On a day where FSLY and DDOG are raging… and since many on this board hold ZM, let’s discuss what ZM might announce on 12/4/20 (est.), given their quarter ends in about 3 weeks. (joking, but yeah, interested in what ZM will announce)
I apologize that this post is so long that it deserves an executive summary
Executive Summary
ZM’s Q3 Revenue and outlook could be larger than some expect, perhaps in the range of $750M-$850M given ZM management’s propensity to (woefully) under call their outlook, the pandemic-driven work from home trend becoming the new normal, and the US seeing the highest number of new corona cases since August.
As always, let’s start with what we know, look at the data, then model some scenarios, based on the data and information we have available.
From the previous quarter’s (Q2FY21) announcement
$663.5M, up 355% year-over-year
370k customers with more than 10 employees, up approximately 458% from the same quarter last fiscal year.
1k customers contributing more than $100,000 in trailing 12 months revenue, up approximately 112% from the same quarter last fiscal year.
TTM NDBER > 130% for the 9th consecutive quarter.
Important tidbits from the earnings call
Q2 revenue increase
• 81%: new customer subscriptions
• 19%: increase subscriptions to existing customers
APAC and EMEA revenue grew 629% YoY and represented 31% of revenue, $206M (EMEA may be seeing a new spike)
Q3 FY21 Forecast:
Revenue: $685M to $690.0M: (upper end meet = +314% YoY, +4% QoQ)
• an upper end of the range “meet” ($690M) represents a YoY growth of 314% and a sequential growth of ~4%, which is respectable, but not mind blowing like Q2’s sequential growth.
Next, let’s look at “in quarter” updates, information, hints, tidbits, etc. [Aside: Look for some insight to be given at the Zoom Analyst Day at Zoomtopia, next Wednesday, on Oct 14, 2020 at 11:00 AM PDT; click this link to register: https://zoom.us/webinar/register/WN_fxvO1P55Ttq_wFFiMX8X4Q ]
In the last earnings call, which happened on Aug 31, 2020, 5:30 p.m. ET, which was 1 month into Q3FY21, we heard the following
•“… monthly churn rate is about 4%, and we did see an increase against that in Q2. and we have modeled at that same level going forward as we – with all the uncertainty with how long this pandemic will last and what other potential economic uncertainty there is. We’ve modeled at that same rate going forward…So, certainly, coming into the Q3, our pipeline is still strong, and we’re continuing to see demand. But based on our guidance, you can see that the demand for the year was front-end-loaded, and we saw that the performance in Q1, the benefit of which we saw in Q2. And that’s why the guidance is highlighting that we expect revenue for the back half of the year to be effectively consistent with Q2.
• Shebly Seyrafi – FBN Securities – Analyst
Yes. Thank you very much. A question for Kelly. You’re guiding revenue to be up around 3% sequentially. But if I assume that your customer count is at least flattish Q to Q, your average customer count is going to be up around 16% Q to Q, which implies that your ARPU is implicitly guided to be down 13% Q to Q. And so, my question is, I’ve never seen a double-digit decline in your ARPU before. What would drive that?
• Kelly Steckelberg – Chief Financial Officer
Well, as we’re sitting here right now, looking forward, I think it’s more around the uncertainty around churn and what’s going to happen with the overall economy. That’s really the uncertainty there, and why we’re guiding flat for Q3 to – Q3 and Q4 revenue will be flat, modestly up from Q2. And, you know, we’ve had a significant increase in our mass market customers, where there just remains limited visibility in terms of the long-term contribution for those customers. So, I don’t think that we necessarily expect that dramatic increase in our provision pointing out. It’s more around the uncertainty in churn and what does that mean for the top line growth.
So some conservative statements by their CFO and CEO. But we also see that ZM has beat their own forecast by an average of 24%, going back to Q2’19, but has a high standard deviation (22%), because of the 63% beat in Q1’20 and 33% in Q2’20. If we remove those two outliers, the average drops to a 9% beat.
So summarizing some of the data and signals
Data
•ZM always beat their Quarterly estimates (data: average beat = 24%, std dev 22%)
Info from 8/31/20 earnings call
•One month into coming Q3, “pipeline is still strong”
•But demand for the year was front-end-loaded: back half of the year consistent with Q2.
•uncertainty around churn and what’s going to happen with the overall economy
3rd party data sources/news
•US sees highest number of new corona cases since August (reported on 10/9 by various news organizations)
•Many (if not most) of jobs are now advertised as “remote” (LinkedIn)
•McKinsey assessed the prospects of when the pandemic ends, and based on their analysis, herd immunity (brought about by a reasonably successful vaccine) will not happen until Q3 or Q4 2021; independent variables are vaccine efficacy and vaccine coverage
•Schools are starting to return to in class learning, but most will retain a hybrid model. This dynamic has little impact on ZM revenue because ZM typically provides their products to schools for free.
Taking all of this into account, I personally believe ZM’s CFO and CEO were overly conservative on the August 31 conference call. I might be in the minority on this opinion because it goes against human nature, suggesting that when things are good, people are optimistic, whereas when things are bad, they are pessimistic about the future, but ZM management always seems to be conservative when talking about the outlook.
On August 31, ZM had just realized their biggest quarter of their existence, beating just about everyone’s expectations. Yet, they made very conservative statement about their higher than average churn and limited visibility of the long-term contribution for their mass market customers. I went back to the Q1 conference call, to evaluate their comments, when they likely knew they were going to blow out Q2, and discovered they were also conservative on their Q2 outlook .
See below for what ZM CFO Kelly Steckelberg said about their Q2 guidance, a quarter in which they blew out every revenue assessment, and recall, she said this one month into Q2 when they were surely seeing strong growth.
Let me help provide a bit more context on the assumptions behind our guidance. As I discussed earlier, we have a far higher portion of revenue attributable to new customers with 10 or fewer employees, who opted for monthly contracts. Historically, monthly subscribers have a higher churn rate compared to annual or multi-year subscribers. In addition, as governments start to ease shelter-in-place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2. …and also, we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment. With that said, I want to make sure you understand that while we did see an increased growth of monthlies, as about half of our sales in the quarter came from monthly subscribers, when you look at the signals from our direct sales organization, the percentage of monthly subscribers was consistent with historical. So we didn’t see an increase in monthly subscribers in the up-market. We saw the same percentage as we have historically. And those typically – the churn in that segment, when they are annual or multi-year, is a fraction of what the monthly subscribers are.
Remember, she said this on June 2nd, one month into a quarter in which the beat their own upper range estimate by 33% . Thinking this might be an anamoly, I went back to the previous conference call, one month into a quarter in which they beat their estimate by 60% (!) and she was still conservative
Kelly Steckelberg – Chief Financial Officer
In terms of our results Nikolay, for Q4, we did not see any impact directly related to coronavirus. As a reminder, we have definitely seen an uptick in usage. But a lot of that is on the free side. So it’s very early to tell whether or not that’s going to convert long term into paying customers. As we mentioned, we are seeing impact and have continued to build capacity to ensure that we can support this increased usage. So we are seeing impact on our gross margins, which is why we’re guiding you toward the lower end of our range for next year..
Anyway, I think you get my point. ZM management is very conservative when it comes to outlook
So I modelled a few scenarios, starting with a “meet” and went up from there. I know that we don’t necessarily think EV/S are relevant to valuation, but I included some EV/Forward Annual Sales comparisons just for fun. I assumed ZM’s EV upon market close, 10/8/2020 = ~135
Scenario Q3’20Rev$M YoY%growth Ann.rev(assum.Q3'20rev) EV($B) EV/S (assume 4x Q3’20 rev)
Meet, no beat $690 314% 2.76 135 49
Low beat(9%) $752 351% 3.01 135 45
10% beat $758 355% 3.03 135 45
24% beat(ZM avg) $856 414% 3.42 135 39
33% beat $918 451% 3.67 135 37
40% beat $964 479% 3.86 135 35
63% beat $1,125 575% 4.50 135 30
So given an EV/NTM of 40ish is in the ballpark, I modelled some ZM quarterly revenue run rate scenarios to see what ZM share price might look like, assuming constant share count, debt, cash and equivalents.
ZM share price ZM EV($B) Ann.Rev(in $B, assum. EV/S = 40) Rough Quarterly Rev run rate, in $B
$500 140 $3.5 $0.9
$600 169 $4.2 $1.1
$700 198 $5.0 $1.2
$1,000 281 $7.0 $1.8
So we can be fairly certain that ZM will beat their $690M number, meaning they will are growing revenue greater than 314% YoY. Some people talk about ZM’s revenue growth slowing (e.g. the slope of the revenue growth is flattening), and it will happen, and the market traders and Robin Hooders will likely (over)react, sell ZM, then look around for better investments. They’ll realize that ZM is still a great investment. Look at the comparison below, of some other really great SaaS companies that analysts see as the top 5 SaaS companies posting the highest growth rates in the industry in Q3. (link: https://twitter.com/Beth_Kindig/status/1314214935803564033)
Q3 Consensus Estimate YoY Rev Growth of
ZM CRWD SHOP DDOG FSLY
314% 71% 65% 51% 50%
ZM’s revenue growth will need to slow by a factor of 4+ to get to the next highest YoY growth number, from a great company that we all know. What will ZM’s quarterly revenue be in a year? I don’t know but would bet it will be more than the $700M they are forecasting. Revenue growth rate? Yup, it will be lower, but remember, even when revenue growth rate slows down, actual dollar growth rate usually isn’t slowing, but still growing. Saul posted about this (post #61045) about a year ago, when we were having the same discussion about ZM’s revenue rate declining!
I hope you find this useful. And man, what’s going on with FSLY and DDOG today? 