact the growth/operational/scale side of this business.

Key Learning: I have a lot more to learn on the funding side of the business and how to interpret it.

What I still do not know:

From my original post: ZoomInfo could be an acquisition target. I am reaching, but the thought process has precedence. Microsoft bought LinkedIn. It was far and away their largest acquisition. If Microsoft wanted this and wanted to make the single biggest recruiting and market intelligence platform there is, what is to stop them? I admit, I am no expert in acquisitions, but I have come across this exact scenario multiple times in my research. It makes sense from a business fit perspective. Is that good for us as investors? I do not know and I will leave that to the comment section.

Is this a real issue, and if so, is it good or bad for us? I just remember (from the outside looking in) the Teladoc/Livongo merger and it appeared to be messy with heavy/lingering clouds.

A more knowledgeable investor today than I was yesterday,
Chad