ZoomInfo Technologies: Intelligent Service, Safe Investment?

ZoomInfo Technologies (ZI) has attracted my interest since the company went public in June. When I covered the prospects following the public offering I concluded that ZoomInfo was an actionable intelligence play which sees strong growth, although in part aided by acquisitions, while I was particularly impressed with the fact that the company is solidly profitable already.

The opening day jump witnessed in the share price unfortunately killed all immediate appeal, yet the company was interesting enough for me to keep an eye on, so let’s see where we stand after the second-quarter results.

The Thesis – Let’s Go Back To July

ZoomInfo offers a 360 degree view of go-to-market intelligence, being on a mission to unlock actionable business information to help its customers succeed.

The company is an intelligence platform for sales and marketing teams, providing information which allows both for shorter sales cycles, and better win rates, optimizing the marketing dollars spent by their clients. However, the savings mostly have to come from time efficiency as the services of ZoomInfo do not come cheap, but provide great value as basic information is not available, is of poor quality, or sales reps have to gather it themselves.

With Covid-19 revealing to the world that large gatherings and conferences perhaps might never come back in a way as they did in the past, this makes online conversions and marketing ever more important. The company has more than 15,000 organizations as its customers with more than 200,000 paid users, as the platform provides for messaging/signaling of data of more than 14 million organizations. As always these days, artificial intelligence and machine learning are the secret sauce in connecting the billions of data points into actionable insights.

In terms of pricing, ZoomInfo and underwriters initially aimed to issue shares at $17 per share, as the IPO price was hiked to $21. With shares hitting a high of $40 on their opening day of trading and ending that day at $34, the enterprise value came in at $13.7 billion.

Between 2018 and 2019 the company doubled sales to $293 million. The company reported pro-forma revenues of $335 million which resulted in a 41 times sales multiple at $34, yet with sales essentially doubling and the company reporting real GAAP operating profits of $36 million, the company was really solidly profitable. Furthermore, the company had already reported first-quarter results with sales up 90% to $102 million as the company furthermore reported a $20-million operating profit, as the annualised revenue number translated into a 33 times revenue number at $34 per share.

This actually looked relatively compelling compared to some other ”IPO” high-fliers as I was curious to learn on the organic growth rates. If this was all-organic growth, I would be quite impressed and appealed to the shares.

I noted that current trends could result in a $600-million business by the end of the year (on an annualised basis), reducing multiples to about 22 times sales; yet pegging organic growth at 40-50% I was turning a bit cautious to buy the shares at $34 at the time.

What Happened?

My somewhat cautious stance did not play out as shares rallied another 50% in just a few weeks, to trade in their $50s through the remainder of June, as shares even briefly traded around the $60-mark. What followed was quite a reversal with shares now back around $40 ahead of the release of the second-quarter results, and following that report now trading around $38.

Second-quarter sales are up 62% to $111 million with organic growth rates reported at 40%. The margin numbers are highly complicated as the company reported a GAAP operating loss of $31 million and adjusted operating profit of $55 million. The GAAP loss included about $10 million in restructuring charges, a similar amount in amortization charges, but the largest item in the discrepancy stems from stock-based compensation expenses, coming in at $65 million in the past quarter.

Given that the public offering took place this quarter, the question is what the realistic stock-based compensation number is going to be forward, now being a publicly traded company, as this cost was elevated in the quarter as a result of the offering. On the conference call, management indicated that stock-based compensation will come down significantly in the coming quarters, yet unfortunately this statement has not been quantified.

The 403 million shares now trade around the $38-mark which translates into an equity value of $15.3 billion, or $15.8 billion enterprise valuation if net debt is included. This valued the company at 35 times annualised sales, yet the trouble is that the pace of growth seems to slow down a little. Third-quarter sales are seen at midpoint of $117 million and based on the full-year outlook, fourth-quarter sales are seen around $123 million.

Diving into the S1-filing of the public offering, this is not all great news. The third-quarter guidance of $117 million reveals 34% organic growth on an annual basis, with fourth-quarter revenue growth seen around 28%, suggesting either a real growth slowdown or conservative guidance. The good news is that the company remains incredibly profitable (based on adjusted earnings) yet the question is what the real stock-based compensation expense is going forward.

With adjusted operating margins trending at around 50%, I really see potential for GAAP operating margins at 30-40%, which based on the run rate by the end of the year suggests operating profits of $150-200 million, for net earnings of $120-160 million, translating into earnings of $0.30-0.40 per share, about a hundred times earnings.

While these multiples are anything but cheap, it is the combination of very strong (current) margins, actual cash flow generation, still solid growth and rapidly falling sales growth multiples which at least creates relative appeal compared to many other momentum stocks. Hence, ZoomInfo continues to trade on my watch list, as levels in the low $30s look like good opportunities to get aboard.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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