ZoomInfo (ZI) is scheduled to price tonight and trade tomorrow with a higher range now of $19 – $20. As we indicated in the Candygram earlier this week this is already a “hot deal” according to equity capital markets.

ZoomInfo provides the data organizations need to do B2B marketing. Specifically company titles, emails, and other contact information that is the basis for marketing and cold calling prospects. There are a few well-established alternatives out there including D&B Hoover’s and LinkedIn.

D&B acquired Hoover’s back in December 2002 for a mere $81M (nets out the cash that publicly-traded HOOV had at the time.) Microsoft purchased LinkedIn in June 2016 for a stunning $26B. Clearly there is value in this sort of “business information.”

It’s not clear what Microsoft (MSFT) really wants to do with LinkedIn. You might say they have “taken their eye off the ball” but it hasn’t ever been clear what the point was in the first place. LinkedIn remains “the world’s largest professional network.”

We already know the ZI deal is in high demand thanks to their recurring revenue model, rapid revenue growth and high profit margins. What’s not to love?

As you can see from the summary model below it’s not hard to get a $50 PT on these shares based on their future growth and profitability.

But how should we think about ZoomInfo longer term as a real investment?

Deal Points

Margins are good. Maybe they are a little too good. The company is ramping expense levels for good reason but margin expansion is not a big part of this story. But investors like the levels now with ~50% margins in both AJEBITDA and FCF.

ZI acknowledges their current status an information provider by comparing themselves to companies like D&B Hoovers and LinkedIn Sales Navigator. Yet they are positioning themselves as more of a sales process orchestration platform. It’s not a bad strategy but will require some execution in software development which the company has yet to demonstrate.

From a rivalry standpoint ZI faces fairly weak competitors. It’s not like D&B Hoovers is going to get all aggressive in this market. They do position LinkedIn Navigator a bit unfairly. As a stand-alone offering it’s not very good. However a broad array of smaller companies offer “enhanced” services based on it and they are much closer compares to what ZI offers today.

This is a messy deal. ZI is the result of a merger between DiscoverOrg and ZoomInfo. There are a bunch of PE style investors as well, multiple share classes and over $1B of debt. The debt will drop to about $840M or so pro-forma. For whatever reason they also neglected to provide a clean set of consolidated historical financial results for the combined company.

There have been some reports of very aggressive sales tactics and some staleness of the data. However we don’t see any real evidence of these things in the level of accounts receivable and customer retention (respectively.)

Management identifies some “adjacent areas” like recruiting where they might expand. There does appear to be some low-hanging fruit there as that industry remains very fragmented.

Valuation

Here’s a simple PFV model and a comps table. It’s not easy to come up with great comps for this one given that the direct competitors are private. But the group provides at least some kind of a yardstick.

It’s important to note that while the market opportunity is there to support this growth, it’s very difficult to transition from a $400M company to a $1B company. The operational scale is not easy to achieve – especially when you are using a direct sales model. They will get some benefit from existing customers increasing their contract amounts.

If you’re bullish you want to compare ZI to names like DocuSign (DOCU) and Atlassian (TEAM) which is not outlandish. But it’s hard to argue that ZI should trade at a premium to these two so if them market bids up the shares to our PFV price then I would sell. Supply may be limited now but more shares will certainly come into the market when they are able.

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