ZoomInfo: Product Innovation Is Exciting, But Growth Is Lacking (NASDAQ:ZI)

Introduction & Investment Thesis

ZoomInfo (NASDAQ:ZI) is a cloud-based sales and marketing platform that has underperformed the S&P 500 and the Nasdaq 100 YTD. The company released its Q4 FY23 earnings report last month, and while revenue and earnings met expectations, the company has guided revenue to grow just 2.4% in FY24 and non-GAAP operating income to remain flat YoY. In FY23, the company saw a decline in its enterprise customers as well as in its Net Retention Rate (NRR), which underlines the slowing spend and adoption among its existing customer base, which includes the software industry vertical, amidst tough macroeconomic conditions and a highly competitive market with increasing vendor consolidation.

On the bright side, ZoomInfo continues to invest in its product innovation by launching AI-powered Copilot in Q4, which will enable sales and marketing teams within organizations to better target and engage with their prospects in order to maximize win rates. During the earnings call, the management discussed that they are seeing an improvement in the Net Promoter Score (NPS), as well as a higher number of win-back rates and new logo acquisitions.

However, given its current valuation and risk reward, I believe the management has a lot to prove to regain investor confidence. Therefore, I am rating the stock a “sell” at the moment.

About ZoomInfo

ZoomInfo is a cloud-based go-to-market platform that provides intelligence and analytics to its customers so that their sales, marketing, and recruitment teams can shorten their sales cycle and increase their win rates by effectively targeting the right person or organization with the right message at the right time.

As of FY23, ZoomInfo had 35,000 customers on its platform, ranging from global enterprises to mid-market and small businesses. It had 1820 large customers with greater than $100K in Annual Contract Value (ACV), which declined 5.5% YoY.

In terms of its business model, the company primarily generates its revenue via a subscription-based pricing model that includes access to the platform and customer support. The company uses a “land and expand” strategy to drive adoption of its solution suite, which includes SalesOS, MarketingOS, OperationsOS, and TalentOS.

The good: Continued investment in product innovation leading to higher NPS, win-back rates, and new customer acquisition

ZoomInfo operates in a large TAM, which it estimates at $100B. The TAM is calculated by summing up the sizes of the following markets: 1) SalesOS at $40B; 2) OperationsOS at $30B; 3) MarketingOS at $20B; and 4) TalentOS at $10B.

During FY23, the company has continued to make key investments in data accuracy and coverage, as well as integrate AI and machine learning into its platform. During Q4, they introduced their generative AI-powered Copilot, which enables their customers to integrate their internal data with ZoomInfo’s data to generate insights in order to drive targeted and high-quality engagement with their prospects in order to maximize their chances of closing deals. The Copilot is currently deployed across a subset of its customers and will be rolled out to everyone by the middle of FY24. This is what Henry Schuck, CEO of ZoomInfo, said during the earnings call, which illustrates how Copilot will enable their customers to win at a higher rate.

“Copilot identifies ideal fit accounts by examining a customer’s history of closed one versus closed lost deals and then running AI against our proprietary data set to identify the characteristics of ideal fit accounts. That includes basics like industry and company size, in addition to tens of thousands of additional sophisticated attributes that we collect like tech stack fit, department budgets, and executive presence. It then scans our proprietary buying signals to identify the accounts most likely in the market to purchase.

Lastly, it will identify the next best action sellers should take by pinpointing the right buyer, exactly when to reach out to them, what channel to engage on, and exactly what the contextual message should be. For example, Copilot might tell them to email the main decision maker or to start a display ad campaign against the buying committee. It then uses our generative AI emailer to create a hyper-personalized message incorporating all of the context we have about an account, contacts, their history, and pain points.”

Given ZoomInfo’s investments to continue to innovate and improve its platform offerings, it has resulted in a higher match rate when a customer looks for a contact, up from 7 out of 10 times at the beginning of FY23 to 9 out of 10 times by the end of it. The management also claimed during the earnings call that its investments on its platform have also resulted in a 23% YoY increase in NPS, which is a measure of customer sentiment. Furthermore, ZoomInfo also experienced the biggest win-back quarters during both Q3 and Q4, where they saw 550 customers return to the platform. At the same time, the company added the most new enterprise customers since 2022, as well as the most new logos on record in this quarter, with the highest win rate in a single month in December. So, while NRR has declined from 104% in FY22 to 87% in FY23, with underperformance in their software industry vertical, the company has started to gain traction with winning new businesses.

I believe this showcases the investments ZoomInfo has made so far in improving data accuracy and coverage while integrating AI, are indeed driving the desired outcomes by positioning the company as a superior, higher-quality provider of data, insights, and automation that enables the sales and marketing teams of organizations to hit their quotas. This is especially important in a tough macroeconomic environment, such as the one we are living in now, where sales and marketing organizations within companies need to successfully and predictably hit their monthly targets without operational roadblocks; otherwise, the impact on return on investment (ROI) will be severely impacted.

The bad: Revenue growth slows and margins stagnate amidst a tough macroeconomic and competitive landscape.

In FY23, the company generated $1.24B in revenue, up 13% YoY. However, for Q4, revenue grew just 5% YoY to $316M. During FY23, the company saw a decline of 5.5% in its large customers with greater than $100K in ACV from 1926 customers in FY22 to 1820 customers in FY23. Meanwhile, NRR dropped sharply from 104% in FY22 to 87% in FY23, indicating the weakness in consumer spending and adoption within ZoomInfo’s existing customer base. Part of the weakness can be attributed to the macroeconomic environment of high interest rates, which has forced companies, especially in the software industry vertical, to cut back on spending and protect their margins. At the same time, the competitive landscape for ZoomInfo is also fierce, with deep-pocketed players such as Salesforce (CRM) and Microsoft (MSFT) who can easily bundle similar solutions that ZoomInfo provides on their platforms among their customer base, especially in an environment where we are seeing increased consolidation of vendors in order to better manage spend.

Looking forward, the company expects to generate approximately $1.27B in FY24, which would represent a growth rate of just 2.4%. While the consensus estimates believe that revenue growth will pick up the following year in FY25 between 8 and 9%, the management has a lot to prove to showcase that its current investments in its products can ultimately help to differentiate and drive deeper adoption of its solution suite among its existing customers as well as win new ones.

Meanwhile, the company generated non-GAAP Operating Income of $498.6M in FY23, up 11% YoY, representing a margin of 40%. Although margins are strong, we can see that overall profitability is stagnating. I believe that can be explained by the decline in NRR, which is limiting ZoomInfo’s economies of scale. At the same time, the company is continuing to drive investments to improve its product offerings and maintain its market position, and therefore, until we see a pickup in revenue growth, overall margins will remain stagnant or come under further pressure. In FY24, ZoomInfo expects to generate approximately $500M, which indicates that there will be no incremental growth in overall profitability, with margins slightly declining from 40% in FY23 to 39.3% in FY24.

Tying it together: ZoomInfo is a Sell.

Assuming ZoomInfo grows its revenue in the mid-single digits between FY24 and FY28, it should generate a total revenue of $1.9B. This is not an optimistic scenario, as this assumption indicates that ZoomInfo will not materially see improvement in revenue growth despite improving its products. However, at the moment, the management has a lot to prove to showcase that its investments will ultimately pay off, especially as the macroeconomic and competitive landscape continue to dampen its growth prospects. Meanwhile, I will assume that the company will maintain its non-GAAP operating margin between 39 and 40%, in which case it should generate $778M in non-GAAP operating income by FY28, which would translate to a present value of $483M, when discounted at 10%.

Taking the S&P 500 as a proxy, where its companies grow their earnings at an average rate of 8% over a 10-year period, with a price-to-earnings multiple of 15–18, I believe that ZoomInfo should trade at 0.5–0.6x the multiple, given the projected earnings growth until FY28. This would result in a price target of $12, which represents a downside of 23% from its current levels.

Conclusions

ZoomInfo’s slowing revenue growth and stagnating margins are a concern at the moment, with declining NRR and enterprise customers. While macroeconomic and competitive pressures remain, the company is investing to improve its solution suite, which shows early signs of success with improving NPS and win-back rates, while it continues to acquire new logos. However, given its current valuation and the risk reward, the management has a lot to prove to re-instill investor confidence, given its vanishing growth story. As a result, I would rate the stock a “sell” at the moment.