In this episode of Industry Focus: Tech, Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to talk about ZoomInfo (NASDAQ:ZI), which went public this summer, and its unique offering in the software-as-a-service space. They discuss how the company has grown over the years, how it is using AI and ML to improve its offerings, its balance sheet, competition, management team, what makes it an attractive investment, and much more.

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This video was recorded on Sept. 11, 2020.

Dylan Lewis: It's Friday, Sept. 11, and we're talking about the other Zoom. I'm your host Dylan Lewis, and I'm joined by Fool.com's best buddy for building big bulletins of best-buy businesses, Brian Feroldi. You thought you had me, didn't you?

Brian Feroldi: I did! Dylan, knock it off. And that one, hat tip to a Fool Live listener Zack for making suggestions. I am very open to taking suggestions on my title name, so we can eventually trip up Dylan.

Lewis: [laughs] I think that that is probably one of my favorite recurring segments; I hope listeners enjoy it as much as I do. Brian, I'm a little surprised that you didn't try to drop a "Z" alliteration here, because we are going to be talking about the other Zoom. Usually, when we're talking about Zoom, we're talking about Zoom Video Communications, today we're talking about ZoomInfo, ticker ZI.

Feroldi: Yeah. And as you astutely pointed out, this isn't even the only zoom out there; I mean there's been a wave of companies that have named themselves zoom, I can only imagine why, Dylan, right? Riding the coattails of one of the best-performing stocks of the year. But, yes, there's Zoom Video Communications, that is "the" Zoom, as in the video communication app that we're using right now; ticker symbol there is ZM. The company we're talking about today is ZoomInfo Technologies; the ticker symbol there is ZI. And when I first heard about this company, it actually came public in June, as we'll get into it, I immediately dismissed it simply because I was like, "Well, all they're trying to do is ride on Zoom's success so far." Shame on me, I did the research and I brought this to your attention; this is a really interesting business.

Lewis: And you wouldn't be wrong for thinking that, Brian, because there are businesses that have done more or less that, whether intentionally or unintentionally. There are, at least within our CMS on Fool.com, two other zoom-related [laughs] name companies that pop up, and there's been a lot of confusion for investors. There's Zoom Telephonics, which is ticker ZMTP, which is a tiny, micro-cap business. And Zoom Technologies is probably the most confusing because it sounds a lot like Zoom Video Communications, ticker ZOOM, which is another tiny, micro-cap company. And depending on when you are looking date-wise, you see some huge spikes in the stock prices for these businesses, because people are confusing them.

So, to drill it down really hard, [laughs] one more time: If you're talking about the Zoom Video app, ticker ZM. We are talking about ZoomInfo, which is a SaaS company worth about $10 billion, and that is ticker ZI. And if you're ever confused about any of the companies that we're discussing -- you want to make sure that we're looking at the right ones -- one of the easiest ways, Brian, in addition to making sure that you have the company name right and the ticker right, is look at that market cap when you Google the business. You really want to hone in on that. Because generally, we're not going to be talking about things that are denominated in, you know, small millions, $50 million, $20 million, we're generally talking about billion-dollar businesses.

Feroldi: Yes, you are 100% on point there, Dylan. Zoom, I believe, Zoom, the real, the spoken-about Zoom, oh geez, what is their market cap these days? Over $100 billion or something like that? Just a phenomenal performer. But, yeah, ZoomInfo Technologies; again, ZI, the one we're talking about in detail today, not a slouch at $14 billion or so, so a sizable business.

Lewis: Yeah, a sizable business and a relatively young one; at least on the public markets. They came public earlier this summer, raised a pretty substantial amount of money, and early investors have done OK so far.

Feroldi: Yeah, the company immediately skyrocketed after it came public, within a few days. It debuted at $21 and it got up to a high of about $64, so they really seem to have left a lot of money on the table. The stock has been trading down since then, and it's really been hit hard over the last couple of days, just like so many other high-flying SaaS stocks that we've seen, but it's currently about $32, $33 per share, so that's still a 50% return for investors that got it at the IPO, since June, not bad.

Lewis: [laughs] I mentioned before that they are a SaaS company -- shocker, talking about it with Brian Feroldi, there's about an 80% chance [laughs] any stock we're talking about is in the SaaS space. I think anytime we say SaaS on Industry Focus, Brian Feroldi gets his wings. But we're going to dive a little bit more into specifically what they do.

Feroldi: Yeah. So, ZoomInfo. Their mission -- and I always like it when companies, right in the registration statement, right up top: "Mission statement" -- their mission is "to unlock actionable business information and insights to make organizations more successful." Doesn't tell you a whole lot about what that really is, but to your point, this is a software-as-a-service business that is aimed at helping salespeople and marketers to reach decision-makers. So, they have this cloud-based platform that pulls in millions upon millions of data points and enables salespeople to find people in businesses, in organizations that are actually decision-makers, so that they can target them, reach them, and sell to them. That is at the core of what this company does.

Lewis: So, the idea is making it very simple to find who you're supposed to be talking to.

Feroldi: Exactly. And as somebody that was in sales myself for over 10 years, I can firsthand attest just how hard it is to obtain that information. You have to imagine -- Dylan, imagine you're a new sales rep, and you're working for a company and your boss says, "Hey, go sell to Boeing, we went Boeing as a customer." And you walk up to Boeing's headquarters. What do you do, who do you contact, how do you get to the right person? I mean, there are so many barriers in place for salespeople to reach the appropriate person. And I just spent a huge amount of my time trying to figure out exactly the information that ZoomInfo provides. So, I really see value in what this company is trying to do.

Lewis: I've never been a salesperson in that sense, Brian, but I have been on the receiving end of a lot of cold-call emails. People being like, "I see you cover tech, are you in charge of the tech decisions at The Motley Fool?" And I have to tell them, "No, I'm sorry, I'm not." [laughs] You know, I'm not your chief technology officer. I'm not the decision-maker when it comes to these things. And I think these types of examples highlight the value that you can really bring. Because we're really talking about salespeople wasting time if they don't have access to this information.

Feroldi: Yeah. And again, as a salesperson, I can tell you firsthand, I spent a tremendous amount of my time trying to figure out the information here. So, what ZoomInfo's platform does is it provides paying customers with org charts for over 14 million businesses out there. So, this platform is really geared at salespeople that are in the business-to-business avenue, not so much business-to-consumer. But again, Dylan: Let's say you're a sales rep, and you're out there and you want to get to make Boeing a customer. Through ZoomInfo, you can buy Boeing's organizational chart and you can see who reports to who, you can see what products they're currently using, you can see the timing of when their upgrade cycles are, and you can get the contact information at that organization so you can reach the people that you need to reach. That is unbelievably valuable information.

Lewis: That seems super-granular. And I think as I'm hearing all of this, my immediate thought is, [laughs] how do they do it, how do they get this information?

Feroldi: That's a really good question. And they pull in data from numerous sources. That includes public data, it also scrapes the internet to find some, and then they also claim -- this is something we'll get into later -- they claim that they have network effects, where the more people that join their platform, that essentially makes their org charts that they have even more accurate, and they can use that data to sell to others. And this is a company with over 16,000 paying customers at this point, including some big heavy-hitters. And yes, Zoom is actually a customer, to make things more confusing. But 16,000 paying customers and millions upon millions of accurate data points.

One thing that really stood out to me about this company that I think helps them to stand apart from the likes of, say, a LinkedIn, would be that they actually guarantee that 95% of their contact data in their database that you buy is accurate and will actually reach the intended target. That's impressive.

Lewis: That's really impressive. And I guess, I'm just trying to think about the value prop side from companies hopping in there and writing the information. Is it almost like, if Redfin were to say, is this your house? Like, do you own the fact that this is your house or, you know, Google saying, if people are googling your business, do you own this business, would you like to correct the information in here? Is that kind of the right way to think about this?

Feroldi: It seems to be somewhere along those lines. And they use verified email addresses, they use direct calling. And they have over 300 full-time data scientists whose full-time job is to just clean data that comes in and get it in the system. They also make use of artificial intelligence and machine learning. And again, with all of that scrubbing of a huge amount of databases, that's how they can make these claims that their org charts are correct. But this is a system that is designed to get better and better over time, and smarter and smarter over time.

Lewis: I like that you threw out there their staffing decisions and how many people they have working specifically in the data world. Because we can look at a lot of businesses and understand, you know, from a human capital perspective, where they're going based on where they're making those investments. You know, for some businesses, we look and we say, "Wow! They are mostly engineers at this company." And doesn't matter the business, for the most part, headcount is going to be one of the massive line items when it comes to costs. So, seeing that they're investing heavily there is obviously backing the importance of that for the platform.

Feroldi: Yeah, that right there alone I think does give them some moat in some sense. I mean, hiring and training and getting 300 people to just gather, collect, and sort through data that you essentially then resell -- that's a hard thing for somebody else to duplicate. And one question that I had when I first started researching this company was, well, how is this different than, say, a Salesforce.com, which has a customer relationship management program in place. Those systems have been around for a long time, and there's lots of competitors in that space.

The thing that they point out is, while those systems are incredibly useful and important, they still rely on data being generated by the salespeople. And I can also attest to this. I was a heavy Salesforce.com user, the company I worked for prior to this when I was in sales used them. And we were uploading data into Salesforce constantly that we were gathering from the field. So, again, ZoomInfo actually has an integration directly with Salesforce so that you can buy the data from ZoomInfo and integrate it into Salesforce to make that data-gathering process better.

Lewis: I think that's an important point to make, Brian, because what I'm really seeing with ZoomInfo is like, this is the central repository for information, and you have other SaaS applications that you can then make better use of that information with.

Feroldi: Exactly. And the nice thing here is they also eat their own cooking. I mean, one of the founders here, I'm going to get into him a little bit more, he himself was a salesperson, and he knows what it's like to have a quota over your head. If you've never had a quota over your head, I assure you it is a stressful thing. And your employer looks upon your career, whether or not you can hit your numbers. He built this company, in a very real way, to help salespeople hit their numbers. So, this is a company that if it doesn't hit its numbers, [laughs] boy! will that raise some red flags.

Lewis: [laughs] Yeah, I guess so. That's eating your own cooking in, kind of, the truest sense. Why don't we talk a little about some of the core numbers? You gave a quick picture at some of their user and business numbers, but let's dive a little bit more into that.

Feroldi: Yeah, the numbers here are both fantastic and also really confusing. In 2019, this company was originally called DiscoveryOrg, (sic) [DiscoverOrg] and last year, in February of 2019, they purchased another company that was similar to them. And the combined company took the name on ZoomInfo. So, this is a number where the GAAP numbers and the non-GAAP numbers are about as wide apart as I've almost ever seen in the business. So, when I talk about the numbers, I'm going to mostly be talking about non-GAAP here; just keep that in mind. So, 99% of this company's revenue is recurring in nature -- love that. And last quarter (they have reported one quarter so far), they reported 62% revenue growth to $111 million. And I also liked that they called out that 40% of that number was organic in nature. So, really, really strong top-line growth, but also growing 40% during a pandemic; that's excellent.

Lewis: That is excellent. And I think maybe we should uncouple the idea of organic growth a little bit, because it can be a little confusing for people.

Feroldi: Sure. Organic growth is revenue that is generated from products or services that are homegrown. Inorganic growth is when you buy another company and then you get to add that company's revenue to yours. So, again, this company has made use of M&A, mergers and acquisitions, to grow itself, but still 40% top-line growth organically last quarter is really impressive.

Lewis: Yeah. And that's like that we'll hone in on particularly close to an acquisition, and over time as an acquisition, especially if it's an integrated acquisition where you aren't running two things separately, you are basically working them in together, depends on the business, it will fade in terms of its relevance. But if there are those operations where you have something that's bolt-on or you have a particularly acquisitive company, the organic growth versus overall growth is always an important thing to look at. You really just want to understand, you know, where is this coming from? If you see awesome top-line growth, and organic growth is basically flat, that business isn't really doing all that much with its core operations, it's only growing because it's continuing to buy other companies.

Feroldi: Exactly. And that strategy does work for some businesses, but personally, I do not want to invest in companies that only rely on acquisitions to grow their top line. But the rest of the company's income statement was equally as impressive. So, again, 62% overall growth. And they called out that customers that spent over $100,000 on their platform grew 60% during the quarter. Adjusted gross margin here, Dylan -- adjusted, keep that number in mind, adjusted -- but still, 88%. Wow!

Lewis: That's darn impressive. [laughs] And I will say one thing, I know you have your investing checklist, Brian, but you talked about a pretty big delta between GAAP and non-GAAP numbers. And we can talk a little bit more about the financials and roll through those. But when you see a big gap between those two things, is that a yellowish or reddish flag until you do a little bit more digging and understand what's going on there?

Feroldi: I give companies such as this -- I make a note of it basically. Whenever a company goes from not public to public, we see a whole bunch of numbers just go completely wonky. Pinterest comes to mind. Prior to coming public, what was their stock-based compensation? Reasonable. The first quarter after it came public, it shot up to $1 billion. So, a whole bunch of one-time things like that can make these numbers look a little bit crazy. So, I always keep that in mind.

The same thing with acquisitions. When acquisitions are at play here, GAAP and non-GAAP numbers can look completely differently. And to illustrate that point, last quarter, their GAAP net loss was $56 million but their non-GAAP net income was $27 million; that is an $83 million delta between the two. And again, on $110 million in revenue. So, those numbers are about as wide as I've ever seen.

And to further complicate things, their free cash flow margins -- so, the amount of money that was actually put into their bank account -- was $52 million, almost double their non-GAAP net income. And that gives them a free cash flow margin of 49%; that is stunning.

Lewis: [laughs] I think to put a bow on the GAAP/non-GAAP thing, one thing that I think can be really helpful for people in understanding what's going on with these numbers, any company worth its salt is going to give you a reconciliation between those two numbers and you can see exactly what the puts and takes are. If you agree with what those puts and takes are, then you can accept that difference. If you look at them and you say, "You know what, I don't really like the way that they're handling these things" or "I don't understand why we're reporting numbers quite this way," then it becomes something that might be a yellow or a red flag.

Feroldi: Yeah, I think that's completely fair. But then again, with companies like this, it's not uncommon to see GAAP net income significantly trail free cash flow production. And between the two, I'll take free cash flow every single time. That actually is going into the company's bank account and making the business stronger, whereas GAAP is just an accountant's opinion basically.

So, overall, I expect these numbers to converge in time, but still, 49% adjusted free cash flow margin, wow!

Lewis: Brian, knowing how you look at businesses and looking at this company's balance sheet, I imagine there might be one ding that you have against this company.

Feroldi: Yes. And this is a company that has not been shy about its use of debt to get to where it's come today. That's not terribly surprising given that M&A has been a part of this company's history, and they did use some of the proceeds from their IPO, which they raised about $1 billion, to pay down their debt; I do like to see that. But even still, after raising $1 billion in the IPO, as of the last quarter they had $259 million in cash and $744 million in debt. I wish those numbers were reversed. So, this is not a pristine balance sheet.

Lewis: No, it's not. And you know, it's something that's sustainable so long as the business doesn't get stressed, but the reason that we emphasize this is when conditions get hard for companies, having a lot of debt can become a burden. When things are going really well, it can become a way to grow very quickly, particularly if that's cheap.

Feroldi: Yeah, that's exactly correct. Now, one of the numbers that we always love to look for with SaaS businesses, Dylan, is dollar-based net retention [DBNR] or dollar-based net expansion. [DBNE] Between the two, retention is much better than expansion. This company does report dollar-based net retention; that's the one we like to see, because that does include churn. Now, they didn't give it to us in the most recent quarter -- at least, my quick look through the press release did not have that number. However, they did showcase it for 2019. In 2019, their dollar-based net retention rate was 109%. If you dig into that number even more, this company has customers that are small and big, like up-and-down the value size. Their DBNR for enterprise customers, so the biggest ones, was actually 127%, that means that their DBNR for smaller customers was in the mid-80s, but overall, 109%, a decent number.

Lewis: Yeah. I think that's pretty solid, particularly when you're looking at the DBNR, and not the DBNE; [laughs] to just throw a bunch of word salad acronyms at you.

Brian, you mentioned the talent that they have as a potential moat, a little bit of the network effects at play here possibly as you have companies that are hopping in there and, kind of, actively verifying information. What else do you see here in terms of moat for this business?

Feroldi: Yeah, I do think that there is a competitive advantage here for sure. To me, the biggest competitive advantage they have going for them would be the switching costs. Once a sales team gets locked into this information, gets used to this data, builds their systems around having this, I think that that's a hard thing to actually give up. And the reason that I believe that is because what happened last quarter, what happened during a pandemic, when every cost that could be cut was cut? Revenue grew organically 40%. That's because this company's job is to help make sales teams better and more effective. That is the kind of spending that will always make sense, even during a pandemic. So, when I saw that kind of revenue growth, that tells me that there are some real switching costs and advantages here.

Lewis: One question I have about this, and I'm sure some of our listeners do, kind of, thinking about the model that this company has, and being an information source is, would it be possible that this makes more sense as like a single-use for some businesses and that the subscription value isn't quite there? You know, if you're looking for a definitive contact list for a specific industry and you get that information, it's possible that that information isn't stale for six months or nine months, do you feel like that's a risk at all for them?

Feroldi: Potentially. However, if every business that is a user of theirs, they want to grow, which means attacking customers that they don't yet have. And how important is it to have real-time data on exactly that? And, Dylan, what's happened to the job market over the last year? It's been kind of crazy. People have left businesses; people have started new businesses. So, having real up-to-date information is something that I think many businesses will be definitely willing to pay for. That's one of the advantages that this company has, is they, again, claim that 95% of their contact data is accurate at any given time. So, I do think given the turnover of some businesses and promotions that happen, that kind of information is always changing.

Lewis: You mentioned the Salesforce integration before. And I think that those types of partnerships or collaborations are really helpful for a business like this, because while it's useful in a silo, it is far more useful when it is able to be applied to other programs, other applications, other business operations.

Feroldi: Yeah, they did call out that they have integrations with Google, Gmail, Chrome, Salesforce, and Office 365. I mean, the two big ones there are Salesforce.com and Office 365; I like that they have integrations. I do wish that they'd spend more on making their data even more accessible on other platforms, like, just throwing about like, I would love if they integrated with, say, HubSpot, for example. And there's a whole bunch of other CRM systems like that. That, to me, if they continue to invest there and build that out, that will only widen their moat further.

Lewis: It's funny you say that, Brian. HubSpot was on the tip of my tongue for, you know, who they might target next. I think that one could make a ton of sense. And you know, we like to see stocks partnering up with other stocks, particularly ones that we already like. That's kind of a nice endorsement.

Feroldi: Yeah, exactly. But the fact that they do have integrations; I think they do have a very weak network effect at play here, like, very, very weak. They think it's a big advantage. I personally think they're overstating that given their sales, but there are some. But to me, the big question that I want to know is, does this company have a durable competitive advantage, and is it trending in the right direction? I think the answer to both those questions is "yes."

Lewis: One of the other things that companies can tend to overstate, particularly in the tech space, is potential and TAM, Brian. [laughs] Why don't we talk a little bit about what that might look like for this business? We mentioned before, it's already a $10 billion company, you know, so we are not looking at one of those, kind of, smaller mid-caps, which is often where a lot of the software-as-a-service companies debut, it's already a fairly big business.

Feroldi: Yeah. So, for the full year, for 2020, this company is guiding for $450 million in revenue, roughly -- that's a pretty sizable number. Management has gone on record and say that they believe their current total addressable market opportunity is $25 billion. And the way that they came up with that is they say that there are basically three-quarters of a million global businesses around the world that meet their criteria. I think it was something along the lines of 100 employees or more -- that's kind of their target. And they currently have about 16,000 of them as customers.

When you play those numbers out, that gives them a current total addressable market opportunity of $25 billion. That's coming from management, so this is definitely a case, Dylan, to me, where you kind of take that with an enormous grain of sugar and you drop that down and say, their total TAM is probably an order of magnitude lower than that. But given where they are today, there's clearly room for this company to grow. And if you need a number that kind of showcases that internationally, this company is in international markets, but even today, only 10% of their revenue comes from international markets. There's clearly demand for this product within the U.S. and the need for this thing is universal. So, just in the international market alone, there's room for expansion.

Lewis: Yeah. And I mean, if you're thinking about the value prop, you know, it's not like business knows borders. We are in a globalized economy and the contacts for folks abroad and in the United States, it's equally compelling on both sides. It's really just a matter of them, kind of, establishing that base.

I know that the company has provided some long-term looks at what they're expecting as a business and also strategically where they're going. What does that look like, Brian?

Feroldi: Well, that might be the most amazing thing I've ever seen in a registration statement. I've never seen a company lay out its long-term targets. And they're actually lower margin [laughs] than what exists today. So, the company has basically said, through 2020 their gross margin was 88%. Longer term, they see it being about 88%. They do think they're going to get some leverage from their spending on sales and marketing, from R&D and from G&A, but they've put out an adjusted operating margin and adjusted free cash flow margin -- both of them longer-term are going to be lower [laughs] than where they stand today. So, this would be a case of operating leverage working against the company. But still, the targets that they're throwing out there are unbelievably impressive.

Lewis: Yeah, I'm not so shocked by that adjusted gross margin being more or less the same, because frankly, when you're at 88%, there isn't a lot of room to go up. You know, we typically see gross margin expansion when a company is starting to scale and really just enjoying the benefits of spreading those fixed costs over more and more usage. And you know, you see it climb from the 60s to the 70s and the high 80s; it's really hard to pull in much more than that.

Feroldi: Yeah. And again, I'm also not going to not ding them for their free cash flow targets. Again, their current free cash flow margin is 50%. So, $0.50 out of every $1 that the business generates is converted into free cash flow -- that's astoundingly high. Longer term, they think that'll normalize in the mid-40s, which again is completely stellar.

One thing I did like that they called out in their registration statement, is they see the potential to expand into new markets, one that they called out was a near-term opportunity was recruiting. They're basically saying, we have this data set, we know what an org chart looks like, we know the talent of people. It is possible that they could use their platform to get into the recruiting business. That's the kind of optionality that I'd like to see management teams thinking about in the long term.

Lewis: Yeah, I think that that's one of the huge benefits that we see with the SaaS model in general, is the ability to work into other markets. And really, if you have a good sales team, they are taking what they're hearing from their customers and what they are really hoping to be able to do with your platform and with your information, bringing that back to the folks that work in product and creating the space for that market expansion.

Feroldi: Yes, exactly. The bottom line for me is, does this company have room to grow and a lot of potential ahead? Clear answer, again, "yes."

Lewis: One of the things we always like to look at, Brian, especially in the software space, but really with almost any business, particularly younger ones is, you know, what does the customer base look like, is this a business that has customer consolidation, is that a risk for this company? What's the story there?

Feroldi: The answer there is, thankfully, "no." As of the most recent quarter, 16,000 total paying customers, none of them accounted for more than 1% of sales. And again, they have some really big names in there. They called out Google, Amazon, Zoom, Citrix, Zendesk, T-Mobile, over 630 customers in total that will spend more than $100,000 with them this year. And 15 that will spend over $1 million this year.

Another metric that they actually point out is that they have 82,000 "fanatic users," which are users that basically use their product over 100 times per year to look at records, to explore, to do searches. And they call out that the people that are really heavy users of our products are going to allow us to drive viral demand down the road as they move around and evangelize the product.

Lewis: You know, I love a funnily named non-GAAP metric, and "fanatic users" [laughs] might be my new favorite one. That's colorful and fun, totally makes sense for the business.

I want to talk a little bit about management, though, Brian, because if we're running through a checklist, this is an important part of the vision for a company, the mission for a company, and really, the culture of the business. And we've seen, you know, in that $10 billion-ish and lower space, leadership tends to matter a lot more. ZoomInfo is just kind of on the fringes of that. What's the story with their CEO?

Feroldi: So, this company, again, was co-founded in 2007. Its co-founders were Henry Schuck, he is still the CEO today. Love to see that he's been there since day one, and he was the driving force behind the business. He actually calls out -- I wouldn't -- the $25,000 worth of credit card debt to get this company off the ground. He knows just how painful it is to get the company to where it is today. Love to see that. His other co-founder, Kirk Brown, appears to have left the company. I could not find him anywhere related to the company. However, these two co-founders are still heavily invested in this company's success. CEO Henry Schuck owns about 10% of shares outstanding and the co-founder that left still owns about 7% of the shares outstanding. That 10% stake makes CEO Schuck a billionaire on paper. That's a lot.

Lewis: [laughs] That is a lot. And I mean, that's the kind of skin in the game that we generally like to see, you know. That's a substantial stake, both personally for him and relative to the overall business and its ownership.

Feroldi: Yes, completely. And overall, we always check Glassdoor. The company does seem to get relatively good reviews from employees; four stars out of five. CEO Schuck gets an 81% overall approval rating. And three out of four employees would recommend the company to a friend.

One other quick thing I want to note is that the other management team owns about 5% of the business. So, this is non-CEO, non-co-founders that combined own 5% of the business; that's a lot of inside ownership.

Lewis: It is. Yeah, you don't typically see that. [laughs] You know, those numbers aren't ones that really come across our desk too often. Thinking about risks for this business, Brian. Usually, when I'm talking about a software-as-a-service company, and it's a space that I'm admittedly less familiar with, I can at least come up with a couple of companies that I think play in the space. This one seems unique in that there are other companies that are kind of there, but at core, they aren't really focused on the information. And it seems like, as the name would suggest, ZoomInfo is focused on the specific information rather than immediately making use of that information.

Feroldi: Yeah. I think that that's completely correct. So, while there are a lot of companies that are in the CRM space, there aren't as many that are doing what ZoomInfo is doing. However, if you had to pinpoint one competitor that stands out above the rest, that would be Microsoft, and more specifically, LinkedIn. LinkedIn is a social network that has tens of millions of users that go in there for professional reasons and upload their information. It wouldn't be that hard, and I know that LinkedIn was actually doing this when they were a public company, to build org charts for people. So, that kind of information is out there and can be subscribed to.

They also call out that Salesforce.com, Oracle, and Google are potential competitors. But as we've seen from this company's growth rate and CBNR, it does tell me that those competitors have always existed, but ZoomInfo is still succeeding.

Lewis: Yeah, I think that if we're getting really into the idea of network effects, LinkedIn probably enjoys some very real network effects, whereas ZoomInfo enjoys some pretty diluted network effects or pretty light network effects, because people really need to be on LinkedIn. You could argue the merits of whether it's important to have your information correct on ZoomInfo. It's certainly helpful for the salespeople. If you don't want to be contacted by salespeople, then perhaps [laughs] you wouldn't necessarily want your information there.

Feroldi: Yeah. And who knows, Microsoft clearly sees value in this kind of market. It's possible that they could be a nice tuck-in acquisition down the road. They did spend $26 billion buying LinkedIn a couple of years back, so possible.

Lewis: [laughs] Beyond competition, Brian, any other major risks that you're paying attention to at this business.

Feroldi: Yeah, I will say that the huge delta between GAAP and non-GAAP numbers is something that I want to see come down over time. If you take a look at the company's operating structure, their holding structure, it's actually pretty complicated. They have had a lot of buyers and sellers over the years. And even prior to coming public, actually just today, they called out that they have sponsors which are three enormous private-equity companies: TA Associates, Carlyle Group, and 22C Capital. Those three companies control 74% of the voting power of this company. So, you have to know that as an outside shareholder. All the outside shareholders combined get something like 1% of the total voting power. If you're joining this company, you have absolutely no say as to what goes on, you need to know that.

Lewis: It's important to understand that dynamic. And ZoomInfo is not unique there. There are a lot of companies where even if you have voting shares, you don't have much of a say, because the founders hold the majority of the voting shares and they can really do as they want. And so, when we see those types of examples, you really got to be on board with the people who have voting power, because they're the ones steering the ship.

Feroldi: Yeah, that's exactly right. Now the good thing is, those three sponsors, as they're called, have been investors for a long time, and clearly, they have an economic incentive to see this company's stock price go higher. That could make the potential stock less volatile, knowing that they have these big permanent holders behind them, but that's a risk to keep in mind. And finally, no surprise here, Dylan, the company's valuation -- pretty high. Trading at about 33 times trailing sales, even after declining by 50% or so from its post-trading high. So, you're really paying a premium.

Although, I will say that if you use non-GAAP numbers and believe the forward estimates, this company is only trading at 71 times next year's non-GAAP earnings. That's not insane.

Lewis: [laughs] There were a lot of qualifiers in that sentence, though.

Feroldi: [laughs] Yes, you do need a lot of qualifiers, and you have to be willing to use non-GAAP numbers. But because the margins here are so incredible, the price-to-sales ratio, you have to be more willing to give leeway through it. So, if they're going to be growing their top line this fast consistently and they can throw up some adjusted earnings, I don't think the valuation today is all that crazy.

Lewis: No, that margin is absolutely incredible. And I think investors always need to keep in mind that when you see a price-to-sales multiple -- and frankly, like, 33 times sales, we've seen some big, big, big numbers out there, 33 times sales is not insane for a software company, particularly one that's high margin. But you are going to pay a premium for high-margin businesses. It's just the way things are. They're growing at, what was it 60%, and 40% organically, those are pretty good growth rates for a business with this valuation. Nothing too crazy here for me. I mean, this is kind of par for the course with what we've seen with software-as-a-service and tech over the last couple of years.

Feroldi: Yeah. So, Dylan, we've done this top to bottom. I got to know, scale of 1 to 10, how interested are you in ZoomInfo?

Lewis: You know, I'd say I'm fairly interested. I think this goes into watch list territory for me. I would give it, let me see, if 8 and above is, I'm buying or I will probably buy, I'm going to put this at 6.5. I think it's on the watch list, I really like that DBNR number that you threw out there. I think that that looks good. Like the growth numbers that are being thrown out there, really like the margin profile for this business.

I want to get a better sense of the space. I love investing in areas where there isn't really anybody else that does what they do, and I want to get a better wraparound -- is there someone really in here that can do what they're trying to do, that can eat away at their market. Because if not, I mean, they really own the market, and that's a pretty compelling thesis.

Feroldi: Yeah, I would say similar for me, although, I would probably give it a 7.5 or even 8 out of 10. I mean, after I've gone through this business, I think there's a lot to like here. And since the valuation today isn't so crazy, I might become a small shareholder in the not too distant future.

Lewis: Are you also a shareholder of Zoom Video Communications, Brian?

Feroldi: Sadly, Dylan, no. I remember doing the S-1 with you, and we're like, "Wow! I like everything [laughs] except the valuation." And it's up what, 5X since that show.

Lewis: It's something like that. [laughs]

Feroldi: So, no, I'm not a shareholder of Zoom Video. So, maybe I'll correct that by becoming a shareholder of ZoomInfo. [laughs]

Lewis: [laughs] Oh, Brian, always happy to have you on the show. This was a fun one.

Feroldi: Yeah, totally. Have a good weekend, Dylan.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey!" shoot us an email over at IndustryFocus@Fool.com or tweet us @MFIndustryFocus. Specifically, if you have used ZoomInfo and you find it valuable, I'd love to hear about it, if you use any of the competitors to Zoom, we'd also love to hear about it, IndustryFocus@Fool.com or you can tweet @BrianFeroldi @WilyLewis. We're always happy to get the personal DMs as well. If you want more of our stuff, subscribe in iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything solely on what you hear here.

Thanks to Tim Sparks for all his work behind the glass, thanks for listening and Fool on!