Chit Chat Stocks - ZoomInfo (ZI) | Not So Deep Dive

Episode Date: January 4, 2022

ZoomInfo is a leading go-to-market technology platform for sales and marketing teams. The company assists in identifying target customers and decision-makers. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of ZoomInfo. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:03) Industry | (7:37) Management & Ownership | (9:42) Valuation | (13:36) Earnings | (16:37) Balance Sheet | (18:53) Our Analysis | (21:25) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the not-so-deep-dive episode on Chit Chat Money. This is a show where we go over a single stock in about 30 to 45 minutes. This is the first look, typically, and for this

show, it definitely is the first look on a company. We're going through the basic SEC filings, looking at the earnings reports, conference calls, kind of get the basic overview. So maybe if you think it looks like a good business, kind of inspire research further. And today we're talking Zoom info. Ryan, it was your pick. I know it was a big recommendation from some of the listeners, but I have to ask Brad, have you looked at this business before? Have you, I don't know, have you seen it before looking at it for this show? Super briefly, I've never, I have not read the S1 or dug into their filings or anything, but I was familiar with what they did and the success that they were having. Yeah. Interesting business name. Isn't that great? I don't think

it's a bit misleading on what the business is. You kind of have no idea what it is, but it's not that hard to understand. When we get into it, you kind of see the value proposition once Ryan will get into and describe that. But first we got to talk about our sponsor for the Tuesday episode today, and that is Potential Multibaggers. The aim of the Potential multi-banker service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. And their track record so far since launching in 2017 has been fantastic. You've probably heard Chris, who runs the service on our show before. And if you want a tidbit of his sort of analysis, go listen to his shows that he did with us on Upstart, on Fiverr. And I guess

that one's more than a year old now, but C Limited from over a year ago, he does research on kind of high growth stocks. The ones that, like the service says, can be a potential multi-bagger. They're going to be maybe higher risk, but the potential for reward is there. And they do plenty of great research. So if you subscribe to the service, it's not like he's just recommending you these picks, black and white. He's going through his analysis. He'll communicate with you. He'll give you a great overview on how to invest in these high growth names or companies. I should call them that instead. Help you out in your journey if that's something you want to do. So if you want to become a multi, you can go to Seeking Alpha and look for From Growth to Value, Google it, or go to at From Value on Twitter.

If you can't find it or are having a struggle finding it, email us or message us if you know where to find us and we'll connect you. All right, Ryan, do you want to talk about Zoom Info? Yeah, Zoom Info describes themselves as a leading go-to-market intelligence platform for sales and marketing teams. And I guess in more layman's terms, what I understand is that they are a database of business information that sales organizations subscribe to or subscribe to get access to. And they use it basically as lead gen and as a way for them to kind of expedite the sales process. And the goal really for ZoomInfo is to give sales teams more accurate information, generate

better leads and shorten that sales cycle. And then as far as the data collection process, they gather it in a few different ways. So they either purchase it from like data aggregators or gather it from public sources. Or if you want to look at another company's data or another person's data on Zoom info, and you're just like a random person, you can put your email in and you put like your business contact info, and then you get access to it, like free access, which I think is limited in this capacity. But that's kind of a way to get that sort of network effect going and get more organic data growth. And then they,

they also help out along the sales process. So it's not just that, it's not just that they're generating leads. They're also helping out over the life cycle. So here's a quote from their S1. They say, paid users leverage our platform to identify the best target customers, pinpoint the right decision makers, obtain continually updated predictive lead and company scoring, monitor buying signals and other attributes of targeted companies, craft the right message, engage via automated sales tools, and track progress through the deal cycle.

So they call it AI, but basically they're like scoring whether or not the likelihood of the sale is going to convert. And I'll get into it in the anecdotal evidence, but I have some experience dealing with that because I was a cold caller way back when. And it helps to have some of that stuff and to actually have useful information. Having a database with stuff where you're calling people that have moved on from the company, have no business answering your calls, that kind of stuff can be really frustrating. So it sounds like ZoomInfo is a more modern solution for it. And then history. ZoomInfo was originally founded in 2007 by Henry Shuck. At the time, it was known as Discover Org, and the focus was really on serving enterprise

clients. It actually stayed as Discover Org until 2019 when it acquired Zoom Info, and then they changed the business name to that. I remember, I think I heard the CEO talking about how they had consulted with a lot of customers, and the customer said, we like your solution, but when it comes to small and medium-sized businesses, we prefer Zoom Info. You should look at them, consider what they're doing. And so, uh, Henry Shuck was impressed enough to go out and try to acquire the company and they always were funded by debt. Um, they may have done some funding rounds as well, but early on that, that was basically how they did it. Uh, that's basically how they grew was they would get debt, acquire more companies, and they'd focus on cashflow and profitability

because they had to pay off that debt as opposed to just pure BC funding rounds. Um, and then And nowadays, I guess even prior to the Discover.org acquisition of ZoomInfo, ZoomInfo themselves had made several acquisitions. So it's really become this kind of blended database that can span sort of the business size spectrum. And really, you can get business contact info on pretty much anyone you might want. And then a year after the ZoomInfo acquisition, they went public. um so it's been i want to say nine months maybe three they were in 2020 so i believe it's over

two years or almost two years now i think it could have been late 2020 though i'll take a look at it but that's pretty much the history it looks like they've had oh yeah they've had six quarters as a public company okay 18 months there yeah um sorry you have anything else no that's it okay yeah they have they're kind of a mishmash of products you would look it's kind of hard to look at um when they have all these out there they're basically a serial choir but they want to be the holistic platform for the database stuff. I watched some sort of program tutorials or platform tutorials, and it doesn't feel like this hodgepodge of mixed databases. It is on the back end, I guess, but it really is presented as sort of one holistic platform. Okay. I'll hit

industry and competition. They estimate they have a $70 billion TAM, which if you don't know, is total addressable market. That seems a bit fishy to me. I don't know where they're getting that number from, it seems a bit large for their niche products that they have. But this is not an industry I'm well aware of. So either way, they're doing less than a billion dollars in revenue right now. So I think they're not really reached any sort of market saturation. And the good news is they don't think they have any direct competitors because in their 10K, they explicitly state that they do not have any direct competitors at the moment. Or if anyone says they're a direct competitor. They're actually a pretender. They don't say that, but they kind of say it in more

professional SEC filing terms. However, there are tons of little products or companies that are basically tiny products that offer something that is either adjacent to what ZoomInfo does, or maybe a small slice of the pie. And they actually like to acquire those. Sometimes they made the recent ones, what were they called? Ring lead, stuff like that. But potential competitors and frenemies that seem to be the biggest potential threat to them or the biggest potential partners are Microsoft through they have their own sort of, I believe they have a CRM solution, but I could be reading that wrong. I don't know Microsoft exactly well, but there's a LinkedIn product that is sort of a competitor, but it's more for recruiting and

stuff like that. So it overlaps slightly with ZoomInfo a bit. But then the big potential competitors are the CRM platforms or companies that own a CRM platform. So Salesforce, HubSpot, Oracle. And right now, ZoomInfo is partnered with them. So I mean, that's great. You can kind of see why a CRM platform would be really nice to merge with ZoomInfo. And ZoomInfo just kind of gets integrated into that. You can see how a salesperson would love that. But over time, there could be that potential threat of those companies starting something like ZoomInfo is done right now. But it's interesting that no one has yet. So maybe that is kind of a sign that there's a moat. But I don't know the industry is well enough to understand that. But Brad, do you want to talk

about management and ownership? Yeah. So co-founder and CEO is Henry Shuck, as Ryan was talking about. He was a former professor at Washington State. Shout out to Ryan and Brett. There we go. Former founder, or I mean, he was the founder and the CEO of Discover.org, which he built to $350 million in ARR right out of college, which I found pretty impressive. And then they had that merger and rebranded to ZoomInfo. As we were talking about, he did go to Ohio State for undergrad, but I won't hold that against him as a Michigan alum. And he does sport a lofty 84% Glassdoor rating with a lot of views. So you can take that pretty seriously. The other co-founder is Kirk Brown. Does not look like he's still involved with the company, but he's got a pretty happy ownership stake, which I'll explain later.

It looks like he was with Discover Org right up until the Zoom Info deal. He was a pro caddy beforehand. I thought that was pretty cool. And a sales representative at a Fortune 500 company. And he was really responsible for heading the R&D department while at Discover Org. but when the merger happened, it looks like he kind of took his wild fortune that he'd built and wanted to do some other things. But the CFO is Cameron Heiser. He's been there since 2018. He was the CFO at Benchmarking Partners for a year in 2004. And he's been a board member since

then with Benchmarking Partners. He's the former CFO of a company called Ease Software Group. So he led it from 30 million to 290 million in ARR. He led a successful exit for over a billion dollars. So pretty successful experience there. The COO is Chris Hayes. A lot of experience with companies that I've never heard of, really small private enterprises. And he's pretty new to the company. The chief product officer is Hila Nir. I'm sorry if I pronounced that incorrectly, which I probably did. She has been with the company since 2011. So longest tenured employee outside of Shuck on the executive team. She started with the company as a VP of marketing, and she's climbed her way all the way up to a C-suite position. So good for her. Former senior

auditor at Ernst Young and some other experience, again, that wasn't super notable. But in terms of ownership, triple-class share structure, not my favorite way of issuing equity. But oh, well, it's not really a deal-breaker. It's more of just a nitpicking for me there. But Shuck owns 1.3% of class A, 33% of class B, and none of class C voting power for a total of 23% of the overall voting power. Sorry, he owns those percentage of the share classes for total voting power of 23%. Kirk Brown, who was the other co-founder who I said, as I mentioned, isn't super involved with the company, but he does own 28% of class B shares. So he's got almost 20% of the overall voting power. So he's still very much so a player in the company. There's a lot

of funds involved with well over 50% combined voting power. It was a little bit difficult to actually arrive at that number just because there's so many overlapping ownership stakes between some of the funds and the people representing them, but it's a very healthy, hefty ownership stake and it's only been rising since the IPO came out. So no red flags, no real yellow flags, just kind of really nitpicking at the triple class share structure, but that's just I will add in the latest quarterly report, they said ZoomInfo's board of directors unanimously approved the elimination of the UPC corporate structure and moved to a single class of common stock. So it sounds like they are taking your concerns and fixing their structure. Yeah, that would be, I didn't read that.

So thank you for adding that. That's a needed addition, but that would be very welcome in my opinion. Yeah. The complicated stuff is just, come on, let's just, let's not do that. Why are you doing it? But yeah, I'll hit valuation. I'll say fair warning here. This ties back into the share count stuff. Market cap is actually different in a lot of places. It has a Dutch bros feel to it. We recorded one of that show back in, I believe, September or October. That one was more, even more confusing. And especially when they were going public, people had the market cap way off, which was huge. They had a similar thing here too, but I just took the latest 10Q, which

may not be exactly what it is now, added up the share counts and then multiplied it by the share price. It could be slightly different because they had an absurd amount of form fours going out since this quarter. They've had 10, I think it was a hundred since the end of the last quarter, which is like, I'm not reading all those. But market cap from my estimation is about $24.4 billion ticker ZI. Price to sales, 36.7. So very expensive. Price to gross profit of 42.5. So as you can see, very high gross margins. And price to operating cash flow of 82.7. So very strong conversion from gross profit to cash flow while they are growing. Some of that is stock-based compensation. It's not all stock-based compensation. It's not like a snap scenario where it's 300% or

something like that. They have just under 4 million RSUs and options outstanding versus almost 400 million shares outstanding. So I don't think there's going to be a huge future headwind from the shares outstanding. However, they've employed some of those tricky things with they had this thing called the unit co or the op co something like that, where they have the tricky tactics that have led to some of the solution recently. And actually, that kind of feels like a bit of a risk to me because on the conference call, and this was a bit embarrassing for the analyst, an analyst said, so we'll look at your market cap at about $16 billion. And they said something about blah, blah, blah, what they're going to do for capital allocation.

And then the CEO or founder, I think it was him, stepped in and he was like, actually, wait, our market cap's 25% higher than you're stating. And then I'm sure the analyst and everyone's like, what, what do you mean? I'm sure whoever that analyst was must have had a hard day at work. I think everyone did because if you look at their share count, no one was really talking about this and their share count went from, this could be part of that merger thing that they're doing. It went from 200 million in October of this year to now 400 million. So if you're really interested in this company, you got to figure those share count things out. It's too complicated to talk about this on the show, but yeah, there's some tricky things there.

Also, if you're ever unsure, you can email Investor Relations and ask. I had to do that for Dutch Bros, and they will give you the stated share count. Yeah, but what about those options or warrants coming down the line? You got to, you know, or some weird- Ask for fully diluted. Yeah, you got to ask for that. But there's some tricky things. Like Dutch Bros, they probably said what it was, but they had some great, you know, the options out there that were quite large as well.

I don't know. They can help, though. IR helps. All right, Ryan, do you want to hit earnings? Yeah. And I thought I had something to add to that, but I'm forgetting it now. So I'll just get into the earnings. Their third quarter revenue was 197.6 million. It's up 60% year over year. They have 81% gross margins. This quarter, they generated 73.3 million in unlevered free cashflow, which was a 37% unlevered free cashflow margin. But they do have a lot of

interest payments on their debt. And Brad's going to get into this. We talked about it. They use debt to fund growth, which is not typical of a lot of young tech companies. So ignore that number. They give you an adjusted number, but if you just do operating cash flow minus capital expenditures, it's still a pretty high margin. I would also do business acquisitions, too, since they're a serial acquirer. And yeah, and you can, they give you that information. It's right there in the cashflow statement. So all in all, it is still pretty high free cashflow margins. They are very focused on profitability. And they closed this quarter with 25,000 customers, company customers, and more than

1,250 customers with over a hundred thousand dollars in annual contract volume. So all in all, they are growing fast. Uh, they're adding a lot of customers. They are not only helping sales people, but they are a sales business. And the CEO Chuck, uh, seems very focused on, uh, that was kind of, that felt like his expertise was sales. Um, and I also, now I'm remembering this, but, uh, since they were always a debt funded company, uh, they didn't have a lot of, they didn't use options as a form of compensation for, uh, it sounds like a lot of their history, But in an interview with the CEO, he said, there's no excuse now not to attract talent. We're a public company.

We're young. We're growing. We can use stock as a way to get the best people in our roles. So it sounds like he tends to use that as a part of their compensation or as a way to compensate employees moving forward. SBC has grown. Yeah. So I think expect some more options to come down the line.

Brad, do you want to hit balance sheet and liquidity? For sure. So around $235 million in cash and very high liquid short-term investments. If you want to be friendly to them, you can add another $75 million in net receivables and another $56 million in prepaid expenses for liquidity of about, total liquidity of about $350 million. And then they have $1.2 billion in long-term debt with about a billion of that raised this year.

And then the interesting thing about this is kind of related. they raised 650 million in senior notes at a 3.875% interest rate. So really not ridiculous in the grand scheme of things. And they used a lot of that to repay a first lien term loan with a higher interest expense, which their interest expense as a percentage of revenue actually rose this quarter versus when you average it out over the entire year. So hopefully that will be a peak and it'll go down now that they've refinanced some of this debt. And then they also have another $250 million first lien credit revolver for added liquidity. So yeah, like Brad and Ryan were saying, the balance sheet is pretty unique compared to some of the other SaaS players and

some of the other software technology players that we look at, that we know and love. I mean, it's a lot different. And I'm not saying it's a lot worse or it's a lot better. It just raises the bar for cash flow generation, which fortunately for this company is very strong. Yeah. Yeah. Shouldn't have any worries of that if you're a cash flow generating company. And I kind of like it better than doing a common stock offering if you are cash flow positive because, I don't know, it's cleaner. I think you can get a better return on that debt, especially if it's long term and you're already cash flow positive. It's just, I don't know. I've seen it before with companies raising, doing stock offerings. Maybe if you have a premium valuation or something, it's fine. But I've seen it before. Who would it be? Peloton? I guess they're on cashflow positive. They added, Brad, do you have something to add there? Yeah, just, I mean, the stock's done extraordinarily well since it IPO'd, I think, unless I'm just completely wrong, but I'm pretty sure it's done very well.

And management telling you that, yeah, we're going to continue to raise debt instead of equity just tells you, maybe we don't think our equity is all that unreasonable right now. And maybe we think, like you're saying, the opportunity cost of raising this equity is a lot higher than with debt because they're expecting great returns. So it's just a very small piece of anecdotal positive evidence. Yeah, it's a good point. All right, let's hit the ad break and we'll get back and get more of our analysis and

what we think about Zoom InfoStock. To explore their thinking, visit reed.kpmg.us slash opportunities. This episode is brought to you by La Quinta by Wyndham. Here you are, miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free Bright Side breakfast. Or squeeze in a workout at their fitness center.

Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Okay, welcome back. We have anecdotal evidence. Brad, do you have any? I know Ryan has some.

I don't have any. No, but respect Ryan for being a cold caller at some point in the past. That is not a fun job. No, it was terrible. It was sort of one of those first jobs. And I guess this is not necessarily anecdotal evidence of ZoomInfo, But I would have killed to have Zoom Info from what I've seen because the company I work for basically gave me just an organized spreadsheet full of names that they probably bought from some data aggregator. And it was all outdated and people had moved on from jobs.

And so Zoom Info, it seems like they bring a lot more relevant, useful, accurate information, which can save a ton of time for salespeople. And so that I imagine provides a lot of value to their customers. Yeah. Understanding the value proposition seems pretty easy here. I actually like you can understand this a lot more and maybe it's because I'm not a salesperson, then a CRM solution like Salesforce, I've never really understood why that's so valuable. Obviously it has to be, or else no one will be paying for it. But I kind of understand zoom info is a lot better because of all the time

you're saving a sales rep. And in that position, you know, the more people you can call that are relevant, the more, the better a company itself will get a return on the spend for that, that they're spending on that sales rep. But let's hit future growth opportunities. Brad, what do you have for us? Yeah, mine's more of a near-term future growth opportunity, but the macro backdrop I think is very compelling for them. So just thinking of variables like school closures popping up temporarily every now and then, the stimulus checks, stock market indexes are trading near all-time highs, the greater economy in entrepreneurship is taking off. And all of this is really translating into lower labor

participation, which really has not recovered with recovering unemployment rates. And that's pushing wage inflation, which was a hot topic last week. And that wage inflation really will push enterprises and companies to want to get more out of their resources and want to raise productivity to combat this input cost pressure. And I think that's exactly playing into Zoom Info's niche of building productivity and building incremental success with added efficiencies in the sales process. So that just seems like a perfect backdrop for them heading out of another perfect backdrop in which remote living, I guess, remote existing really kind of was a unique variable for them. Yeah, that makes sense. Ryan, what do you got? To touch on kind of that point is COVID,

they were sort of a COVID beneficiary. I think, uh, they said the CEO gave a story of sort of one of one customer example where they used to, and I think they were like an HVAC provider or something. And they would go to each building in like San Francisco. Um, and they would find the tenants. They'd look up those tenants online. They'd call them and ask them if they needed their services or something like that. And this, and they'd do all that in person. Well, obviously without those people in the office, you can't really, it doesn't do much to go to those buildings. So ZoomInfo kind of became the destination for all those customers.

But my growth opportunity is going to be mergers and acquisitions or just acquisitions really. And they recently acquired Ringlead and Chorus AI, which will get lumped into, I believe it's getting lumped into the ZoomInfo and Gage, which Brett's going to talk about here. But the company was built on acquisitions and I expect this to be a big part of their growth moving forward. They've said it's going to be a big part of their growth moving

forward. And the other thing that I like is this is a sales organization helping sales teams. And so they, yeah, I believe the Chorus AI came out of it. The reason they acquired them was because their entire sales staff was using Chorus AI all the time. And if I'm not mistaken, Chorus AI basically transcribed sales calls and allows, and there might be more to it as well, But apparently, for most sales representatives, your job is either to sell or to train younger sales reps to become another sales rep. And, of course, AI really expedited that process. And so they decided to acquire it, and now they can kind of offer it to these other customers that they're servicing as well. That funnel gives them, I think, a good insight as to what's really valuable to their customers.

And so they're in a position to acquire a bunch of those. Yeah, that makes sense. That rolls right into mind, which is Zoom Info Engage. This is a relatively new product they launched that is trying to help them move downwards instead of just having the data stuff into more of helping people manage the day-to-day process of being a sales rep and relating to all of your clients. so it's basically it's a little hard to understand as an outsider but two of their big products are something called an automated dialer that it just helps with efficiency i guess and then email automation which again will help with efficiency really the whole point of zoom info is to save you time and they're trying to do this with cross-selling you know these type of products to more and more of their existing zoom info customers and so far zoom info engage has done quite well for them after just launching, I think probably 2019 or something. It's only been a few

years at best. I didn't get the exact number of the date when it was launched, but they've cross-sold already to over 2,000 of their customers. So looks like a lot of people want to use it. And remember, like we said before, they only have 25,000 customers. So that's almost 10% of their existing customer base. It seems like this is something everyone's going to want. this can help their net dollar retention rate or net revenue retention, whatever metric they use, that can help that stay high over the next few years and beyond. All right, let's move into highlights and lowlights. Brad, what do you think? Yeah, I think Shuck is a rock star. He built an extremely successful company while an undergraduate. I was struggling to get decent

grades in my classes in undergraduate and can't really imagine building an enterprise during that time. So just the extremely high Glassdoor ratings, the fact that he built a hyper growth company with immense capital discipline at his age at that time just is extremely impressive to me. But that kind of leads into the low light, which I thought of during the show that that's a little different than the one I have. But just the fact that this philosophy of raising debt, while it did force them to be extremely capital, capital, well, it forced them to be very discipline with their capital allocation and focus on profitability. And that focus, which is maybe why they're starting to transition to more equity raises, probably capped the spending, the

outbacks that they could do to create growth and create as rapid of top line compounding as possible. So the margins are fantastic right now. And it's weird saying the margins are too good for where it is in their growth curve, but the margins are fantastic. And it's probably partially because they raised all this debt. So maybe precluding them from compounding at as lofty of a rate as they could have without it. Yeah, I kind of agree. If it's such a big opportunity and the unit economics have proven it, I would rather have them operating at breakeven, but you can't complain and think they're going fast. Well, they really are. Yeah. With acquisitions. True. True. If you To add back the acquisition expenses, it's not 40% true free cash flow margins.

Fake free cash flow, yeah. I call that fake free cash flow because free cash flow is supposed to be the cash available to shareholders if you're giving us some of that. It's not available to shareholders. I mean, if you X out, well, I wouldn't necessarily. Okay. Yeah. It's a little bit lower if you include the interest expense from debt, but I am not opposed to them using that remaining free cash flow to go out and acquire the businesses if they see a huge opportunity. And I think that's a much better place to invest than to return it to shareholders at this point.

Oh, sure. But I would rather have them spend more on operating expenses if the unit economics are so great, which they are, then let's grow as fast as we possibly can. they're going at 60%. Some of that's inorganic, I guess, but they're going 60%. So I guess you can't complain, but if we could, you know, if it's just how many sales, how many customers we can get, why not accelerate a bit? Um, but that's a, that's a good problem to have, right? Yeah. It's, it's a bit nitpicky. Yeah. I just, I just, I was going to say like, I'm, I'm reaching here. There there's, there's no red flag to pick at for a low light. Um, and, and using a low light of their margins are too good and they're making too much money. feels a little bit wrong, but that's where I'm at. Yeah. Yeah. My highlights, I like that

since Shuck has always relied on debt, he has this focus on generating profits. Some, you know, we've seen it where some young tech founders can get a little loose with their spending. What do you mean? Rule of 40, you know, we're just going to have 40% negative cashflow margins, but we're growing a hundred percent. So it's all good. Yes. That's something I'm not a fan of. Other things I like, I guess in theory, the platform gets better the more it's used because you can generate more contacts. And so it's something that should be more useful to further customers, kind of that network effect. um low light for me though and this i might this might not be that big of a deal but most of their data is not first party it's stuff if i'm not mistaken it's really stuff they're acquiring like they're buying the data yeah i can give some i have some notes on that for mine that i can get

into yeah that's something maybe it isn't that big of a deal but it just feels a little less uh certain that they're going to have that incoming if there's some data crackdown yeah i I agree. That'll be my lowlights, but I'll hit my highlights first. I mean, great profit margins. You could see maybe if they were still operating at breakeven, you could have that thought that the profit margins would be really high as they scale. And yeah, these are non-gap profit margins. So take those with a grain of salt. But they have proven the profit margins. You could see a path to them even expanding those slowly over time, at least maybe not in the short term. But in the long run, there's the clear value proposition to the customer. If it's saving them all this time

and making the sales rep that much better, they probably have a lot of pricing power and minimal competition from anyone large. It seems like anyone that would be a potential competitor has just partnered with them. And that's kind of coming down to the big question of is Salesforce a perfect friend? Are they going to be part of them for life? Would Salesforce ever compete with them or try to take them down. And I kind of come to the big question is what is more valuable in five years from now to a sales rep, ZoomInfo or Salesforce? I'd say possibly ZoomInfo, but I could be underrating what the value of Salesforce to someone. But I also think Salesforce would probably acquire them at the right price. So that's probably a floor and

Salesforce loves acquiring people. Yeah. I imagine most sales reps use both. Exactly. I feel like it's a perfect acquisition for Salesforce, but maybe it's a bit too expensive for them right now. Or maybe Zoom is, oh, it doesn't want to get bought. I think it's better than, I think it's more fitting than Slack. Yeah. Seems to fit more into their wheelhouse than Slack.

I think everyone would agree on that. Yes, for sure. All right, low lights though. This is the big risk I think that a lot of people may want to think about is the risks of data and cookies going away and ruining their business. So if I look at their 10K, they had, let's see, where is the risk? Okay, I'm going to read it directly from the 10K and their risk factor. Here's the quote.

If the way cookies are used or shared, or if the use or transfer of cookies is restricted by third parties outside of our control, or become subject to unfavorable legislation or regulation, our ability to develop and provide certain products or services could be diminished or eliminated. that's something that i think is a huge risk for this business one google could shut them off whenever they want and two the government can shut them off whenever they want but um i think it's it's it's just tough i would leave because i guess i don't know the answer to this but would that eliminate the data they've already collected or the data that they could potentially collect in

the future because they have this big database already yeah but stuff's changing it's not a it's not a it's not a stagnant system and hold their whole thing is they have the data crawler that goes across the internet and will update their database when say a company moves, buys a new product, does something that will indicate to a sales rep that they're a potential client to go after. So I think it would be a huge risk for their business. Other risk I have here is the ability for Microsoft through LinkedIn, Oracle, or Salesforce or HubSpot to be able to replicate the product. I think this is a way lower risk because if they haven't been able to replicate the product, it's probably a lot harder than someone might be assuming. But I still think

there is that risk, like, why are there no competitors? It seems a bit strange to me. All right. Maybe that's a highlight. That's a highlight. And it's also a bit of a conundrum. If I was researching that, I would want to research that further if I was interested in this business. All right. Bold case, Brad, what do you think has to go right here for this to be a good investment? Yeah, I'm going to take a qualitative angle here because it looks like you guys covered the quantitative pretty well. But speaking of Salesforce and Slack, much like Slack or Asana or Monday are becoming integral pieces of enterprise workflows. I think this needs to reach

that level of ubiquity within the sales and marketing departments in order to not just deserve the $25 billion market cap that it has right now, but to deliver that coveted 10-bagger that everyone is focused on and looking for, or that a lot of people are focused on and looking for. It really needs to continue to be this market leader. And again, Brad talking about the fact that, okay, $70 billion TAM, no competition. Why is that happening? And I don't really have a great answer for that. But I mean, if there isn't a great answer for that, then this is a really compelling opportunity. And the bull case is very realistic. Yeah. I'll say money.com is a great product. I think I hate most software products. Money.com is fantastic. Brian, what's your bull

case? Well, at a $25 billion market cap, which is what we think it is based on the last 10Q, Kofin has it at like 30 billion. They're off. They're off. Cause yeah, I think Kofin's wrong, but. Okay. Either way, I think you have to be forecasting out a billion dollars or more in annual free cashflow within the next five years in order for this to be a better than market return and that doesn't seem impossible i think right now they're guiding for 300 million in unlevered free cash flow for the year which you're gonna have to extract uh take back the interest expense on that but um it doesn't seem impossible but that means a lot of growth um yeah gotta expect a lot of growth gotta expect a lot of growth um yeah i know that's

not much of a like hot take. Obviously it's going fast and the market expects it to. So. Yeah. They've raised, yeah, they've raised their guidance. I mean, this year they've executed wonderfully. Yeah. I mean, mine, the bull case, the margins are proven out. So I think that's not a concern at all. You're going to have that, but I think you need to see a path to $5 billion in annual revenue. With that, you can probably see them doing about $2 billion in cashflow. There's going to be some dilution in there, but looking at that versus the current market cap, I mean, you know, they have to get there and they got to be growing kind of at a steady rate because you look at that $2 billion in cash flow versus a market cap of $25 billion. Maybe that would be valued at $50 billion if they weren't growing.

But if you expect them to be growing, it's kind of one where you have, you know, if they're growing quickly, they'll probably get a premium valuation. And hopefully over the long term, they could get up to $10 billion in revenue. But again, they're well below $1 billion right now. So that is a long ways away, and you do have to be expecting some high growth here. It feels a bit like a young sales force, maybe. I know that's a great comparison to give any company. Steady, yeah, steady 20% revenue growth forever, yeah. Yeah, I don't know.

What about bear case, Brad? Yeah, so all these factors that may have helped pull forward some demand for the company did pull forward that demand. That's the bear case. So looking forward, now that we're on hopefully the heels of the pandemic, I cross my fingers when I say that, or the toes of the pandemic, I don't know, we're at some part of the foot of the pandemic where it's almost over. And I cross, I really hope that's happening, but I'm not a doctor, so I don't know. And then all this macro drama that I kind of went into, just really incentivized a lot of growth and demand and adoption. And then going forward, when things start to normalize and smooth out a little bit, that higher hanging fruit will be met with higher revenue growth friction and lower margins. And again, I'm reaching here because they've done a fantastic job executing so far. So the bear case is that they stopped doing a fantastic job executing, simply put. Yep. All right, Ryan. It doesn't seem, we already highlighted the business risks. So the real bear case,

aside from those, is just multiple compression. I know we say that every time, But this is at a premium valuation. And I think for those of you that like the growth companies, these last few months should point to the fact that multiple compression can be a real hindrance on your returns. And that's always out there for a company like this. now fortunately they've been growing really really fast um but there's expectations that they are able to continue doing that um i don't know that's that's really only the bear case it's the only bear case i could think of the business risks don't seem that high to me except for maybe the data stuff yeah that's my bear case besides the one you guys gave the data laws could kill the business entirely there's a lot of talk about cookies um and someone may be laughing if they don't know what cookies are but it's like the data crawlers type stuff you know except

cookies. That's what it is. If you stop accepting the cookies, you can kill it. If you want Zoom info to do well. Talk about a ladder attack. We start to have a decentralized ladder attack of it. No one accepts the cookies anymore. Sorry, Brad, do you have something? Yeah. I feel like in this black swan world where Google stops playing ball with them, they almost have to go the open internet route and go pursue a company like Trade Desk and all these first party partnerships that they have to tap into that data treasure chest. So I think that that's a large risk that can be combated with alternative data sources, but for sure,

one of the largest bear cases and something to keep closely in mind. Yeah. And that's one of these for us, I would say for certainty, all three of us do not know too much about that type of industry, whatever it is, data collection across the internet. So it's almost the risk is a known, unknown kind of deal where you know that you do not know what's going to happen and you do not know anything about the industry, which is just, that's tough for me. All right. More or less interested. Brad, you want to go first here? Yeah, I'm going to go more interested, actually. I feel like I haven't been saying that very, very frequently for our recent episodes, but but more interested here. The I'd have to I'm going I'm planning on diving deeper into the competitive landscape and understanding why it's so wide open at this point in time when there are definitely companies doing similar things that that it feels like could intuitively and naturally expand into this area.

But if the answers to those questions that I have are good ones, I'm definitely going to take a serious look at this company. Ryan? I'm a little less interested. I'm not fond of investing in companies where it's a platform that I don't interface with at all. And a lot of business to business, especially enterprise software, fits into that category. That's why I don't own a ton of it. So it's something that I got to be really, really, at this premium valuation, it's something that I have to know intimately to feel like I have some sort of an inkling as to whether the returns will be above the market. So I'm going to go a little less interested, just not my circle of competence.

Yeah, I'm in the same boat. I think this business looks great. I mean, I don't think anyone can look at it and say this isn't a great business. There's potential for great returns here, but it's just outside of what I like to look for. I usually avoid enterprise companies. And that's just the kind of deal. But if that is your cup of tea, if that's kind of what you like to look at,

because it's your niche that you understand well or something like that. I mean, compared to a lot of other ones out there, this one looks like the financials are fantastic and the growth trajectory is great and minimal competition. I mean, that adds up to something where I would typically look at. it's just, it's just the industry is tough for me. And we got a lot of recommendations for the show. A lot of people seem to really like it on Twitter as well.

And so I have a feeling that it's the people that use the platform that are really encouraged by it. Cause it seems like they provide a ton of value. Yeah. Value proposition is it's easy to understand. It seems like it's high. All right. Stock for next time. We're doing this. We're recording this in December, December 21st, darkest day of the year. fun fact everyone should know that but the this is coming out on january 4th or something so we're not going to have the next one until mid to late january so just fair warning uh it'll be a month

from now but brad it is your choice and what are we going to do then yeah i didn't run this by you guys beforehand so if it's uh if it's not doable i have a plan b but how about lending club haven't heard of it so let's do it seems all right upstart upstart competitor uh hear a lot about it. I'm a big upstart bull, so I've done a little bit of work on it, but excited to do more. Nice. Yeah. We should be able to pair that with the upstart, not so deep dive we did, and that upstart interview we did with Chris, who runs Potential Multibaggers. That should be a great way to pair with that. All right. That's going to do it for this episode, Ryan. I should add, this was a listener recommendation. So if you want us to cover a show or cover a

company that you're interested in, just to get our perspective on it, feel free to email us, chitchatmoneypodcast at gmail.com. Also, before we do this closure, we are starting to do polls on Twitter for potential shows. So if you want to vote on what shows to listen to, you have to follow us on Twitter, which will be linked in the show notes and give us a rating on Spotify. They just started that out. We're going to hack the algorithm. If you give us a rating, that would be much appreciated. It's right on the homepage. Just give us a tap. If you like us, because you've got to combat the people that don't like us because there's plenty of them out there. We get plenty of bad ratings. That's right. If you don't give us a

five-star review, you are sworn enemies for life and you should understand that. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. Thank you for watching!