ZoomInfo: Q4 Earnings, Still Attractively Priced, 55x Free Cash Flows

Summary

• ZoomInfo continues to rapidly grow and points to enticing revenue growth prospects for the year ahead.
• A discussion of ZoomInfo's debt profile. Debt profile grows from 1.9x to 2.9x net debt to EBITDA.
• Altogether, paying 55x forward free cash flows isn't all that expensive.
• Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Learn More »

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Investment Thesis

ZoomInfo (NASDAQ:ZI) allows subscribers to its intelligence platform access to data on organizations and professionals. This is the core of the value proposition, allowing sales reps to shorten the sales cycles, and position them to convert more leads to wins.

No more time-wasting updating information on potential clients. ZoomInfo uses data scientists to clean out the data and provide subscribers to its platform with up-to-date +95% data accuracy.

As you'll read, even though the sound of paying my own estimated ''clean'' estimate of 55x forward free cash flows may seem expensive, in actuality, I believe this is a very reasonable valuation.

There's a lot to like here, from a high-growth business to one that actually generates robust cash flows today, to a stock that's not shockingly expensive.

Investor Sentiment Stays Positive Post-Earnings Results

Data by YCharts

In the past 3 months, countless high-growth tech names are down. The fact that ZoomInfo is also down 30% is neither here nor there. What's more insightful is that after the earnings results, the stock sold off slightly, approximately 10%, but appears to have stabilized and found its ground quickly.

Given the backdrop where countless high-quality companies have been smashed to a pulp on the back of earnings results, as companies have failed to impress with their guidance, I contend that this is a positive indication that investors consider this company to be above average.

And there are good reasons for this too.

ZoomInfo's Revenue Growth Rates Remain Enticing

ZoomInfo revenue growth rates

Ultimately, when it boils down to it, investors are being enticed by its very strong growth rates. Q1 2022 is still guided for approximately 50% y/y growth rates, which compared against last year's Q1 2021, that quarter was no pushover either.

Looking further ahead management is guiding for at least 36% y/y top-line growth, which we can reasonably expect management to increase its guidance as the year progresses.

Thus, for all intents and purposes, I suspect that we are looking at a company that has what it takes to grow by approximately 40% CAGR over the coming year.

Why ZoomInfo?

ZoomInfo sells subscriptions sales and marketing teams.

The idea is that ZoomInfo is the go-to platform to gather pertinent, updated, relevant, and accurate business information. Do you want to know exactly who to contact and how? ZoomInfo holds that data. No more wasting time chasing up contacts that suck out the time of the sales process.

Over time, ZoomInfo has become an indispensable platform to get granular department data, including funding information and revenue profiles of subsidiaries.

During the recent Q4 2021 quarter, ZoomInfo has augmented its offering by integrating chat conversation on its platform, which has led to a net retention rate of 116%, up from 108% in the same period a year ago.

Remember, investors typically consider 120% net retention rates to be a gold star, so this is very close to that hurdle, suggesting that there is still more revenue growth opportunity amongst its existing customer base.

Also, keep in mind that ZoomInfo's customer base grew from last year's Q4 2020 having 850 customers spending $100K annualized or more, to 1,452 customers spending $100K or more, a jump of 71% y/y.

Crown Jewel: Profit Margins Are Impressive

Before we get further into understanding ZoomInfo's profit margins, we should remember that during 2021, ZoomInfo spent approximately $700 million to purchase a few businesses.

This implies that its balance sheet went from being approximately net neutral at the end of 2021, meaning that ZoomInfo's cash and debt essentially canceled out, to end 2021 with approximately $900 million of net debt.

ZoomInfo Q4 2021 investor presentation

This isn't a thesis breaker, by any means, but it does imply that ZoomInfo's ability to perform the same level of needle-moving acquisitions in the near term will be somewhat hampered.

It also is worthwhile to remember that buying in companies is expensive. And perhaps, most importantly, these acquisitions are not reflected in its free cash flow profile.

ZoomInfo Q4 2021 investor presentation

Indeed, ZoomInfo goes to great lengths to highlight to investors its unlevered free cash flow (''uFCF''). However, this is a somewhat misleading figure given its rapidly rising debt profile.

Accordingly, a more appropriate free cash flow guidance for 2022 would be approximately $380 million, if we keep in mind that during 2021, interest expense was approximately $45 million. And indeed, we could reasonably expect ZoomInfo's interest expense to grow to approximately $50 million in 2022.

ZI Stock Valuation - Attractively Priced

If we look out to 2022 and assume that my adjusted free cash flow calculations are vaguely right, this means that ZoomInfo is priced at approximately 55x forward free cash flow.

This is not expensive for what's at play. Particularly when we consider just how sticky this leading business-to-business leading sales platform is and the amount of customer growth we are seeing, particularly customers spending more than $100K annualized.

We also have to keep in mind that ZoomInfo is still very much in high growth mode. Its operations are far from being maximized for free cash flow generation.

The investment thesis isn't contingent on a further multiple expansion, just needs ZoomInfo to continue to execute against its strategy.

The Bottom Line

I recognize that expectations are high for ZoomInfo. However, there's no doubt that ZoomInfo is delivering against those high expectations too.

This business continues to be on my watchlist. However, for now, I'm preferring to deploy my own capital into businesses with a few more hairs on them. Whatever you decide, good luck and happy investing.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.