ZoomInfo Technologies Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
ZoomInfo provides a cloud-based go-to-market intelligence platform for sales and marketing teams, including business data, analytics, predictive scoring, buying signals, and automated sales tools. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Revenue is primarily subscription-based, with contracts generally lasting one to three years and billed in advance.
As of March 31, 2021, ZoomInfo Technologies Inc. owned approximately 99% of ZoomInfo HoldCo, while ZoomInfo HoldCo owned approximately 48% of ZoomInfo OpCo. The consolidated results therefore include significant noncontrolling interests.
Financial Performance and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $153.3 million | $102.2 million | Up 50% |
| Gross profit | $125.2 million | $81.8 million | Up 53% |
| Gross margin | 81.7% | 80.0% | Up approximately 170 bps |
| Income from operations | $28.0 million | $20.3 million | Up 38% |
| GAAP net income (loss) | $(33.9) million | $(5.9) million | Higher loss |
| Net income attributable to ZoomInfo Technologies Inc. | $3.2 million | Not applicable | Q1 2020 pre-IPO comparison unavailable |
| Adjusted operating income | $66.1 million | $49.1 million | Up 35% |
| Adjusted operating margin | 43% | 47% | Down 400 bps |
| Adjusted EBITDA | $68.8 million | $51.0 million | Up 35% |
| Operating cash flow | $93.0 million | $28.3 million | Up $64.7 million |
Subscription revenue was $151.4 million, or approximately 99% of total revenue; usage-based revenue was $1.9 million. Growth was attributed primarily to new customers added during the prior 12 months and expansion of existing customer relationships.
Operating expenses increased 58% to $97.2 million. Sales and marketing increased to $48.8 million, research and development to $20.4 million, and general and administrative expense to $18.8 million. Equity-based compensation increased to $18.1 million from $11.3 million.
The GAAP loss was driven principally by $49.7 million of income tax expense, including substantial non-cash tax expense related to the shift from a largely pass-through structure to a taxable corporate structure. The reported effective tax rate was 314.5%.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $229.1 million at March 31, 2021, compared with $269.8 million at December 31, 2020.
- Short-term investments increased to $124.6 million from $30.6 million, resulting in total cash, cash equivalents, and short-term investments of $353.7 million.
- Operating cash flow was $93.0 million, supported by $39.2 million of additional unearned revenue and substantial non-cash tax, equity compensation, depreciation, and amortization adjustments.
- Investing cash flow was $(99.0) million, primarily reflecting $103.6 million of short-term investment purchases.
- Financing cash flow was $(33.8) million, including $356.4 million of debt repayment, $350.0 million of new debt proceeds, $10.8 million of tax distributions, and $9.2 million of deferred consideration payments.
- Total debt carrying value was $738.7 million, consisting of approximately $394.2 million of first-lien term debt and $344.5 million of 3.875% senior notes due 2029. The term loan matures in February 2026.
- The first-lien revolving facility was increased to $250.0 million, with no borrowings outstanding at March 31, 2021.
- Management reported compliance with debt covenants and stated that cash flows, available liquidity, and external financing sources should be adequate for at least the next 12 months.
- Unearned revenue was $261.9 million, including $260.6 million expected to be recognized within 12 months. Remaining performance obligations totaled $591.6 million, including $461.3 million expected within one year.
Material Changes Versus the Prior Comparable Period
- Revenue growth of 50% reflected new customer additions and expansion among existing customers.
- Gross margin improved modestly, while adjusted operating margin declined from 47% to 43% because of increased sales and marketing investment and higher public-company general and administrative costs.
- Interest expense declined 73% to $6.5 million following prior debt repayments and the February 2021 debt repricing and refinancing.
- The company issued $350.0 million of senior notes due 2029 and used the proceeds, together with cash, to prepay $356.4 million of first-lien term loans.
- Restructuring and transaction-related expense increased to $4.4 million, primarily due to impairment and accelerated depreciation associated with the planned Waltham office relocation.
- The company recognized a $5.9 million loss on debt extinguishment, primarily from writing off unamortized debt issuance costs.
- Tax receivable agreement liabilities increased to approximately $390.2 million, with $390.2 million of projected obligations disclosed in Note 16.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide specific quantitative revenue, profit, or cash-flow guidance. Management expects continued investment in sales and marketing, research and development, and customer support, while anticipating potential operating leverage over time. Management reported a 108% net annual retention rate for 2020 and more than 950 customers with over $100,000 of annual contract value as of March 31, 2021.
- COVID-19 created early sales-cycle headwinds, cancellations, and spending reductions in certain industries, but management stated that demand had normalized by the end of 2020. Ongoing effects remain uncertain.
- Key risks include competition, data privacy regulation and enforcement, data accuracy and collection challenges, customer acquisition and retention, integration of acquisitions, cybersecurity and technology dependence, and reliance on third-party systems.
- Substantial indebtedness exposes the company to interest-rate risk, refinancing risk, restrictive covenants, and potential limitations on distributions from subsidiaries.
- The company had approximately $129.2 million of undiscounted future payments for additional office leases that had not commenced as of March 31, 2021; those leases were expected to begin in the second quarter of 2021.
- The company recorded $3.2 million for sales and use tax exposure and had a contingent Komiko earn-out liability of $2.1 million expected to be paid in the second quarter of 2021.
- A putative class action filed April 15, 2021 alleges that the company’s use of Illinois residents’ names on public-facing web pages violated the Illinois Right of Publicity Act. The filing states that a loss estimate was not yet possible.
- Management stated that it remediated a previously disclosed material weakness involving accounting personnel and complex transactions as of March 31, 2021. Disclosure controls were considered effective at quarter-end.
Important Facts for Investors to Verify
- Whether 50% revenue growth and customer expansion continue without a further material decline in adjusted operating margin.
- The cash impact and timing of tax receivable agreement payments, which provide eligible holders 85% of realized or deemed tax benefits.
- The effect of the $129.2 million of additional office lease commitments and the Waltham relocation on future cash costs.
- Future interest expense and exposure to LIBOR or replacement reference rates on the $400.0 million variable-rate term loan.
- Whether non-cash tax expense and noncontrolling interests continue to create a significant difference between consolidated GAAP results and income attributable to ZoomInfo Technologies Inc.
- The resolution and potential financial exposure of the Illinois right-of-publicity litigation.
- The sustainability of adjusted results given $18.1 million of quarterly equity-based compensation and other excluded items.