ZoomInfo Technologies Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
ZoomInfo provides a cloud-based go-to-market intelligence and engagement platform for sales, marketing, and recruiting teams. Revenue is primarily subscription-based, generally under one- to three-year non-cancelable contracts billed in advance. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
The company remains an emerging growth company and reports substantial noncontrolling interests resulting from its holding-company and partnership structure. As of June 30, 2021, ZoomInfo Technologies Inc. reported controlling interests in ZoomInfo HoldCo and ZoomInfo OpCo, while approximately 51% of the consolidated subsidiaries was held by the company based on the ownership calculation disclosed in Note 12.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $174.0 million | $110.9 million | $327.3 million | $213.1 million |
| Revenue growth | 57% | — | 54% | — |
| Gross profit | $143.7 million | $77.1 million | $268.9 million | $158.9 million |
| Gross margin | 82.6% | 69.5% | 82.2% | 74.6% |
| Income (loss) from operations | $40.9 million | $(31.2) million | $68.9 million | $(10.9) million |
| Operating margin | 23.5% | (28.1)% | 21.1% | (5.1)% |
| Net income (loss) | $24.5 million | $(77.9) million | $(9.4) million | $(83.8) million |
| Net income attributable to ZoomInfo Technologies Inc. | $9.3 million | $(34.4) million | $12.5 million | $(34.4) million |
| GAAP diluted EPS | $0.05 | $(0.30) | $0.07 | $(0.30) |
| Adjusted operating income | $75.8 million | $55.0 million | $141.9 million | $104.0 million |
| Adjusted operating margin | 43% | 49% | 43% | 48% |
| Adjusted EBITDA | $78.5 million | $57.1 million | $147.3 million | $108.0 million |
Subscription revenue was $171.9 million in the second quarter and $323.3 million for the first six months. Usage-based revenue was $2.1 million and $4.0 million, respectively. More than 1,100 customers had annual contract value exceeding $100,000 as of June 30, 2021, and the company reported a 108% net annual retention rate for 2020.
Net cash provided by operating activities was $181.6 million for the first six months of 2021, compared with $53.6 million in the prior-year period. Cash flow benefited from $53.3 million of additional unearned revenue, $48.1 million of deferred tax adjustments, $35.2 million of equity-based compensation, and $30.6 million of depreciation and amortization.
Cash used in investing activities was $79.0 million, including $31.8 million for acquisitions and $11.0 million for property and equipment. Cash used in financing activities was $39.0 million, primarily reflecting $356.4 million of debt repayment, partially offset by $350.0 million of senior-notes proceeds. Cash, cash equivalents, and restricted cash increased by $63.6 million to $334.6 million during the first six months.
As of June 30, 2021, the company held $332.9 million of cash and cash equivalents, $66.8 million of short-term investments, and had $250.0 million available under its undrawn revolving credit facility. Total debt carrying value was $739.2 million, consisting primarily of $400.0 million of first-lien term loans and $350.0 million of 3.875% senior notes due 2029. The company reported a 1.3x total net leverage ratio and a 0.0x first-lien net leverage ratio, based on its defined measures.
Material changes versus the prior comparable period
- Revenue increased 57% in the second quarter and 54% for the first six months, driven primarily by new customers and expansion among existing customers.
- Gross margin expanded substantially, benefiting from revenue scale and lower prior-year equity-based compensation in cost of service.
- Operating income improved from a loss in the 2020 comparable periods to positive income in 2021.
- Interest expense declined 60% in the second quarter and 67% for the first six months, reflecting prior debt repayments and the February 2021 debt repricing.
- Equity-based compensation declined to $17.1 million in the second quarter and $35.2 million for the first six months, compared with $64.5 million and $75.8 million, respectively, in 2020.
- Adjusted operating margin declined from 49% to 43% in the second quarter and from 48% to 43% for the first six months as the company increased sales and marketing, research and development, and public-company administrative spending.
- Income tax expense increased to $55.9 million for the first six months from $8.4 million, producing a 120.2% effective tax rate. Management attributed the increase primarily to non-cash tax expense from the change in GAAP tax basis following the 2021 tax-borrower restructuring.
- The company acquired Insent, Inc. in June 2021 for $34.1 million. Purchase accounting was not finalized as of the filing date.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a clear formal revenue, earnings, or margin guidance range. Management expects continued investment in sales and marketing, research and development, and acquisitions. It expects operating leverage over time in certain functions, while research and development spending is expected to increase and future amortization and interest expense may rise with additional acquisitions and debt.
In July 2021, after quarter-end, the company acquired substantially all assets and specified liabilities of Chorus.ai for approximately $575.0 million, including $132.0 million related to certain tax liabilities. The acquisition was funded with $225.0 million of revolving borrowings and cash on hand. The company also issued $300.0 million of additional 3.875% senior notes due 2029 and incurred $200.0 million of additional term loans. These transactions are not reflected in the June 30, 2021 balance sheet and will materially affect subsequent-period debt, interest expense, liquidity, and acquisition-related results.
Tax receivable agreement liabilities totaled $551.4 million at June 30, 2021. The agreements generally require payment to eligible holders of 85% of realized or deemed cash tax benefits, creating a significant future cash obligation that depends on taxable income, unit exchanges, tax attributes, and other assumptions.
Key risks include COVID-19 and broader economic conditions, customer demand and sales-cycle changes, competition, data privacy and regulatory developments, data accuracy and contributory-network participation, integration of acquisitions, substantial indebtedness and variable interest rates, tax receivable agreement obligations, controlled-company governance, and potential dilution or cash requirements from equity exchanges.
A putative class action filed in April 2021 alleges that the company’s use of Illinois residents’ names on public-facing webpages violates the Illinois Right of Publicity Act. The litigation was in its earliest stages, and the filing states that a loss estimate or range could not be provided.
The company recorded $2.7 million of impairment charges and $2.1 million of accelerated depreciation related to its Waltham office relocation. It also had $60.1 million of anticipated undiscounted lease payments for signed but not yet commenced office phases.
Important facts for investors to verify
- Assess the sustainability of 54% to 57% revenue growth, including the contribution from new customers, existing-customer expansion, and acquired products.
- Reconcile GAAP results with adjusted operating income and adjusted EBITDA, particularly the effects of equity-based compensation, amortization, restructuring costs, and acquisition-related adjustments.
- Evaluate post-quarter-end leverage and liquidity after the Chorus.ai acquisition, additional term loans, revolving borrowings, and $300.0 million of additional senior notes.
- Review the $551.4 million tax receivable agreement liability and the timing and assumptions underlying future payments.
- Monitor the unusually high six-month effective tax rate and distinguish non-cash tax effects from recurring cash tax requirements.
- Consider customer retention, expansion, concentration, and the company’s ability to maintain data quality while complying with privacy and publicity laws.
- Follow the Illinois right-of-publicity litigation and any developments that could create a material loss or operating restriction.
- Verify ownership, noncontrolling-interest allocations, and potential dilution from exchangeable OpCo, HoldCo, Class P, RSU, LTIP, and other equity awards.