Zoom (ZM) announces earnings on Aug 31, 2020 at 2:30 PM PDT. I like to forecast revenue, so let’s talk about what revenue they might announce and how the market might react. Let’s start with what we know, then bake in some of what we’ve learned in the quarter, then model the inputs to forecast the revenue results, and then discuss how the market might react. First what we know:
From the previous quarter’s (Q1FY21) announcement
- $328.2 million, up 169% year-over-year
- Q2 FY21 Forecast:
Revenue: $495.0M to $500.0M; mid-range = $497.5M Analyst’s predictions: $498.9M in revenue (and $0.45 EPS) (Even a mid-range “meet” represents a YoY growth of 241% or a 3.41X growth factor and a sequential growth of ~52%, which is mind-blowing.)
Next, let’s look at “in quarter” updates, information, hints, tidbits, etc.
• According to Keybanc, billings are “up 32% q/q in its F2Q21 vs. consensus down 15%…” according to KeyBanc analyst Alex Kurtz citing “internal data”. Link from SeekingAlpha here: https://seekingalpha.com/news/3606209-zoom-billings-seeing-s…
This data is from KeyBanc’s own modeling, based on debit and credit card information, weighted for small and mid-sized enterprises. As some have discussed on the board, modelling billings into revenue is sometimes tricky because of rules that require companies to recognize billings within the context of the length of contracts and other accounting rules . For example, when ZM gets a new customer by displacing a competitor (Cisco’s Webex or Skype, etc.), ZM often comps the remaining months the new customer has on the competitor’s contract. So, in this example, ZM will count them as a new customer, will bill the entire amount up front, but the revenue gets amortized over the full period of the contract (often 12 months), including the free periods (per the new revenue standard for ASC 606.). So this is challenging to model, but we can make some reasonable assumptions to model some outcomes. I’ll show this in the numbers below.
Another consideration is that ZM’s guidance assumes “historical churn rates”, which is likely conservative. In the last earnings call, they suggested they took a conservative approach in terms of thinking about churn in terms of potential uncertainty around the economic environment. They did see an increased growth of the “monthlies”, about half of their sales in the quarter came from monthly subscribers (in which billings are often recognized as revenue in the month they are billed), and signals from their direct sales organization suggest the % of monthly subscribers was consistent with historical. So that factors into a somewhat conservative revenue forecast but also suggests some billings are recognized as revenue in the month they are billed.
So, taking these things into account, let’s start by assuming the midpoint of the revenue guidance ZM gave, $497.5M, is the base case, and this assumes the quarter’s billings is about 85% of the previous quarter, (per the previous consensus). The new information is that billings are actually up 32% sequentially (again, per Keybanc’s modelling). But recall, billings do not equal revenue. So we have to make some assumptions about how much of those billings become Q2 revenue. If we assume about 25% of the billings will be realized in Q2, we get the following, pre-update
Q2 Rev. forecast % of prev. Q billings % of billings realized in Q2 billings recog in Q2 $497.5M 85% 25% $106M
Now, using the same assumptions, let’s apply the new information of billings actually being up 32% to this equation to see if we can get a Q2 revenue ballpark
If we assume the same % of billings realized in Q2, 25%, and assume billings actually increased by 32%, we get a new, larger, billings number that is recognized in Q2 as revenue: $193M.
So if we look at the difference in those revenue components, we get an additional $87M in Q2 revenue that may not have been accounted for previously. ($87M = the difference between the billings recognized in Q2, assuming 85% of the previous quarter, and the billings recognized in Q2 assuming 132% of the previous quarter’s billings.) So if we add that $87M to the previous forecast of $497.5M, we get a $585M Q2 revenue for ZM, representing an ~18% beat from ZM’s and analysts estimates! In tabular form, it looks like this:
Scenario Billings assumption % of billings=>revenue in Q2 $billings==>Q2 revenue Rev. Forecast base case 85% of prev. Q 25% $106 $498 incr. billings 132% of prev. Q 25% $193 $585
The real factor in this assessment is estimating how much of that increased billings shows up as revenue in Q2. The calculation above assumes 25% of the billings hits the Q2 top line resulting in a $585M Q2 revenue. Assuming a 12-month contract period, in general, the percent of billings that shows up as revenue in any given quarter is 25% (3 months divided by 12 months), so 25% is reasonable, IMO. Now assuming ZM adds a large number of customers, the percent of billings showing up in any given quarter might be lower than 25%, if they have to comp the number of months remaining on the contract. But there are many factors that affect this: sales might have special terms and conditions to secure a customer, or they may grant extensions to customers, etc. The table below shows three different scenarios.
% of increased billings recognized as revenue in Q2 Updated Revenue forecast 10% $532M 20% $567M 25% $585M 33% $602M
So, IMO, ZM has a very good chance to materially beat their own and analysts revenue forecast. Now let’s discuss how the market might react. ZM has had a nice run up in the last few weeks since the ‘increased Q2 billings’ assertion was postulated (up 16% since Aug. 13th, when share price was $250ish). The challenge is understanding how much of performance accounts for the increased billings info and, perhaps more importantly, how ZM might update their forward looking outlook. As we’ve seen with DDOG and others, a company can have a substantial beat but when the outlook is reduced, it presented a nice buying opportunity. In ZM’s case, expectations are likely well above analysts’ stated estimates, so a number anywhere close to the guidance range could result in a buying opportunity. It will be interesting to see how ZM guides for the rest of the year given their massive growth rates thus far.