Those flat revenues sequential revenues that they predicted, and that you are talking about, will be tripling revenue year-over-year.
Yes. But, as we’ve discussed, the stock price has also already more than tripled. So tripling of revenue YoY might be considered “yesterday’s news.”
They will be tripling their revenue at least, year-over-year in each of the next three quarters, and will probably be doubling it in the fourth quarter.
That’s just an accounting benefit of maintaining the gains they’ve already experienced, not of new gains to come.
As I see it, the investing thesis today is that in this environment where companies are not providing any guidance at all, Zoom providing guidance for growth from Q1 to Q2 (because they had already seen over a month of Q2 by the time they had the earning call), and then flat, with multiple “conservative” caveats, is actually very bullish.
But again, this doubling of Q4 YoY doesn’t require any new growth beyond what we’ve already seen, which would be great if the stock price hadn’t already anticipated this kind of growth. Then again, we saw Wall St. doubting this before the earnings announcement. I even had a post with one such article on an analyst saying the retail investors were expecting too much even as she admitted Wall St. wasn’t expecting enough. Retail Investors 1, Wall St. Analysts 0.
Here’s what CFO Kelly Steckelberg said in the call (https://www.fool.com/earnings/call-transcripts/2020/06/03/zo… ):
Total revenue grew 169% year-over-year to $328 million in Q1. This top line result significantly exceeded the high end of our guidance range of $201 million…
For the second quarter, we expect revenue to be in the range of $495 million to $500 million. … For the full year of FY21, we expect revenue to be in the range of $1.775 to $1.8 billion, which would be approximately 185% to 189% year-over-year growth.
…we are projecting Q3 and Q4 revenue to be relatively consistent with Q2.
So we already had 169% YoY growth, and they predict a QoQ growth of another 50% for Q2. Quite astounding, yes. But for the full year, they’re saying less than 190% growth, which means no more growth from Q2.
But, as Saul patiently explained, this is too conservative. Not only has Zoom management in the past under guided and over achieved, but looking at the rates people are still adopting the service, management’s worry of a massive increase in cancelations as lockdowns expire don’t seem right: most people & companies will continue to Zoom with friends and family and co-workers even after they can see them in person. Some just because of distances to travel, others because of cost or convenience. While I could go see my mom now, Aunt Millie is still 300 miles away. And while my company could fly me a thousand miles to the home office, it’s cheaper to just have a few Zoom meetings instead. (These aren’t real - I don’t have an Aunt Millie and I’m retired).
Just to put an exclamation point on it, here are some other Steckelberg quotes on being conservative about churn:
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.
So, in the guidance, … we have assumed multiples of what the historical churn rates have been. And also, we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment.
We’ve taken, again, a conservative approach to that, but it’s too early to tell, as most places – even where they’re starting to ease shelter-in-place, people are taking their time to go back to work.
I would say that we are taking a very conservative approach and assuming that the historic norms don’t yet apply to these new cohorts, both from the magnitude as well as the potential around economic uncertainty. So we – the way we’re forecasting it is using multiples of the historic churn rates.
When the CFO says “multiples,” I interpret that to mean a 2X, 3X, 4X kind of increase. As Saul points out, that doesn’t seem likely. More cancelations, yes, but compared to growth that they were still seeing in Q2 as they gave the call, not enough to zero out growth for future quarters. Being conservative is good, and since they don’t need to raise capital, management doesn’t actually want the stock price to zoom up (pun intended) because that’s a distraction to employees (I posted about Amazon in that situation previously).
Given the ginormous growth they just experienced with no ability to forecast and with no one having any idea how the rest of the year is going to play out in terms of COVID-19, WFH, etc., etc., what in the heck would you expect them to forecast?
Zoom’s in a unique situation. Whereas most businesses get worse as lockdowns continue, Zoom management is actually worried about lockdowns expiring and thus people going face to face instead of Zooming, with resulting cancelations of their monthly subscriptions. But, we all know WFH is here to say. Even when things re-open there will still be lots more WFH than there was last year. I myself think there will be a second wave of some sort, and even if not the world won’t completely return to 2019 normal ever.
Time to go re-watch some old Jetson’s episodes, where they all use Zoom: