Tune in to this week's episode of Industry Focus: Tech, and join host Dylan Lewis and Motley Fool contributor Brian Feroldi to hear about these 2020 IPOS: C3.ai (NYSE:AI), Snowflake (NYSE:SNOW), and ZoomInfo (NASDAQ:ZI). Have they lived up to heady expectations? Why have two of them stumbled? And why do all three remain interesting companies for your watch list?
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This video was recorded on April 16, 2021.
Dylan Lewis: It's Friday, April 16th, and we're checking in on a few recent IPOs to see how they've done. I'm Dylan Lewis and I am joined by Fool.com's rebel rising reviewer of recent risky riches, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: Dylan, I'm doing great even though I had a meeting with my accountant yesterday to talk about a letter that I got from the IRS this week. Besides that, I'm doing great. How are you doing?
Lewis: I don't want to put your personal finances on blast, Brian, but I could see how that wouldn't be a very uplifting way [laughs] to start wrapping up the week.
Feroldi: That's correct, and I'm on vacation next week for the first time in a long time, that's OK. I'm not going to let it get me down.
Lewis: There you go. Yeah, stressful time of the year for a lot of people, but hey, we got an extension. Folks are a little bit behind on this filing season. You got some extra couple of weeks to make that happen. I'm one of those folks. I will be taking advantage of the extension, waiting for a couple of things to be clarified before I file my taxes. Happy to be in that spot. But, Brian, this is not a tax show.
Lewis: This is a tech stock show at core, and that's what we're going to be talking about today. Folks that listen to the show regularly know we love getting deep into a perspective when a company first files and we really got our first look at a business. A lot of people like doing that. But I think the true work, and really where things get interesting is once the rubber meets the road and that company is a publicly traded company, we start seeing the quarters of results coming after that IPO. We're going to be checking in on the results from a couple of businesses that we've talked about recently and see how the picture is coming together for them.
Feroldi: We've been spoiled over the last, basically, year-and-a-half with S-1 after S-1, and as you just said, Dylan, when a company comes out with our S-1, they're picking the time that they come public. They're showing you the great results, they're getting excited. But when you actually come public and you report your first-quarter results, that's when the culture can change as a company and you really see, is this business for real? It totally makes sense to go back, look behind and say, how are these businesses doing?
Lewis: Yes, and that's precisely what we'll be doing today. We're going to be talking about C3.ai, talking about Snowflake and we're also going to be talking about ZoomInfo, which I'm going to clarify right now, not that Zoom. [laughs] It is not Zoom Video Communications, it is ZoomInfo. We will get specifically into what the company does. But first, let's talk a little bit about C3.ai.
Feroldi: Sure, the ticker symbol here is AI. Got to love that. This is a company we profiled last November. It was an S-1 that came out, and this is a software as a service company that is focused on, wait for it, AI. Nice and obvious, Dylan. What they are specifically trying to do is bring enterprise grade applications to companies and as easy as possible of a format as possible. They have studies out there that say using their AI saves companies time from deployment. They offer a lot of solutions that can be used with either no code or a low code. Basically, they want to be the easy on-ramp for enterprise getting started with AI.
Lewis: There is no shortage of companies that are interested in the space. Actually sounds a little bit similar to another company we talked about recently, UiPath, in what they are trying to do with giving everybody a robot, so to speak. It's a way to think about that in a sense. There's a lot of companies investing in this space. Definitely one of those businesses, because, Brian, you and I are only so sophisticated in the technical elements of tech, we need to see the results come in and see what the market reaction is a little bit to get a better sense of how good this company is in the industry and really where they stand because there's a lot of investment dollars going.
Feroldi: Absolutely. This market is expected to be enormous. There definitely will not be one winner. But to your point, yes. If we're not using these products, it's really hard to tell who is the leader. That's where the results come in. One shorthand we did note that really put this company on my radar, was the CEO and founder here, a guy named Thomas Siebel, who's a legend in Silicon Valley. He founded a company called Siebel Systems a few decades ago, and sold it to Oracle in 2006 for $5.8 billion. Having his name on this company is a huge plus.
Lewis: We talked about the IPO or the perspectives, I should say in mid-November. The company actually came public in early December, and that was a hot time for a lot of companies to come public. Still is, as we're seeing with the market in general. But not surprisingly, they very quickly saw a lot of excitement on the market.
Feroldi: This is a company that came public or priced, I guess we should say, at $42. However, the very lowest price that you could have paid on day one to get this company stock was about $92. It was one of those stocks that jumped more than doubled on the first day. That means this company left a lot of money on the table. You were still able to raise about $610 million in total. This stock has been all over the map. Again, they were priced at $42. It was as high as $183. It's since come back down to earth and given up a lot of those gains, currently sitting in the mid $60s or so. If you are a buyer of this stock, anything after the IPO, you're currently sitting on a loss.
Lewis: That's one story. I think that a lot of people will just kind of very quickly look at a company saying, right in the aftermath of an IPO is, it's down below where investors were first able to get in. It's a broken IPO. While ultimately, we know it's all about the financial results and what winds up happening there. There are a lot of reasons why companies can be above or below where they initially priced, particularly in that first three, six month window, because there's so much wacky stuff that's happening with price discovery, with the number of shares outstanding and available for buyers, the supply and demand dynamics there. There's just a lot. We ultimately have to look at the quarterly results.
Feroldi: Exactly, and that's why we consistently say we're probably not going to be a day one buyer, but we're going to put the company on our radar. We're going to watch it and see how it does. This is a company that shows why that can be a great strategy. But to your point, the company did report its first earnings report since coming public. Revenue growth was 19% to $49 million. Wall Street was only expecting $47 million so they bid on the top-line. If you dig into that a little bit, this company makes money in two separate ways. The first is through subscription revenue, which is high margin and investors should care about that. That actually grew 23% to $43 million. The company also has professional services revenue, which is consulting revenues you get set up. That revenue we really shouldn't care about at all, and that actually declined 5%. If you want to look at just the subscription revenue, which I think you should, the growth there was 23%. That shift toward subscription revenue helped to boost the gross margin of the company. It came in at 75%. That's a pretty good number. The quarterly net loss was about $12 million or $0.13 per share. That was also better than the $0.16 net loss that Wall Street was expecting. On the first earnings report based on the headline numbers, pretty good.
Lewis: Yeah, I think one of the hard things about this company for folks is we kit it up right away. This is a SaaS company. With that, you're expecting that certain figure to be there and it's just not there and you want it so bad that dollar-based net retention rate number.
Feroldi: We called this out in the S-1. They said right upfront, do not expect us to report dollar-bid net retention or dollar-bid net revenue retention because they said that the contracts that they are signing and they're going out for enterprise grade customers and the contracts can be lumpy. We may have seen that with the recent quarterly results. Last year in 2020, this company was reporting revenue growth in the $70s. Again, this company's revenue growth last quarter was just 19%. That does showcase how this company can be lumpy. But yes, to your point, we did not get a DBNR at all.
Lewis: Yeah, and what's crucial and I think why this company is a really classic, I need to see results, is it's entirely possible that it's a very lumpy growth cycle for them and sales are something that come in a little bit of fits and starts, and that obviously is going to affect the topline growth and that's what a lot of us are really paying attention to. The only way to know that is to really see it over time and realize, yes, that's the story that I'm being sold because it is easy for management to cite something like that when there are a couple of bad quarters in there as a reason for why they are not matching the growth that they were posting before they became public.
Feroldi: Exactly. I think the company did a good job of setting that expectation upfront. Hey, don't expect DBNR from us. But when you dig into the rest of the other company's quarterly results, there were encouraging signs in here. Management really hammered home that they have expanded several of their partnerships that they have in place. As a reminder, they have partnerships with companies like Microsoft, Baker Hughes, Adobe, Raytheon, Info, and FIS. FIS is in the financial services industry. The company really thinks that these partnerships not only take time to develop, but will really give it a leg up down the road with landing new customers. Those are some big names in each of their industries. Company also said that it recently rolled out an updated version of its software that expects to be even better than what it has today, and it did give guidance. This is a company that is at least comfortable out there to say that we're going to be giving guidance. For the full year, the company is guiding for revenue to be $181 million. That's going to be up 15% over the prior year, again, that's going to be much, much slower than the 71% growth that was reported last year. My guess is that the company is sandbagging there a little bit, and then expects to do a little bit higher, but only time will tell on that one.
Lewis: Yeah. It's hard to know. You mentioned that management has done a decent job of signposting this. The problem that we run into sometimes is just because management satisfying in a conference call doesn't mean that people pay attention to it. Or that it's really wrapped up in the market's expectations for a company. If you see a high multiple stock all of a sudden see a major correction to its growth rates, or major movement in its growth rates down, people that are a little bit less familiar are going to start talking about it in much more dire way because they haven't necessarily done the due diligence to understand exactly what management is telling investors.
Feroldi: Exactly. This company again came out of its protective and said, "Hey, we grew 71% in 2020. If you were an investor, how could you not think, well, OK, growth might slow a little bit next year, but it's going to slow to 50%, 40%." I mean, this is a company that's saying, "Hey, expect 15% revenue growth for the full year." So that's a big disconnect. Given that and the wild numbers that we've seen out of this company, it makes sense to me that the stock is down considerably since its opening trading price. But again, this company is priced at $41, which I think is a high number, but reasonable. What was unreasonable was the amount that again bid up, likely because one, just a pure excitement of investing in IPOs at the time, and two, this is still the largest pure-play AI company out there. That is a category that investors want exposure to. It makes sense that many of them jumped into this company right away.
Lewis: Yeah, it's a really attractive industry, there are a lot of tailwinds and I think anyone in the tech space is having conversations internally about AI and machine learning right now. If they're not, they're going to get left behind. That's just the reality of where we are. I think to some extent this is a company that can maintain a relatively high multiple, if we see signs that we're going to get back to some more compelling growth rates over time. Ultimately, that's going to happen because they start learning some new contracts, and expanding spend. But I think a big part of why you're paying up for this business right now, is you believe that those growth rates are going to reaccelerate over time.
Feroldi: Yeah, you definitely have to believe that. Even after the stock has declined pretty significantly from its high, it's still trading around 40 times sales, that's a high number that you generally want to see a growth rate, or revenue growth rate of at least say 30% or 40% for it, so there might still be some disconnect there. But if the company comes out with a couple of big contract wins in 2021, it's possible that that growth rate can really accelerate.
Lewis: Yeah, the way that I'm looking at this one, Brian, is basically a really compelling business model, we know that SaaS is so investable for so many reasons. There are other players in the SaaS space, not necessarily the AI specific niche of SaaS, that maybe you just have an easier path forward or easier numbers and then an easier business model for me to wrap my head around and forecast out. This is a little bit tougher, it's a little bit lumpier, and because of that, it's a little bit lower on my list. But it's not to say that it's not a company worth watching or possibly even earning.
Feroldi: Fair enough. The other nice thing is the market for AI products is expected to just be enormous, tens of billions or even over $100 billion in time. This company has Thomas Sabo, don't discount that, and two, it's a pure play. If it can be successful, especially from today's $6 billion market cap, this company could be a good investment today. But from what I've seen, I think I'm going to take a wait-and-see approach with it from here.
Lewis: You and I are both sticking on the watch list for this one. Actually, we're seeing a similar story with the second company we're going to talk about. At least with the share price movements in its infancy as a publicly traded company, and that is Snowflake. This is probably of the names we are talking about, Brian, the one that folks are most familiar with. There was a lot of fanfare around this IPO, Warren Buffett hopped into this IPO, there were some very well-heeled investors in the mix on this one. That's because it is probably one of the most impressive businesses we've seen a perspective from, in terms of growth rate, in terms of retention rates, there's a lot to like here.
For the people that are unfamiliar with this business or maybe have heard it but don't really know exactly what it does, you can think of it broadly as data management for the cloud. This is something that really specializes in data access, providing a platform for companies so that they have the ability to access their data anywhere, and then use that in order to upload both structured and unstructured data, making it virtually accessible inside a cloud. We talked about the cloud a lot, and I think a lot of our listeners like it, there are some titans in that space. You have Amazon, you have Azure [Microsoft], you have Google Cloud [Alphabet], Brian. We have thought about this business as a Roku in the cloud space because they work with all of these huge, huge players in a platform agnostic way. But they also, to some extent, compete with them.
Feroldi: Yeah, and I really like that analogy there, calling this company the Roku of the cloud. Because if you are a large organization, and you just have massive amounts of data, you don't necessarily want to be tied 100% to Amazon, or 100% to Azure, or 100% to Google Cloud. By going with Snowflake, you get access to all of them and you can switch back and forth that easily. As you said, it also had both structured and unstructured data. I really see the appeal of that.
Lewis: Yeah. It seems like from everyone that I talked to in the industry and full time Fools that I talked to, there is a little bit more in the weeds on tech. This is where we're going, and this essentially must have stuff for businesses of a certain size. What you're really solving for here is issues with data silos, making data governance a little bit easier, and really creating an ecosystem where customers, partners, all of the folks who would normally be providing data or accessing your data would be able to, in a way that does not create barriers that get in the way of them doing that. As it sounds, a complicated space. What they're trying to do is make things as easy as possible for people using the cloud for most of their data purposes.
Feroldi: What do we say with companies like this? [laughs] Tech sounds great because prior to this company come public, I remember looking at the S-1 here, and my jaw was dropping with some of the retention rates that we saw, the revenue growth rates that we saw, this company was posting triple digit revenue growth and a dollar-based net retention of, I think, +160%. Those are ridiculously impressive numbers.
Lewis: Yeah, when we first did the perspective show, their most recent year-over-year quarterly growth rate was 121%, and then the two earnings reports they released in the time sense, they've only posted, Brian, growth of 119% and 117%. I could see how you might be a little disappointed in this business, [laughs] they're not sticking to the numbers that they were given before they were public.
Feroldi: You're saying there's slowing down. It sounds pretty substantial too. I may choose to post 119% and 117% revenue growth, how many companies would absolutely kill for that? That's the thing you would expect out of a company that just started commercializing, not one that's been doing the run-rate that this company is at.
Lewis: Yeah, and they are starting to do it on a pretty sizable amount of revenue. Looking back over the trailing 12 months, we're looking at just under $600 million in revenue. That denominator is getting bigger and bigger and there's still continuing to be able to put up some impressive rates. The other numbers that are, I think, crucial for tracking this business and really understanding where it's going are the remaining performance obligations stat. This is going to be referred to as RPO very often in conference calls, and write-ups on the business. This is basically the amount of contracted future revenue that has not yet been recognized. This is deferred revenue and it's also non-cancelable contract amounts. There's some semantics in some more niche elements of it, I will save our listeners to that. But the idea is basically, this is a backlog that they're going to be able to work through, and be able to recognize over the coming quarters and years. For the most recent quarter, RPO was $1.3 billion, which was up 213% year-over-year, and in the quarter prior it was 240%. We're still seeing a massive backlog of revenue for them to recognize.
Brian, the other key metric for them is a net revenue retention number, not surprising for the space that we're talking about. Then this is again, if you look at the cohort of customers, and how they spend in year two, compared to year one, we say it all the time, it bears repeating. Retention is the good one, it's net and it includes the churn, and the customers that stopped spending. It was 168% as of January 31st, 2021, and I think that this is probably one of the most important and guiding quotes for this business from a conference call. CFO, Brian Scarpelli said, "Recently, I do expect the net retention rate this year to remain very high, it should be not less than 160% throughout the year." That's what we're seeing right now. Brian, that's a pretty stunning stat.
Feroldi: Let me just repeat that, 117% revenue growth. RPO was up 240% and the DBNR was 168% and expected to remain above that. Those are ridiculously impressive numbers. I understand why this company is trading at 100 times sales.
Lewis: Yeah, I don't know that any other business in history deserves that multiple. You could make a very good argument that Snowflake doesn't. But I think if anyone comes close, it's Snowflake with those stats, that's putting up there. It would be easy to hear all of that Brian and say, this thing must be up into the right, I can't imagine that the market's penalizing those types of numbers, especially when revenue came in ahead of expectations for both quarters that we've seen so far. Not the case, shares priced at $120 when it debuted, immediately doubled, so there was some cash, certainly on the table. They currently sit around $230 a share as of taping. Well above where shares priced, but you and I both know that's not necessarily where a lot of folks like you and me, we're actually able to get shares. There are probably a lot of people that wind up getting in relatively early that are either flat, down a little bit or in the case of some folks you bought near the top recently, down as much as about 40%. It can be tough to see that kind of stock performance when you see these types of financials, Brian, and try to reconcile the two.
Feroldi: It just shows you how much growth was baked into the company when it came public. To your point, the stock was traded double its IPO price right out of the gate, and then it went as high as $390 per share. Again, this company IPOed or raised capital at $120 and was trading at the time 100 times sales, and then they doubled to 200 times sales. Given that the market was expecting these numbers, I mean, that's the only way that you can say it. You might even say they were expecting even better than these numbers. That's where the disconnect is coming from. However, if the company can continue to put up things like this, it wouldn't surprise me if the stock started to go up again.
Lewis: Yeah, I think when you see a business that is growing its top line at a triple-digit year-over-year clip, you wonder how long that can sustain itself. The denominator on that just keeps getting bigger. Over time, just by virtue of the numbers getting bigger, it gets really tough to do. But I think when you look at that RPO stuff, Brian, and you look at that net revenue retention number, I think Snowflake has just about as good chance as any company I've ever seen to keep at maybe low triple-digit, but certainly very, very high double-digit growth for a very long time.
Feroldi: For sure. The thing is, yes, I'm very willing to pay a high multiple for a company, however, I'm less willing to do so when a company is already enormous. At today's valuation, this is a $67 billion company. For this company to say 10X, and that's what you would probably want, if you were to look at the growth numbers you're at, that would be an almost $700 billion company. Is that possible? Maybe. I wouldn't bet against it, but that's a big hurdle to get over.
Lewis: It is a big hurdle to come over. I think what's hard about the stock is it excites growth investors, but a lot of growth investors are also looking for multibagger potential and it's already [laughs] so big with its market cap. I would not be surprised in the least if this is a multi-hundred billion-dollar business at some point in the next, let's say, five to seven years. That said, if you're looking for something that has 10X potential, Snowflake might not necessarily [laughs] be the stock for as good as it is on paper.
Feroldi: You're the one that did the research on this. What do you think after reviewing the recent quarter results?
Lewis: I don't own any shares, but I think that this is something that I will probably take a small bite of. Part of it, Brian, is even if it isn't a massive winner or even a market bidding position, right now, I put this up on the Mount Rushmore of really great tech companies that are worth following. I think it's just worth having in my portfolio for the sheer reason that I will learn a lot by following this business.
Feroldi: I love that. One great way to speed up education and learning is to get some skin in the game, Dylan. I guarantee, if you buy a share of this stock, you're going to learn fast. [laughs]
Lewis: Yeah, nothing works like incentives. [laughs] You start to learn plenty when there's some money behind something. I like what I see. I'm not going to put a very large chunk of money behind it, but I think at some point in the next couple of months, I'll probably just have a small position. In part because these are electric numbers. These are just numbers that we don't see very often. It will help quell some of the FOMO, I think, for me if five years from now we're doing this show and everything is Snowflake all the time. [laughs]
Feroldi: There you go. This has got to be the one that Dylan Lewis is not going to let get away.
Lewis: [laughs] Brian, what about you?
Feroldi: I need to take a closer look at this company. One thing I do like about it that we pointed out was that this is a consumption-based model. Customers pay more when they consume it. More on that, it aligns this company's incentives with its customers. It's not just a subscription-based model. Clearly, given the numbers that we've seen, given the RPO, given the [...], customers really, really like this product. We've also talked to several people on the tech side here that also say this tech is really impressive. I agree with you here, this might be a company that enters my portfolio. I just need to do more work.
Lewis: Yeah, and I'm glad you brought up the consumption model part because we were talking before with C3.ai about the importance of listening to management and understanding the story that they are trying to tell you, and how you should be looking at this business. If you see Snowflake's CEO, Frank Slootman, in an interview, I almost guarantee you he's going to talk about the consumption side of their business and how ultimately consumption is the revenue driver, it's not sales. That's because that's how this business is set up. It wins when its customers win by using it. That just fundamentally is a little different than a lot of other companies out there. They are trying to write narratives that analysts on the Street have a better understanding of the business. [laughs] Honestly, they probably still have a little bit of ways to go because it's a common misconception.
Feroldi: Totally is. That reminds me of a little company called Twilio, that one's doing OK for investors.
Lewis: Yeah, small business, multibagger. That's been a great one. Brian, I own that one. I don't know about you?
Feroldi: Yes, I do.
Lewis: I'm a proud shareholder and it's a great proof point for the consumption model. It clearly works.
Feroldi: Similar idea. With Twilio, it's not a subscription fee you're paying, you're paying each time the APIs are used, so it's a consumption-based model. The CEO there, Jeff Lawson, believes that that is going to be like SaaS 2.0. That the next generation of SaaS is it's not going to be subscription, it's going to be based on usage.
Lewis: Speaking of folks that are worth following just for the lessons alone, Jeff Lawson. [laughs] We aired one of the interviews a couple of weeks ago to cover the time that I was going to be out of the office. It was with Jeff Lawson on Motley Fool Live talking through his recent book. Great episode, great interview. I didn't even do the interview. I just thought it was so great I wanted to share with people. But certainly another best-in-class business worth following if you're interested in the future of tech and where things are going. But Brian, we got one more stock we got to talk about. You did the homework on this one. This is the other Zoom, ZoomInfo, ticker ZI, not to be confused with Zoom Video Communications.
Feroldi: That's a ridiculous [laughs] clarification here. This is ZoomInfo, ticker symbol ZI. I almost feel bad for this company because we profiled them in September of last year. They came public in June of 2020. The first thing I thought about this company was this is a knockoff. Are they just trying to play into all the excitement around Zoom Video Communications? This must be a throwaway business. Boy, was I wrong about that? Because once we dug in, there is a lot to be impressed about here. As a reminder, we did a deep dive on this company on Friday, September 11th. But this is a SaaS platform that helps professional salespeople to reach decision-makers in organizations. Specifically, this tool is designed to help businesses that sell business-to-business. When you're doing that, reaching the key decision-maker in your organization is the challenge, that is where salespeople should be. Talking to people that actually can make decisions. The problem is it's really hard to get through all the barriers that are in your way to access that person. ZoomInfo points out that salespeople spend the bulk of their time actually manually coming up with information, not selling. A minority of their time is actually devoted to selling. ZoomInfo helps them break through that. They have this huge collection of databases that lets you access key decision-makers. You can get an org chart of the companies that you are targeting, and ZoomInfo guarantees that 95% of the information on its platform is accurate. That is something that companies are willing to pay for.
Lewis: Yeah. Brian, one of the reasons I was so happy to do that show with you when we first tore through the perspective is in a former life, you were a salesperson and so you had firsthand experience with the value of something like this. Unless you know the pain points, it can be hard to appreciate just how helpful and elegant a software solution is for this kind of thing.
Feroldi: Yes. I spent a huge amount of my time organizing information, being stopped at doors, just trying to get to the person. Once you could get to the person and have a conversation with you, that's where the value add of a salesperson is. Everything else is just getting in your way. If I had access to this kind of information, and I could quickly access that person through a phone call, or through an email, or through a text message, boy, would that save me a lot of time.
Lewis: Brian, of the companies that we talked about so far, I think ZoomInfo is actually the best performer as a [laughs] publicly traded company. Mostly because it's currently above where it opened on day one and where a lot of retail investors were actually able to first buy shares.
Feroldi: Yeah, so this is another company that pops significantly on day one. They were priced at $21 and they raised $1 billion in cash. That same day they opened at $40, so this is another stock that was up 80%, 90%-ish. The stock went up to a high in the $60s and a low in the $30s, but it was currently about $47. Even if you bought as soon as you possibly could in the secondary market, you're actually up about 20% on that investment. That does make this company stand out from the other two.
Lewis: Yeah, [...] it's nice. I know that a lot of people get excited about these and they hop in and that's certainly a place where a lot of newer investors first wind up getting introduced to the idea of investing is that they hear about a hot new publicly traded company. They have seen the stories of so many great tech businesses that have gone on to create massive wealth or multibagger returns for people, get excited, and put some money into it. It's nice when that actually works out for some people. They feel good about those early investing decisions and lessons.
Feroldi: ZoomInfo came public several months ago, almost a year ago at this point. We actually have three earnings reports to look at. One thing that we teased this company for when we're doing the deep dive on it was, one of this company's tag lines is, hit the numbers, AKA, you use ZoomInfo to help your company hit its numbers. Well, wouldn't that be embarrassing if this company didn't hit its own numbers? Luckily, the company has reported three times, it has hit its numbers in all three cases. In the most recent quarter, revenue was up 53% to $140 million. Gross margin here is very strong at 81%. This company is also highly profitable. I mean, really profitable. Its adjusted operating margin on a non-GAAP basis, I should point out, is 45%, and it's adjusted EPS was $0.12, that was above the $0.10 that Wall Street was expecting. They're also producing copious amounts of free cash flow, $76 million in free cash flow in the fourth quarter. As a reminder, their revenue was $140 million. So that's a free cash flow margin of over 50%, and they now have 850 customers that are going to spend $100,000 or more on this platform.
Lewis: Yeah, those are darn impressive stats, and it's a shame that this company, for as strong as they've been and the results they've put up have been in the shadow of the others. Because it creates a little bit of a mental barrier for some investors to really be like, "Okay, I'm going to take this company seriously."
Feroldi: That's fair enough and I guess that's our opportunity then. If you look at the full-year of 2020, the company's numbers were extremely strong. Revenue grew 62% to $476 million, $244 million in free cash flow. Unlike C3.ai, this company does report DBNR. It was 108% during the year. That's not lights out, but that's a respectable and that's a positive number showing that they're retaining customers and convincing them to spend more. One thing that we did note was this company actually fairly issued a lot of debt prior to coming public ahead over a billion dollars in debt at the time of the IPO. It has paid off over $500 million of its debt over the last year, in part with the proceeds that it used from coming public. So it's balance sheet looked OK at the end of the year, $300 million in cash, $745 million in debt, but given the free cash flow number that we've seen here, that should really concern you.
One thing that it did note on the recent call was that it launched a new product called Zoom Intro for recruiters. This is essentially a tool that will help recruiters to use this platform to reach out to people and target individuals at companies so that they can fill positions and do their job better. I like that. That shows that this company is thinking outside the box, it has some optionality in it.
Lewis: Yeah, and I think the test for me, Brian, anytime I see a company that is looking to either rollout new products or enter a new market is, does this make sense? With the core competency, and the competitive advantages that this business has, are they able to leverage that in a way that makes sense for them strategically and also means that they're going to be well-suited for this new market. I think that a lot of the things that they offer with their core product are also super valuable to recruiters.
Feroldi: I really think so too. That's going to be facing off against companies like LinkedIn, for example. So they might have an uphill battle there. However, if you're already using Zoom in post platform for sales and marketing efforts, it's not that big of a stretch to say that you can also use it for recruiting efforts too. If that's successful, we can also see that DBNR numbers go up substantially. But the good news is, we don't necessarily need that product to be successful for the company to continue to win. In fact, for fiscal year 2021, management is predicting that revenue is going to be about $650 million for the year. That's going to be up 37%. It's also estimated to do adjusted earnings of about $0.48 per share. So the company basically says all systems go for 2021.
Lewis: Yeah. One of the things I want to unpack a little bit, Brian, is the growth rates in the DBNR. Because we have it and we have benefited from being able to look at it. So that 108% is all other things being equal, no new customers coming in, you can expect something around eight% growth. What that means is that a lot of the top-line growth that we've seen recently and probably will see based on their guiding form, is coming from, for the most part, customer acquisition.
Feroldi: That's right. They are attracting new customers to the platform, and DBNR is a great metric for looking at. It also can be a little bit deceiving sometimes. For example, if a company is having success and on day one it lands a customer and that customer spends $100,000, well, that's great news, isn't it? But they're already starting at a really high level. However, the DBNR might shrink, might fall over time because you're not ratcheting up that much because they're starting at such a higher base. So that can be something to think about DBNR, but the point to me in this company is it's clearly having success, signing on new customers, keeping those around, and convincing its existing customers to spend more. That's why this company's revenue growth is so strong.
Lewis: Brian, on a recent episode, we had someone watching on Fool Live, which is our member livestream where we tape a lot of these podcasts. You guys like doing bets every now and then and they referenced the DocuSign, Upwork bet that we had a while ago, and I think that today's show is a good opportunity for us to throw another bet out there. We have three different stocks. I think there are really encouraging elements of all three of these businesses. Also, I would say, one of them is probably quite a bit different than the others, [laughs] with Snowflake, but they are also three somewhat differently sized businesses. I believe ZoomInfo's up in the high-teens for market cap. We're somewhere in the mid-cap single-digit range, when we're talking about C3.ai and then Snowflake is about $65 billion. Looking at these three, what is your once a buy, if you're looking to maximize returns, we'll look at it that way. Which one do you think has the most interesting upside?
Feroldi: On a pure upside basis, I would say C3.ai. The reason there would be its market cap is $7 billion and the potential of AI is just massive. I wouldn't buy it today based on its current growth rate. I want to see that this company is out there for a couple of quarters and really comes up with some spectacular growth in the future to prove that it can be a high-growth company because it's really hard for me get excited about paying 40 times sales for a company that's growing its top line in the mid-teens. So that's along with the highest upside potential though, if they can make that work. But if you want to take a bet, as long as I get to pick ZoomInfo, I'm happy to go up against whatever you want to throw out there.
Lewis: [laughs] No. I mean, I think you're right. I think Snowflake has the benefit of winning the snap tests, hands-down. Of these three businesses, I think Snowflake is probably the most important to the most players in the tech industry. My hunch is the range of outcomes for a company like Snowflake are a little bit narrower, and maybe for ZoomInfo and for C3.ai. I imagine it's a much bigger company in three, five, 10 years. But because it's already so large, the return potential might be a little bit kept compared to some of the others. So if that's your bet, that's my pick. But if you're looking for risk-adjusted upside, I think ZoomInfo is probably the play. I think you're right.
Feroldi: What's the timeframe we're talking about here? [laughs] A year, three years, five weeks?
Lewis: We're Fools, man, we got to be long term with this. I think we're looking at least five.
Feroldi: Okay. We can check in yearly to see who's winning, right? We'll have to do a reminder in a year to do that, but yeah. Just to be clear, I'm taking ZoomInfo, you're taking Snowflake, correct?
Lewis: Yes, I'll take Snowflake on that, in part because I said I was going to buy it. So I [laughs] feel like I should be happy about the stocks that I own in my future portfolio. Obviously not going to be acting on that anytime soon. I think it sounds like we're dismissing C3.ai a little bit, but I don't think we are, I think we like the business. We just want to see some results that backup what we're hearing from management in general about the way that business is going to be coming in.
Feroldi: I wouldn't bet against any of these businesses. In fact, I think there are reasons to be interested in all three of them today. Just that when given the choice here, I think that I would rank them No. 1, ZoomInfo, No. 2 Snowflake, No. 3 C3.ai. That's not about potential, that's just purely about what I've seen so far.
Lewis: We get to disagree sometimes. That's the beauty of doing what we do, being in Motley and being able to get ideas from our friends and the community of Fools.
Feroldi: You know what? I think the last time we did this, it was Upwork versus DocuSign and at that time, [laughs] I won that bet even though you own shares at Upwork. I think if we did that bet today, you might have won.
Lewis: Yeah. It's funny. It totally depends on how you're measuring returns for those two stocks because Upwork was a dog for a long time. It was a company that was having a hard time despite what seemed like a lot of really good tailwinds, pushing it forward. DocuSign has proven to be the better stock to own, at least from the infancy of that bet. Upwork has turned it around and become a market theater. Though we severely discounted Fiverr in that market when we did the show on the freelance market and just what contractors turned to. The beauty of it though, Brian, you own them both, you get to benefit from the great ideas, even if they weren't yours, which is just part of the fun of what we did, right?
Feroldi: Totally. Certainly, but I like this, so I'm going with ZoomInfo, you're going with Snowflake, we'll check back into the year.
Lewis: Perfect. Brian, thank you so much for joining me on today's show.
Feroldi: Thank you, Dylan.
Lewis: 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 at firstname.lastname@example.org or tweet us @MFindustryfocus. If you're looking for more of our stuff, subscribe on iTunes, Spotify, 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 stocks based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time, Fool on!