Zoom - a deeper look at the numbers

[cfee2000]

By now much of you have already read and reacted to Saul’s informative post on Zoom’s recent QoQ revenue declaration - https://discussion.fool.com/zoom-results-my-thoughts-34688389.as….

My goal in this post is to dive deeper into the numbers and provide some additional insight for those of you who are still trying to figure out what to do with Zoom (buy/hold/sell)

Lets focus on Zoom’s quarterly results from Q1 2019 on to get a fuller sense of the trends……

Starting with the Income Statement, remember that Zoom was growing BEFORE the pandemic at extremely high growth rates, and the sequential (quarterly) growth was a steady, healthy balance between 10% and 20%, then the burst sequentially in Q1 and Q2 to 74% and 102% respectively. So, in this context, is 17% sequential growth in Q3 really that concerning, especially when 17% sequential growth, if annualized, leads to 64% YoY returns, which would still be near the top of our stocks in terms of YoY growth?

+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
|                               | Q119    | Q219    | Q319    | Q419    | Q120    | Q220    | Q320    |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Rev (in millions)             | $122.00 | $146.00 | $167.00 | $188.00 | $328.00 | $664.00 | $777.00 |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Rev Growth (YoY)(Organic)     | 103.33% | 94.67%  | 85.56%  | 77.36%  | 168.85% | 354.79% | 365.27% |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Rev Growth (QoQ)(Organic)     | 15%     | 20%     | 14%     | 13%     | 74%     | 102%    | 17%     |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| EPS (GAAP)                    | 0       | 0.02    | 0.01    | 0.06    | 0.1     | 0.66    | 0.7     |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| EPS (Adjusted)                | 0       | 0.02    | 0.01    | 0.05    | 0.09    | 0.63    | 0.66    |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Shares Outstanding (Adjusted) | 136     | 292     | 292     | 295     | 295     | 297     | 299     |
+-------------------------------+---------+---------+---------+---------+---------+---------+---------+

Ok, so how about Expenses as a % of Revenue? The keys in my mind here are S&M expense, Operating Margin, and Gross Margin. S&M has dropped from the high 50% to the low 20% in a short amount of time. With other operating expenses staying fairly consistent, the Operating Margins have jumped to 28% and 25% respectively the last 2 quarters, and that has helped Zoom build up a mountain of cash.

On the other hand, the Gross Margin deceleration I think is more concerning than anything else in their reporting. Zoom was consistently mid 80% in 2019, but this year they’ve took a pretty big drop and according their their latest 10-Q its only going to get worse “While we have experienced a significant increase in paid hosts and revenue due to the pandemic, the aforementioned factors have also driven increased usage of our services and have required us to expand our network and data storage and processing capacity, both in our own co-located data centers as well as through third-party cloud hosting, which has resulted, and is continuing to result, in an increase in our operating costs. Furthermore, a significant portion of the increase in usage of our platform is attributable to free Basic accounts and our removal of the time limit for school domains, which do not generate any revenue, but still require us to incur these additional operating costs to expand our capacity. Therefore, the recent increase in usage of our platform has adversely impacted, and may continue to adversely impact, our gross margin.”

+----------------------------+------+------+------+------+------+------+------+
|                            | Q119 | Q219 | Q319 | Q419 | Q120 | Q220 | Q320 |
+----------------------------+------+------+------+------+------+------+------+
| Total CoR                  | 20%  | 19%  | 19%  |      | 32%  | 29%  | 33%  |
+----------------------------+------+------+------+------+------+------+------+
| Research and Development   | 11%  | 10%  | 10%  |      | 8%   | 7%   | 6%   |
+----------------------------+------+------+------+------+------+------+------+
| Sales and Marketing        | 53%  | 55%  | 58%  |      | 37%  | 24%  | 24%  |
+----------------------------+------+------+------+------+------+------+------+
| General and Administrative | 15%  | 14%  | 14%  |      | 16%  | 12%  | 12%  |
+----------------------------+------+------+------+------+------+------+------+
| Operating Margin           | 2%   | 4%   | 1%   |      | 8%   | 28%  | 25%  |
+----------------------------+------+------+------+------+------+------+------+
| Gross Margin (TOTAL)       | 80%  | 81%  | 81%  | 84%  | 68%  | 71%  | 67%  |
+----------------------------+------+------+------+------+------+------+------+

Now, looking at Free Cash Flow, the kind of numbers here are rarely seen. Zoom literally cracked the 1 billion dollar mark in FCF this past quarter! One could argue they aren’t efficiently putting that cash to use, but it’s still a mountain of cash and it’s hard to find a home for it when you’re so busy trying to keep up with demand. Recall that many of us were dumbfounded by the $251 million in FCF in Q1 and thought it couldn’t be sustained, but they’ve clearly done that and then some.

+------------------------------------+--------+--------+--------+--------+---------+---------+-----------+
|                                    | Q119   | Q219   | Q319   | Q419   | Q120    | Q220    | Q320      |
+------------------------------------+--------+--------+--------+--------+---------+---------+-----------+
| Free Cash Flow (FCF) (in millions) | $15.34 | $32.47 | $87.21 | $26.60 | $251.00 | $625.06 | $1,071.78 |
+------------------------------------+--------+--------+--------+--------+---------+---------+-----------+

Now, you can’t really look at FCF in a vacuum and ignore the Deferred Revenue the company has. So, as we look at the Balance Sheet, you can see the FCF is clearly outpacing the Deferred Revenue. To be honest, the level of analysis on this gets even deeper than I’m able to fully comprehend, so hopefully someone can jump in here and add a more valuable explanation or analysis on this.

+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
|                                                 | Q119   | Q219   | Q319   | Q419   | Q120   | Q220   | Q320   |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Cash and Cash Equivalents (in millions)         | 629.79 | 213.88 | 230.87 | 855.20 | 488.65 | 748.94 | 730.50 |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Accrued Expenses (Short-Term Debt)(in millions) |        |        |        |        | 507.01 | 560.19 | 565.5  |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Deferred Revenue (Short-Term Debt)(in millions) | 137.38 | 163.59 | 186.54 |        | 523.24 | 714.52 | 835.76 |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Deferred Revenue (Long-Term Debt)(in millions)  | 11.99  | 17.81  | 15.06  |        | 28.59  | 28.1   | 18.9   |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Long Term Debt (lease) (in millions)            | 46.1   | 48.1   | 50.13  |        | 62.99  | 63.1   | 60.5   |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+
| Long Term Debt (other) (in millions)            | 26.85  | 31.21  | 32.54  |        | 40.76  | 47.6   | 56.98  |
+-------------------------------------------------+--------+--------+--------+--------+--------+--------+--------+

On to some customer specific numbers. There’s some good stuff here, but in particular the numbers that stand out to me are the QoQ Customer Growth for customers spending more than $100,000 on an annualized basis. In particular, Q1, Q2, and Q3 have seen $100k customer growth accelerating to 20%, 28%, and 30% sequentially. These are the big fish that Zoom is landing, and as long as that number continues to stay healthy and grow, I don’t see the Total Revenue QoQ sequential growth dropping from 17% to, say, single digits.

+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
|                                                 | Q119   | Q219   | Q319   | Q419   | Q120    | Q220    | Q320    |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| Dollar-Based Net Retention Rate                 | 130+   | 130+   | 130+   | 130+   | 130+    | 130+    | 130+    |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| 10+ Employee Customer Base                      | 58,500 | 66,300 | 74,100 | 81,900 | 265,400 | 370,200 | 433,700 |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| $100,000 TTM Revenue Contributing Customer Base | 405    | 466    | 546    | 641    | 769     | 988     | 1,289   |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
|                                                 |        |        |        |        |         |         |         |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| Customer Growth (YoY)(10+)                      |        |        |        |        | 354%    | 458%    | 485%    |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| Customer Growth (YoY)($100k)                    |        |        |        |        | 90%     | 112%    | 136%    |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| Customer Growth (QoQ)(10+)                      |        | 13%    | 12%    | 11%    | 224%    | 39%     | 17%     |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+
| Customer Growth (QoQ)($100k)                    |        | 15%    | 17%    | 17%    | 20%     | 28%     | 30%     |
+-------------------------------------------------+--------+--------+--------+--------+---------+---------+---------+

Lastly, to wrap things up, how about Zoom’s guidance for next quarter in terms of Total Revenue? Regrettably, I don’t have a full historical table here, but note that they are guiding to $811 million in revenue, but last quarter they beat their guide by 12.61%. If they matched that beat this coming quarter, they’d have $913 million in revenue, which would be 18% sequential growth, a small but improvement over the 17% sequential growth they just posted is Q3.

+----------------------------------------------------+---------+---------+
|                                                    | Q320    | Q420    |
+----------------------------------------------------+---------+---------+
| Revenue Guide (next Quarter)                       | $690.00 | $811.00 |
+----------------------------------------------------+---------+---------+
| Revenue Guide (next Quarter YoY, organic)          | 313.17% | 331.38% |
+----------------------------------------------------+---------+---------+
| Revenue Guide (next Quarter QoQ, organic)          | 266.05% | 328.37% |
+----------------------------------------------------+---------+---------+
| Net Gain/Loss Guide (next Quarter) (millions)      |         |         |
+----------------------------------------------------+---------+---------+
| Net Gain/Loss Guide (next Quarter, per share, adj) | $0.74   | $0.09   |
+----------------------------------------------------+---------+---------+
| Shares Outstanding Guide (millions, diluted)       | 300     | 306     |
+----------------------------------------------------+---------+---------+
|                                                    |         |         |
+----------------------------------------------------+---------+---------+
| Revenue Beat/Miss % (Guide vs Actual)              | 12.61%  |         |
+----------------------------------------------------+---------+---------+

Hopefully you found this deep dive into Zoom insightful, and can confidently make whatever decision you feel is appropriate based on your own analysis of these numbers.

-Chris

[SoonerAJ]

Hi Chris - Good stuff there. Here’s how much Zoom has beat revenue guidance for the past 3 quarters.

63.3%
32.7%
12.6%

As you can see, their beat has decelerated to 12.6%. I agree that if they match that beat, they are in a pretty good spot! However, I expected more than a 12.6% beat last quarter, and I’m expecting this quarter to come in below 12.6%.

Sequentially, here is their revenue growth the past 3 quarters.

74.3%
102.2%
17.1%

If I had to guess, their sequential revenue growth will come in below 17.1%.

I think the best bull case is what you stated here - "Q1, Q2, and Q3 have seen $100k customer growth accelerating to 20%, 28%, and 30% sequentially." I think thats a lot to get excited about.

So why has my confidence in ZM come down? Because I believe their revenue guidance won’t match the 12.6% beat nor the 17.1% sequential growth of last quarter. In the next report I’ll be closely watching that revenue growth for customers over $100K.

I still own ZM, just not as much of it as I did a few months ago.

-AJ

[Vijest]

Hi Chris,

I just wanted to expand on your point about the growth of customers spending $100K+ W/ZM.

Saul made a very interesting comment about this metric… https://discussion.fool.com/i-stumbled-on-an-interesting-and-ast…

And I’m wondering if it might affect expectations for their earnings growth going forward.

If I’m interpreting the numbers correctly, the growth of their $100K+ customers just reported was only through Q3 of last year. That is, pre-covid growth which was very good but does not account for the explosive customer growth during the pandemic.

I’m making a few assumptions here so please correct any errors I have made (only my second post on this board). One is that the number of the $100K+ customers just reported (1,289) is part of the number of customers with 10+ employees for Q3 of last year (74,100) since a customer is not counted among the $100K+ club unless they’ve spent that much over the last 4 quarters. If that is correct then no new $100K+ customers came from among the group reported in Q1 when the customer count went from 81,900 to 265,400 (2.24 times as many).

I realize that free accounts are likely a part (perhaps a large part) of that number so there will probably be nothing close to a 1 to 1 correlation. But if the numbers of $100K+ customers were growing 20%, 28% and 30% sequentially before the large influx of customers may we not expect a substantial increase over and above that as this large wave of customers from Q1 (and the 160,000+ more acquired through Q3) is incorporated into the coming earnings reports?

Thanks to Saul and the rest of this board for greatly improving my ability to care for my family and others as I am retiring in a few years…

Mike

[monkeydluffy]

Hi Chris, thanks for sharing the deep dive! It’s great analysis. I’d just like to point out one point that I feel it may be missing.

The metric reported by Zoom was Dollar-based net expansion rate of customers with more than 10 employees, which was above 130% as reported. It’s not the same as the Dollar-based net retention rate we typically hear from other companies we discussed here. So this metric only discloses the ability of expansion of 62% of Zoom’s revenue, as Zoom reported in Q3 earning call that 38% of their revenue was from customers with 10 or fewer employees, who had higher churn rate historically. In addition, I’m not sure whether the net expansion rate has counted churn like net retention rates. (Trying to figure it out but I did not find clear explanation about this.)

In summary, I think Zoom’s 130%+ expansion rate is not as great as it sounded like. Their true ability of expansion should be discounted from this number. They’ll still need to keep a high pace of new customers acquisition on top of the current huge customer base in order to maintain a hyper-growth.

Luffy

[cfee2000]

Here’s how much Zoom has beat revenue guidance for the past 3 quarters.

63.3%
32.7%
12.6%

As you can see, their beat has decelerated to 12.6%. I agree that if they match that beat, they are in a pretty good spot! However, I expected more than a 12.6% beat last quarter, and I’m expecting this quarter to come in below 12.6%.

AJ - I went back and found the guidance numbers, so I filled out the table and I also fixed a few data points that were incorrect on it.

+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
|                                                    | Q219    | Q319    | Q419    | Q120    | Q220    | Q320    | Q420    |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Revenue Guide (next Quarter)                       | $130.00 | $156.00 | $176.00 | $201.00 | $500.00 | $690.00 | $811.00 |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Revenue Guide (next Quarter YoY, organic)          | 73.33%  | 73.33%  | 66.04%  | 64.75%  | 242.47% | 313.17% | 331.38% |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Revenue Guide (next Quarter QoQ, organic)          | 6.56%   | 6.85%   | 5.39%   | 6.91%   | 52.44%  | 3.92%   | 4.38%   |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Net Gain/Loss Guide (next Quarter, per share, adj) | $0.02   | $0.03   | $0.07   | $0.10   | $0.46   | $0.74   | $0.79   |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Shares Outstanding Guide (millions, diluted)       | 301     | 294     | 296     | 297     | 300     | 300     | 306     |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
|                                                    |         |         |         |         |         |         |         |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+
| Revenue Beat/Miss % (Guide vs Actual)              | 12.31%  | 7.05%   | 6.82%   | 63.18%  | 32.80%  | 12.61%  |         |
+----------------------------------------------------+---------+---------+---------+---------+---------+---------+---------+

I think on looking at a broader data set, it’s fair to say that Zoom has been a bit “rangy” on their guidance, even pre-pandemic. So, using 12.6% as a barometer is probably not super reliable in either direction.

My TL;DR, strictly based on the numbers, is basically that Zoom’s Q3 was “mixed” - I like the QoQ $100k customer growth, FCF, and Operating Margins. It’s the Gross Margins and the commentary on those that was the biggest negative for me, and I’m certainly not ignoring the sequential revenue deceleration concerns.

I did reduce my position to what now is 6.5%, but I don’t think it deserved the drop it had for a myriad of reasons, and I still think the tailwinds will be there for them at least through most of 2021. I will likey add to my Zoom position next week.

The metric reported by Zoom was Dollar-based net expansion rate of customers with more than 10 employees, which was above 130% as reported. It’s not the same as the Dollar-based net retention rate we typically hear from other companies we discussed here. - Thanks for the correction on this Luffy!

I’m making a few assumptions here so please correct any errors I have made (only my second post on this board). One is that the number of the $100K+ customers just reported (1,289) is part of the number of customers with 10+ employees for Q3 of last year (74,100) since a customer is not counted among the $100K+ club unless they’ve spent that much over the last 4 quarters. If that is correct then no new $100K+ customers came from among the group reported in Q1 when the customer count went from 81,900 to 265,400 (2.24 times as many). - It’s a very relevant question Mike. I’m not 100% sure if, say for example, a new customer in July spent $500,000 between July and September, whether that customer gets added to Zoom’s $100k customer list, since from one point of view, they’ve already eclipsed the $100k in just a few months of business? Normally I would think that’s not how TTM works and therefore that’s not what Zoom is doing, but its just a Zoom manufactured metric, so I’m not sure there’s a lock on interpretation. Maybe someone else has an answer, or maybe there was some conference call notes that would help clarify this?

[spekulatius]

ZM FCF mostly comes from issuing stock (stock option exercise, stock plan sales etc) - $296M last quarter alone for 10Q.

[nilvest]

ZM FCF mostly comes from issuing stock (stock option exercise, stock plan sales etc) - $296M last quarter alone for 10Q.

This is not true.

FCF generally equals “Operating Cash flow” - “Capex”.
Operating cahs flow is your bottom line of the first section of cash flow statement called “Cash flows from operating activities”.

Capex is one or two line items from second section called “Cash flows from investing activities” - specifically what money spent on acquiring plant and properties as well as capitalized software. There are other items in that section that do not count a capex.

Money coming in from stock issuing goes into third section in cash flow statement called “Cash flows from financing activities”

There are ways to fudge FCF but it is much much harder than fudging income statement… because it really is about actual cash coming in from operation.

[Ruhaan]

Small correction:

±-----------------------------------±-------±-------±-------±-------±--------±--------±----------+
| | Q119 | Q219 | Q319 | Q419 | Q120 | Q220 | Q320 |
±-----------------------------------±-------±-------±-------±-------±--------±--------±----------+
| Free Cash Flow (FCF) (in millions) | $15.34 | $32.47 | $87.21 | $26.60 | $251.00 | $625.06 | $1,071.78 |
±-----------------------------------±-------±-------±-------±-------±--------±--------±----------

This makes it look like ZM hit 1B in a qtr. However thats not how I have it… Here are the numbers I am tracking:

±-----------------------------------±-------±-------±-------±-------±--------±--------±----------+
| | Q119 | Q219 | Q319 | Q419 | Q120 | Q220 | Q320 |
±-----------------------------------±-------±-------±-------±-------±--------±--------±----------+
| Free Cash Flow (FCF) (in millions) | $15.34 | 17.1 | $57.7 | $26.60 | $251.70 | $373.40 | $388.00 |
±-----------------------------------±-------±-------±-------±-------±--------±--------±----------

They did hit a Billion in FCF over the past TTM basis. If they were hitting 1B per quarter that would be a whole different story. It would make ZM a value play which both Growth investors and value investors can drool over. I personally am agnostic about growth / value investing. At the end of the day all investing is value investing. Price is what you pay and value is what you get. Period.

Ruhaan
Long ZM

[cfee2000]

You are right Ruhaan, thank you for that very important correction. That was an oversight on my part. Zoom breaks FCF down in their 10-Q’s by aggregating past quarterly earnings and then starting over each new fiscal year (ie. they don’t provide a quarter by quarter breakdown of FCF - that has to be calculated).

Still a mountain of cash, but my commentary on FCF outpacing Deferred Revenue was not accurate given this. I did leave that section open for someone with more expertise to jump in since I was a bit puzzled with the spread, but with these corrected numbers it makes much more sense.

Thanks again!