ZoomInfo Shares Struggle As Reduced Demand From The Software Sector Weighs On Growth

ZoomInfo (ZI), a provider of a cloud-based sales and marketing intelligence platform, is working its way through a challenging environment.

The company at the end of July reported that total revenue for the second quarter rose 16% to $308.6 million, missing the consensus estimate of $310.9 million. For Q3, ZoomInfo’s revenue outlook of $309 million to $312 million (below the consensus at the time of $325.8 million) represents growth of only 7% to 8%.

After the Q2 earnings report, ZoomInfo stock fell 27% in one session. Today, the shares hit a new record low of $17.10. The stock is off 42% YTD.

ZoomInfo’s hefty exposure to the software sector is weighing on near-term results. Many software vendors use the company’s go-to-market platform to find and engage with potential customers. However, numerous software companies over the past year have laid off workers and sharply reduced expenses. This is causing seat contractions and smaller renewals at ZoomInfo. There isn’t much indication of a demand rebound from the software sector anytime soon.

In fact, the operating environment in the second half of this year could get tougher, as renewals from software customers are more tied to the final quarter. The software sector now accounts for about 35% of ZoomInfo’s overall business, down from 40% previously. With many software vendors continuing to watch their costs, this vertical could see its contribution fall even more, further curtailing a previously strong growth motion for ZoomInfo.

The company needs to boost its presence at organizations outside of the software sector. In Q2, non-software annual contract value (ACV) gained 20%. ZoomInfo management is trying to win more non-software business with new educational initiatives to inform potential customers about the quality of the company’s data and the ROI benefits of its platform. ZoomInfo has continued to add enterprise sales resources.

ZoomInfo’s strategy to diversify its customer base will take some time. Meanwhile, there’s limited near-term visibility when it comes to the renewal cycle for the second half of this year.

ZoomInfo’s latest 2023 revenue outlook indicates growth of 12% at the midpoint. In 2022, the company delivered organic revenue growth of 41%. As investors try to figure out if guidance for this year is de-risked enough, they have little confidence that another downward revision is out of the question. For 2024, analysts on average look for revenue growth of just 7.5%.

One key metric to watch is the total number of enterprise customers (ACV of $100,000+). As of Q2, ZoomInfo had 1,893 of these large accounts (representing 45% of total revenue), down nearly 2% from the end of 2022. Stabilization on the enterprise front would be an encouraging sign because these accounts have larger contract values and lots of up-sell potential.

While ZoomInfo is clearly going through some things right now, the company is sitting on a big book of future business. Total RPO at the end of Q2 stood at $1.11 billion. Improving profitability is another positive. For 2023, ZoomInfo expects to deliver per-share earnings of 99 cents to $1.00, up from adjusted EPS of 88 cents reported last year.

In late July, ZoomInfo authorized a new share buyback totaling $500 million. As part of an initial $100-million repurchase plan announced in March, the company spent $87 million through June to buy 3.9 million shares at an average price of $22.26.

Despite its near-term challenges, ZoomInfo still has plenty of fans on Wall Street. Canaccord lowered its ZoomInfo price target to $26 from $32, but kept its ‘Buy’ rating, saying the shares are too cheap to downgrade. DA Davidson trimmed its target to $34 from $40, but called out the company’s strong competitive moat. It now sees ZoomInfo as a value investment opportunity in software for a high-quality global market leader in business-to-business intelligence.

While Barclays turned a bit more cautious, reducing its target to $25 from $34, the firm maintained its ‘Overweight’ rating, saying estimates should be fully de-risked now. The firm says the problem is not with ZoomInfo. Instead, it blames end-market demand, which should improve eventually.

BofA isn’t quite as optimistic right now because it doesn’t expect downward pressure on renewal cycles to abate by the end of this year. The firm says it will likely take several quarters of consistent execution to drive an improvement in investor sentiment. Deutsche Bank is in agreement, lowering its target to $20 based on lack of visibility.

In Q2, when ZoomInfo shares traded between a low of $20.33 in May and a high of $28.75 in June, some institutional investors were big buyers. Blackrock was the #1 buyer, boosting its position by 78% with the purchase of 13.21 million shares. Blackrock now owns 30.1 million shares, placing it among ZoomInfo’s top five holders. Wellington Management picked up 10.53 million shares and now owns 28.98 million shares (it’s also a top five holder).

Cadian Capital Management in Q2 purchased 3.84 million shares, boosting its total holdings to 4.63 million shares. Holocene Advisors opened a new position of 3.74 million shares. State Street lifted its position by 62% via the purchase of 3.49 million shares and now owns 9.07 million shares. Activist investor HMI Capital Management added 2.62 million shares, increasing its position to 10.79 million shares (it’s now the #7 holder).

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