ZoomInfo Technologies Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
ZoomInfo provides a cloud-based go-to-market intelligence platform for sales and marketing teams, generating approximately 99% of revenue from subscription services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to September 30, 2019. The company completed its IPO and related reorganization in June 2020; historical results primarily represent the accounting predecessor, ZoomInfo OpCo.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $123.4 million | $79.1 million | $336.5 million | $202.2 million |
| Revenue growth | 56% | — | 66% | — |
| Gross profit | $96.7 million | $61.3 million | $255.6 million | $152.1 million |
| Gross margin | 78.4% | 77.5% | 76.0% | 75.2% |
| Income from operations | $18.4 million | $13.1 million | $7.5 million | $16.9 million |
| Operating margin | 14.9% | 16.6% | 2.2% | 8.4% |
| Net income (loss) | $11.1 million | $(12.4) million | $(72.7) million | $(72.5) million |
| Adjusted EBITDA | $60.9 million | $48.6 million | $169.0 million | $124.1 million |
| Adjusted EBITDA margin | 49.4% | 61.4% | 50.2% | 61.4% |
Q3 revenue growth reflected new customer additions and expansion with existing customers. Subscription revenue was $122.4 million, compared with $78.0 million in the prior-year quarter. Management reported more than 720 customers with annual contract value above $100,000 as of September 30, 2020; 2019 net annual retention was 109%.
Q3 income attributable to ZoomInfo Technologies Inc. was $4.9 million, or $0.03 basic and $0.02 diluted per share. For the nine-month period, income attributable to the company was a $29.5 million loss; the earnings-per-share note presents a $40.5 million loss numerator after additional preferred-unit-related allocation adjustments. Investors should reconcile these presentation differences to the financial statements.
Equity-based compensation increased to $28.4 million in Q3 and $104.2 million for the nine-month period, compared with $5.5 million and $17.1 million, respectively, in the prior-year periods. The increase primarily reflected IPO-triggered recognition and accelerated vesting of HSKB and other equity awards.
Cash flow, debt and liquidity
- Operating cash flow was $102.7 million for the first nine months of 2020, compared with $27.4 million in the prior-year period.
- Capital expenditures and other asset purchases were $11.8 million; investing cash flow was $(11.8) million, versus $(724.2) million in 2019, which included the Pre-Acquisition ZI acquisition.
- Cash and cash equivalents were $304.9 million at September 30, 2020, compared with $41.4 million at December 31, 2019. Including restricted cash, total cash was $306.0 million.
- The company reported $100.0 million of availability under its first-lien revolving facility and stated that cash, operating cash flow and available financing were adequate for at least the next 12 months.
- First-lien term-loan principal outstanding was $756.4 million, with contractual maturity on February 1, 2026. The carrying value of long-term debt was $744.3 million.
- The company repaid all second-lien debt, repaid $35.0 million of revolver borrowings, and prepaid $100.0 million of first-lien term debt using IPO proceeds. The first-lien net leverage ratio was 1.8x at September 30, 2020.
- The company reported a $182.6 million tax receivable agreement liability and expects to pay eligible pre-IPO holders 85% of realized tax benefits under the agreements.
Material changes versus the prior comparable period
- Revenue increased 56% in Q3 and 66% for the first nine months, while adjusted EBITDA increased 25% and 36%, respectively.
- Adjusted operating income increased to $58.5 million in Q3 and $162.6 million for nine months, but adjusted operating margin declined to 47% from 54% in Q3 and 48% from 52% for nine months. Management attributed the decline to increased sales and marketing investment and public-company costs.
- Interest expense declined 63% in Q3 and 23% for nine months due primarily to debt repayments and lower interest rates.
- GAAP profitability remained affected by $104.2 million of equity-based compensation, amortization of acquired intangibles, IPO-related costs and debt-extinguishment charges.
- The IPO generated approximately $1.02 billion of net proceeds. A secondary offering of 17.2 million shares was completed on August 24, 2020; it generated no proceeds for the company.
Guidance, outlook, commentary and risks
The filing does not provide a clear formal revenue, earnings or EBITDA guidance range. Management expects continued investment in sales and marketing, research and development, and public-company infrastructure. Management also expects future interest expense to remain lower than historical levels following debt repayment, subject to variable rates and any additional borrowing.
- COVID-19 could reduce new-customer demand, slow sales cycles, increase requests for pricing concessions, quarterly billing or early termination, and adversely affect renewals and upgrades.
- The company remains exposed to variable LIBOR-based debt; a hypothetical 1% change in the effective interest rate would change projected interest expense by approximately $4.1 million over 12 months.
- Competition, data privacy laws and enforcement, data accuracy, third-party integrations, customer acquisition and retention, and participation in the contributory data network are key operating risks.
- The company’s debt agreements impose restrictive covenants, and noncompliance could lead to acceleration of substantially all debt.
- The tax receivable agreements may result in substantial future payments and could accelerate upon certain termination or change-of-control events.
- As of September 30, 2020, management had not remediated a previously identified material weakness related to insufficient accounting personnel for complex transactions. Consequently, disclosure controls and procedures were deemed not effective.
- After quarter-end, the company acquired Clickagy and EverString for aggregate cash consideration of approximately $71.5 million, subject to adjustments, and issued 67,075 unregistered Class A shares. Purchase accounting was incomplete at the filing date.
Important facts for investors to verify
- Reconcile GAAP net income attributable to ZoomInfo Technologies Inc. with the nine-month EPS numerator and understand the effect of preferred-unit and noncontrolling-interest allocations.
- Assess the sustainability of cash generation after excluding substantial equity-based compensation and other noncash adjustments.
- Monitor the $756.4 million variable-rate debt balance, interest-rate hedges, covenant compliance and February 2026 maturity.
- Evaluate the economic impact and timing of the $182.6 million tax receivable agreement liability and future payments.
- Track whether COVID-19 affects customer acquisition, renewal rates, pricing, collections and unearned revenue.
- Confirm remediation of the material weakness in internal control over financial reporting.
- Review the final purchase accounting and integration outcomes for Clickagy and EverString.