ZM Q2FY22: GauchoRico's Take

ZM (0% allocation; Q2FY22 30Aug earnings date)

ZM’s 31Jul quarter’s results were released on 30Aug. I sold my entire position after the result. Below is the explanation for my decision.

Some other investors who I know and respect sold their ZM position either late last year or early this year. I decided to hang on because I wanted to give ZM a chance to leverage their strong market presence to gain fast traction on some new products: Zoom Phone, Zoom Room, and OnZoom. I made the assumption that ZM’s video conferencing business would continue to grow at about 50% y/y while these faster growing new businesses become large enough to reignite overall revenue growth.

ZM’s revenue growth was ok, but the guidance for Q3 and the implied guidance for Q4 show much more slowing than I (and apparently the market) expected. Customer growth numbers were also somewhat anemic compared to prior quarters. Management’s reason for the projected deceleration was that the video conference business customers (non-enterprise only) slowed faster and more steeply than they expected. The enterprise business was very strong particularly with the Zoom Phone adoption: +241% y/y growth in the number of $100K+ ARR customers and +320% y/y growth in the number of $1M+ ARR customers. Also, Zoom Phone doubled the number of seats to 2M from mid-January to August.

So Zoom Phone is doing great as I hoped it would, and it appears that Zoom Phone is on the way to strong success. However, compared to the size of the overall business the Zoom Phone contribution is still too small to make a difference. Adding up the ARR of the $100K+ and $1M+ Zoom Phone customers, I estimate that Zoom Phone currently contributes about $65M in annual revenue. Unfortunately, this is less than 2% of the Company’s overall revenue. Thus, even if Zoom Phone doubles again in a year, it won’t contribute to growth in a meaningful way. Zoom Room and OnZoom are even smaller and even farther behind on the customer adoption curve.

In summary, ZM’s core business is slowing sooner than I expected coupled with a lack of visibility in any meaningful revenue from ZM’s second act products was the reason for my exit from ZM. Others foresaw this sooner than I did, but better late than never; regardless, the ZM ride has been a fun and profitable one. Now was the time to let it go and pay the taxman for all those capital gains.