ZoomInfo Technologies Inc. — Q1 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 generated primarily from one- to three-year, generally non-cancelable subscriptions to SaaS applications, data, analytics, and related services. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparisons to the three months ended March 31, 2021.
As of April 22, 2022, 403.4 million shares of Class A common stock were outstanding. The company completed the elimination of its UP-C and multi-class voting structure in 2021; only Class A common stock remains outstanding.
Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $241.7 million | $153.3 million | Up 58% |
| Subscription revenue | $239.7 million | $151.4 million | Up 58% |
| Gross profit | $197.7 million | $125.2 million | Up 58% |
| Gross margin | 81.8% | 81.7% | Up slightly |
| Income from operations | $32.4 million | $28.0 million | Up 16% |
| GAAP operating margin | 13% | 18% | Down 5 percentage points |
| Net income (loss) | $6.2 million | $(33.9) million | Improved |
| Net income attributable to ZoomInfo | $6.2 million | $3.2 million | Up 94% |
| Diluted EPS | $0.02 | $0.02 | Flat |
| Adjusted operating income | $95.7 million | $66.1 million | Up 45% |
| Adjusted operating margin | 39% | 43% | Down 4 percentage points |
| Adjusted EBITDA | $99.1 million | $68.8 million | Up 44% |
| Cash flow from operations | $105.0 million | $93.0 million | Up 13% |
Revenue growth was attributed primarily to new customers added during the prior 12 months and expansion among existing customers. Products acquired within the prior 12 months contributed $13.0 million of Q1 2022 revenue. The company reported 1,623 customers with annual contract value above $100,000 as of March 31, 2022 and reported 116% net annual retention for 2021.
Cost of service increased 57% to $44.0 million. Operating expenses increased 70% to $165.3 million, including sales and marketing of $84.1 million, research and development of $45.6 million, and general and administrative expense of $27.8 million. Equity-based compensation increased to $42.5 million from $18.1 million and represented a significant component of reported expenses.
Income tax expense declined to $13.0 million from $49.7 million. The Q1 2022 effective tax rate was 67.6%, compared with 314.5% in Q1 2021, when the company recorded significant non-cash tax expense associated with its change to a taxable corporate structure.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $394.4 million at March 31, 2022, compared with $308.3 million at December 31, 2021.
- Short-term investments were $12.4 million, resulting in cash, cash equivalents, and short-term investments of $406.8 million.
- Total cash, cash equivalents, and restricted cash increased to $400.2 million from $231.2 million at March 31, 2021.
- Operating cash flow was $105.0 million. Investing cash flow was $(8.6) million, and financing cash flow was $(10.3) million.
- Unearned revenue was $406.1 million, including $403.8 million expected to be recognized within 12 months. Remaining performance obligations totaled $917.6 million, including $715.0 million expected to be recognized within one year.
- Debt carrying value was $1.234 billion, consisting of approximately $600.0 million of first-lien term loans and $650.0 million of 3.875% senior notes due 2029. The term loans mature in February 2026.
- The company had $250.0 million available under its first-lien revolving credit facility and stated that it was in compliance with its debt covenants.
- Total net leverage to trailing-twelve-month Adjusted EBITDA was 2.4x; total net leverage to Cash EBITDA was 1.8x.
- The tax receivable agreements liability was $3.052 billion at March 31, 2022. The company paid $5.0 million under the agreements during Q1 2022 and generally owes 85% of realized or deemed tax benefits covered by the agreements.
Material Changes Versus the Prior Comparable Period
- Revenue increased $88.4 million, or 58%, driven by new customer additions and expansion with existing customers.
- GAAP operating margin declined because investments in sales and marketing, research and development, and corporate infrastructure grew faster than revenue.
- Adjusted operating margin declined from 43% to 39%, reflecting increased investment in product development, sales capacity, and public-company infrastructure.
- Equity-based compensation increased by $24.4 million, or 135%, to $42.5 million.
- Interest expense increased 82% to $11.8 million, primarily because of additional senior notes issued in February and July 2021.
- Q1 2021 included a $5.9 million loss on debt modification and extinguishment; no such expense was recorded in Q1 2022.
- Q1 2021 restructuring expense largely reflected Waltham office impairment and accelerated depreciation, while Q1 2022 restructuring expense primarily reflected transition and retention payments related to acquisitions.
- Operating cash flow increased $12.0 million despite higher cash interest, restructuring payments, and tax receivable agreement payments.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide clear quantitative full-year revenue or earnings guidance. Management expects continued investment in sales and marketing capacity, research and development, and platform functionality. Management expects cost of service as a percentage of revenue to remain consistent or modestly decrease, while research and development spending as a percentage of revenue may modestly increase over the long term.
Management stated that existing cash, operating cash flow, and available borrowing capacity should fund operating and capital needs for at least the next 12 months and the foreseeable future. The company also expects to pursue acquisitions or investments in complementary businesses, which could require additional debt or equity financing.
In April 2022, after quarter-end, the company acquired Comparably and substantially all assets and specified liabilities of Dogpatch Advisors for expected consideration of approximately $145 million, plus up to $28 million in equity awards to acquired employees. Purchase accounting was incomplete as of the filing date. The company had purchased a $10 million Comparably convertible note during Q1; the note was cancelled upon the April acquisition.
- Key risks include COVID-19 and broader economic uncertainty, reduced customer spending on sales and marketing, competition, customer acquisition and retention, data accuracy, privacy and regulatory changes, cybersecurity, third-party integrations, and successful integration of acquisitions.
- Variable-rate debt creates interest-rate exposure, although the company uses interest-rate derivatives. A 100-basis-point change was expected to have an immaterial effect on interest expense over the next 12 months based on outstanding debt and rates.
- Debt agreements restrict additional indebtedness, liens, acquisitions, investments, distributions, asset sales, and other actions. Noncompliance could lead to acceleration of substantially all debt.
- Tax receivable agreement payments could be substantial and are not conditioned on continued ownership by the exchanging holders. Changes in tax law or tax rates can remeasure the liability through earnings.
- The company disclosed putative class actions concerning alleged violations of Illinois and California right-of-publicity laws. Management stated that loss amounts could not be estimated and intends to defend the matters vigorously.
- Additional non-cancelable purchase obligations of $30.9 million were identified, mainly for cloud hosting and software-as-a-service arrangements. Executed but not yet commenced office leases involve approximately $331.4 million of undiscounted payments.
Investor Verification Checklist
- Verify the sustainability of 58% revenue growth, including the contribution from acquired products and the conversion of remaining performance obligations into revenue.
- Assess whether higher sales and marketing and research and development spending can produce continued customer growth and expansion without further erosion in GAAP and Adjusted operating margins.
- Reconcile Adjusted EBITDA and Adjusted operating income to GAAP results, particularly the effects of $42.5 million of equity-based compensation and other excluded items.
- Evaluate debt-service capacity under higher variable interest rates and confirm compliance with first-lien credit agreement covenants.
- Monitor the $3.052 billion tax receivable agreement liability, expected cash payments, and sensitivity to tax-law or tax-rate changes.
- Review the final purchase accounting, funding, and integration outcomes for the April 2022 Comparably and Dogpatch acquisitions.
- Track the potential financial and operational impact of the disclosed right-of-publicity litigation, data privacy developments, cybersecurity events, and other regulatory risks.