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Stock Pick For November: ZoomInfo (NASDAQ:ZI)


Full Report / November 04, 2021
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Founded in 2007 by Henry Schuck who is still the CEO today, ZoomInfo (NASDAQ:ZI) is a software as a service product that provides sales departments with access to a database of prospective clients.

ZoomInfo (ZI) Q3 FY2021 Highlights:

  • Revenue: $197.6 million vs analyst estimates of $183.8 million (7.5% beat)
  • EPS (non-GAAP): $0.13 vs analyst estimates of $0.12 (8.43% beat)
  • Revenue guidance for Q4 2021 is $207 million at the midpoint, above analyst estimates of $195.4 million
  • Free cash flow of $41.7 million, down 54.5% from previous quarter
  • Customers: 1,250 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 86.2%, up from 82.9% same quarter last year


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 representatives spend only a minority of their time actually selling, in large part because they must spend so much of their time researching potential prospects. Sales and marketing departments are coming under pressure to increase efficiency, and that drives demand for platforms like ZoomInfo.

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 exceptional over the last year, growing from quarterly revenue of $123.4 million, to $197.6 million.

ZoomInfo Total Revenue

This was another standout quarter with the revenue up a splendid 60.1% year on year. On top of that, revenue increased $23.6 million quarter on quarter, a solid improvement on the $20.7 million increase in Q2 2021, and happily, another slight acceleration of growth.

Analysts covering the company are expecting the revenues to grow 32.1% over the next twelve months, although ZoomInfo has exceeded analysts expectations in every quarter since becoming a public company.

Large Customers Growth

You can see below that at the end of the quarter ZoomInfo reported 1,250 enterprise customers paying more than $100,000 annually, an increase of 150 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a very strong pace of sales.

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 86.2% in Q3.

ZoomInfo Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.86 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year this is a great gross margin, that allows companies like ZoomInfo to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from ZoomInfo's Q3 Results

With a market capitalization of $17.9 billion, more than $233.3 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest for growth.

We were again impressed by the exceptional revenue growth ZoomInfo delivered this quarter. Q3 marked another quarter of revenue growth acceleration, an unusual feat for a company of this size and an indication that the market for ZoomInfo is expanding. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company currently trades at $69.7 per share.

Is Now The Time?

When considering ZoomInfo, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are numerous reasons why we think ZoomInfo is one of the best software as service companies out there. While the growth rates might moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

There's no doubt that the market is starting to recognize ZoomInfo's growth prospects, as its price to sales ratio based on the next twelve months of 31.8x would suggest. But looking at the tech landscape today, ZoomInfo's qualities as one of the best businesses really stand out and we like it at this price.

The Wall St analysts covering the company have a one year price target of $84 per share implying that they see upside in buying ZoomInfo even in the short term.

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