2023-04-15 01:34:21 ET
Summary
- Shares of ZoomInfo have continued to sink, down more than 25% year to date.
- The company is expecting growth to decelerate to the teens this year, vs. full-year FY22 growth of 41% y/y.
- In a recessionary environment, companies are cutting their sales forces, which impacts ZoomInfo's key client base.
- ZoomInfo's saving grace is a high pro forma operating margin profile, but this is offset by a large debt load.
Volatility is continuing in stride, and the best thing that investors can do to maneuver this market is to constantly be on the lookout for good trades and diligently pick stocks. Fundamental stories have been moving around sharply this year as different companies have reacted in various ways to the current recession, and valuations have fluctuated as well.
ZoomInfo ( ZI ), in particular, has seen marked volatility this year. This sales database/CRM software company has seen its share price tank by ~25% year to date, an anomaly in the tech space and a reflection of both its previously bloated valuation as well as the expectation of coming deceleration.
I had long been bearish on ZoomInfo, and recommended that investors stay away from the stock earlier this year when ZI stock was trading closer to $30. Now, with ZoomInfo hovering closer to $20, I'm putting this stock on my watch list and shifting my recommendation to neutral.
Now, I view the company as a relatively mixed bag of positives and negatives. On the bright side for ZoomInfo:
- Growth at scale. The fact that ZoomInfo so far has been able to sustain >30% y/y growth after reaching a >$1 billion annualized revenue scale is quite impressive.
- Strong pro forma operating margin profile. ZoomInfo has long generated profits, even on a GAAP basis - which is a rarity for a company growing as quickly as it does.
- Recurring revenue and expansion potential. ZoomInfo sells its products as a subscription, with embedded expansion opportunities due to its seat-based pricing.
On the flip side, however, investors should watch out for the following:
- Deceleration is kicking in. In this recessionary environment, companies are cutting back on growth plans and letting salespeople and recruiters go - the exact clientele that uses ZoomInfo's database products.
- Large debt load. Unlike many tech peers, ZoomInfo is in a net debt position, and its floating debt structure exposes it to high interest costs. To offset this, however, ZoomInfo does generate strong unlevered free cash flows.
- Stiff competition. ZoomInfo is one of many CRM-style products, and competes with much more recognizable names such as Microsoft's ( MSFT ) LinkedIn and Salesforce ( CRM ).
ZoomInfo is also not quite as expensive as it used to be, but neither is the stock cheap. At current share prices near $22, ZoomInfo trades at a market cap of $8.96 billion. After we net off the $545.7 million of cash and $1.24 billion of debt on ZoomInfo's most recent balance sheet, the company's resulting enterprise value is $9.65 billion.
Meanwhile, for the current fiscal year FY23, the company has guided to $1.275-$1.285 billion in revenue. This represents a slowdown to 16-17% y/y growth, after the company exited Q4 at a mid-30s growth rate. This, however, is an appropriate reflection of the macro slowdown, especially in sales-oriented roles.
Taking the midpoint of ZoomInfo's guidance at face value, the stock trades at 7.5x EV/FY23 revenue. This is down from when ZoomInfo traded at mid-teens multiples at the height of the pandemic - but considering its deceleration to high-teens growth, I think ZoomInfo's multiples should rightly come down.
In my view, there is room for ZoomInfo to slide further before investors should consider buying in. My price target for the stock is $17, representing a 6x forward revenue multiple and ~20% downside from current levels.
The bottom line here: in my view, ZoomInfo is reaching a buy point. Though its growth is moderating, the stock is still retaining a large subscription client base that is built on strong operating margins. Wait for a further dip before buying, however.
Q4 download
Let's now run through ZoomInfo's latest Q4 results in greater detail. The Q4 earnings summary is shown below:
ZoomInfo's revenue grew 35% y/y to $301.7 million in the quarter, only slightly beating Wall Street's expectations of $298.8 million (+34% y/y). Revenue also decelerated sharply from 45% y/y growth in Q3, as ZoomInfo both laps strong pandemic-era demand as well as enters into a cooling-off of demand in the current macro environment.
ZoomInfo's management cited sharp macro impacts on sales this quarter. Per CEO Henry Schuck's remarks on the Q4 earnings call :
While these are good results, we can be doing better. Our customers are challenged by the current state of the economy, within our largest vertical software, companies are laying off employees and cutting back spending. Many companies, regardless of size or vertical, have materially lower growth prospects than they did a year ago.
All companies are looking to do more with less. We remain early in the digital transformation of B2B sales and while our platform drives meaningful efficiencies for companies in all industries as our customers reduce their sales budgets and headcount, they take a harder look at all their spending.
As we had indicated earlier in the year, the more challenging economic environment has impacted our upsell and cross-sell motions with increased customer scrutiny causing an elongation of sales cycles.
The economy has had a direct impact on our business to be sure. But to continue to grow and scale through this time, we will be intensely focused on four priorities, surrounding ourselves with the right people, investing in enterprise solutions, delivering delightful product experiences and executing with excellence and efficiency."
Notably, ZoomInfo's net revenue retention rates have slipped to 104%. This still indicates that customers are expanding their subscriptions, but this is a far cry from the fourth quarter of last year at 116%, indicating that churn is beginning to impact ZoomInfo's growth.
Thankfully, ZoomInfo has been able to maintain a strong pro forma operating margin. Adjusted operating income grew 47% y/y to $301.8 million in the quarter, representing a 42% margin - up three points from the year-ago quarter.
ZoomInfo adjusted operating income (ZoomInfo Q4 earnings release)
Management has reiterated its commitment to prudent expense management. Year-end headcount levels have dipped from where they were in September, and ZoomInfo is targeting 40%+ adjusted operating income margins for FY23 as well.
Key takeaways
Net-net for investors: wait a bit longer before digging into this stock. ZoomInfo's deceleration is driving a much-needed compression in valuation multiples, but there will be upside in this stock once it reaches the mid-teens.
For further details see:
ZoomInfo: Add To Your Watch List, But Don't Buy Yet