ZoomInfo is a hyper-growth company that is also throwing off gobs of free cash
flow but what does this company do? here's an overview of the business
in about five minutes my name is Brian Feroldi and my name is Brian Stoffel
ZoomInfo is worth about $19 billion and trades under the ticker symbol ZI the company's mission
statement which to be honest with you we're not a huge fan of is to provide every company with a 360
degree view of their ideal customer empowering each phase of their go to market strategy not
terribly simple and easy to understand now ZoomInfo is a cloud-based software company
that provides information on organizations and professionals now sales and marketing team use the
company's software to target and find key decision makers at businesses so that those sales teams can
then reach them and sell to them think of zoom info kind of like LinkedIn but on steroids the
company utilizes a software as a service solution for all of their business and they do have a
freemium model where customers can try the product out for free its net retention rate of 108%
might look small but ZoomInfo is focused on small and medium-sized businesses
and as such this is actually a fairly strong number zoom info is spending heavily on
sales and marketing in order to drive its top lane higher as a result its current customer
acquisition costs are medium we believe that the company's product is recession-proof because in
tough times sales teams need to still bring in business to keep their employers alive
and as you can see because it's software as a service the majority of the revenue is recurring
zoom info claims that it benefits from the network effect in that the more data it ingests
the smarter it gets we're not entirely convinced of that but we think it has a weak network effect
working for it switching costs on the other hand are the key mode that we believe is surrounding
the business once a sales and marketing team gets used to using these tools to find the people they
need to talk to they'll stick with it and the 108% dollar retention rate shows that this company is
growing within its existing customers and if you look at this company's customer account over the
last couple years it's rapidly growing which tells out this company's moat is widening over time when
we look at ZoomInfo's top line we see something impressive which is 60% annualized growth over
the past two years and even when you break it down that growth is accelerating just as impressive to
us as the company's gross margin which recently clocked in at 81.5% now when it comes to net
income don't be fooled by these bar graphs yes they are red meaning the company is losing cash
on a GAAP basis however those are relatively small numbers in relation to the revenue they're
bringing in plus when we go down and we look at cash flow the company's free cash flow has been
growing very quickly and is at a very healthy $274 million dollars over the past 12 months on the
flip side when we take a look at this company's balance sheet we are not that impressed it has
far more debt than it does cash at this time and because those net income figures are negative on a
GAAP basis returns on capital are also negative turning to management henry shuck founded this
business many years ago and is still leading the company today and if we judge based on anonymous
employee reviews on glassdoor.com he's doing a great job getting 4.1 stars as a company overall
out of five and both of us were delighted to see that inside ownership here is very high coming in
at over 20% which is more than $4 billion dollars at current prices when it comes to optionality we
mostly like what we see zoom info has a history of rolling out new products that open up new revenue
opportunities for the company over time however it's worth noting that some of those new products
were acquired technologies not grown in-house when we look at operating leverage there's actually a
lot to like because the company hasn't hit the break-even point yet there's a lot of room for
net income to grow however free cash flow might have less room to grow in terms of opportunity
management believes that it's total addressable market opportunity is more than $70 billion
dollars of which it's currently captured less than 1% and while ZoomInfo has been highly acquisitive
it's mostly to acquire tools not customers a lot of the growth the company has been experiencing
is organic despite the huge growth and strong free cash flow ZoomInfo stock has only been a
mild market beater since it came public on the plus side this company regularly blows past wall
street's estimates that's great considering this company's tagline is hit the numbers
and unsurprisingly given the fact that it's in growth mode cash is not being returned to
shareholders as for risks there's no company that does quite what ZoomInfo does however it
would be a mistake to overlook competitors such as linkedin it's also worth noting that dilution
is something to watch given the company's highly acquisitive nature some of those acquisitions are
made by issuing new shares and because of those acquisitions the company's gap financials are
actually quite complex which makes them difficult for a regular investor to understand and when it
comes to the company's valuation it is value quite high trading at roughly 80x free cash flow so what
should investors watch and tell if this thesis is on track first keep an eye on net retention rates
zoom info is doing a great job about bringing new customers in the door we want to see that continue
to happen and we want to see spending per customer continue to grow speaking of bringing customers
in the door they've done a really great job of accelerating the sign-ons of customers paying them
thousand dollars or more per year and we want to see that trend continue
lastly to fund those acquisitions zoom info's balance sheet has taken a bit of a beating we
want to see the balance sheet continue to prove over time as it continues to generate
huge amounts of free cash flow so how did zoom info score on our investing checklist the answer
for me is pretty good the company grinded at a 72 which is in my investable category
and no surprise here the score was very similar for me and eight and a half is within the robust
category meaning i think it's investable as well overall both brian and i were very impressed with
the company's high growth rate margins and free cash flow and if the company can continue to
execute it wouldn't surprise us to see this stock continue to beat the market from here brian's out