Zoom check in, and farewell?

Zoom has generally fallen off the radar for this board and rightfully so, but it appears that there are a few who are still watching it a little and maybe taking one last glance during this growth stock downturn. Therefore, I thought I would share some poking around that I did after Zoom’s last quarter. The genesis of this check was the following line from their Q3 “2,507 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 94% from the same quarter last fiscal year.” At first glance that doesn’t sound like a company with stagnating growth.

Zoom Q3 https://investors.zoom.us/news-releases/news-release-details…

I no longer have a position in ZM because of the complete deceleration in growth now that they are lapping the Covid quarters. However, I am still paying attention to them because I like their team and I really respected their ability to capitalize so fully on the conditions that Covid created. I have wondered if they were so good at taking advantage of the pandemic situation that they killed their own growth as they experience heavy churn of smaller businesses and individuals. Thus, I think there is a possibility that once they finish working through this large bolus of smaller customers with larger churn their growth may re-accelerate. Let’s see if the numbers show any hidden signs of reacceleration.

Topline Revenue continues to underwhelm, they have been guiding to very flat growth for several quarters. They are only beating their guide by about 3% so I was expecting 1052mil in revenue in Q3 and they just reported 1051 mil. So basically no surprises here. The guide for Q4 was flat (1053mil) so I estimate 3% beat and thus 3% QoQ growth for next quarter (1082mil).
Zoom last 3 quarters and next quarter my estimate with the YoY growth

956.2	1021.5	1050.8	1082.3
191.3%	54.0%	35.2%	22.7%

As you can see the growth rate is rapidly declining from 191% to 23% and if they continue to only grow ~3% QoQ that’s only about 12-13% yearly growth, Yuck! This doesn’t quite mesh with the 94% growth in customers >$100k. Add to that Zoom continues to report Net Dollar Expansion of >130% for customers >10 employees. Again, my initial thought is that I can’t reconcile 94% growth in large customers plus a presumable 30% growth and flat guidance. For many of our SaaS companies the growth of these 100k+ customers are big revenue driver. These are likely the customers that have lower churn and higher net-dollar expansion. So as long as this number stays high the revenue mix from large customers and smaller ones should shift (I think). Next, I looked at the trend for customers >100k over the past handful of quarters and it doesn’t show reacceleration at all as it is dropping fast from 160% to the initially intriguing 94% number.

Q4 2020	Q1 2021	Q2 2021	Q3 2021	Q4 2021	Q1 2022	Q2 2022	Q3 2022
641	769	988	1289	1644	1999	2278	2507
86.3%	89.9%	112.0%	136.1%	156.5%	159.9%	130.6%	94.5%

A nice visualization for me was graphing the quarterly increases in Zoom Customers >100k which again doesn’t point to a turnaround https://imgur.com/a/jR5MfR4

From here I merely played around with graphing a variety of numbers from the below set of numbers that I hope formats OK in this post.

  	        Q4 2020	Q1 2021	Q2 2021	Q3 2021	Q4 2021	Q1 2022	Q2 2022	Q3 2022
Revenues       	188.3	328.2	663.5	777.2	882	956.2	1021.5	1050.8
YoY     	78.0%	169.0%	355.1%	366.5%	368.4%	191.3%	54.0%	35.2%
QoQ rev        	13.0%	74.3%	102.2%	17.1%	13.5%	8.4%	6.8%	2.9%
Cust >10 emp   	81900	265400	370200	433700	467100	497000	504900	512100
QoQ >10 emp	10.5%	224.1%	39.5%	17.2%	7.7%	6.4%	1.6%	1.4%
Cust >100k rev	641	769	988	1289	1644	1999	2278	2507
QoQ >100k	17.4%	20.0%	28.5%	30.5%	27.5%	21.6%	14.0%	10.1%
>100k additions	95	128	219	301	355	355	279	229
>100k YoY	86.3%	89.9%	112.0%	136.1%	156.5%	159.9%	130.6%	94.5%

I did put together an interesting graph that appears to visually show the way that certain effects from that initial pandemic boost lagged that surge. I think this may help explain why there is still no reacceleration in growth despite the appearance of having lapped the biggest covid quarters.

QoQ percent growth of Revenue, Customers >10, and Customers >$100k https://imgur.com/a/BnPpoBM

Each set has a peak and the peaks are staggered. To me I interpret the visual this way: During the initial frenzy they signed up everyone they could with amazing success (>10 peak), the major revenue boost followed quickly after, the larger customers took a little longer still and that peak was spread out over a few quarters. I’m sure there are multiple sources for the delayed increase in >100k customers, large customers a little slower to sign up, large customers signing up and then ramping up seats, etc. Of note to me is that the last huge QoQ >100k customer quarter was Q4 2021 at 27.5%. This tells me that Zoom still has a somewhat hidden big Covid quarter to lap in their Q4 2022 coming up. This meshes with the flat guidance. For me as a potential investor that means that I do not expect to see any reacceleration in Q4 and I will have to wait at least 1 additional quarter to see if they can indeed re-accelerate. I will keep an eye to guidance after Q4 but staring down 5 months before I expect any potential good news excludes Zoom from having a place in my portfolio and mostly knocks it off my radar as a high growth candidate.


p.s. hopefully I can get the formatting and graphs to work, apologies in advance for any wonky display issues.