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ZoomInfo (ZI -17%) wipes out its gains from the month today despite delivering decent Q3 numbers, including a top and bottom-line beat as well as Q4 guidance consistent with analyst estimates. Shares of ZI zipped over +60% higher from early August lows ahead of its report yesterday after the close, raising expectations and increasing the risk of a sharp pullback on possible weak points.

The central issue for ZI, which develops analytics software to complement customer relationship management platforms, remains a stubbornly challenged environment for small and medium-sized businesses (SMBs). Last quarter, ZI plummeted on alarming Q3 and FY24 guidance, which branched from elevated write-offs largely surrounding SMBs. Underpinning this issue is that in 2022 and 2023, ZI extended credit to a higher mix of SMB customers whose non-payment rates jumped throughout the past few quarters. ZI acted quickly to mitigate the issue, implementing initiatives to flag riskier customers.

This move led to a meaningful uptick in small business disqualifications, which will pose a headwind to the optics of ZI's growth over the coming quarters. Even though management added that it noticed stabilization related to write-offs and net retention rates during Q3, its warning over the problem hindering future growth is dampening investor sentiment today.

• Aside from the nagging write-off issue, ZI delivered meaningful improvements in Q3. Adjusted EPS of $0.28 represented a substantial 65% jump sequentially. Likewise, revenue of $303.6 mln was a 4% improvement from Q2.
• ZoomInfo Copilot, the company's AI-powered offering that provides B2B insights for sales teams, performed better than expected. This tool may be helping fuel meaningful mid-market and enterprise growth, given that ZI expanded its $100K and $1 mln-plus customer cohorts sequentially in Q3. Revenue from the $100K cohort now comprises 44% of ZI's total annual contract value (ACV).
• As ZI continues to grow enterprise customers, benefit from a turnaround in mid-market, and remove riskier businesses from its platform, SMBs will become a smaller percentage of its overall business. This trend will then support a more favorable mix of revenue and set ZI up for more durable levels of growth.

To start 2024, investors were excited about ZI potentially finding a bottom soon, especially as more businesses turned to AI. However, the year has unfolded much differently than ZI may have hoped. With the demand environment essentially unchanged from last quarter, particularly regarding SMBs, while write-offs remain a headwind to future growth, the next few quarters could remain volatile, preventing ZI from mounting a more meaningful turnaround until later in 2025.