ZoomInfo Technologies Inc. — 2023 Q3 Form 10-Q
Business context and reporting period
ZoomInfo provides a cloud-based go-to-market intelligence and engagement platform for sales, marketing, operations, and recruiting teams. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $313.8 million | $287.6 million | $923.1 million | $796.4 million |
| Gross profit | $269.0 million | $239.4 million | $789.6 million | $657.2 million |
| Gross margin | 85.7% | 83.2% | 85.5% | 82.5% |
| Income from operations | $63.1 million | $51.8 million | $189.0 million | $123.7 million |
| Operating margin | 20.1% | 18.0% | 20.5% | 15.5% |
| Net income | $30.2 million | $17.9 million | $112.8 million | $40.0 million |
| Diluted EPS | $0.08 | $0.04 | $0.28 | $0.10 |
| Adjusted EBITDA | $131.1 million | $123.2 million | $386.6 million | $333.7 million |
Revenue was approximately 9% higher year over year in Q3 and 16% higher for the first nine months. Net income increased approximately 69% in Q3 and 182% year to date. Adjusted EBITDA increased 6% in Q3 and 16% year to date. Adjusted operating margin was 40% in both comparable nine-month periods and 40% in Q3 2023 versus 41% in Q3 2022.
Cash flow, liquidity, and capital structure
- Net cash provided by operating activities was $306.1 million for the first nine months of 2023, compared with $296.9 million in 2022.
- Net cash used in investing activities was $11.1 million, versus $180.3 million in 2022, when the company spent $143.7 million on acquisitions.
- Net cash used in financing activities was $266.6 million, primarily reflecting $247.0 million of share repurchases, $17.0 million of taxes on net share settlements, and $4.5 million of debt repayment.
- Cash, cash equivalents, and restricted cash totaled $452.5 million at September 30, 2023. Cash and cash equivalents were $442.6 million, short-term investments were $125.3 million, and the revolving facility had $250.0 million of availability.
- Carrying value of debt was $1.233 billion, consisting primarily of a $591.7 million first-lien term loan and $641.3 million of senior notes. The term loan bears interest at SOFR plus an applicable spread and matures in February 2030; the senior notes bear 3.875% interest and mature in February 2029.
- Management reported total net leverage of 1.3x adjusted EBITDA and first-lien net leverage of 0.1x as of September 30, 2023.
- Tax receivable agreement liabilities totaled $2.965 billion, including current and noncurrent amounts. The agreements generally require payment of 85% of realized or deemed realized tax benefits to specified holders.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by new customers added during the preceding 12 months, partially offset by cancellations among existing customers.
- Gross margin improved due partly to lower acquired-technology amortization and reduced equity-based compensation within cost of service.
- Sales and marketing expense increased as the company invested in sales capacity, commissions, and deferred commission amortization.
- General and administrative expense increased substantially, primarily because of higher bad-debt accruals. The company recorded $22.0 million of bad-debt provision in the first nine months of 2023, compared with $1.8 million in the prior-year period.
- Research and development expense declined in Q3 but increased for the first nine months, reflecting period-specific staffing and investment changes.
- Restructuring and transaction-related expenses increased to $5.1 million in Q3 and $9.9 million year to date, primarily related to a June 2023 reduction in force and office lease impairments.
- Equity-based compensation declined to $42.9 million in Q3 and $126.9 million year to date, from $48.1 million and $137.6 million, respectively.
- The company repurchased 12.7 million shares for $247.0 million during the first nine months. At September 30, $353.0 million remained authorized. Through October 27, 2023, it repurchased an additional approximately 5.6 million shares for approximately $93.3 million.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical revenue, earnings, or cash-flow outlook for fiscal 2023. Management expects continued investment in sales and marketing, research and development, and platform capabilities. It expects operating leverage over time but notes that margins may fluctuate.
- Management expects macroeconomic conditions to adversely affect near-term net revenue retention; the reported annual net retention rate was 104% for 2022. The company had 1,869 customers with more than $100,000 in annual contract value at September 30, 2023.
- Management believes existing cash, operating cash flow, investments, and borrowing availability will fund operations and capital needs for at least the next 12 months, while warning that future performance and financing conditions could affect liquidity.
- Interest-rate exposure remains material because of the variable-rate term loan. The company uses interest-rate swaps and a cap; it expected approximately $24.8 million of net pretax gains in accumulated other comprehensive income to reduce interest expense over the following 12 months.
- The company recorded $4.6 million of Q3 impairment expense related to certain office right-of-use assets and $5.2 million year to date. It also disclosed $293.6 million of future undiscounted payments for executed but not yet commenced leases.
- Outstanding legal matters include putative class actions concerning the use of individuals’ names in public-facing web pages and free trials. The filing states that potential losses cannot currently be estimated.
- The company transitioned to a new accounting and financial reporting system during Q3. Testing of internal control effectiveness under the new system was ongoing and expected to be completed by December 31, 2023; management concluded disclosure controls were effective as of September 30, 2023.
- Potential risks include weaker customer spending, cancellations and reduced expansions, competition, data accuracy and privacy regulation, cybersecurity and intellectual property matters, integration of acquisitions, variable interest rates, debt covenants, tax receivable agreement payments, and geopolitical and macroeconomic uncertainty.
Important facts for investors to verify
- Reconcile reported GAAP earnings and cash flow with non-GAAP adjusted EBITDA, adjusted operating income, and adjusted net income, particularly the effects of $126.9 million of year-to-date equity-based compensation.
- Monitor customer retention, cancellations, expansion activity, and the effect of macroeconomic conditions on the company’s expected net retention rate.
- Assess the sustainability of cash generation after $247.0 million of year-to-date repurchases and the additional post-quarter repurchases.
- Review debt maturity, SOFR exposure, hedge effectiveness, covenant compliance, and the company’s ability to maintain reported leverage levels.
- Evaluate the $2.965 billion tax receivable agreement liability and the timing and magnitude of future payments.
- Track bad-debt expense, accounts receivable collections, and the impact of office lease impairments and future lease commitments.
- Follow the unresolved right-of-publicity litigation and any developments affecting data collection, privacy, and regulatory compliance.