ZoomInfo Technologies Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
ZoomInfo provides a cloud-based go-to-market intelligence and engagement platform for sales, marketing, and recruiting teams. The platform combines organizational and professional data, analytics, workflow orchestration, and engagement tools. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $197.6 million | $123.4 million | $524.9 million | $336.5 million |
| Revenue growth | 60% | — | 56% | — |
| Gross profit | $159.7 million | $96.7 million | $428.6 million | $255.6 million |
| Approximate gross margin | 80.8% | 78.3% | 81.7% | 76.0% |
| Income from operations | $20.2 million | $18.4 million | $89.1 million | $7.5 million |
| Approximate operating margin | 10.2% | 14.9% | 17.0% | 2.2% |
| Net income (loss) | $(40.9) million | $11.1 million | $(50.3) million | $(72.7) million |
| Net loss attributable to ZoomInfo Technologies Inc. | $(40.6) million | $4.9 million | $(28.1) million | $(29.5) million |
| Diluted loss per share | $(0.15) | $0.02 | $(0.13) | $(0.26) |
| Adjusted operating income | $78.4 million | $58.5 million | $220.2 million | $162.6 million |
| Adjusted operating income margin | 39% | 47% | 42% | 48% |
| Adjusted EBITDA | $81.3 million | $60.9 million | $228.6 million | $169.0 million |
Subscription revenue represented approximately 99% of total revenue. Products acquired during the prior 12 months contributed $8.1 million of Q3 revenue and $15.4 million for the nine-month period.
Cash flow from operations was $228.1 million for the first nine months of 2021, compared with $102.7 million in the prior-year period. Investing cash flow was $(739.4) million, primarily reflecting $717.5 million of acquisition payments. Financing cash flow was $442.9 million, primarily reflecting $1.1 billion of debt proceeds partly offset by $581.4 million of debt repayments. Cash, cash equivalents, and restricted cash totaled $202.6 million at September 30, 2021, including $196.8 million of cash and cash equivalents. Short-term investments were $36.5 million.
Total debt was $1.232 billion at September 30, 2021, consisting primarily of $600.0 million of first-lien term loans and $650.0 million of 3.875% senior notes due 2029. The $250.0 million revolving credit facility was undrawn. Management reported $250.0 million of revolver availability and stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased 60% in Q3 and 56% for the first nine months, driven primarily by new customers and expansion with existing customers.
- Gross margin improved because revenue growth exceeded the increase in cost of service, although acquired-technology amortization increased.
- Q3 operating expenses increased 78%, including substantially higher sales and marketing and research and development spending, as well as $11.0 million of restructuring and transaction-related expenses.
- Adjusted operating margin declined from 47% to 39% in Q3 and from 48% to 42% for the nine-month period as the company invested in research and development, sales and marketing capacity, and public-company infrastructure.
- Net income turned into a loss in Q3. The principal driver was $45.5 million of income tax expense, including $41.9 million of non-cash tax expense associated with a shift in GAAP basis from a non-taxable entity to a taxable entity. The nine-month effective tax rate was 198.4%.
- Equity-based compensation declined to $24.5 million in Q3 and $59.7 million for the nine-month period, compared with $28.4 million and $104.2 million, respectively, in the prior-year periods.
- The company acquired Insent, Chorus.ai, and RingLead for aggregate purchase consideration of approximately $699.9 million. The acquisitions added $575.2 million of goodwill and $120.7 million of identifiable intangible assets; purchase accounting for Chorus.ai and RingLead was not finalized at quarter-end.
- The company issued an additional $300.0 million of 3.875% senior notes due 2029 and incurred $200.0 million of incremental first-lien term loans in July 2021.
- In August 2021, the company simplified its corporate structure. In October 2021, after quarter-end, it eliminated the UP-C and multi-class voting structure through a holding-company reorganization.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, or cash-flow guidance. Management expects continued investment in customer acquisition, sales and marketing capacity, research and development, and product enhancements. Management also expects to continue evaluating acquisitions and stated that operating cash flow, available cash, and financing sources should fund operating and capital needs for at least the next 12 months.
- Management cited a 108% net annual retention rate for 2020 and more than 1,250 customers with annual contract value exceeding $100,000 as of September 30, 2021.
- COVID-19 conditions remained a risk, although management stated that demand had normalized by the end of 2020. Most employees continued working remotely during Q3 2021.
- Data privacy, data accuracy, opt-out rates, third-party integrations, competition, customer acquisition and retention, and integration of acquired businesses remain material operating risks.
- Tax receivable agreement liabilities totaled $3.066 billion. The agreements generally require payment of 85% of realized or deemed realized tax benefits to eligible pre-IPO owners, creating a significant potential long-term cash obligation.
- Operating lease liabilities totaled $71.3 million. Additional leases not yet commenced represented anticipated undiscounted payments of approximately $351.2 million, including a planned Vancouver headquarters lease.
- Two putative class actions filed in 2021 allege violations of rights-of-publicity laws concerning the use of individuals’ names on public-facing web pages. The filing states that potential losses cannot currently be estimated.
- Interest-rate exposure remains due to variable-rate first-lien debt. Management reported $150.0 million of variable-rate debt not currently designated in a hedging relationship through April 2022.
- Management stated that disclosure controls and procedures were effective as of September 30, 2021 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether revenue growth and customer expansion continue to offset the company’s higher sales, marketing, research and development, and acquisition-related spending.
- The sustainability of adjusted margins after excluding equity compensation, amortization, restructuring, and acquisition-related costs.
- Integration progress and final purchase accounting for Chorus.ai and RingLead, including the acquired goodwill and intangible-asset balances.
- Debt paydown capacity, variable-rate exposure, covenant compliance, and refinancing requirements for the $600.0 million term loans due in 2026 and $650.0 million senior notes due in 2029.
- The timing and amount of future tax receivable agreement payments and the company’s ability to realize the underlying tax benefits.
- The ultimate outcome and potential financial exposure from the two rights-of-publicity lawsuits.
- The effect of the October 2021 UP-C and multi-class voting structure elimination on governance, ownership, and future financial reporting.