Notes ZM Q2 Earnings Call/Analyst Questions

The following are my notes from the earnings call and analyst questions. Please forgive any typos as the call literally ended moments ago and typing was done as quickly as possible.

New ZM Customers include: ExxonMobil, servicenow and Activision Blizzard

Q2 growth
Revenue grew 325% to $625M (guidance was $500M), lower than expected churn.
81% of growth was from new customers and 19% was with existing customers.

Key metrics: 988 customers w/ over $100K revenue.
105,000 customers w/ over 10 employees was +458% growth.

Customers w/ 10 or fewer customers represented 32% of customers. Shift to larger companies is a large part of outlook.

Domestic growth: Americas grew 288% yoy
International represented 31% of revenue
Profitability (non-gap)
Gross margin was 72.3% yoy
Expect gross margin for remainder of year to be consistent w/ Q2
R&D expense was $129M up approx. 120%
FY 21, expect to invest in R&D and diversity R&D to US & India.
S&M was 19% of overall revenue. Overall plan to add sales capacity quickly in the next two quarters
G&A was up 159% yoy. Or approx… 8% of revenue.
Op income of $277M vs. $21M a year ago. Non Gaap earnings was 82 cents higher than last year.
RPO is 1.2Billion, a huge increase. 72% or $1B will be recognized in Q2.
ZM does not focus on calculated billings. It is less meaningful.

$1.5B of cash and cash equivalent as of the end of Q2. $373M in free cash flow, up from $17M a year ago!!! Will be increasing capital expenditures w/ more data centers needing to be built to accommodate growth.
Guidance is based on current business environment. $685-695M revenue expected in Q3.
Investing for growth w/ expenditures.
Operating margins will decrease due to increased spending on R&D and sales.

FY21 2.31 to 2.39 Billion expected revenue. Indicating a decline of q over q growth
$790 expected in _______(???).
Believe they will grow to over $2 Billion by end of this FY. Which is amazing considering they projected less than $1B prior to the beginning of the current FY.

RBC Question: What’s the biggest opportunity for ZM growth?
Answer: Telemedicine, telehealth, keep people connected based on customer feedback. Live for the future and stay laser focused on keeping the customer happy for now.
RE: Churn, what are you expecting for new users? Monthly customers churn 4% approx… and are modeling this same rate into the future.

Morgan Stanley question: Where are you working w/ organizations in a department having multiple services or migrating to the entire enterprise. Do you have the sales teams in place to broaden the deployment throughout the enterprises of existing clients. Zoom phone largest deal has been signed to date, which quadrupled that company’s existing deployment. There is still tremendous opportunities in the future.
Hiring: One of the biggest priorities for the remainder of the year.
Bank of America Question: As the business grows at unprecedented rates, what’s happening within the existing systems within the ZM organization?
Eric’s Answer: They had a strong and fantastic culture before Covid and the huge growth they’re experiencing. ZM is very committed to delivering customer experience.

Use Cases Growing: Too many to mention, but doing public tours in real estate, law and trials, mental health telehealth.

Googenheim Question: Servicenow has been a customer since 2018, and they’ve grown significantly. ZM has deployed across their enterprise and have unified and become more consistent and at a far lower cost.

JP Morgan question: Where is focus of R&D going forward and how are you changing location ie: India vs. China.
Eric’s answer: Security is driving it. Enterprise, Education and tele-medicine. Phoenix, AZ and Pittsburgh, PA are locations ZM is hiring workers to work on ZM’s R&D.

Needam Question: Entered Q2 w/ larger pipeline than Q1. How does Q3 look?
Answer from CFO: Revenue in Q3 will be consistent w/ Q2. Seeing large demand and growth from Zoom phone.

Steifel Question: As a unified communications platform and how it’s impacting digital transformation.
Eric’s answer: ZM phone. We believe video is the game-changer. ZM has far more robust architecture than legacy PBX systems and ZM can work into a single-service provider.
Will not see meaningful negative impact on margins due to _______.

Question: RE: ZM phone, how fast do you see legacy, on prem, PBX phone systems being displaced by ZM phones?
Eric’s Answer: Covid was a wake-up call in this regard. A lot of other systems will be displaced by ZM phone as well. In the next 12-18 months, you will see an expedited change to ZM phone from these legacy, on-prem PBX systems.

Baird Question: Rest of world strength, How broad-based was this and were there specific areas/geographies that grew more than others?
Eric’s answer: _______ #1, India #2, Japan #3. Building a data center in Singapore to accommodate growth in APACS.

Question: RE: Moves in China and expanding R&D in India and the US. What’s the impetus of this and what kind of impact will this have on margins?
CFO Answer: Do not have any plans to move their R&D out of China, rather, future R&D growth is being expanded into India and the US.
Eric’s Answer: This will have very little impact on margins.

Wells Fargo Question: Converting monthly users to annual users, How has this gone from Q1 to Q2 and how should we look at this into the future?
Answer from CFO: Focusing on converting existing customers from monthly to annual and this will be a continued focus in the future.

FBN Securities Question: Guiding revenue to be up 3%. What is driving decline in RPO in Q3.
CFO Answer: Don’t expect dramatic increase in RPO. Can’t totally see into the future.

Question: From a product perspective, how can ZM go deeper into human experience.
Eric’s answer: How can we shake hands remotely, how to make it more 3D-ish and leverage AI and 5G to improve it. That’s where we’re looking to improve user experience.

Question: Go to market strategy and reseller channels, how will you change this?
Answer: Decline in S&M is driven by larger revenue numbers. They expect direct model to be largest driver of sales into the future.

William Blair Question: Re: Convergence w/ Slack and Zoom Topia, how do you think about this market and how do you plan to use this for events?
Eric’s answer: Looking at the entire event, ZM believes their service has strategic value to companies. Events are low hanging fruits.

Question: Are you seeing an uptick in customers who had tried a different solution and have decided to switch over?
Answer: People had solutions in place prior to Covid, but did not feel their existing solutions could take them through the pandemic and into the future.
For ZM phone, they’ll give updates at ZoomTopia.

BTIG Question: Channel partners remaining a low portion of sales. What’s the uptick in channel partners? Do you feel like you can hire enough people to accommodate the planned growth?
Answer: Have invested heavily in their talent acquisition team and do believe they can hire the number of people they can to expand the international market.

Piper-Sandler Question: What is % of revenue from enterprise customers compared to 23% last quarter.
Answer: Revenue from customers w/ less than 10 employees was 20% and that’s all they share.

KeyBank Question: Thinking about OPEX trending into next year, in Q1 next year, what’s a framework for that?
Answer: Operating margins will decrease as ZM invests in S&M and R&D. Will talk more about this on analyst day. Expect it to be closer to the 20% presented than the 47% previously stated.

Question about International expansion: 2 largest ZM phone deals were won outside of the US, and there are some amazing customer names they’re calling into, but cannot yet share. (tease)

Question: When everyone at ZM is working from home, how do you make sure your employee and company culture is what you want it to be.
Eric’s answer: Eric sees the future as a hybrid where people work perhaps 3 days a week from home and 1 or 2 days in the office.

Summit Insights Group Question: Last quarter they were modeling in the assumption that the ZM sales teams will be more moderate in their activity. Also, tell about the discount for the pricing you’re seeing in the RFP’s to which you’re responding.
Answer: Q3 & Q4, modeling higher for in the future.

Hope this was helpful.


Here’s a link to the slideshow from the earnings call today with additional details as described in the preliminary notes.

Zoom Video Communications, Inc. 2021 Q2 - Results - Earnings Call Presentation…




Thanks for posting the earnings call analyst questions!

I noticed that the Zoom CFO talks about converting monthly Zoom subscribers to annual subscribers.

This will be good for locking in revenue but it would also seem to mean Zoom could be in for choppier quarterly revenue accrual due to the new ASC 606 revenue recognition rules that have negatively affected the quarterly earnings of some of our favorite SaaS stocks like AYX recently. Something to keep an eye on moving forward…

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One question I like to ask is if Zoom is planning to add advertising to the Zoom meeting for non paying customers. The way I look at it is that advertising can be a part of long term sustaining growth. For Facebook, Google, Youtube, advertising is their major source of revenue. And advertising model always work. zoom can add some short ads in the background and there’s no need to delay the meeting. Some companies already created some free Zoom background image to advertise for movies etc… With their huge customer numbers, Zoom can make lots of money with ads. Think about Tiktok.

I highly doubt they will try to use ads at least in a traditional sense. Maybe they can have companies sponsor a Zoom event for instance, but not targeted or even randomly inserted ads. I think if they include ads, users will switch to other options. They make a lot of money even with the free tier. They might add additional features like AR, filters, etc. But their money is in enterprise and I hope they focus on that. The free tiers for consumers might be justified if only to make users comfortable with Zoom. This would encourage companies to use Zoom to interface with their customers, rather than asking them to download another app like Teams or Google Meet.

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