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ZoomInfo Deep Dive
Lessons from ZoomInfo and the power of efficiency
ZoomInfo reports its Q2 2023 earnings after market close today (July 31st) so I wanted to write about its current financials / valuation and what makes ZoomInfo such a unique company. There are many reasons why ZoomInfo is unique, but the origin of its uniqueness stems from how it was founded.
A quick outline:
ZoomInfo financials, metrics, and interesting observations
The unique history of ZoomInfo
Software companies are typically valued based on a multiple of revenue by looking at their Enterprise Value / Next-12-Month Revenue (EV/ NTM Rev). This multiple indicates how richly valued a company trades at compared to its revenue. Faster growing companies and efficient companies generally trade at a relatively higher multiple.
ZoomInfo currently has the 25th highest EV/NTM Rev multiple amongst public software companies. Like most tech companies, the past few years have been really volatile as the below ZoomInfo chart of its EV/rev multiple since it’s IPO shows.
In the following sections I look at ZoomInfo’s key financial metrics compared to the 24 companies that have a higher EV/Rev multiple.
ZoomInfo is tied for the 4th highest gross margins amongst this set of companies.
Gross Margin is critical to a company’s profit margin potential since gross margin scales fairly linearly with revenue while there is a lot more leverage in operating expenses that should scale down as a company matures.
Free Cash Flow (FCF)
ZoomInfo has the 2nd highest FCF margins over the last 12 months (LTM) and its forecast is for FCF margins to increase 4 percentage points over the next 12 months (moving to the 2nd best).
FCF and the future FCF potential is ultimately all that matters for the value of a business. The slight nuance is that FCF/share is really what matters because tech companies can have extremely high dilution from employee equity programs which dilutes returns…more on this some other time.
As I write about in ZoomInfo’s history below, efficiency has been part of ZoomInfo since the beginning and it has clearly maintained that focus with its world class profitability. But I think we are going to discover that ZoomInfo’s level of profitability is the exception and not the norm. Many investors assume that all SaaS companies can get to similar levels of FCF at scale…but I doubt most actually can.
ZoomInfo’s NTM estimated revenue growth is the 3rd lowest out of this group of 25 companies, which is the main reason it sits close to the bottom of this group of companies. But as mentioned before it is also one of the most profitable. It has a significantly lower EV/Rev multiple compared to the below companies with similar growth rates, especially when considering ZoomInfo’s incredible profit margins.
The outlier here is C3 which should be ignored because it is being valued solely on generative AI hype.
Rule of 40 - Balancing Growth vs Profitability
The Rule of 40 Score (defined as revenue growth % + FCF %) is a metric that attempts to show the optimal balance between growth vs profitability. ZoomInfo is the 3rd highest on that list….
As growth slows down for software companies, the expectation is that they should become much more profitable — balancing between growth and profits.
ZoomInfo Key Milestones
Note that many of the financial numbers below came from Henry during interviews but are likely generally correct.
2007 - Founding
Henry Schuck started a company called DiscoverOrg (later renamed ZoomInfo) in college with $25K in credit card debt with combined debt of around $150K including his undergrad and law school loans.
He founded the company in Columbus, Ohio. Back in 2007 location mattered a TON more than it does today for companies to be able to raise money from venture capitalists. So building a highly efficient, profitable company was the only way for Henry to succeed.
2012 - Calls from VCs and PEs
After about 5 years of bootstrapping (i.e. not outside capital) the business, DiscoverOrg had about $20M in revenue and $10M in profits. At this scale, it didn’t really matter where they were located or where they went to college — Henry started getting calls from venture capitalists and private equity firms.
At one point, a VC came in and wanted to buy ~70% of the business and Henry would get $40M in secondaries (i.e. cash goes directly to Henry’s bank account versus going to the company). The VC’s idea was they would get control (Henry would have only 10% ownership) and replace Henry with a professional CEO.
However, the deal fell apart because the VC changed the offer at the last minute which essentially cut the valuation in half so Henry said no. Obviously in hindsight this was the best outcome…
2014 - First Outside Capital
Henry and team picked up the process again to look for outside capital by hiring investment bankers. In 2014 TA Associates (a PE firm) bought 50% of the business at a $275M valuation - $110M in equity and $80M in debt. At the time, DiscoverOrg was at $35M in revenue, growing at 60% with 50% EBITDA margins.
Henry cashed out approximately $90M in the deal.
2017 - RainKing Acquisition
Soon after founding DiscoverOrg Henry learned about a company called RainKing that was a direct competitor and he thought his company that he just started would be killed so he reached out to RainKing and asked if they wanted to acquire them. Henry went in to the meeting with RainKing thinking if they could get a $1.7M valuation then they would sell. But RainKing didn’t think Henry had a real business.…
10 years later…DiscoverOrg acquired RainKing.
RainKing started at about the same time as DiscoverOrg, but they received $4M in VC funding and the founders had built a company before. Compare that to DiscoverOrg who was founded by some college students who received no outside capital for many years. From all the facts it seemed like RainKing should have won.
At the time of acquisition, RainKing had $40M of revenue and $10M in profits. DiscoverOrg was more efficient at $80M in revenue and $40M in profits.
DiscoverOrg’s extreme efficiency and profitability gave them more options so they were able to finance large acquisitions through debt and not give away ownership. They also were able to make RainKing much more efficient and profitable. Three months after the acquisition RainKing was doing $45M in revenue and $35M in profits.
2018 - The Carlyle Group Investment
Just four years after the TA Associate deal, The Carlyle Group made a minority investment in DiscoverOrg at a $2B valuation (almost a 14x valuation increase). At this time DiscoverOrg had ~170M in revenue with continued world-class profit margins.
As part of this deal, TA Associates sold 33% of their holdings for a nice 14x return and employees sold ~50%. Henry also sold 33% of his holdings.
2019 - ZoomInfo Acquisition
A little more than a year after the large RainKing acquisition, DiscoverOrg acquired ZoomInfo (and took on their name).
DiscoverOrg acquired ZoomInfo for $785M. To finance the deal they ended up with $1.2B in debt. The reason they were able to secure that much debt is because they were extremely profitable at $100M in annual profits — but they had essentially maxed out their debt capacity after the deal.
Fun fact: A private equity firm bought ZoomInfo a year before at just $240M (vs the $785M that Henry had to pay). So they could have gotten the deal a lot cheaper, but according to Henry, DiscoverOrg wasn’t ready to take on that type of acquisition at that time so it was for the best.
2020 - IPO
Zoominfo raised $1B at its IPO and it soared 60% in its first day of trading. One of the largest tech IPOs with tons of excitement. At the IPO Henry had 12% ownership.
But it hasn’t been all up and to the right….ZoomInfo currently trades 33% less than it did after the first day of the IPO.
Concluding Thoughts & Takeaways
Scarcity forces creativity and innovation. Henry bootstrapped the company for a long time which is not typical for public software companies. Because of that he was forced to build a highly efficient and profitable company from day 1. That mindset has stayed with the company over the past 16 years.
ZoomInfo’s high profit margins has given it very interesting opportunities over the years that would not have been possible had it been a typical software company. The biggest example is that it has been able to take on relatively huge acquisitions through debt which didn’t dilute existing shareholders. Since its founding, ZoomInfo (formerly DiscoverOrg) has completed over 14 acquisitions). ZoomInfo has repeatedly proven that it can acquire, integrate, and make these acquired companies quite profitable.
More software companies should move to higher profit margins sooner rather than justify bad profits through higher growth. I think many companies could maintain their revenue growth rates but meaningfully increase profits through higher discipline like ZoomInfo.
Most venture backed software companies have built bad habits of inefficiency since their founding and investors have supported it in the pursuit of growth. I am all about growth…but if radically inefficient and the company struggles to turn a reasonable profit, then what’s the point. I doubt most public software companies can reach the FCF margin levels of ZoomInfo but many companies still trade as if they eventually can.
I have no idea what will happen when they release their earnings today…but long-term I wouldn’t bet against Henry and the ZoomInfo team.
*Not investment advice and author may own positions in securities discussed.