ZoomInfo, the misunderstood titan

Investment Analysis Clubs Saul’s Investing Discussions
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Jon, I think you should take another look at ZoomInfo. It is one of my highest confidence positions. It’s not just a little company that noone has ever heard of. We have very few companies where everything seems to be going as well as this. Read the conference calls with each analyst saying something like “Amazing! How are you doing it!”

Some of its new and expansion customers in the last three quarters include Okta, SAP, Toyota, Zoom, Docusign, Shopify, Uber, Forbes, Motorola, Staples, Office Depot, Marathon Oil, AmazonBusiness (part of Amazon).

Think about that! Shopify? Zoom? Okta? SAP? Toyota? These are companies that can hire the best, and are smart enough to find the best.

Forrester has ZoomInfo so far to the right on Strength of Offering that they are sitting on the right border of the graph. I never remember seeing a company actually placed on the actual right side border line before, but I could have missed one.

They only had the one Module back in 2019, but now, two years later, they have at least four to sell to bost their NRR

From the last Conference Call:

In ZoomInfo Recruiter, we added a number of new features to improve the user experience and open up the platform for more integrations. While still early and small, we more than doubled the number of Recruiter customers SEQUENTIALLY. (Caps are mine!)

We now have more than 1,250 customers with greater than $100,000 in ACV. These customers now represent more than 40% of our overall ACV with the ACV from that cohort growing by more than 85% yoy.

We’re again raising our financial guidance for the year. We now expect to deliver revenue growth of 54% in 2021 with organic growth of 50% at the midpoint.

Saul: Look at that! 54% growth with organic growth of 50%!!! Does that look like more than half the growth is from acquisitions? You are reading the boilerplate legalese that as you pointed out they haven’t gotten around to changing for the last 5 quarters.

And what does the revenue growth actually look like? 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.

And then there’s International:

International continues to be a success story. We materially grew our data coverage in Europe and expanded the number of reps targeting the international opportunity. We’re in the process of opening an office in the U.K. and have already hired our first team of sales reps that will be based there. Because of our highly differentiated offering, demand for our platform is high, driving year-over-year international revenue growth greater than 80% in the quarter, with international representing more than 11% of our overall business or over $80 million on an annualized basis. We now cover nearly all businesses with more than 100 employees in Europe in our data bank.

And hardly any investors know anything about this company yet.

Saul

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I have gone back and forth on whether I should weigh in here but I guess if everyone with a contrary opinion kept quiet, this board would suffer overall.

The #1 reason why myself, and probably many others, ignore ZI is because of their debt level. Why would I invest in a company, no matter how great their customer growth and operating leverage is, if they are growing revenue ~50% YoY with this level of debt when other companies are growing faster (some much faster) with little to no debt?

Let me head off the response of: “Well their absolute debt level is close to other companies.” I am not referring to absolute debt levels but their balance sheet as a whole.

Let’s start with their cash to debt. I include cash and short-term investments of which they have a sum of $233.3M as compared to their $1232.2M in debt. This gives a debt/cash ratio of 5.28. That means they have 5x the amount of debt than they have cash available!

Next let’s look at their assets all together. A majority of their assets consists of 3 things: intangible assets, goodwill, and deferred tax assets. These three make up $6028.7M of their $6608.1M in assets. I would argue these 3 things are not tangibly valuable (I believe deferred tax assets really only applies to a reduction in tax liability in the future, not that they will receive a check). This would mean that ZI has $579.4 in “good” assets. This gives a debt/assets ratio of 2.13. This mean they really have 2x the amount of debt than they do assets!

All of this can certainly be ignored, and each person has their own thresholds for different metrics, but I personally am not interested no matter how great their growth metrics are. Again, there are many other companies out there growing much faster without being saddled with this debt load. Debt is future growth brought into the present so eventually this will catch up in some way, and it could most certainly be long after this board has moved on from the investment meaning it was a nonissue. I agree with jonwayne though that “they just don’t make the cut of the ‘best of breed’ hypergrowth stocks for my portfolio.” Luckily we don’t all have to agree and that is why this board has remained a mainstay resource for my investing research.

-Junomean2
No position in ZI

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To Chad, WSM, Saul:

I apologize in advance if this post contains numbers repeating the info that everyone has posted today. But I figure I needed to look at all the numbers into a spreadsheet and read the conference call transcripts myself, instead of relying on my brief cursory look that I had done months ago when I noticed ZI mentioned on this board.

Here’s what I gathered:

         Q2-20  Q3-20  Q4-20  Q1-21  Q2-21  Q3-21  
Revenue* 111.2  123.6  139.7  153.3  174.0  197.6
   QoQ   7%     11%    13%    9.7%   13.5%  13.6%
   YoY   40%    41%    45%    48%    56%    60%

              Q1-20  Q2-20  Q3-20  Q4-20  Q1-21  Q2-21  Q3-21         
Total cust    15000                20000                25000
Rev per cust  $6906                **$6985                $7904**

Cust ACV>100K   630    650    720    850    950   1100   1250
   QoQ                  3%    11%    **18%    12%    16%    14%**

*Note: ‘revenue’ is used interchangeably with “allocated combined receipts” to accurately reflect the acquisitions until it converged fully with ‘revenue’ after Q3-20.

‘Inorganic’ YoY revenue growth certainly accelerated the last few quarters, including organic YoY growth, which went from 40% in Q2-20 and 41% in Q3-20, to now 54% in Q2-21 and 54% in Q3-21.
Just like you all pointed out, the customers with ACV>100K has been jumping considerably QoQ.

I also divided the reported quarterly revenue by the number of total customers (which they’ve only reported that figure for Q1-20, Q4-20, Q3-21), and it seems to indicate a jump in dollars spent per customer over time.
All of this points to a NRR that should significantly exceed the 2020 reported figure of 108%.
So, I concede and withdraw my prior objection with ZI’s NRR. This certainly teaches me a lesson to refrain from posting my thought without having done a true, full due diligence by myself.

However, I remain concerned about the large amounts of debt and the 10%+ owners (venture capitalists) that have already shown their determination to sell their stake ASAP (evidenced by the offerings done last year plus the continual form 4 filings showing their sales, and the many millions of shares they still retain).
I believe there is a high probability of opportunity cost of my funds if placed into ZI for the near future (unless I treat it as a stock to constantly trade, rather than ‘intending to hold long term’). Of course, I could be wrong, but just my opinion here.

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4

I want to point out something very important regarding their debt levels. Check the interviews of Henry Schuck you can see he is a very big advocate for raising debt instead of equity, since raising equity is much more expensive in the long term since he thinks his company will be worth much more in the future. Furthermore his policies are also very shareholder friendly since he does not dilute shareholder.

My main point is do not stare yourself blind on debt. Raising equity is a piece of the same pie, only it is no so visible in the balance sheet as debt, but outcome is the same if not worse long term.

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Hi
As someone more familiar with Debt markets here’s my two cents:

The most important metrics for debt carrying capacity is EBITDA. Now for companies who are growing fast but do not generate profits yet, I would agree that Debt of this magnitude vs all the metrics you have pointed out would be problematic.

But the crucial (and favourable) distinguishing feature of ZI vs some of our boards favourites is how profitable it is from a bottomline perspective.They have a trailing 12m EBITDA of circa 350+mm thus giving them a Debt/EBITDA ratio of 3.4. This is a perfectly acceptable amount of leverage, particularly where a company is growing as fast as ZI is, both on top and bottomline. This will reduce to close to 2.3 times within the next twelve months provided they continue to grow revenues at 50% rate at current EBITDA margins(so 50% increase in EBITDA as well). There is nothing to indicate that they can’t do this, in fact they should exceed this comfortably.

This is what allows ZI to be credit rated in the BB range in line with many other traditional larger companies.

Another way to think about it is this: if ZI management wants they can simply raise 1.25bn of equity to pay down the debt by diluting circa 5% of the company, given debt is 1.25bn and Market Value of the company is 22bn. And if they felt their equity was expensive, or this debt was an overhang to their share price they would probably do just that.

In summary I do not believe that this debt should be a factor worth considering unless ZI stopped being profitable.

Tuisona
Circa 3% allocation to ZI

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To further illustrate my point:

Lets say Zoominfo needs additional funding of 50 USD in cash and current equity total is 50 before raise There are currently two ways to get it: raising cash or debt. Most of our companies raise in equity. This dilutes the shareholder in the background, but makes the balance sheet look very pretty with each time increasing equity. In this example equity will be 100 after the raise

If you issue debt this makes the balance sheet look worse then in the example you have 50 equity and 50 debt. Text book says this must be a worse company.

In practice this is all a piece of the same cake, where long term you are probably worse of with raising equity as shareholder

Do not let accounting shenanigans fool you!

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7

Jon, I believe the debt is because they didn’t have an IPO and didn’t sell any shares when they went public. That means they didn’t raise billions of dollars but also means they didn’t have a dilution of their shares.

On the other hand they have Free Cash Flow at about 55%, 64% and 53% of total revenue the last three quarters. That’s a lot of cash and they are paying down their debt.

What happened in 2019 is that they bought the company called ZoomInfo, and they adopted its name as they liked it better than the one they had. That was long before Zoom became a household word, by the way (March/April of 2020), so they weren’t copying. They took on debt as well, which is where the debt came from.

And in 2019 where you were reading the thing about more than half of revenue growth came from acquisition, that was because of the merger/acquisition, of course, but that’s ancient history now.

Best,

Saul

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Juno,
With regard to the discussion of ZoomInfo’s debt levels, one must ask himself one question: whether or not they support/agree with the source of the debt—-the Post-IPO acquisitions of Chorus.ai, RingLead, Clickagy/Everstring, and Insent (total consideration for all about $800M) and the pre-IPO acquisition of Zoom Info for a little under $800M. Let’s recall that Henry Schuck’s DiscoverOrg acquired ZoomInfo and then rebranded to “ZoomInfo” pre-IPO.

If you disagree on the acquisitions in the first place, then the conversation stops there.

Assuming you concur that these strategic, mostly bolt-on acquisitions were beneficial, then you must ask yourself if the company should finance these through debt or equity?

DiscoverOrg/ZoomInfo chose debt, at an average interest rate of about 3.5%.

This benefits us shareholders as it prevents dilution. ZI’s shares outstanding have barely moved since the IPO—- 389M at IPO to 398M now, across all classes.

Frankly I wish more of my companies would access capital markets more eagerly than equity markets.

Regarding your other points about balance sheet…

Imagine for a moment that tomorrow morning Cameron Hyzer (CFO) announces that he and the board agreed to dilute the share pool by about 6% and will be retiring the full balance of their debt. Also, they obtain an opinion from their auditor, KPMG, that instead of separately reporting the $4.0B deferred tax asset and $3.1B tax receivable agreement liability, they’ll net them on the balance sheet to report only the remaining $900M asset.

Both of these changes have no affect on the business, their revenue, nor their gross or operating margins. The share price will naturally drop 6% due to dilution, and EPS would jump slightly, by about 10-cents per year, with no more interest expense.

Given that these non-operational factors are the reason you don’t own shares, I expect that you would be looking to start a position?

I aim not to convince you to buy shares. Only to encourage you to critically think through your reasons for not buying, as the reasons you stated may be more superficial and not truly connected with business performance.

Take Care.

Eric Przybylski, CPA

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Jon,

I hear you regarding the strong venture capitalist selling. It’s not ideal, but this is quite common practice from long term backers in the private market. They have to sell down for their LP’s.

On the other hand, something I track and like to see is significant increased institutional ownership. Take a look at the link below and click on the graph, this shows a lot of funds stepping in here:

https://fintel.io/so/us/zi

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The debt is pretty much irrelevant for the investment case.

I think people on this board are mostly invested in earlier stage SaaS which are not generating meaningful FCF (Free Cash Flow) and hence equity (rather than debt) is the preferred vehicle for raising capital.

For Zoominfo, it is expected to generate $380 mil of FCF* in 2022* ; and the $ 1 bil of net debt (gross debt minus cash) can be repaid with 2.6 years of FCF.

This is a very conservative capital structure actually. With this kind of capital light business model and stable FCF profile, if ZI ever ends up in the hands of the private equity guys, they will lever it up to 6-7x (rather than 2.6x).

There are other nuances such as the type of debt (notes vs term loans), the covenants and the debt repayment profile but I think a discussion of that will stray too far from this board.

  • While many in the debt community prefers to use EBITDA, I prefer to use FCF rather than EBITDA because FCF represents the cash that can be used to pay down debt.

  • I use 2022 FCF because it is “run-rate” and gives full credit for the acquisitions it made in 2021 such as Chorus in July 2021 and datachain in June 2021; so the 2021 FCF only has partial contribution of the FCF from the acquired entities.

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To explain further how conservative ZI’s capital structure actually is: to use an imperfect analogy, imagine you own a property and the mortgage can be fully repaid just using 2.6 years of your disposable annual income (i.e. what’s left after paying every other expense - so it’s like Free Cash Flow), would you be concerned?

I certainly wouldn’t. This is especially so if your disposable annual income (just like ZI’s FCF) is stable and growing fast every year.

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This is a very conservative capital structure actually. With this kind of capital light business model and stable FCF profile, if ZI ever ends up in the hands of the private equity guys, they will lever it up to 6-7x (rather than 2.6x).</i.

100% agree buddy. When private equity bought out my former company (US listed), the first thing they said they would do and did was raise debt leverage to 5-6x, (that was back in ~2011).

Current debt levels are both minimal and manageable and the current equity issuance/dilution is one of the most responsible and conservative I have come across in listed SaaS companies.

Ant

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I had a question, in Q3 they generated $197.6 M in revenue, $8.1 M was from an acquisition, 54% organic revenue growth.

From a QoQ revenue perspective, excluding the acquisition, the QoQ figure comes to 13.6%, but what does that number look like without the acquisition? I don’t think it’s as simple as subtracting $8.1 M from the total, but I would assume that QoQ organic revenue growth is definitely less than 13% is it even possible that it’s in the high single digits?

ZoomInfo definitely has found synergies in their acquisitions, but just trying to understand if their revenue is slowing down more rapidly organically but the inorganic revenue is helping prop up?

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I had a question, in Q3 they generated $197.6 M in revenue, $8.1 M was from an acquisition, 54% organic revenue growth. From a QoQ revenue perspective, excluding the acquisition, the QoQ figure comes to 13.6%, but what does that number look like without the acquisition? I don’t think it’s as simple as subtracting $8.1 M from the total, but I would assume that QoQ organic revenue growth is definitely less than 13% is it even possible that it’s in the high single digits?

Hi Runner Guy,

I don’t know the answer, but they count it as acquisition revenue for a full year after the acquisition (as they should). Therefore, if last quarter was also after the acquisitions, there was probably, say, $7.2 million of acquisition revenue last quarter, so you have to take that off last quarter, and the QoQ organic revenue would still be roughly 13.6% or 13.7%. [$189.5 divided by $166.8 = 1.136].

Now this is simply illustrative as I didn’t go through the previous conference call to dig out the exact acquisition revenue the quarter before, but I’m just illustrating the principle that you have to subtract the acquisition revenue from both quarters before you divide.

Saul

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I thought this article on ZoomInfo was extensive and really well written and worth reposting here.

https://seekingalpha.com/article/4479629-zoominfo-great-grow…

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