ZoomInfo Technologies (ZI)

[wrciii]

ZoomInfo Technologies (ZI)

ZI is a Bert recommendation. Saul bought a 4.7% in May: https://discussion.fool.com/my-portfolio-at-the-end-of-may-2021-… “So to conclude: This is a company that is a first mover, making its own market with a cloud-based new technology that is changing an old way of doing things, attacking S&M expense, the largest expense item for many B2B companies, a company that is already very profitable, is using its data to move into a second market (recruiting), has very impressive clients (Zoom, Shopify, Docusign, Forbes, etc) and last quarter had 50% revenue growth and 63% free cash flow margins. But the market doesn’t seem to love it. I think it’s partly because its goal is to help marketing, and we all have developed negative feelings about advertising and marketing, thinking of obtrusive calls or ads on websites, etc so we automatically feel negaitve about it. We’ll have to see what happens.”

In June, Saul sold ZI to add Upstart (UPST):”To pay for the added Upstart I sold some of my smallest position, ZoomInfo, which, despite all the good press and great customers, I just couldn’t see growing forever as I can with most of my other companies. (I may be wrong, of course). I also trimmed some other positions to raise the cash.”

I also cringe when I think about “obtrusive calls or website ads.” But I like the numbers, especially the profits, so I held my position.

ZI reports August 2. From Zack’s: “This company is expected to post quarterly earnings of $0.12 per share in its upcoming report, which represents a year-over-year change of +71.4%. Revenues are expected to be $162.38 million, up 46.4% from the year-ago quarter.”

For those interested in a deep dive, FoolishJeff started a thread here: https://discussion.fool.com/mf-deep-dive-into-zoominfo-34810679…

Your thoughts?

Long ZI and UPST

[SaulR80683]

In June, Saul sold ZI to add Upstart (UPST):”To pay for the added Upstart I sold some of my smallest position, ZoomInfo, which, despite all the good press and great customers, I just couldn’t see growing forever as I can with most of my other companies. (I may be wrong, of course). I also trimmed some other positions to raise the cash.”

Hi wrciii,
After I did trim way, way back on my ZoomInfo, I rethought it and have built back to about a 3.8% position. I’ll say more about it in my end of the month summary this weekend.
Best,
Saul

[MFChips]

I am now a ZoomInfo customer. I learned about the company from this board, and thoroughly investigating the company as an investment, I had established a large position (4%).

I own a small “sales agency” whereby we are the contracted exclusive outside sales team for various manufacturers in a defined sub-region in the US. We are a salesforce for rent, if you will.

We occasionally “scrape the internet” looking for very specific contacts to introduce a product to. Generally, though, we already know those contacts and have personal relationships, which is really our value to our clients. But there’s always change, so I decided to reach out to ZI to see if this tool would make sense for us. I did a test drive for a few days and I can report that the tool works great, is intuitive, etc.

In the end, it does moderately seem to make sense for our use case, so I’ve made a 1-year commitment in the very low 5 figures. I say moderately, only because our situation is different than their average customer. Since our value is our inherent knowledge of our local customers, tools such as this are in fact a threat to our business, as our clients could opt to establish their own direct salesforce, if these tools could level the field. So I decided to make the small 5-figure investment for 1 year. We will see where this goes, we are in our first few weeks of running ZoomInfo.

Here’s a few basic impressions so far:

1. The tools are well assembled and intuitive. Their database is large and expanding.
2. Much of their contact information is harvested from their free user base, known as “Community Edition”. Users may have up to 3 free licenses in exchange for installation of a program called “Contact Contributor” that scans their emails for contact info that is shared with ZoomInfo.
3. Their sales process is well refined. I almost didn’t sign up but they have a very good process to walk the customer thru. When I made it clear that the value to my company would be limited given we are a bit of a special situation, they sort of custom-crafted a package for us to reduce the price without flat out “discounting” to meet my needs.
4. Their onboarding process is slick and fine-tuned.
5. I have no concerns with how they mine data and the whole spam-concerns expressed by others. Professional Salepeople need contacts and this information is definitely of value.

However, I have sold all of my shares. In my opinion, there is no real “secret sauce” here, and that this tool would be a really nice little add-on to any CRM, that most sales teams already use. Zoominfo is well integrated with Salesforce.com and Hubspot already. But I would expect that all of the CRM folks will come after this space, perhaps thru a buyout of one of the smaller ZI competitors. I believe that the reason that the ZI stock has really not performed as we’d expect given the revenue growth and existing leverage to turn revenue into profits is because of the lack of a defensible product. They have a first-mover advantage, but will that survive 3 years? Could Zoominfo be a buyout target? Perhaps.

In my opinion, compared to complex products such as Crowdstrike, Cloudflare, Snowflake etc, Zoominfo’s first mover advantage is pretty small and perhaps not sustainable. The software required to make this come together does not seem very daunting and I believe the big guys (Salesforce, Hubspot, Microsoft…) will be adding this as a feature to their enterprise products soon enough.
This is the chief reason I decided to cash out my 18% short-term profit. But I intend to be a customer for now.

YMMV,
Chips

[ibuildthings]

Thank you Chips, for the interesting post.

I can see how the software the customer uses to find the contact info isn’t hard to develop for a talented team. However, what about the database itself? Would that be easy to generate too? In other words, is the ZI magic in the software and user interface, or is it in the collection of names and methods for keeping that collection current?

Thanks

[MFChips]

Certainly, there is a moat in place, which is that the database is large and mature and a competitor would be starting with a product that has much less information.

The software to recreate this is straightforward. Being the first mover and having the large database in place is important. How hard is it to recreate that to a large extent?

Important to remember, the free-user is supplying this information to ZI. It is my opinion that Salesforce (for one example) could release this as a relatively small existing database, but that it could grow VERY quickly, by mining their (initially)free-users. Certainly, that would take time, and ZoomInfo would have an advantage during that time. But it seems to me that Saleforce could grow that database very, very quickly. Ultimately, Saleforce could then turn that tool to a subscription add on that would offer more features etc over the free version and convert many free users.

Also, there are competitors out there today such as:

UpLead
Lead411
Leadfeeder
DiscoverOrg.
Prospect.io

And literally 10’s of others that return when doing a google search. I have not looked at any of very deep, but there are some offering very similar tools for about 10-20% of ZI’s cost. I do not know how useful their database is at this point.

I don’t know that any of those small players are a threat, but they very well could be if in the hands of CRM, HUBS etc.

There are other features to ZI beyond the features I’ve mentioned (org charts, scoops, etc), but I don’t see those as major selling points, nor particularly easy to defend either.

I could see CRM or HUBS offering their own products in short order. Just my opinion though.

[SaulR80683]

Thanks very much, MFChips, for a view from the field which is always tremendously valuable. But I have a question: You seem pretty sure that Microsoft or Salesforce could quickly reproduce what ZoomInfo is doing. I have no experience at all in the field and you have a lot more knowledge about it, but I have to wonder why in all the years that ZoomInfo has been doing this, and considering that they are growing at over 40% with Free Cash Flow at over 50% of revenue, which makes it a very desirable model, why have none of the big guys tried to copy it, as you say would be easy to do? Obviously it is extremely profitable and desired by customers, and they have customers like Okta, SAP, Toyota, Marathon Oil, Zoom, Docusign, Shopify, Uber, Forbes, and AmazonBusiness. If it’s easily copied, why haven’t the big guys copied it?

Best,

Saul

[MFChips]

Saul - easy is relative.

I think ZoomInfo’s market looks different now that they are seeing hypergrowth. I’d assume the big boys have noticed, but were late to do so. This product fits so well as a adjunct to existing CRM tools.

The tools ZI offers do not seem complex, their database does have first-mover advantage.
How big is that advantage is up for debate.

I suspect that some big buys have taken notice and have a strategy that is well into drive. In house development, creating the first viable dataset, etc would take some time, measured in years rather than months.

I’m no expert in software and I am only speculating on potential competition. Bottom line is how big is the first mover advantage. Is it like UPST’s AI and learning? Or is it in the target of some of the big boys?

[SaulR80683]

Or maybe it’s not worth it for Salesforce, Microsoft, etc to actually try. A lot of work and expense for something that wouldn’t even budge their needle on overall revenue, AND, and it’s a BIG “AND”, might get them some really bad publicity like “Salesforce is spying on you and selling your “private” information to people who want to call you to sell you things you don’t want!!!”

Do you think that Salesforce would even for a minute be willing to risk THAT kind of malicious publicity for the chance that they might get an additional half or one billion of revenue at some time five or six years from now? I just don’t see the “big boys” as an impending competitive threat.

Best,

Saul

[HappyT]

It’s not so easy to copy a product.
Look at zoom (ZM). Google is a much bigger company with all technology in place and already in this field way before zoom entered the picture. Zoom is still the one who made it in this line.
In the same vain, look at Amazon vs Walmart. Years ago you would say Walmart has the edge. They are around longer, they bought off jet.com, and just join the online race as well, etc., yet even with it all in place, now we see amazon is clearly the winner here.
Seems not so simple to just copy something even with all the resources…

[jgrothaus]

I work in the Salesforce ecosystem, happy to provide more insight. CRM did originally have a prospecting database, very similar to ZI, called Data.com. With GDPR laws (along with a few other changing trends), CRM didn’t feel they could continue offering a quality service, and shut down the service in 2018 to focus on their core competancy. In this same time, ZI thrived with the same industry challenges CRM faced.

When Data.com went bust, even Salesforce’s AEs were recommending ZoomInfo as a replacement to their own customers, as it can easily integrate back into a customer’s Salesforce instance.

So, CRM did try to copy it, but it failed.

I have to imagine that the other big guys are looking more at CRM’s failed experiment and seeing that as a warning for themselves rather than thinking they can outright copy ZI. I think it’s right to call that a moat.

[anthonyms]

I could see CRM or HUBS offering their own products in short order. Just my opinion though.

To a degree that was what drove Microsoft to acquire LinkedIn - the opportunity to combine with Microsoft Dynamics - their CRM system. LinkedIn and Microsoft has continued to perform and evolve but I haven’t seen them deliver on the integrated contact management and prospecting solution this was supposed to deliver.

This and CRM’s data.com failed experiment reminds me of Amazon trying and failing to compete with Shopify and just gave up.

Ant

[luciuse]

"Or maybe it’s not worth it for Salesforce, Microsoft, etc to actually try. A lot of work and expense for something that wouldn’t even budge their needle on overall revenue, AND, and it’s a BIG “AND”, might get them some really bad publicity like “Salesforce is spying on you and selling your “private” information to people who want to call you to sell you things you don’t want!!!”

I think it’s important to realize that companies entrust Salesforce with their crown jewels by storing all their customer data and associated intelligence. It’s a big enough leap of faith given the data security threats of having all this data in the cloud, but if Salesforce actually started mining and monetizing their customers’ confidential data, that would be the instant death of their business model.

[XMFBreakerTinker]

Perhaps this should be a rule of Saul investing. Except in very rare instances when Microsoft has been able to give away something for free, I cannot recall a single situation (and perhaps someone on the boards can) where a first moving category dominator was materially disrupted by the large incumbent who came to prominence under a prior technology platform. Not a single one. Not even the most likely one and that would be Amazon taking out Shopify. For crying out loud, Amazon is the largest host of third party merchants in the world! It is what they do! Even Nvidia, with Intel and all Google and Amazon and all those start ups, could not be dislodged from the AI category that it pioneered and dominates, despite so much press to the contrary.

In the same way, large banks won’t disrupt or even hurt Upstart’s business, which focuses on the Shopify like markets of the smaller to midsized players (and then moving upscale from there).

I cannot say that Upstart’s business model is built to stand the test of time, economic cycles, etc., but that is why we follow the numbers. But I can say Bank of America is not going to hurt their business, nor take any of their customers away. In fact, it might break the dam open and cause these smaller and mid-sized banks to become compelled to go with an AI solution just so they can keep up with the whales and stay in the business.

We had the same sort of discussion with CRWD. Just another security company. But they are a security company on a new technology platform, the cloud. And all one had to do was follow the numbers. Speculation galore about the nature of the security industry, but they created and dominated the category, so what more do you need?

I won’t clog up the board with this, as I am not sure if it is something that fits on the board (although it probably should as it is really a new technology platform (web3), that is an enabling technology) But Ethereum (who created the smart contract blockchain market and dominates it) started running into a huge growth spurt in their business in late 2019. Faster growth than even Zoom saw at its peak. Ethereum both created and overwhelmingly dominates its category, and the price of Ether (the currency that runs Ethereum) has risen along with the huge growth spurt in its usage. I think the discussion of this will be a bit more dense than is the usual here so I will leave at that and you can email me off board if your interested in further discussion (I do own some of the Greyscale Ethereum Trust, which is a tracking stock, but not based on currency but based on the technology adoption model and following the numbers).

So anyway, always some new opportunity developing. SaaS in 2015 is now maturing, and things move on to AI (like with Upstart), blockchain like with Ethereum (and yes, some interesting things being done with Bitcoin by such as Square), and who knows where else we mind find these same indicia that indicate a category dominator with rapid growth where we can just follow the numbers.

With Zoom Info, no incumbent is going to build from scratch and materially hurt their business. Not gonna happen. Although Microsoft, through LinkedIn, could possibly hurt Fiverr (but that is another discussion). Zoom Info shares have disappointed so far this year, but so has SNOW’s (unless you opportunistically made buys near its lows) and there is nothing wrong at all with SNOW’s long term prospects. Oracle is not going to disrupt them.

Tinker