ZoomInfo (NYSE: ZI) went public earlier this month and the stock has more than doubled since then, like many other recent IPOs. The market excitement for IPOs has not completely distinguished between long-term promise offered by the businesses, valuation, management quality, or the industry dynamics.
That’s why making a simple Long or Short argument isn’t easy with the stocks hitting new highs but digging deeper into quality businesses is warranted, especially ahead of the market cooling off. ZoomInfo looks like one such quality execution story with favorable macro tailwinds.
Good business model and a great execution story
Selling Cloud-based services to the B2B segment takes a while to break in, but once established customers tend to be sticky. As a B2B platform to help customers drive lead generation, sales analytics, and market intelligence, ZoomInfo has built a nice franchise in the space.
Forrester’s research found out that only 1.2% of companies have mature B2B intelligence practices & technology. Those who have implemented some B2B intelligence practices realize 35% more leads and 45% higher quality leads. Yes, one can take these researches with a grain of salt, especially if the company itself commissioned the research, but the opportunity is large even if the company garners just a portion of the untapped market.
Secondly, users paying for services tell a lot about the usefulness of the service and the company has more than 20,000 paid users using the service to target, track and analyze potential deals through the deal cycle.
Founders still hold more than 17% of shares outstanding, which is always a healthy sign for a fast-growing company after an IPO.
Good organic growth topped with acquisitions
Starting as DiscoverOrg in 2007 by Henry Schuck, who is still active in management, the company acquired several companies through the year, RainKing in August 2017, NeverBounce in September 2018, Zoom Information in February 2019 and Komiko in October 2019. Expanding the breadth of services, market intelligence, industry coverage, and addressable market through the process.
Acquisitions tell more about the growth-oriented company philosophy rather than hiding any softness in sales growth. Organic growth has been impressive throughout, around 35% during 2019. There is little to suggest that the pace of acquisitions will slowdown. Indeed, given the management has talked about using $700 million to pay off debt, safe to assume that the additional balance sheet strength will be used to acquire new businesses.
GAAP accounting is just delaying the numbers shining through
Looking at GAAP numbers and analyzing the business’s ability to generate profitability may be misleading. Various one-time charges, including restructuring, transaction-related expenses, and amortization of acquired technology are hiding both profitability and operating leverage in the business model.
|As % of Revenue||2019||Q1 2020||Improvement with scale|
|Cost of Service||14%||13%||Good|
|Sales and marketing||27%||27%||Some|
|General and admin||10%||8%||High|
As the chart above shows, excluding stock-based compensation, restructuring and transaction-related expenses; business generated close 45% operating margins, impressive even for a Cloud-based business.
Besides high cash profitability, business requires limited capital investment. Capital expenditure for 2019 was close to $15 million, low compared to $293 million of revenues.