In the summer of 2021, I was turning neutral on ZoomInfo Technologies Inc. (NASDAQ:ZI) after it saw solid top line sales growth in combination with profitability, with the latter being somewhat of a positive surprise. While I liked the investment story since the public offering, the risk-reward has rapidly deteriorated as shares marched higher, making me very cautious.
Following the bust cycle post 2021, shares have come down a great deal as well, with shares down three quarters from their highs. At these levels, fundamental (earnings) support is seen, provided that revenues hold up and continue to grow, although I have not enough confidence in that to get involved just yet.
Actionable Intelligence
ZoomInfo went public in the summer of 2020 with a mission to unlock business intelligence for customers. The intelligence platform helps sales and marketing teams to create shorter sales cycles and boost their conversion.
ZoomInfo’s platform aims to provide great, relevant, accurate and timely information, as quality and timeliness of data is often the biggest issue with data providers. With quality being key, the solutions offered by ZoomInfo are not cheap, yet they are quite effective, at least that is the promise.
On top of the generic qualities of the platform, the company saw a huge boost to the business following the pandemic breaking out, with sales and marketing teams having to resort to full online options, with traditional gatherings and conferences being not accessible of course.
The company went public at $21 per share, as shares rose to the $34 mark on the first day of trading, granting the business a $13.7 billion valuation which marked a huge multiple as the company generated $335 million in sales in 2019, although accompanied by GAAP operating margins of around 10% of sales.
The company had seen very strong growth during 2020. First quarter sales rose 90% to $102 million, with second quarter sales advancing by 62% to $111 million, as third quarter sales were up 56% to $123 million. Fourth quarter sales rose by 53% to $140 million, and with sales trending at $560 million per annum the original outlook for 2021 sales at $650 million looked rather conservative.
Following a 50% increase in first quarter 2021 sales to $153 million, the company hiked the midpoint of the sales guidance to $673 million, as the company furthermore announced integration with Dynamics 365 from Microsoft (MSFT) as well as a partnership with Snowflake (SNOW) as well.
With shares trading in the $50s by the summer, the company commanded a $22 billion valuation, as a roughly 30 times sales multiple was too demanding to see appeal, even as growth rates came in around 50%.
A Boom-Bust
After turning cautious on SNOW in the low fifties, ZI shares advanced to levels around the $75 mark in November 2021, peaking alongside the remainder of the technology sector. By the end of 2022, shares had fallen to the $30 mark, and following a dismal report over the summer, shares have fallen to the $15 mark here, with shares trading at their lows.
In February of this year, ZoomInfo posted its 2022 results. After the company ended up growing 2021 sales to $747 million, on which GAAP operating profits of $113 million were reported, growth continued in 2022. Sales rose by 47% to $1.10 billion as operating profits grew even quicker than top line sales growth, with operating profits up 55% to $175 million.
The company guided for 2023 sales to come in at a midpoint of $1.28 billion, with adjusted operating profits seen around $528 million, essentially at a dollar per share. This compares to a $0.88 per share number on this (adjusted) metric in 2022.
After shares fell to the mid-twenties in March, the board announced a $100 million share repurchase program. In May, ZoomInfo posted a 24% increase in first quarter sales to $301 million. The company maintained the full year sales guidance, while hiking the earnings per share guidance by a penny to exactly a dollar per share, undoubtedly due to the buyback program as well.
By the end of July, ZoomInfo posted second quarter sales of $309 million, up 16% on the year before, as GAAP earnings of $0.09 per share were down two pennies. With the slowdown in the annual growth visible, ZoomInfo cut the full year sales guidance by $50 million to $1.23 billion, indicating that sequential growth is likely seen stable.
It was this guidance cut which triggered the latest selloff in the shares, even as the company guided for adjusted earnings to come in around a dollar per share, as the board announced a half a billion buyback program. Such a program can be financed, with the company ending the quarter with nearly $600 million in net debt, but of course the business is (still) solidly profitable.
Valuation Thoughts
With 415 million shares trading at $16, the equity valuation of the firm has shrunk to $6.6 billion, for a $7.2 billion valuation if we factor in the net debt load. So far this year, the company posted adjusted earnings of $0.50 per share. In dollar terms, adjusted earnings were reported at $206 million for the first six months of the year, with GAAP earnings posted at $82 million.
The vast majority of the difference stems from an $84 million pre-tax stock-based compensation expense, meaning that realistic earnings trend at $150 million for the half year period. This means that the business could realistically earn about $0.70 per share in earnings, which means that the business trades at a low twenty times earnings multiple.
This look quite compelling given solid growth of the business, but the issue is that growth is rapidly slowing down, and furthermore is set to slow down completely based on the revised full year outlook on a sequential basis.
The issue is that ZoomInfo traditionally guided conservatively and now is forced to cut the sales guidance. This comes in part because many peers are cutting back on sales and marketing efforts, with sequential growth no longer seen. This could be a turning point, as year-over-year decline, infused by AI threats or slower economic growth, could wipe out the fundamental valuation support here.
Hence, I am performing a balancing act. If ZoomInfo Technologies Inc. is a stable growth play to come, current valuation look highly enticing, but a potential decline in sales could be very painful, as aggressive buybacks – which jack up net debt here – are not the solution.
Given all this, I am not yet willing to commit here, waiting for some more clues before potentially reconsidering a small allocation in ZoomInfo Technologies Inc.
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