Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
The ZoomInfo IPO slipped through our fingers in the last news cycle, so we’re going to catch up.
Founded in 2000, the company has had a somewhat complicated history. ZoomInfo raised a Series A in 2004, according to Crunchbase data, but that’s where its funding history stops. The firm, a SaaS operation that provides information on business people, later sold itself to private equity firm Great Hill Partners in 2017 for a reported $240 million. That wasn’t the end, however. ZoomInfo was later sold to DiscoverOrg for a sum reported to be more than $500 million. DiscoverOrg is a sales and marketing services company based in Washington state that has raised money from private equity.
As you can imagine given the transactions ZoomInfo has gone through, the company’s accounting is a mess to understand. It’s latest S-1/A has the following wording to describe what the IPO encompasses, just to give you a taste:
Immediately following this offering, ZoomInfo Technologies Inc. will be a holding company, and its sole material asset will be a controlling equity interest in ZoomInfo HoldCo, which will be a holding company whose sole material asset will be a controlling equity interest in ZoomInfo OpCo. ZoomInfo Technologies Inc. will operate and control all of the business and affairs of ZoomInfo OpCo through ZoomInfo HoldCo and, through ZoomInfo OpCo and its subsidiaries, conduct our business. Following this offering, ZoomInfo OpCo will be the predecessor of ZoomInfo Technologies Inc. for financial reporting purposes …
You don’t need to understand all that. Instead, this morning, let’s take a few minutes to dig into the company’s recent earnings results, and its valuation. How is the market valuing this firm? And did its previous owners do well to pay as much as they did for the company?
IPO fundamentals
We’re a little late to this, which means that the math has been done for us. Reuters reports that ZoomInfo sold 44.5 million shares at $21 apiece, raising $934.5 million. At that per-share price, ZoomInfo is worth around $8 billion, according to Retuers’ math.
What makes the firm worth $8 billion? ZoomInfo’s IPO document is a goat rodeo of differing relationships and voting rights and debts, so it can be a little hard to parse. But if we narrow our focus to just a few elements of its financial results, we can see a SaaS business that, unlike most, generates positive operating income.
In 2019, ZoomInfo’s $334.6 million in revenue led to gross profit of $254.1 million, according to pro forma adjusted results that mimic the company as it will exist after its IPO. That figure generated $36 million in operating profit. A ~10% operating margin isn’t bad for a growing SaaS business. But, ZoomInfo’s $72.1 million interest expense on its debt and other debt-related costs pushed the firm to a $54.3 million net loss in the year.
More recently, in the first quarter of 2020 the company’s results (not pro forma, so we’re mixing apples and oranges here) showed sharp growth to $102.2 million in top line. That led to $81.8 million in gross profit and $20.3 million in operating income. This time, however, the company’s debt costs only pushed it to a $6.3 million net loss, lower on an annualized basis than what was shown in its pro forma results for 2019.
So if you bought shares of ZoomInfo, you’re buying into a company that could pay for itself — if it didn’t carry so very much debt.
You aren’t in charge
If you buy ZoomInfo shares, you aren’t buying anything like a say in the company’s operations. A multiclass share structure ensures that its current owners will retain nearly all voting power.
Here’s the IPO filing, after noting that if you buy its stock you will get Class A shares (Bolding: TechCrunch):
Immediately following the consummation of this offering, the Pre-IPO OpCo Unitholders and the Pre-IPO HoldCo Unitholders will hold all of the outstanding shares of our Class B common stock. The shares of Class B common stock will have no economic rights, but each share will entitle the holder to ten votes […] Immediately following the consummation of this offering, the Pre-IPO Blocker Holders will hold all of the issued and outstanding shares of our Class C common stock. The shares of Class C common stock will have the same economic rights as shares of Class A common stock, but each share will entitle the holder to ten votes …
Once you do all the math on what that means, it turns out that the “voting power held by our pre-IPO owners after giving effect to this offering” is between 98.5% to 98.7%, per the document. In short, those buying into the IPO will have effectively no democratic rights.
How exciting that would be to you, of course, doesn’t matter. Why? Because ZoomInfo’s IPO didn’t just price at the top of its range, at $21 per share it priced $1 per share above its IPO range. So, there was plenty of demand for this complexified company.
And at a healthy multiple, too. If you annualize the company’s Q1 revenue result (the non-pro forma figure we mentioned above), and use that figure in a revenue multiple calculation, you’ll find that ZoomInfo is being valued at around 20x revenue. For a SaaS business that’s slightly better than average, given today’s generous SaaS valuations.
The company priced well regardless of what we might think about its structure, voting rights and debt costs.
Perhaps investors are hungry for growth shares? If they are, the final S-1/A filing has notes on that, too (Bolding: TechCrunch):
As a result of the COVID-19 pandemic, we expect we will experience slowed growth or decline in new customer demand for our platform and lower demand from our existing customers for upgrades within our platform. We have experienced and expect to continue to experience an increase in potential customers seeking lower prices or other more favorable contract terms and current customers attempting to obtain concessions on the terms of existing contracts, including requests for early termination or waiver of payment obligations, all of which has adversely affected and could materially adversely impact our business, results of operations, and overall financial condition in future periods.
But maybe if the company can clear some of its indebtedness post-COVID, it can generate real GAAP net income in time. The firm does generate cash from its operations. But with an expected debt load of $841.5 million after the IPO, any debt-clearing would take a lot of time.
Anyway, that’s the word on ZoomInfo, which priced yesterday and starts trading this morning. My read of this odd deal is that it demonstrates that the IPO window is reasonably open, even today.
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