ZoomInfo IPO:  Capitalize On The Changing Tides Of B2B Sales (NASDAQ:ZI)

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B2B marketing and sales are increasingly becoming data-driven. ZoomInfo (NASDAQ:ZI) is the only comprehensive data-driven platform in the market whose offering covers the entire sales lifecycle. Further, ZoomInfo’s high growth rate, positive cash flow, and benchmark-beating metrics set it apart from its peers. As such, I’m bullish on the company. ZoomInfo began trading on June 4, 2020, making it the first technology IPO of 2020. ZoomInfo priced its initial public offering of 44.5 million shares at $21 per share, higher than its initial band of $16-$18 per share. On its first day of trading, ZoomInfo popped 62% and ended the day $34.

Market

ZoomInfo terms itself a “go-to-market intelligence platform for sales and marketing teams”. The B2B sales landscape has changed substantially over the past decade. Prior to the ubiquitous availability of prospecting tools, sellers relied on existing relationships, cold calls, and other inefficient practices. Even with the advent of digital tools, most sellers and marketers spend a significant portion of their time in researching prospects. This process is inefficient due to a number of reasons, including:

  1. Manual search and compilation of data.

  2. Creation of data silos across prospecting data.

  3. Incomplete and inaccurate data.

  4. Lack of visibility to expand into existing accounts.

  5. Loss of data when salespeople turnover.

These problems exist for companies of all sizes and across industries. ZoomInfo has identified 740k companies globally with a headcount of over 10, which comprise its addressable market. As such, the company estimates its total addressable market to be $24 billion, which seems reasonable. With its current customer base, the company is at a 2% penetration.

Source: ZoomInfo S-1

ZoomInfo’s Product Offering

ZoomInfo’s platform offers information and insights on organizations and professionals. This allows salespersons and marketers to target the right prospect at the right time with the right message, thereby shortening sales cycles and increasing win rates. A schematic of what the company calls its “360 degree view” is below. I view the company’s product offering as an evolution along the information hierarchy. Organizations have been using CRM tools and enrichment databases for a while now, both of which act as systems of record. ZoomInfo’s platform offers a more robust feature set that would qualify as a system of intelligence as well as a system of knowledge and execution.

Source: ZoomInfo S-1

Of note within the company’s product stack is their application of machine learning techniques to solve some vexing problems in this domain. Sellers and marketers spend an unreasonable amount of time in gathering, cleansing, and normalizing data from hundreds of sources. Like with other domains of scale that have similar data accuracy issues, this is a problem where the application of machine learning can result in better accuracy and completeness. ZoomInfo can achieve this much more efficiently due to learning from “wisdom of the crowd,” as they use user data to train and improve their machine learning models.

Using machine learning, ZoomInfo can create incredible enrichments on data. Some examples described in the S-1 include:

  1. Accurate identification of contact information using source count, source reliability, recency, and other attributes.

  2. Deriving contact information, hiring intent, and customer connections through email signatures, surveys, and conference transcripts.

The company’s platform provides the following key features:

  • 14 Million Companies. Includes description, location, industry, revenue and employees.

  • Over 120 Million Contacts. Includes role, location, verified email and direct dial phone numbers.

  • Scoops. Curated insights, such as personnel moves, pain points or planned investments.

  • Technologies. The stack of technologies used by companies.

  • Intent. Reveals companies signaling intent to buy through research on products or related topics.

  • Attributes. Enables granular targeting on categories of attributes, such as location, job function and company rankings. Examples include: “Has a call center,” “Has a mobile application,” “Has 100+ locations,” and “Has a data scientist.”

  • Organizational Charts. Displays the organizational hierarchy of a company and helps identify decision makers.

  • News & Events. Links to relevant news articles and events including press releases.

  • Corporate Structure and Hierarchy. Illustrates the relationships between parent companies, subsidiaries, and acquisitions.

  • Locations. Identifies all known company sites and contacts located at each location.

  • Funding and Acquisition Announcements. Timely alerts on funding rounds and merger and acquisition activities.

Source: ZoomInfo S-1

Go-to-Market

ZoomInfo has a high-velocity, high-volume go-to-market engine. The company uses predictive algorithms to qualify leads and assign them to the account executive who is most likely to close the deal. ZoomInfo also uses a similar data-driven approach for its outbound sales motion, which represented 40% of its 2019 sales. Notably, median sales cycle (i.e., time between opportunity creation to close) was only 30 days in 2019, which is extremely impressive. The company also states its LTV/CAC ratio to be 10x, which, depending on the reasonableness of the assumed lifetime, is also benchmark-beating.

ZoomInfo has a customer base of over 15k customers that span a wide variety of industry verticals, including software, business services, manufacturing, telecommunications, financial services, media and internet, transportation, education, hospitality, and real estate. By size, the company’s customer base includes large enterprise customers such as SAP, DocuSign, and Zoom Video; mid-market customers such as Novo Group and Brain Shark; and small customers such as Deal IQ and TTN solutions. The breadth of applicability of the company’s product offering is extremely impressive.

Competitive Landscape

The sales and marketing intelligence landscape is competitive and fragmented. Some companies that compete with ZoomInfo include LinkedIn with its Sales Navigator offering, legacy data providers like D&B Hoovers, niche data providers like TechTarget, and startups that have a less mature product than ZoomInfo. Notably, all of ZoomInfo’s competitors focus on specific use cases or types of data; they do not offer a comprehensive platform like that offered by ZoomInfo. To retain its defensibility, ZoomInfo should nudge users to use as many features as possible, thereby increasing switching cost. The company should also consider acquiring niche data providers to further strengthen its moat.

Key Risks

ZoomInfo discusses several risks in its S-1, including macroeconomic environment, COVID-19, competitive pressure, privacy issues, and dependency on third party tools. In my view one of the main risks is the company’s ability to sustain its high growth rate that it has achieved organically and through acquisitions. The company’s high trading multiples are justified given its high growth rate, however, its net retention is one of the lowest among its peers. Retention is a key driver of growth and will pose strong headwinds to growth if the company does not address it. Another risk that needs to be evaluated is the company’s ability to continue to out-innovate its competition, especially companies such as LinkedIn and Salesforce. While ZoomInfo’s offering is currently superior to that of its competitors, it needs to bolster its position by leveraging network effects that are inherent to its platform.

Financials

ZoomInfo grew its revenue by over 100% between 2018 and 2019, recording 2019 revenues of $293 million. Gross margin in 2019 was a respectable 77% and increasing over time. The company recorded an operating income of $36 million, a positive operating income being rare for tech IPOs. However, due to the interest expense of the debt on its balance sheet, ZoomInfo recorded a net loss of $78 million. A snapshot of the company’s financials is below:

Source: ZoomInfo S-1

To better evaluate ZoomInfo, it is helpful to see the company’s key metrics compared to other software IPOs of the past two years. ZoomInfo’s revenue growth rate of 87% in the most recent quarter places it at the third spot among software IPOs of 2018-2020. Given the low penetration into its TAM and strong tailwinds given the acceleration of inside sales given COVID, I expect the company to be able to sustain this growth rate in the near future.

Source: ZoomInfo S-1 and author’s analysis

There is little deviation in the gross margin of most software IPOs of 2018-2020. This is to be expected given the high scalability of the SaaS model. ZoomInfo places in the upper quartile of the cohort with a gross margin of 80%. The company’s gross margin has steadily increased from 66% in Q1 2018 to over 80% in the most recent quarter.

Source: ZoomInfo S-1 and author’s analysis

ZoomInfo’s operating margin is the second highest of the 2018-2020 software IPO cohort at 17%. The company is one of the handful of software companies that has had a positive operating margin at the time of its IPO.

Source: ZoomInfo S-1 and author’s analysis

Net dollar retention is a critical metric for any SaaS company. Net dollar retention is defined as the amount of revenue that the company is able to retain from its existing customers over a period of time. Expansion into existing accounts is typically a less expensive way of increasing revenue. A high net retention rate is also typical of products that are loved by their customers. ZoomInfo’s net dollar retention across all its customers is 109%, one of the lowest of this cohort. However, with only enterprise customers, its dollar retention rate is 127%. While it is typical for such a variation to exist among enterprise and smaller customers, the company needs to focus on improving its net dollar retention rate.

Source: ZoomInfo S-1 and author’s analysis

Valuation

ZoomInfo priced its IPO at $21, which equates to a 15x EV/2020E revenue based on my estimates. I have assumed sustained revenue growth for 2020 based on strong Q1 2020 earnings and robust pipeline as reported by the company. The typical valuation methodology for high-growth technology companies (many of which are unprofitable) is to benchmark against peers based on EV/revenue. The median EV/2020E revenue of a cohort of public SaaS companies is 13.5x. The median revenue growth rate of the same cohort of companies is 31%. As such, ZoomInfo’s IPO was significantly underpriced in my opinion. Based on its TAM, revenue growth rate, free cash flow, and market trends, my estimate for a fair EV/2020E revenue multiple of ZoomInfo is 24x-32x based on my analysis of the trading multiples of other SaaS companies using the Rule of 40 method. The Rule of 40 for software companies is a principle that states that the sum of revenue growth and profitability of a company should exceed 40. A plot of the Rule of 40 for a cohort of software companies below:

Source: author’s analysis

ZoomInfo’s stock has seen significant price movement this past week, increasing by over 30%, and closing at $51 on Friday. At this price, ZoomInfo’s implied EV/2020E revenue multiple is 36x, which is slightly above the range derived through the Rule of 40. However, given that ZoomInfo is in the top decile of both growth and profitability among its peers, a premium is justified. Further, COVID-19 may significantly accelerate the adoption of data-driven practices in sales and marketing given that much of it is happening remotely. This may be a tailwind for ZoomInfo and increase its revenue growth beyond what is assumed. As such, I am bullish on ZoomInfo.

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.

Additional disclosure: The opinions expressed in this article are my own and not necessarily those of my employer.

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