ZM Bests Expectations

Investment Analysis Clubs Saul’s Investing Discussions
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-Third quarter total revenue of $777.2 million, up 367% year-over-year vs. consensus expectations of $694.5 million, suggesting 316.9%.

-Number of customers contributing more than $100,000 in TTM revenue up 136% year-over-year

-Approximately 433,700 customers with more than 10 employees, up 485% year-over-year

-A trailing 12-month net dollar expansion rate in customers with more than 10 employees above 130% for the 10th consecutive quarter

Other Highlights:

Income from Operations and Operating Margin: GAAP income from operations for the third quarter was $192.2 million, compared to GAAP loss from operations of $1.7 million in the third quarter of fiscal year 2020. After adjusting for stock-based compensation expense and related payroll taxes, and acquisition-related expenses, non-GAAP income from operations for the third quarter was $290.8 million, up from $21.3 million in the third quarter of fiscal year 2020. For the third quarter, GAAP operating margin was 24.7% and non-GAAP operating margin was 37.4%.

Net Income and Net Income Per Share: GAAP net income attributable to common stockholders for the third quarter was $198.4 million, or $0.66 per share, compared to GAAP net income attributable to common stockholders of $2.2 million, or $0.01 per share in the third quarter of fiscal year 2020.

Non-GAAP net income for the quarter was $297.2 million, after adjusting for stock-based compensation expense and related payroll taxes, acquisition-related expenses, and undistributed earnings attributable to participating securities. Non-GAAP net income per share was $0.99. In the third quarter of fiscal year 2020, non-GAAP net income was $25.2 million, or $0.09 per share.
Cash: Total cash, cash equivalents, and marketable securities, excluding restricted cash, as of October 31, 2020 was $1.9 billion.

Cash Flow: Net cash provided by operating activities was $411.5 million for the third quarter, compared to $61.9 million in the third quarter of fiscal year 2020. Free cash flow, which is net cash provided by operating activities less purchases of property and equipment, was $388.2 million, compared to $54.7 million in the third quarter of fiscal year 2020.
Customer Metrics: Drivers of total revenue included acquiring new customers and expanding across existing customers. At the end of the third quarter of fiscal year 2021, Zoom had:

Approximately 433,700 customers with more than 10 employees, up approximately 485% from the same quarter last fiscal year.

1,289 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 136% from the same quarter last fiscal year.

Financial Outlook: Zoom is providing the following guidance for its fourth quarter fiscal year 2021 and its full fiscal year 2021. Zoom’s revenue outlook takes into consideration the demand for remote work solutions for businesses. It also assumes increased churn in the fourth quarter when compared to historic churn levels due to a higher percentage of customers who purchased monthly subscriptions.

Fourth Quarter Fiscal Year 2021: Total revenue is expected to be between $806.0 million and $811.0 million and non-GAAP income from operations is expected to be between $243.0 million and $248.0 million. Non-GAAP diluted EPS is expected to be between $0.77 and $0.79 with approximately 306 million non-GAAP weighted average shares outstanding.
Full Fiscal Year 2021: Total revenue is expected to be between $2.575 billion and $2.580 billion. Non-GAAP income from operations is expected to be between $865.0 million and $870.0 million. Non-GAAP diluted EPS is expected to be between $2.85 and $2.87 with approximately 300 million non-GAAP weighted average shares outstanding.

-Charles

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Q3 big fish customers: 1289
Q2: 988
30% QoQ growth

Q3 accounts with >10 employees: 433,700
Q2: 370,000
17% QoQ growth

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485% growth in customers >10 employees. Presentation slides highlight Peloton as a new customer along with Rakuten. Love it when my portfolio has such synergies.

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Slide 14 – Growing Future Revenue under Contract
Turning to the balance sheet. Deferred revenue at the end of the quarter was $855 million dollars, up 324% year-over-year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.6 billion dollars, up 215% from $517 million dollars year-over-year. The increase in RPO is consistent with the strong demand and execution in the quarter.

Zoom Q3FY21 Earnings - Prepared Remarks We expect to recognize approximately 72% or $1.2 billion dollars of the total RPO as revenue
over the next 12 months as compared to 64% or $330 million dollars in Q3 last year.

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Q3 big fish customers: 1289
Q2: 988
30% QoQ growth

Q3 accounts with >10 employees: 433,700
Q2: 370,000
17% QoQ growth

Also from a QoQ view:
Q3 rev: $777.2 M up 17%
Q2 rev: $663.5 M up 102%
Q1 rev: $328.2 M up 74%
Q4 rev: $188.3 M up 13%
Q3 rev: $166.6 M up 14%
Q2 rev: $145.8 M

Q2 and Q3 were “full COVID” quarters. Q1 was over half COVID. The QoQ growth between the adjacent full COVID quarters seems more meaningful than YoY growth between a non-COVID and a COVID quarter. They are smart to try to expand their base of services while they have the spotlight.

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I think the question everyone should be asking instead of being star struck by giant percentage Yr/Yr comps is where does zoom go from here post-pandemic. I’m not yet convinced even after listening to the Call, there were not many details regarding zoom phone which seems like many analysts were trying to get a stronger understanding on. Need to understand more on Zooms’ optionality and opportunity.

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As far as I could see, there were only a few negatives in the quarter, gross margins (free users, increased public cloud usage). Customer growth dropped off in percentage terms, Sales and marketing expense increased significantly.

But these points are splitting hairs. It was another excellent quarter. As far as I could see, the only thing that is unclear is what TexasTitan pointed out. What happens Post-COVID?

You either believe:

  1. The world returns to pre-COVID, everyone back in the office, video conferencing drops, ZM churn rockets up.
  2. The world shifts to a ‘hybrid’ work-from-home model, where some people are in the office, others are working from home, cafes, etc.

If you believe 1, you should probably ditch ZM. If you believe 2… you should consider their other products, the ZM Phone, OnZoom, ZoomRooms, Chat etc. Will companies standardise on ZM as their communications platform?

TexasTitan was right IMO, there weren’t a lot of details on the call. The positives that stood out to me were:

  1. Lower than expected churn.
  2. Using Q2 churn forecast for Q3 (Q3 was lower than expected), for their Q4 guidance.
  3. Government was their strongest growth vertical.

I expect they’ll beat guidance in Q4 as well. But there wasn’t a lot in the results that suggested that ZM wasn’t doing really (really) well.

cheers
Greg

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TexasTitan,

It’s a good question. But let’s also remember there is likely another quarter or two of explosive growth before we get to that point. I don’t really have any definitive answers, but here’s my view after listening to the call tonight. Maybe it’ll help:

1. There is no doubt that their business at this point is heavily influenced by the level of the pandemic. Case in point – EMEA only grew 5% QoQ. Kelly (CFO) confirmed that this was because Europe was in good shape virus-wise in 3Q and they didn’t go back into lockdown until late 3Q/4Q.

2. They say they will continue to see churn in the mass market during the pandemic. Churn in 3Q was below expectations because their sales team was successful in converting monthly mass-market customers into annual contracts. However, they are still projecting the same level of churn that they assumed in 3Q for 4Q (not the actual 3Q churn). More on this below in #4.

3. Zoom Phone is taking off. They again set a record with the largest Zoom Phone deal in 3Q. Features-wise, they think they are in good shape. And their sales team is hard at work upselling Zoom phones to existing customers. They are hiring big time to accelerate the pace of adoption.

4. It’s clear they are totally sandbagging 4Q guidance. You can’t have it both ways. You can’t say that EMEA only grew 5% due to the lower level of the virus, then turn around and model 3Q-like churn for 4Q when the virus is at an all-time high. But they did. I expect them to blow 4Q guidance out of the water. But I also suspect that everyone knows this and is expecting them to do so.

Net… I expect 4Q to look terrific and perhaps 1Q as well as the pandemic isn’t likely to really slow down until the late spring with weather and vaccine distribution. Then it gets interesting. Essentially, there is a race condition here. Will the sales team’s conversions to annual contracts, further adoption of Zoom’s technology to support a hybrid workforce, and penetration of the Zoom Phone adequately replace the current growth in Zoom seats as the pandemic inevitably slows down? I think that’s the question we all need to grapple with.

Unfortunately, as you mention, they aren’t providing details on Zoom phone sales. But it sure sounds like they are doing everything possible to keep the growth coming. Buckle up your seatbelts, this should be interesting!

-Dave.

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They have decelerated revenue growth significantly from prior QoQ (How could they not?). $328 → $664 → $777 → Guidance of $810

Their QoQ % change is:
Q4FY19 15% 19.6% 14% 12.5% 74% 102% 17% (est. for Q4FY21 based on $840MM) 8%

They are projecting to grow only 4%, If they overdrive to $840, that doubles their growth rate, but is still down 50% from this last Quarter.

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GD,

Their Q3 guidance was $690m at the top end. The actual rev was $777mil (12.6% above top end)

Applying the same 12.6% above the top end gives Q4 ~$913 mil. This will represent 17.5% QoQ growth

Bnh91

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Some things I loved:

  • International Growth up 629% YoY

-International Customers now make up 30.7% of total revenue, 17.4% in EMEA and 13.3% in APAC

-“We plan to continue to invest in international
expansion to capitalize on our brand awareness and the increased global opportunity.”

-Peloton, which I hold, committed to a long-term engagement where they will deploy services across all locations and employees.

-Outstanding Guidance: “For the full year of FY21, we expect revenue to be in the range of $2.575 to $2.580 billion
dollars, which would be approximately 314% year-over-year growth. We expect non-GAAP
operating income to be in the range of approximately $865 to $870 million dollars which would
be approximately 876% to 881% year-over-year growth. Our outlook for the non-GAAP
earnings per share is $2.85 to $2.87, based on approximately 300 million shares outstanding.”

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I work a lot internationally; when times were normal I would travel internationally about a quarter of the time for work, usually to Asia and Africa. Here is how I see the situation in my work changing after immunization for Covid-19 rolls out:

In the Covid-19 era I spend most of my day on Zoom, wake up very early most days to talk with people working on projects in Asia, Africa and Europe. Most of the time the connection is smooth, less so for countries like Ethiopia because their infrastructure isn’t so good but many countries have really good internet-- especially those in Asia, it often sounds like it’s next door, better than local calls even. As I said before, Zoom quality is so much better than anything else–to their credit, the quality of calls on Microsoft Teams has improved a lot over the past 6 months, but the interface and quality is not at the same level yet. Nobody I know uses Webex anymore, before Covid-19 about half of my calls were with them.

When you combine internet build out with the tremendous capacity development that has happened in many countries over the past 20 years I feel like in my field we will never go back to the days of traveling so much… yes I will start traveling early next year probably when we are permitted to, as some travel is essential, but this experience has taught me that perhaps up to half of the travel that I used to do can be replaced with calls, delegating more to colleagues and consultants in countries etc.

It also saves a ton of money and reduces my carbon footprint, and makes my wife happy, although my teenage kids would probably be happier to have me on the road.

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TexasTitan,

I think the simple answer is international video conferencing which is growing 629% YoY.

It reminds me of NFLX. As US growth first rose then slowed, international followed a similar trend but delayed a few years. I think that ZM is moving faster than NFLX because of the rate of adoption due to Covid. However I still think 2021-2022 will have YoY growth due to international business.

Could be wrong, but that’s what I believe the catalyst for the next year or two will be.

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You either believe:

1. The world returns to pre-COVID, everyone back in the office, video conferencing drops, ZM churn rockets up.
2. The world shifts to a ‘hybrid’ work-from-home model, where some people are in the office, others are working from home, cafes, etc.

As far as I can tell the world has never gone backwards. Why should it in this particular case? The reasons I see it going forward are the new technologies and facilities that have been created and the associated cost efficiencies like less commuting, less office space, and even saving on clothing and food.

The covid-19 driven spike will create a few quarters with difficult comparisons as Zoom adjust to the new plateau and this might induce some investors to sell. I’m less willing to make bearish predictions so I’ll just watch developments before taking any action.

Taking profits in October turned out to be a good move but the reason for taking profits was that the position had grow too large, 40% of the portfolio. At this time ZM is a hold for me and still my largest position.

Denny Schlesinger

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I’m pretty sure everyone agrees that the world won’t go into a pre-pandemic mode. It will be a hybrid environment and there is no point - in my eyes - even discussing a return to pre-Covid environment.

Another point is to assess the future of the Zoom’s business in such hybrid world. In my opinion the future of the Zoom’s business is bright! I see big runway in the core business, exploring different verticals (education, healthcare etc), international expansion, optionality in phone and other communications, platform development etc.

I expect next fiscal year revs should reach or exceed 4b and we’re looking at 10b revenues in 3-4 years or so. If we take next year 4b (conservatively) and compare to 135b valuation today - it’s a bargain ! At 34x forward PS its cheaper than TTD growing at 30% or DDOG growing in 50s or so.

I also suggest folks to read a long-term thesis on ZM from Tom Gardner. I won’t be posting it here due to the rules, but just mention that he sees 1 trillion valuation in 10 years. So, we’re looking at 8x from today’s price in 10 years. Not too shabby if this will come true… :slight_smile:

ZM is my biggest position and I’m happy with the results and definitely keeping it.

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Our company, we are in the airline supply industry, announced a WFH policy where everyone will be allowed to work from home for 60% of the time (or less). And we are not some fancy tech company, so I believe few companies will go back to before and it will be more hybrid model. The need for these tools will not disappear.

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I stumbled on an interesting and astounding statistic which you might miss. Zoom’s over $100,000 customers were 1289 this quarter, and were 988 last quarter sequentially. That means that they increased their number of big customers by 30.4% SEQUENTIALLY!!! Read that again! It really astounded me. And this is a trailing twelve months figure, not an annual recurring revenue figure, so it’s not even counting many new $30,000 or $40,000 per quarter customers, because they don’t have $100,000 yet looking backwards. Interesting…

Saul

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It’s clear we won’t return to a pre-Covid world, it’s also clear to me that we won’t forever live in a Covid scenario. Reality will be a mix:

  • education (universities, schools) will go back to in-person teaching mostly
  • businesses will likely adopt a mix of office and WFH
  • travel won’t recover to pre-crisis levels, simply because it’s so expensive (time and spend), and companies have learned that video conferencing will do just fine most days.

Still, at current valuation, there is a ton of future growth baked in, and I’m not sure where that’s going to come from.

Downside/limitations:

  • just about every company is now using video conferencing already. If they haven’t had a need in the last 9 months, they probably won’t have one in the future either. This includes international of course.
  • other suppliers will catch up eventually and video conferencing risks becoming a commodity that any number suppliers can handle

Upside:

  • companies like mine, who already have been intensive users of video conferencing, switched to Zoom because solutions like Lifesize or Google meet weren’t able to handle calls with 300+ participants. Zoom was. So even with video conferencing fully rolled out, there might still be a gradual shift towards Zoom as best-in-class supplier
  • other bolt-on features/expansion into other products

I’ll stay put for now, but having a hard time seeing a lot of upside in the stock. Just growing into its current valuation will require a continued impressive performance.

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Denny,

I have not seen any figures on productivity for workers at home, compared to productivity of the same workers from home. I think worker productivity will be the deciding factor.

Gordon

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I have replied to Greg, VTDave, and Retirementdough below

Greg,

You either believe:

1. The world returns to pre-COVID, everyone back in the office, video conferencing drops, ZM churn rockets up.
2. The world shifts to a ‘hybrid’ work-from-home model, where some people are in the office, others are working from home, cafes, etc.

If you believe 1, you should probably ditch ZM. If you believe 2… you should consider their other products, the ZM Phone, OnZoom, ZoomRooms, Chat etc. Will companies standardise on ZM as their communications platform?

1. Lower than expected churn.
2. Using Q2 churn forecast for Q3 (Q3 was lower than expected), for their Q4 guidance.
3. Government was their strongest growth vertical.

I expect they’ll beat guidance in Q4 as well. But there wasn’t a lot in the results that suggested that ZM wasn’t doing really (really) well.

I agree with your statements but to elaborate on the two camps and churn…

Regarding going ‘back-to-normal’ vs a hybrid situation. I would say if anyone has children doing lessons at home know what a pain it is and parents don’t want that trouble : ) . My kids teachers prefer in person teaching - better engagement and participation. Post-pandemic will affect the education vertical. (And what about the ‘college experience’ ?!). I have 2 elementary kids and I can’t wait till they can go back to normal schooling.

On commercial business, not all roles are effective in WFH model. ‘individual contributors’ are fine but roles that manage people are difficult. Anyone that contributes cross-departmentally or has unstructured work or role knows how difficult it is to get things done. Some things simply need a drop by their office and have a quick conversation.

I would say generally that in-person participation and engagement is important.

  1. If we go back to Q2 the trend and story that was new COVID cases going down, summer would help , etc. Expectations would be that churn would increase as cases go down. The reality was that COVID kept dragging on with spotty waves around the country and now globally increasing in q4.
  2. Per above
  3. I’m not sure if I feel that government being the strongest is a positive or ‘negative’ rather than commercial business

VTDave,

I have no doubt Q4 will be strong, but I want to keep in my mind that I invest in the future. And in this case it is trying to see what Q1 2021 going forward will look like. Am I investing in a video conferencing platform or a communications ecosystem? I guess with less than 6 months to a potential post-COVID world I would have expected more talk about what their future strategy would be like. I want to know what are they going to push for and invest into.

Dramatically speaking - my ears are ringing from what felt like short-term thinking of moving prudent monthly subscribers into annual. I would say let the customer decide what’s right for them because - what value are they adding for that 1yr commitment? And how is that best for the customer? (Sounds harsh, yes, but I get pitched a lot at work)

For most cloud platforms I generally think of the runway for continued growth as more modules, features and integrations to create more value. I feel like this is much more limited with video conferencing. So that leads me to the question what other product innovations will drive continued growth and what is the adoption like? This seems like zoom phone and the potential for extending into a ‘communications ecosystem’.

That being said, I’m not going to invest in hope - so I would really want to keep an eye on how they are doing with zoom phone and any new ways to innovate, integrate, or drive post pandemic growth.

Retirementdough,

I think the simple answer is international video conferencing which is growing 629% YoY.

It reminds me of NFLX. As US growth first rose then slowed, international followed a similar trend but delayed a few years. I think that ZM is moving faster than NFLX because of the rate of adoption due to Covid. However I still think 2021-2022 will have YoY growth due to international business.

Could be wrong, but that’s what I believe the catalyst for the next year or two will be.

I guess my response would be…if in a pandemic world where we have the MOST INCENTIVE to WFH and use video conferencing and everyone is using zoom - what would drive growth in the future when it becomes an option rather than a necessity?

NFLX provided entertainment with great value internationally when very limited options existed - this to me is a clear driver for growth. I can’t see as clearly with zoom at this point in time.

With all this being said, I will say that my conviction has decreased and I am somewhat willing to wait another quarter to see what strategies and plans maybe revealed to shield light on my two points below:?

  1. ZM will need to build a case for where their product offering goes from here, will it become an ecosystem, will it partner & integrate? (zoom phone, etc)
  2. What will drive future sales growth when a necessity turns into an option.

This being my single longest post yet, I just want to be clear that I don’t intend to be overly harsh in any of my responses. Just trying to elaborate my critical view point as best as I can. I’ve set my personal bar with zoom very high because it is not what I would call the stickiest platform.

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