Description

ZI is a software busniess and market leader in a large secularly growing market. The Company enjoys a rare combination of high 50% growth and FCF (40% margins) and currently trades at 14.5x NTM ARR and thus 37x Fwd FCF (87% gross margin, 30% GAAP EBIT margin). We believe the stock generates a base case ~30% IRR (2025YE PT of $130/sh) based on 33% Revenue and 36% FCF CAGR, assuming a 35x exit FCF multiple. The market underappreciates ZI’s growth durability and incorrectly buckets the company into “Unprofitable tech." Shares are down nearly 40% from November 2021 highs.

Business Overview

ZI’s mission is to digitally transform sales motions by empowering enterprises with data, insights, and software tools to increase sales pipeline, deal close, and conversions. ZoomInfo provides a go-to-market platform that helps sales reps identify their next best customer. Historically, B2B Sales has been a relationship-driven, highly manual, poorly-timed, inefficient, and gut-driven approach that lacks data and automation. An Oracle study suggests 30-50% of data in a CRM are inaccurate. ZI solves this problem with its suite of tools that integrate with CRMs and enable customers to automate and accelerate their go-to-market function. ZI’s products allow sales, marketing and recruiting teams to shorten sales cycles and increase win rates by delivering the right message, to the right person, at the right time. ZI does this by delivering competitive intelligence and offering services that make reaching prospects fast and easy. ZI better enables sales reps to assess market opportunities, find the right prospects, drive increased customer engagement, and derive learnings/insights from customer meetings. We leave details into “how the product works” to the 10K and earnings transcripts.

Why is ZI a great business?

ZI has the best product on the market with no comparable #2 at scale. Customers’ key purchasing criteria are based on depth of coverage, breadth of coverage, and data accuracy. As ZI acquires more users & customers, the accuracy of its database improves, resulting in better value prop, more revenue, greater reinvestment and diversification in its product portfolio, and additional customers.

As the biggest user and best customer for its own product, ZI builds products to solve its own problems. This has led to rapid new product development across the modern sales stack, including purchase intent, sales enablement, and now conversational intelligence. ZI’s expansion into a multi-product platform deepens customer stickiness, and the Company is still severely underpenetrated across the broader TAM and even within its own customer base.

Customer calls suggest users (sales reps) view ZI as a mission-critical tool that is integral to their ability to sell. Sales reps spend many hours on the platform per day. ZI is the one of the last services a company would cut in a downturn, given it has the most immediate and direct impact on new revenue generation and immediate ROI. Alongside Linkedin Sales Navigator, ZI is a complimentary and must-have weapon for the sales rep.

Investment Thesis

1. ZI is a category leader in the sales technology stack, benefiting from a multi-decade tailwind as B2B sales orgs transition from experience/intuition-based selling and into data-driven selling

a.      ZI is only 3% penetrated across its customer base by seat count. Management believes seat expansion within the existing customer base is a billion-dollar opportunity

2. Revenue growth has been accelerating. We think the market underappreciates the dramatic improvement in ZI’s competitive positioning, recession resilience, and durability of growth

a.      ZI is currently getting more leads than ever before with win rates continuously improving, due to quick time-to-value where customers begin seeing ROI as soon as 5 days. Total customers grew 33% in 2021 yoy. Management notes the biggest constraint to growth is that rate at which they onboard quota-based sales reps

b.      Net revenue retention (NRR) has expanded meaningfully due to seat growth, enterprise mix-shift, new product adoption, and reduced logo churn. ZI did 108% NRRs in 2020 and we believe it’s operating at 118% NRRs today

c.       Enterprise mix-shift. Customers with >$100K ACV account for ~40% of revenue today but grew ~90% yoy in 2021 with substantially higher NRRs than company average. The number of customers with >$100K ACV grew 70% yoy in 2021, accelerating from 46% yoy in 2020

d.      International (11% of revenue) grew 90% yoy in 2021, accelerating from 70% in 2021. ZI’s international strategy is very new and in the early stages of growth

3.      Attractive competitive landscape where ZI is the strong market leader

a.      ZI has shrewdly acquired its largest competitors, as a previously fragmented landscape of competing data vendors have either gone out of business or have been acquired. Today, no one is remotely comparable in terms of size and scale

b.      Competitors are, on average, mentioned less than 1% of the time during sales conversations, with competitor mentions in sales convos continuing to trend down. CEO Henry Schuck notes, “We don’t lose to a competitor. Our competitor is a ‘no decision’”

c.       While a new entrant is certainly a risk, we believe the likelihood is low. Salesforce has previous tried and failed to enter this market with their product data.com which was shut down

4.      Valuation

a.      ZI has some the best SaaS metrics across growth software. ZI generates 50% yoy organic revenue growth and 40% FCF margins in an environment in which the Company is arguably under-earning due to S&M catch-up spend on building out their enterprise and international sales orgs

b.      Consensus expectations are for a deceleration in growth that we believe is too steep given business fundamentals. We model 35% ’21-’26E revenue CAGR and are 8% and 20% higher than Street on ’22 and ’24 Revenue

c.       While multiples the last few years have been elevated, it's worth noting that ZI’s multiple has come down from an average of 26x NTM ARR in 3Q’20 to 15x today, despite the Company improving across product, growth, and competitive positioning. We believe there is meaningful multiple expansion upside if inflationary pressures / monetary policy fears were to abate

5.      Strong Management

a.      CEO Henry Schuck founded DiscoverOrg in 2007 before acquiring legacy ZoomInfo in Feb 2019 to further expand into go-to-market intelligence

b.      Reference checks suggest Henry is a best-in-class operator. He owns 18% of S/O

Catalyst

Catalysts

1.      Earnings upside. Accelerating revenue growth

2.      Greater transparency into net retention and mix, revealing improving net retention due to accelerating Enterprise revenue

3.      One or several of ZI’s new products takes off

4.      International revenue continues to exceed expectations

5.      ZI exercises its pricing power

6.      Margins expand back to 50% Adj EBIT (where the Company was at, pre-covid) and beat management’s long-term guide (40% range)

Risks

1.      Large incumbent software vendor (CRM or MSFT) acquires a small competing data vendor and successfully executes on product integration

2.      ZI is unable to successfully transition from a single product company and into a multi-product platform, as new products are currently emerging (though have received strong early feedback)

3.      Regulators place restrictions that prevent ZI from gathering professional contact data, negatively hurting data accuracy

a.      Mitigant: Legal due diligence gives us confidence that common investor privacy concerns are overblown

b.      Legislative concerns revolve around consumer privacy, while enterprises have successfully defended b2b data as a separate issue. ZI has successfully been building its b2b data business despite the California data privacy act and GDPR, which are now in the past and haven’t had significant impacts on the business

c.       ZI asks for permission: Companies must proactively opt in to contribute their CRM data

d.      Significant US economic activity depends on free flow of information. Professionals do not have an expectation that their email or where they sit in their org structure counts as sensitive private data. A crackdown on b2b contact data would be low (if at all) on the legislative docket given the plethora of other highly impactful issues today, and if so, would have widespread negative consequences on US business activity

4.      As a growth technology company, ZI is highly sensitive to interest rates and monetary policy

a.      We acknowledge a highly precarious macro backdrop. We are comfortable modeling 35x FCF multiples in 2026E with high-twenties revenue growth rates at exit. On our numbers, ZI trades at 13x ‘26E FCF