ZoomInfo: a SaaS Business With Massive Growth
A rare combination of 50%+ growth in revenue and net income positive
SaaS businesses historically have negative earnings due to massive investments toward growth. Finding this is a truly unique case. Couple that with a strong first mover’s competitive advantage and unique value proposition, I’m convinced we have a business that is positioned for long term shareholder returns. This publication explains the value proposition they have for their customers as well as their financial results, and business model.
(Ticker: ZI)
To fully understand the value proposition of ZoomInfo, we must first talk about the responsibilities of sales representatives today that primarily do business to business sales. I am fortunate enough to offer a unique perspective and insight due to my personal utilization of the product/service and have witnessed first-hand the value it provided me in my day-to-day responsibilities. Surprisingly, sales representatives usually spend a fraction of their time face-to-face selling. I have noticed that a large portion of time is spent in preparation for sales calls or prospecting for new leads/business. Since sales reps are commission based, they’re essentially paid as the business development arm and only make money when business is newly generated, retained or grown.
The number one problem sales reps face is rooted in time constraint. It takes an enormous amount of times finding and preparing to have conversations with executives (or a key stakeholder) than it is to have a meeting. In my opinion time allocation can broken down like this:
It is important to note that this is subjective. Different sales roles vary in complexity and so do circumstances but this provides a framework.
ZoomInfo’s best in class data first capabilities provide a unique ability to address the prospecting box (above) and reduce the amount of time you spend in that chunk of the pie. In addition, they constantly update their platform to make it more accurate which enables the rep to have access to additional prospects they might not know about and provides valuable sales enablement data about these prospects. The easiest way to think of their value proposition is like this:
This data is mission critical and drives top-line growth for the organization that adopts ZoomInfo’s infrastructure within their sales strategy. Executes have obligations of growth to meet for shareholders and the board. Their jobs often depend on their ability to drive sales and growth which is direct alignment to the organizations overall mission.
This leads to a very sticky model. Investors should understand the unique value of being able to drive top line growth through a platform.
They collect data from all over the internet and process it through their platform to usable insight. This is important due to the rapidly changing business land scape. Sales reps need to have access to the fastest and beset data for this to be effective. Although not 100% perfect today, ZoomInfo is best of breed and a first mover in this circumstance. I do think they’re well on their way to real time analytics.
There are few alternatives to ZoomInfo, with comparable being drawn to: LinkedIn Navigator, ClearBit, Insideview, and Dun & Bradstreet. Of these, LinkedIn Navigator is the most thought of alternative according to Gartner Peer Reviews. I have used both ZoomInfo and LinkedIn Navigator. My experience found it best to use them in tandem, as not all executives have LinkedIn profiles. But exclusively, I would have chosen ZoomInfo every time.
ZoomInfo TAM was recently expanded due to strategic acquisitions and product offerings. This is always a sign of a leader, when they innovate or acquire based on a broader business strategy. Their core competency is still providing sales teams with the data they need, you can clearly see that they have something bigger in mind with their latest acquisitions.
Chorus and Insent acquisitions bring ZoomInfo closer to becoming a fully automated go-to-market platform. As said on their earnings call, “sales teams are effectively doing two things: 1.) Prospecting and closing new business, and 2.) training and scaling up their sales team’s”. With their native data platform, they’re already instrumental in helping with prospecting. The Chorus acquisition addresses the training and onboarding for new sales staff.
Although these two acquisitions were recently highlighted, it is important to know that they have a strong history of M&A as they continue to consolidate the markets sales product offerings and expand their full solution to sales and recruiting teams.
They’re doing all the right things to become a premier solution. However, I rarely make an investment decision unless it has 3 important characteristics:
1.) It’s high growth
2.) It’s innovative
3.) It’s profitable or there’s a path to it
They checked my first two buckets but their latest financial statements are what really won me over. After they reported earnings, they posted a very impressive operating margin and growth. Breaking down some of the key top-line metrics, it will look like:
108% net revenue retention (this tells us clients are staying and spending more)
57% growth YoY
43% adjusted operating income margin, GAAP is 24% operating margin
Cashflow from operations $88.6m
Un-levered free cashflow $91.8m
From their top-line results, this tells me a unique story. One of the biggest risks I saw with the company last year was that it had a pretty large sum of debt. However, this risk becomes substantially less when a business is generating cash flow. This means they can, and most likely will, pay off all their debt in time. This is a profitable business model and they’ve shown they can scale and be profitable at this point in their business journey. This is very encouraging to any investor which should continue to justify a higher multiple and valuation moving forward. Obviously this is dependent on them being capable of driving long term growth.
Their guidance didn’t disappoint either and was another motivating factor on why I picked up shares after the earnings release. In this market, only posting good earnings from last quarter isn’t always good enough. You need to beat expectations and raise guidance to be rewarded. They did just that.
Revenue guidance in particular was great. However, I do wish there would have been a bigger raise in terms of operating income, but I’m sure they were looking to leave some room there and wanted to set expectations correctly from a bottom-line perspective.
My Conclusion here is easy after these earnings, this was a buy for me. It does have everything I am looking for and it helps that I am familiar with the product. I entered in at $59/share but do expect volatility in the near to intermediate future. In that case, I fully plan on taking advantage of any significant market pull back and will add to my position over time. Despite the lofty valuation, the future is bright and you must pay up for high growth best of breed businesses.