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ZoomInfo's (NASDAQ:ZI) Q3 Sales Top Estimates But Contract Wins Slow Down


Full Report / October 30, 2023

Sales intelligence platform ZoomInfo beat analysts' expectations in Q3 FY2023, with revenue up 9.11% year on year to $313.8 million. The company also expects next quarter's revenue to be around $310.5 million, slightly below analysts' estimates. Turning to EPS, ZoomInfo made a non-GAAP profit of $0.26 per share, improving from its profit of $0.04 per share in the same quarter last year.

ZoomInfo (ZI) Q3 FY2023 Highlights:

  • Revenue: $313.8 million vs analyst estimates of $310.5 million (1.06% beat)
  • EPS (non-GAAP): $0.26 vs analyst estimates of $0.25 (5.62% beat)
  • Revenue Guidance for Q4 2023 is $310.5 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $75.9 million, down 31.3% from the previous quarter
  • Gross Margin (GAAP): 88.8%, up from 87.5% in the same quarter last year

Founded in 2007 as DiscoveryOrg and renamed after a merger in 2019, ZoomInfo (NASDAQ:ZI) is a software as a service product that provides sales departments with access to a database of prospective clients.

The company essentially runs a large database of professionals similar to LinkedIn, and it also maintains a repository of companies with information about their revenue, industry or number of employees. It then puts this data together to help sales teams find and identify potential customers, alerts them if new ones appear and provides them with contact details of prospective buyers. ZoomInfo scrapes the information and data from public websites, sources it from email communications of people who let the company scan their mailboxes or buys it from other companies.

Sales Software

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrates data analytics with sales and marketing functions.

ZoomInfo’s main competitor is LinkedIn which is owned by Microsoft (NASDAQ:MSFT), but there are plenty of smaller competitors in this space whether public, like TechTarget (NASDAQ:TTGT), or private, like Clearbit or FullContact.

Sales Growth

As you can see below, ZoomInfo's revenue growth has been very strong over the last two years, growing from $197.6 million in Q3 FY2021 to $313.8 million this quarter.

ZoomInfo Total Revenue

ZoomInfo's quarterly revenue was only up 9.11% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $5.2 million in Q3 compared to $7.9 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that ZoomInfo is expecting revenue to grow 2.95% year on year to $310.5 million, slowing down from the 35.7% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 4.8% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, ZoomInfo reported 1,869 enterprise customers paying more than $100,000 annually, a decrease of 24 from the previous quarter. We've no doubt shareholders would like to see the company regain its sales momentum.

ZoomInfo customers paying more than $100,000 annually

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. ZoomInfo's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 88.8% in Q3.

ZoomInfo Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.89 left to spend on developing new products, sales and marketing, and general administrative overhead. ZoomInfo's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that ZoomInfo is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. ZoomInfo's free cash flow came in at $75.9 million in Q3, roughly the same as last year.

ZoomInfo Free Cash Flow

ZoomInfo has generated $402.2 million in free cash flow over the last 12 months, an eye-popping 32.9% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from ZoomInfo's Q3 Results

With a market capitalization of $6.16 billion, ZoomInfo is among smaller companies, but its $567.9 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was encouraging to see ZoomInfo narrowly top analysts' revenue and adjusted operating profit expectations this quarter. That really stood out as a positive in these results. On the other hand, its new large contract wins slowed and both its revenue and adjusted operating profit guidance for next quarter came in slightly below Wall Street's estimates. However, full year guidance for those two line items was slightly above. Overall, the results could have been better, but there were no major surprises good or bad, so the company is on track. The stock is up 1.48% after reporting and currently trades at $15.75 per share.

Is Now The Time?

When considering an investment in ZoomInfo, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of ZoomInfo, we'll be cheering from the sidelines. Its revenue growth has been strong over the last two years, though we don't expect it to maintain that historical pace. And while its impressive gross margins indicate excellent business economics, unfortunately its customer acquisition is less efficient than many comparable companies.

ZoomInfo's price to sales ratio based on the next 12 months is 5.0x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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