Zoom  - FCF and Price

With a revenue of 329 million Zoom had an incredible FCF of 251 million !! That’s an incredible 76 % FCF, in spite of all the free users.

Once the margins are known, the correct metric to value is use Price / FCF as opposed to Price to Sales.

EV / FCF of more SAAS companies on TTM basis (quick Yahoo Finance Check - so they are approximate)

ADBE - 45.15
TEAM - 40.45
WDAY - 57
CRM - 35.5
VEEV - 68

Based on the above we can make a case of using a multiple of 45 to 50 for ZM.

Zoom’s anticipated revenue for the next 12 months (not including the last quarter):

Next quarter projection 450- 500 million. Let’s take 500 million and annualize it, so we got 2 billion.

Last year Zoom beat their original annual guidance by 18-20 percent. This year they emphasized they are more conservative. I will not be surprised if they end up at 2.4 billion to 2.8 billion sales.

Assuming the same cross margin that would imply a forward 12 month FCF of 1.8 to 2.1 billion.

At a current market cap of 58 billion, that gives a price /FCF of 29. Assuming the market will assign an FCF of 40 to 50, the rally in Zoom may well continue.

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Zoom’s anticipated revenue for the next 12 months (not including the last quarter):

Next quarter projection 450- 500 million. Let’s take 500 million and annualize it, so we got 2 billion.

Last year Zoom beat their original annual guidance by 18-20 percent. This year they emphasized they are more conservative. I will not be surprised if they end up at 2.4 billion to 2.8 billion sales.

Assuming the same cross margin that would imply a forward 12 month FCF of 1.8 to 2.1 billion.

At a current market cap of 58 billion, that gives a price /FCF of 29. Assuming the market will assign an FCF of 40 to 50, the rally in Zoom may well continue.

Yes, I think you nailed it, Oracleoo!

Yes, once a company becomes FCF positive, you can value it based on a multiple of FCF (EV/S becomes less important. The important numbers are FCF and FCF growth. You can then assign a multiple of FCF. When I did my analysis of CRM (https://discussion.fool.com/crm-a-case-study-for-saas-companies-…), I looked at the multiple of TTM FCF (i.e. EV/TTM FCF) and FCF growth. When CRM was growing revenue at 50%, the multiple was typically valued at 40-60x TTM FCF. When CRM’s revenue growth slowed to around 25%, the multiple was typically lower at 35-45x TTM FCF.

Applying the above to ZM and assuming that ZM will continue to grow for a long time like CRM did, I think we can apply could use the midpoint of Oracleoo’s $1.95B in TTM FCF 12 months from now. Then what multiple should be use. If ZM is still growing 50% in a year, then I think we could use a 60x multiple. This would give you an EV of $117B or more than a double from here. But perhaps ZM will still be growing fast than 50% (certainly possible and maybe even probable). If we were to assign a multiple of 80x then the EV would be $156x or close to a triple in a year. For those of you who think ZM is expensive today, just think about the above calculations.

Chris

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Sounds great, though the small business and consumer accounts are probably going to see much lower NER than enterprise accounts, which might make growing 50% off the base for the rest of this year difficult. A small business is likely to be fine with one account shared among employees, or even closing the account when things get back to normal, knowing they can just sign up again with little friction in the future if needed. I’m sure Zoom is hard at work locking in some annual plans.

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Still have one question though if we are to value this way. I just checked the more established SaaS names TEAM, WDAY, NOW, CRM, VEEV’s latest FCF margin:
TEAM 35%
WDAY 18%
NOW 27%
CRM 19%
VEEV 40%

So really not sure how sustainable ZM’s current 76% FCF margin gonna last…I think it might come down over time but if it really holds, then its EV/FCF multiple can even be higher than these big names? Too good to be true…

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On digging in more in the numbers, I think I should correct myself on my above post.

Assuming the same gross margin that would imply a forward 12 month FCF of 1.8 to 2.1 billion.

The above FCF margins are clearly not sustainable. This time was helped by very large growth in deferred revenue which likely came from a large increase in customers paying upfront. To offset that cash flow were large contract acquisition and prepaid expenses likely because of addition of hardware capacity - which are likely one time. Also their cost of revenue or HR cost was not optimized due to sudden addition of capacity, which should get better going forward.Prognosticating on the margins is a more complex exercise of how the company would look like at scale, but I think 40-60% FCF number based on the choices they make is likely more accurate.

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Chris, sounds like you’re not factoring in a substantial downturn in the current market. Are you assuming all those businesses signing up will not have significant deterioration of their cash flow in the next 6 months?

Chris, sounds like you’re not factoring in a substantial downturn in the current market. Are you assuming all those businesses signing up will not have significant deterioration of their cash flow in the next 6 months?

If Zoom saves money on leases by letting people WFH, do you think Zoom is the first “expense” they’ll cut? Same with travel, it’s cheaper to zoom than to fly and you save on lodging and eating out. I think the deterioration of cash flow will impact other goods and services that are not money savers.

Think of it the other way around, how many can stay in business thanks to Zoom? Add all the new use cases…

Denny Schlesinger

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My take is that

  1. There will be a new normal - hybrid working environment (WFH and Work From Office). This looks like short-term and mid-term trends and likely a long-term trend as well. CRWD CEO during the call emphasized this new normal hybrid environment emphasizing that WHF will be a long-term trend. Twitter, Alphabet and FB recent announcements confirm that.

  2. Corporates WILL KEEP and use video and other distance communication tools (e.g. Zoom, Slack etc.) also mid-term and most likely long-term as they have to adjust to new normal AND be ready in case of similar events (second waive, new pandemics etc.) - aka Business Continuity Management.

So, Zoom is here to stay for longer.

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Hi Denny,

If Zoom saves money on leases by letting people WFH, do you think Zoom is the first “expense” they’ll cut? Same with travel, it’s cheaper to zoom than to fly and you save on lodging and eating out. I think the deterioration of cash flow will impact other goods and services that are not money savers.

Think of it the other way around, how many can stay in business thanks to Zoom? Add all the new use cases…

I’m new to the board (but not to the Fool) so don’t want to drag too far OT, but I can offer a case study based on my own experience here.

I work for a nonprofit that has offices in NYC and LA. So far, our leadership is happy with the way we’ve transitioned to work from home. The biggest issue is juggling work at home and school at home for those of us with small kids.

In general our finances are doing well, all things considered, but we are looking for ways to cut costs. The lease on our NYC office expires in October and we are not renewing or looking for new space, which will save a good deal of money. Searching the news, we see other companies doing the same, especially some of the big firms in NYC.

We are also considering what to do about our annual meeting of grantees in January, where 300+ people come together for a few days. Zoom wouldn’t work for that because one of the values of the meeting is the “hallway conversation” but I wonder if there is a VR solution. Even thought the IEEE had a VR meeting and headset prices are falling, it doesn’t look like VR is quite ready for prime time. I would love to be proven wrong here!

One additional item to note is that we have MS Office with a full MS Teams implementation. Our IT and finance departments have been trying to move people to use Teams for videoconferencing but people are comfortable with Zoom and reluctant to change. I think this indicates a level of stickiness to the product that I didn’t anticipate, although I remain a bit concerned about Zoom’s moat in the business world.

Dave

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One additional item to note is that we have MS Office with a full MS Teams implementation. Our IT and finance departments have been trying to move people to use Teams for videoconferencing but people are comfortable with Zoom and reluctant to change. I think this indicates a level of stickiness to the product that I didn’t anticipate, although I remain a bit concerned about Zoom’s moat in the business world.

Dave, thanks for your reply. IT is usually very protective of their fiefdom as they fear easy to use apps that are a threat to their job security. The “stickiness” of easy to use should overcome.

Denny Schlesinger

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Hi Oracleoo,

Thanks for a great explanation.

I have been looking at the free cash flow data and am little lost.

When I look at the seeking alpha they show levered cash flow and unlevered cash flow, I am assuming that we are not using either one of them.

Then there is free cash flow/share.

So I started looking at the total outstanding share and what I found was there are multiple outstanding share line item.

Total common outstanding share, basic/diluted outstanding share.

Due to all this I got lost. Any help or guidance is really appreciated.

Due to all this I got lost. Any help or guidance is really appreciated.

Mark Twain is reported to have said “Lies, damn lies, and statistics.” I would add accounting to the list. This is not the place to explain these items but the fact is that keeping it simple is the best way to handle it. I would use free cash flow and diluted shares outstanding and ignore the rest. What you really want to see is how much they change year to year.

Denny Schlesinger

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