ZoomInfo Technologies Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
ZoomInfo provides a cloud-based go-to-market intelligence and engagement platform for sales, marketing, operations, and recruiting teams. Revenue is primarily generated from one- to three-year subscription contracts, generally billed in advance. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $287.6 million | $197.6 million | $796.4 million | $524.9 million |
| Revenue growth | 46% | — | 52% | — |
| Gross profit | $239.4 million | $159.7 million | $657.2 million | $428.6 million |
| Gross margin | 83.2% | 80.8% | 82.5% | 81.7% |
| Operating income | $51.8 million | $20.2 million | $123.7 million | $89.1 million |
| Operating margin | 18.0% | 10.2% | 15.5% | 17.0% |
| Net income attributable to ZoomInfo | $17.9 million | $(40.6) million | $40.0 million | $(28.1) million |
| Diluted earnings per share | $0.04 | $(0.15) | $0.10 | $(0.13) |
| Adjusted EBITDA | $123.2 million | $81.3 million | $333.7 million | $228.6 million |
| Adjusted EBITDA margin | 42.8% | 41.1% | 41.9% | 43.6% |
Subscription revenue was $284.4 million in Q3 and $788.8 million for the nine-month period. More than 35% of customer contracts, measured by annualized value, were multi-year agreements. The company reported 1,848 customers with annual contract value exceeding $100,000 as of September 30, 2022.
Cash provided by operating activities was $296.9 million for the first nine months of 2022, compared with $228.1 million in the prior-year period. Cash and cash equivalents were $406.3 million, and short-term investments were $32.4 million at September 30, 2022. Total cash, cash equivalents, and restricted cash were $412.4 million.
Cash used in investing activities was $180.3 million, including $143.7 million for acquisitions and $22.5 million for property and equipment and other assets. Cash used in financing activities was $18.3 million. The company stated that $250.0 million remained available under its revolving credit facility.
Carrying value of long-term debt was $1.235 billion. Contractual principal consisted of $600.0 million of first-lien term loans due in 2026 and $650.0 million of 3.875% senior notes due in 2029. Total net leverage to trailing-twelve-month Adjusted EBITDA was 1.9x; total net leverage to Cash EBITDA was 1.6x. The company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 46% in Q3 and 52% for the first nine months, primarily from new customers and expansion with existing customers. Acquired products contributed $7.8 million of Q3 revenue and $40.7 million of nine-month revenue in their first 12 months post-acquisition.
- Q3 operating income more than doubled, while the operating margin increased to 18.0% from 10.2%. For the nine-month period, operating margin declined to 15.5% from 17.0% because of increased investments in research and development, sales and marketing, and public-company infrastructure.
- The company returned to GAAP profitability. Q3 net income attributable to ZoomInfo was $17.9 million versus a $40.6 million loss in the prior-year quarter; nine-month income was $40.0 million versus a $28.1 million loss.
- Adjusted EBITDA increased 52% in Q3 and 46% for the first nine months. Q3 Adjusted EBITDA margin improved, but the nine-month margin declined because of increased operating investment.
- Equity-based compensation increased to $48.1 million in Q3 from $24.5 million and to $137.6 million for the first nine months from $59.7 million, primarily due to increased headcount.
- Restructuring and transaction-related expense declined substantially to $0.2 million in Q3 and $3.8 million for the first nine months, compared with $11.0 million and $17.6 million, respectively, in the prior-year periods.
- In April 2022, the company acquired Comparably and Dogpatch Advisors for $150.6 million in cash and a $10.0 million convertible note receivable. Purchase accounting remained preliminary at September 30, 2022.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that operating leverage, acquisitions, customer additions, and expansion within existing accounts remain important growth drivers. The company expects continued investment in sales and marketing capacity, research and development, customer support, and acquisitions. It expects cost of service as a percentage of revenue to remain consistent or modestly decline, while research and development spending as a percentage of revenue may increase over the long term. The filing does not provide explicit numerical revenue or earnings guidance.
Q3 other income of $9.8 million and nine-month other income of $7.0 million were driven primarily by remeasurement gains on the tax receivable agreement liability. The company recorded a $9.5 million TRA measurement gain for the nine months, principally related to Q3 2022 state tax legislation and updated tax attributes. The TRA liability was $3.042 billion at September 30, 2022; the company is generally obligated to pay TRA holders 85% of realized or deemed tax benefits.
A sublease termination in Q3 generated a $2.5 million payment, partially offset by a $1.4 million impairment of initial direct costs and a $1.1 million gain recorded as a reduction of rent expense. The company also entered into future office leases with anticipated undiscounted payments of $340.9 million that were not yet recorded as lease liabilities at quarter-end.
Key risks include adverse economic conditions affecting sales and marketing spending, COVID-19 uncertainty, competition, customer acquisition and retention, data privacy and regulatory developments, data accuracy, cybersecurity, third-party integrations, acquisition integration, indebtedness and variable interest rates, and the substantial obligations under the tax receivable agreements. The filing identifies two putative class actions alleging violations of state right-of-publicity laws; the company intends to defend both matters, but states that potential losses cannot currently be estimated.
The company hedges interest-rate exposure on its variable-rate term loan. A hypothetical 100-basis-point change in the effective interest rate was expected to have an immaterial effect on interest expense over the next 12 months. Disclosure controls and procedures were effective as of September 30, 2022, and no material change in internal control over financial reporting was reported.
Most Important Facts for Investors to Verify
- Whether revenue growth and customer expansion remain durable as macroeconomic conditions affect sales and marketing budgets.
- The reconciliation and sustainability of non-GAAP Adjusted EBITDA, including the large and rising equity-based compensation adjustments.
- The $3.042 billion tax receivable agreement liability, timing of payments, and sensitivity to tax-law and tax-rate changes.
- Debt maturity and interest-rate exposure, including the $600.0 million variable-rate term loan due in 2026 and $650.0 million senior notes due in 2029.
- Integration performance and final purchase accounting for Comparably and Dogpatch, including potential additional equity awards.
- The financial impact of future office lease commitments, including $340.9 million of undiscounted payments for leases not yet commenced.
- The status and potential exposure of the two putative right-of-publicity class actions and other legal or regulatory matters.