ZoomInfo Technologies Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
ZoomInfo provides a cloud-based go-to-market intelligence platform for sales and marketing teams, primarily through subscription services. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company completed its IPO on June 8, 2020, and the financial statements reflect the related reorganization and noncontrolling interests.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $110.9 million | $68.5 million | $213.1 million | $123.1 million |
| Revenue growth | 62% | — | 73% | — |
| Gross profit | $77.1 million | $50.9 million | $158.9 million | $90.8 million |
| Gross margin | 69.5% | 74.3% | 74.6% | 73.8% |
| Operating income (loss) | $(31.2) million | $5.6 million | $(10.9) million | $3.8 million |
| Net income (loss) | $(56.2) million | $(19.9) million | $(62.1) million | $(60.1) million |
| Net loss attributable to ZoomInfo Technologies Inc. | $(20.4) million | Not applicable | $(20.4) million | Not applicable |
| Adjusted operating income | $55.0 million | $41.3 million | $104.0 million | $72.9 million |
| Adjusted operating margin | 49% | 52% | 48% | 51% |
| Adjusted EBITDA | $57.1 million | $42.6 million | $108.0 million | $75.3 million |
Subscription revenue represented approximately 99% of total revenue. Basic and diluted loss per share for the post-IPO period was $0.21 and $0.22, respectively.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $53.6 million for the six months ended June 30, 2020, compared with $8.9 million in the prior-year period.
- Capital expenditures and other investing uses were $8.2 million, versus $721.1 million in 2019, when the company paid approximately $714.9 million for the Pre-Acquisition ZI transaction.
- Cash and cash equivalents were $259.1 million at June 30, 2020, compared with $41.4 million at December 31, 2019. Including restricted cash, total cash was $260.2 million.
- The company reported $100.0 million of availability under its first-lien revolving credit facility and stated that cash, operating cash flow, and available financing were expected to fund needs for at least the next 12 months.
- Carrying value of long-term debt was $743.7 million at June 30, 2020, compared with total debt of $1.203 billion at December 31, 2019. Remaining first-lien term-loan principal was approximately $756.4 million, generally due at maturity on February 1, 2026.
- The IPO generated net proceeds of $1.0196 billion. Proceeds were used to redeem $274.2 million of preferred units, repay the $370.0 million second-lien term loan, repay $35.0 million on the revolver, and prepay $100.0 million of first-lien term debt, among other uses.
- Unearned revenue was $172.1 million at June 30, 2020, including $171.0 million classified as current. Remaining performance obligations totaled $413.5 million, with $319.5 million expected to be recognized within one year.
Material changes versus the prior comparable period
- Revenue increased 62% in the quarter and 73% for the six-month period, primarily from new customers, expansion with existing customers, and the recognition of renewed contracts at contracted rather than acquisition-adjusted values.
- Gross profit increased, but quarterly gross margin declined to 69.5% from 74.3%, primarily reflecting higher cost of service and significant IPO-triggered equity compensation.
- Operating expenses increased 139% in the quarter and 95% for the six-month period. Equity-based compensation rose to $64.5 million in the quarter and $75.8 million for the six-month period, compared with $6.0 million and $11.6 million, respectively, in 2019.
- The company recognized $57.6 million of additional equity-based compensation in the second quarter related primarily to IPO-triggered vesting of HSKB incentive and phantom units and select Class P Units. Total unamortized equity compensation was $154.6 million at June 30, 2020.
- Restructuring and transaction-related expenses increased to $9.5 million in the quarter and $12.4 million for the six-month period, primarily due to IPO preparation and related costs.
- Interest expense declined modestly despite debt being outstanding for the full current-year period, reflecting lower rates and substantial debt repayments. The company also recorded $12.7 million of debt-extinguishment loss in the quarter and $14.9 million for the six-month period.
- Adjusted operating income and adjusted EBITDA increased, but adjusted margins declined from the prior-year periods because of additional sales and marketing investment and public-company costs.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide specific quarterly or annual revenue, earnings, or EBITDA guidance.
- Management expected continued investment in sales and marketing, research and development, and public-company infrastructure. It also expected interest expense to be substantially lower after the IPO-related debt repayments.
- COVID-19 created uncertainty around new customer demand, upgrades, sales cycles, pricing concessions, early termination requests, and payment obligations. Offices were temporarily closed and the workforce operated remotely.
- Material risks include data privacy and security regulation, cybersecurity incidents, dependence on data accuracy and contributory-network participation, third-party cloud and CRM integrations, competition, customer renewal and expansion, acquisition integration, variable-rate debt, and general economic weakness.
- The company had a material weakness in internal control over financial reporting related to limited accounting personnel capable of handling complex transactions. Management had not concluded that the weakness was remediated as of June 30, 2020 and determined that disclosure controls and procedures were not effective.
- Tax receivable agreement liabilities totaled $109.4 million at June 30, 2020. The agreements generally require payment of 85% of realized or deemed tax benefits to certain pre-IPO owners. Potential payments may be substantial and may accelerate upon certain changes in control or termination events.
- The company had goodwill of $966.8 million and net intangible assets of $350.2 million. No impairment charges were recorded for the quarter or six-month period.
- Ordinary-course legal proceedings were disclosed, but management did not expect their resolution to have a material adverse effect. The filing also disclosed a new employment agreement for Chief Revenue Officer Chris Hays executed August 10, 2020.
Important facts for investors to verify
- Whether COVID-19 affected renewal rates, new bookings, pricing, collections, and customer expansion after the reporting date.
- The sustainability of adjusted margins after excluding unusually high IPO-triggered equity compensation and transaction expenses.
- Cash conversion relative to adjusted EBITDA, including the effects of deferred commissions, unearned revenue, tax payments, and tax receivable agreement obligations.
- Future interest expense and refinancing risk associated with the $756.4 million variable-rate first-lien term loan.
- Progress in remediating the material weakness in internal controls and whether additional control deficiencies are identified.
- The potential dilution from exchangeable OpCo and HoldCo units, Class C common stock, equity awards, and the 2020 Omnibus Incentive Plan.
- The magnitude and timing of future tax receivable agreement payments, including possible acceleration upon a change of control.