Thesis
I reiterate my buy rating for ZoomInfo (NASDAQ:ZI) after the strong 1Q23 performance and also the update from the JPM TMC Conference. I don’t think the recent swings in the stock price accurately reflected underlying performance or the long-term secular trend. Many investors were waiting for the change in demand trends which came in the previous earnings where management mentioned about the April performance and gave positive comments on higher-than-expected operating efficiency. Importantly, management noted a possible recovery growth in the second half of the FY23. Hence, although ZI was affected by the banking crisis, I consider that time to have been an anomaly with no long-term implications for the company. The improved demand trends in April, along with organic RPO growth exiting the quarter at 20% y/y, 300bps higher than the 17% guidance, lead me to believe that management’s projections may be too conservative. Hiring new sales representatives to take advantage of the expanding business market is also indicative of the company’s forward motion and strength. Keep in mind that these new employees will be inefficient at first, so the anticipated increase in P&L won’t show up until they mature and become more efficient, resulting in a boost in sales productivity. All in all, I expect growth to sequentially accelerate through the rest of the year, which will be a catalyst for the stock price as investors become more convicted that the recovery trend is real.
Near-term momentum remains strong
There are already plenty of proof that ZI is going to outperform in 2H23, if one were to pay attention to management comments. During the JPM TMC Conference, management reaffirmed their guidance, indicating a projected increase in revenue growth on a sequential basis, and also expressed expectations for the potential of growth going back to normalized rates (post-2021 which I assume is the high 20s to 30s% range). I believe the sequential growth will also reflect well from a headline perspective, as ZI faces lesser seasonality impact throughout the year (4Q is always the largest quarter). Recall earlier that I mentioned about adding sales capacity, I believe those additions will help with improving ACV trends throughout the year, showing further signs of recovery and, hopefully, improvements in net retention rates as well – sales rep can now focus on driving retention vs splitting their resources to engage in existing customers vs finding new prospects.
Enterprise penetration
ZI’s strategic shift toward going after the $1 billion captive upmarket opportunity is most evident, in my opinion, in the company’s continued emphasis on enterprise customers. The supports the high growth expectation for the business as the runway is now extended. In addition, I’m confident that ZI’s ongoing investments in developing their international go-to-market strategy and releasing innovative new products will help the company’s financial model become more effective. This is made possible by the leverage gained from both marketing and R&D, which in turn increases EBITDA margins. Considerable incremental margin (the flow of gross margin to EBITDA margin) is being generated as a result of this company’s continued growth and high gross margin of 84%. Therefore, achieving scale is crucial as it allows ZI to reduce unit costs by lowering expenses on sales and marketing, as well as research and development, for each individual customer.
Underlying trends remain strong
Even though FY23 is a challenging year due to the macro environment, in my view, ZI will continue to grow in importance in today’s business operating environment. ZI’s Go-to-Market Platform meets the varied and complex needs of contemporary sales and marketing groups as a whole. This platform uses cutting-edge AI/ML technology to efficiently collect data from various sources, validate it, and then compile it into useful insights and analytics. The value proposition of a digital intelligence platform like ZI has gained rapid traction as the world becomes more digitalized and sources of data become more widespread (think of all the data from IoT usages).
Risks
While ZI claims that customer engagement has increased year over year, it also reports a decrease in renewal activity from disengaged customers. Traditional renewal rates for disengaged customers hover around 60%; today they’re closer to 30%. This is a terrible number, suggesting ZI is losing a lot of market share in this area. I worry that this could be a drag on the overall growth figure, which is crucial in the current recovery narrative, even though these customers are likely to be of lower value due to their low engagement levels. In addition, ZI’s software-vertical continues to see weakness as loss-making software business are now pressured by shareholders to go for profit, pressing discretionary spend. I believe this is a vertical that is hard to see any strong recovery bound in this tough environment, especially in Europe.
Conclusion
I reiterate my buy rating for ZI based on their strong 1Q23 performance and the positive update from the JPM TMC Conference. Despite recent stock price fluctuations, I believe they do not accurately reflect the underlying performance or long-term trends. Management’s comments at the conference, including expectations for recovery growth in the second half of FY23, further support my positive outlook. However, risks related to disengaged customer renewal rates and weakness in the software vertical should be considered. Nevertheless, I expect ZI’s growth to accelerate throughout the year, driven by improved demand, increased sales capacity, and enhanced financial efficiency. Overall, I believe ZI is well-positioned for success, and as investors gain more confidence in the recovery trend, it should act as a catalyst for the stock price.
Read the full article here
