Zoom reports Q2 total revenue of $663.5 million, up 355% year-over-year.
Number of customers contributing more than $100,000 in TTM revenue up 112% year-over-year.
Approximately 370,200 customers with more than 10 employees, up 458% year-over-year
Zoom raises FY guidance: Third Quarter Fiscal Year 2021: Total revenue is expected to be between $685.0 million and $690.0 million and non-GAAP income from operations is expected to be between $225.0 million and $230.0 million.
Just wow.
To me, one of the most impressive parts of this is that revenue more than doubled SEQUENTIALLY! Off of a BLOWOUT previous Q!! From 328M to 663M.
Hold on tight, this rocket just accelerated!!
My jaw is on the floor… I figured growth would be around 300% but was not expecting 355%. If Zoom reported the greatest report in the history of SaaS in Q1, I don’t even know what you call this. A few highlights to point out that jump off the page…
– 355% YoY Growth
– 71% Gross Margins
– 42% Non-GAAP Operating Margin
– 56% FCF Margin
– Guided $690M at the high end of Q3, good for 314% growth YoY
– Increased FY revenue forecast to $2.38B, good for 282% growth YoY
Fun fact, they reported more revenue this quarter than in all of 2019. Unbelievable.
The best part of all, is looking at Q3 guidance, in my opinion. They guided for 314% growth, but if you assume they beat by 30% (they beat this quarter by 33%), that means Q3 revenue growth would be 438%.
I could bold this entire report. I am speechless. Zoom is my largest holding and I will not be offering a single share. In fact, I will be looking to add.
Rex
This quarter still included the early parts of the pandemic related work from home shift. They’ll still keep growing – never a bad sign that overuse of your brand has become a commonly used phrase (Zoom fatigue) – but probably not the same sequential growth.
Off topic, but now my issue is what to do with a position that was such high conviction (and thus a large percentage of the portfolio) before this latest run-up but has gone on to even outpace the other positions, assuming after hours action holds or even extends tomorrow.
“Off topic, but now my issue is what to do with a position that was such high conviction (and thus a large percentage of the portfolio) before this latest run-up but has gone on to even outpace the other positions, assuming after hours action holds or even extends tomorrow.”
What to do? Buy more. Have any of us ever seen an earnings report like this? This is the blow out of all blow outs.
Certainly not the time to sell shares.
In my little bubble I was seeing major adoption around me. Enough that I was adding shares on any significant dip the last few months.
Once these numbers are plugged in I think the case will be made that ZM in fact might just be undervalued.
I also am amazed that with this kind of growth and adoption ZM is keeping up with it and keeping services running with this kind of demand. There was that one outage last week, but shocked there aren’t more. A credit to the management team of ZM.
Shout out to Saul for his conviction as well. Helped me first buy and then stay in the stock and even add shares along the way.
TMB
I’ll try to keep things on topic. The numbers are great now and I suspect will be great for the next two or three quarters. I follow sports and they all seem to use Zoom except in instances where Zoom doesn’t work. The NBA uses Teams to do their “virtual fan” experience since Teams has that “together” mode, but a friend of mine who did it said it wasn’t easy to use. All the reporting about players meeting virtually says they used Zoom calls, and the players do press availability in “Zoom Rooms”. The NFL is heavily partnered with Microsoft (they use Surface tablets on the sidelines) but on Hard Knocks it certainly looked like the teams were using Zoom.
But there is inevitably going to be some slow down in growth, and coming from this year’s circumstances it may be dramatic. They’ll continue to expand existing customers but there won’t be the same explosive growth in new customers indefinitely. At a $100b market cap, a 10 bagger from here seems much less likely than when it was valued at $30b, probably requiring them to essentially become the standard for business phone services.
I probably won’t trim quite yet, but it’s definitely pushing my limits in terms of comfort level. One can only hope that CRWD helps to knock ZM down in the allocation rankings with a blowout quarter of its own.
I remember when the same was said for Shop at around $119.00. Amzn, Apple, and a few others come to mind. TSLA anyone? But when you have leaders in their field and with such total disruption in one year, not to mention 6 months, after seeing those figures, I actually brought more at 4.08pm. A lot more.
More than revenue for last Q, their guidance is blow out… if anyone is thinking that Zoom will fall off the cliff post pandemic, you have huge reassurance from the guidance…
I had tiny (relative to most others on this board) 10% position going into the earning… with such a blow out earnings, I bought some shares in after hours and brought it to 14%… this is certainly not time i.e. price) to sell Zoom…
But there is inevitably going to be some slow down in growth, and coming from this year’s circumstances it may be dramatic. They’ll continue to expand existing customers but there won’t be the same explosive growth in new customers indefinitely. At a $100b market cap, a 10 bagger from here seems much less likely than when it was valued at $30b, probably requiring them to essentially become the standard for business phone services.
Don’t let the numbers scare you. Think “S” curve. Covid-19 simply expanded the teleconferencing TAM explosively. Try to figure out what the teleconferencing TAM really is and what market penetration has been achieved. Market penetration governs the growth rate.
Zoom is best of breed in a fast expanding market. At market close ZM was almost 26% of my portfolio, a triple in six months. I would not mind letting it grow to 50% but the portfolio has grown so much that I have been banking some of the profits.
Denny Schlesinger
Summarizing the thread with a paraphrased quote that will likely trigger the “end the thread” directive:
A day may come when the courage of men fails, when we forsake our rules and sell Covid-driven telephony stocks. But it is not this day. An hour of increasing saturation and shattered growth expectations when the age of Zoom comes crashing down! But it is not this day!
Good job I don’t bother to read stuff like this…oh, I just did and just confirms these these analysts don’t know what they are talking about… more please…
“Microsoft Teams is the one that’s going to give a run for their money there,” Binger said during the same “Trading Nation” segment. "Skype is getting there, Google … [Meet], Facebook is in play. But right now, Zoom does really own the market here, and the competition is getting heavier, but I think it’s still Zoom’s market to lose.
Short term, you know, it’s really a coin flip, and it’s really difficult to justify buying the stock here if you haven’t currently owned, thinking that it’s the right risk-reward. I would look at buying the stock in the weeks to come if you pull back down to $275 or even down to $227 near August lows, but being over $300, for me it’s just a poor risk-reward technically," he said.
Short term, you know, it’s really a coin flip, and it’s really difficult to justify buying the stock here if you haven’t currently owned, thinking that it’s the right risk-reward. I would look at buying the stock in the weeks to come if you pull back down to $275 or even down to $227 near August lows, but being over $300, for me it’s just a poor risk-reward technically," he said.
I don’t know in what world someone can expect a pull back to $227 (50% of the current price) for a company that has just reported 355% revenue growth and over 100% growth SEQUENTIALLY!!! I have a feeling he will be waiting for a very long time.
Zoom could have reported 1000% growth and you would have the same people saying it’s overvalued and that it is just a Covid play. What more could someone possibly want in a company?! To me it is simple, multiples catch up quick. What might be a 100 PS ratio today would only be 30 in a year’s time for a company trebling in growth. The best companies demand a higher multiple and they will be rewarded with one.
Zoom was a c.100% grower pre Covid, its growth will not drop off a cliff ‘post Covid’ - whenever that will be. It has an advantage, and it is executing on that advantage just unbelievably well. I feel strongly that companies that are negatively affected due to Covid will be hit worse than expected, and those doing well will do even better. And this impact will continue longer than many seem to expect.
I entered in to Zoom later than most here, just before Q1 earnings, and grew it into a 20-25% position quickly. Today it’s a 33% position. I will continue to add to it and let it run, while the market catches up to the opportunity. I just wish I had recognised the opportunity earlier myself.
The opportunity loss of ‘waiting for a pullback’ is a tale as old as time.
Some thoughts:
• We’re seeing the benefits of a SaaS provider being built on top of public clouds. Whether its still mostly AWS or more of Oracle as indicated months ago, Zoom was able to smoothly scale up to handle its massively increased user base. Zoom didn’t need to build out server farms or really do much infrastructure expansion. Very cool.
• Zoom needs to hire like crazy, as they said on the call. It sounds to me like their employees are stretched pretty thin and working long hours to keep things rolling. Hiring will help, but I do wonder about ramp up times and hiccups with newbies supporting customers and the like. And then there’s whether Zoom can maintain its company culture as it rapidly expands. Companies like Amazon have been really careful about not just vetting people, but having a strong new hire orientation process. I don’t know where Zoom is on this. Not a concern, yet.
• On the sale front: As a percentage of total revenue, sales and marketing was approximately 19%, a decrease from Q2 last year, due mainly to strong top-line growth and marketing efficiencies from our increased global awareness. Overall, we plan to add sales capacity quickly over the next several quarters. A swift ramping of our sales organization to further capitalize on market opportunities is a priority.
So, this is an area in which to watch. While thanks to the pandemic, Zoom has basically sold itself, moving forward it’s not going to be as easy. I think Zoom needs to get people to switch off other platforms, and that takes a good sales force. Having to expand here could lead to problems down the road (as we’ve seen with a couple of our other companies in the past). Not a problem today, of course, but something to watch.
• Churn wasn’t nearly as bad as the CFO was worried it could be last quarter. It was higher than 4% historical number (CFO Steckelberg didn’t say how much higher), but that was to be expected. It sounds like they finally realize what Saul said a few months ago - that people have found Zoom to be a valuable communication tool and won’t drop it even when we are able to shake hands again. Churn does not appear to be a significant issue for Zoom at this time.
• The percentage of revenue from customers with 10 or fewer employees increased. This is remarkable considering that customers with more than 10 employees grew 458% in number! Of course, revenue increased greatly (ok, GREATLY) across the board, but it was interesting to see that the 10 & fewer segment grew more, revenue-wise. Hard to compare customer numbers for one against revenue for the other. Anyway, the potential concern here is that these are mostly monthly customers and will have the largest churn. I can’t find the segment, but my recollection is that Zoom was viewing these customers as ones to get to upgrade to yearly contracts. That’s good, and again, churn does not seem to be a problem at all.
• Zoom is growing internationally, from 19.7% of quarterly rev to 31.6% of (increased) rev YoY. I don’t suspect they’re anywhere near saturation internationally.
• I haven’t yet digested future guidance. Zoom has been quite conservative in the past. That can be great for earnings surprises, but when the surprise is this big it actually brings up concerns that management isn’t really tapped into the sales pipelines and customer contentment. As we see now, management is behind on hiring and that might be at least partially because they didn’t properly anticipate the expansion of their business. Of the problems to have these are good ones, but they’re still problems. If there’s a future hiccup, will management be able to anticipate it and either fix it or at least reduce spending accordingly?
I know I sound like the sports reporter who is interviewing the winning pitcher of the last game of the World Series and asking him if he’s coming back to the team next year. Without taking anything away from this great report, though, I do think it’s important to understand where Zoom goes from here. The past is great, but we need to focus on the future.
• I haven’t yet digested future guidance. Zoom has been quite conservative in the past. That can be great for earnings surprises, but when the surprise is this big it actually brings up concerns that management isn’t really tapped into the sales pipelines and customer contentment. As we see now, management is behind on hiring and that might be at least partially because they didn’t properly anticipate the expansion of their business. Of the problems to have these are good ones, but they’re still problems. If there’s a future hiccup, will management be able to anticipate it and either fix it or at least reduce spending accordingly?
I think a lot of these SaaS companies, perhaps rightfully, guide basically as if there will be little or no new sales. Okta does the same, basically guiding to a quarterly growth that is nearly flat each time and beating it by a decent margin. Especially in this year when we saw business essentially stop for a few weeks, it’s not that big of a concern for me. There’s no inventory to worry about, so failure to predict new sales is not nearly as much of an issue for Zoom or Okta as it is for Nvidia or Apple.
Or maybe we should file a class action suit for their failure to provide enough information to elevate the stock price even further? (just kidding)
A peek into the future came from one of Eric Yuan’s responses during the Q&A of the CC:
Eric Yuan
That’s a great question. That’s why please join our Zoomtopia. I think, first of all, you’re absolutely right. Zoom is not only a communications tool , because our mission is to develop a better service, better online video conferencing service, even better than face-to-face meeting, how to lever AI functionality , like not only have you the meeting transcription , but also how to analyze that in a timely manner . Let’s say, if you change a topic, give you a quick reminder, please slow down , right? So, based on face detection or something like that, all those AI features , and for us, look at it in the long run, right, language translation real time , and also how to shake hand remotely , a lot of cool features like that, and in the past, you look at the inflow of video and perspective, right, how to add some of the fun features like video filter and how to make the 3D video , leverage AR. I think a lot of technologies, right, not to mention 5G and in the future, I think that if you look at the future, a lot of those good technologies can truly make the video conferencing experience much better.
ME: So while WebEx, Google Hangouts, et al are trying to catch Zoom on functionality – actually working as well as Zoom – Zoom is already pushing further ahead
I saw this post on a separate platform and many of a similar vain gaining A LOT of traction, and I think it’s important (for me as a Zoom investor) to have a counter argument and to have some idea how Zoom will grow into its valuation:
A company that may do $3.2 billion of revenues next year being valued at $120 billion is equivalent to a company that may do $32,000 of revenue next year being worth $1.2 million.
Maybe that makes sense, maybe it doesn’t.
Talking ratios
The crux of this is that Zoom’s assumed forward PS ratio next year will be 38, and that this is too high. Ok, for a start do we really believe that Zoom will only do $3.2bn revenue next year? Let’s assume that Zoom only meet their FY guidance of $2.38bn this year (again, do we really think that they won’t beat that), this assumes a YoY growth deceleration from 282% YoY to just 34% next year or only 17% growth on it’s Q4 exit rate.
Now, that’s saying a company that has just demonstrated an amazing ability to scale and doubled its revenue in a single quarter, has more or less peaked, or any revenue growth will be substantially offset by churn next year. This seems a scenario where a Covid vaccine is imminent, many of Zoom’s customers decide they no longer need a remote work or video conferencing option (because everybody is back in the office presumably), while Zoom struggles to steal business from customers using other platforms. This seems fanciful to me.
On the contrary, if we assume a best case of 100% growth next year for a FY of $4.8bn, it’s forward PS ratio becomes 25. Assuming another year after that of 100% growth and a market cap of $120bn (which would be unlikely in that scenario), its PS ratio will be just 14. In my opinion Zoom has earned a higher multiple because of its growth and will keep one for as long as it executes.
This time last year Zoom had a market cap of about $23bn and a PS ratio of 41. They have just grown 355%, is it so surprising that its market cap has increased 400% in the same period, with a far greater opportunity & strangle-hold of a market now than a year ago. The market is forward looking. I am not concerned about this perceived high ‘PS ratio’, if we can assume Zoom continues to grow at a high rate.
The real question is, how will Zoom keep growing at a high rate.
Q2 Earnings Call
Perhaps there are some clues from the Q2 earnings call over what Zoom’s growth for the next twelve months and beyond looks like.
CHURN
Kelly Steckelberg – Chief Financial Officer
"While better-than-expected churn was one of the drivers to our Q2 outperformance, we did experience a significantly higher level of overall churn in Q2 as compared to historical rates. As customers with 10 or fewer employees have increased to 36% of our revenue, we are assuming a higher rate of churn due to this mix shift.
So, remember going all the way back to the S-1, we talked about that the monthly customers churn, on average, about 4% per month. Their monthly 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."
Shebly Seyrafi – FBN Securities – Analyst
“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.
It’s more around the uncertainty in churn and what does that mean for the top line growth."
My take on churn: they have applied a prudent higher than average churn rate that they saw in Q2 for rest of the financial year, because ultimately no one knows what will happen with the pandemic and due to the mix shift to customers with <10 employees. But let’s consider that Q1 included one month of positive ‘Covid impact’, Q2 included three, Q3 already includes at least one (August). Now apply your own assumption of when you think Covid will come to an end, and how this would immediately affect the churn rate.
PIPELINE
Kelly Steckelberg – Chief Financial Officer
"So, certainly, coming into the quarter, 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."
Analyst: “Kelly, you had said last quarter you were modeling in the assumption that your sales teams would start being more a moderate or more normalized level of business activity. I didn’t – I noticed that wasn’t in the guidance in the commentary this quarter. Is that still the case in that carrier from last quarter?”
Kelly Steckelberg – Chief Financial Officer
“So, in terms of our sales rep productivity, you know, as you can imagine, it was an extreme high level in Q1 and also extremely elevated in Q2. As we look forward to Q3 and Q4, we have modeled it certainly to be lower than that but still higher than what we saw last year. So, it’s kind of somewhere in between what we saw for the first half of this year but where it was exiting FY '20.”
On Zoom Phone:
"No. We – it’s performing as we expected. And, as I said, we’re really excited to see our largest deal to date and ongoing upsell. So really still can see strong demand for Zoom Phone."
My take on pipeline: clearly they are forecasting a constant demand at Q2 rates, but as was pointed out they had also done so in Q1 guidance and clearly smashed it out the park. I don’t know how much credence to pay to that, especially when they also emphasise how much they are hiring to boost their sales org. The implied demand for Zoom Phone seems new opportunity from Q2, and certainly very interested to get an insight of that contribution. Again, feels like conservative guidance here.
BEYOND THIS YEAR - USE CASES
Nikolay Beliov – Bank of America Merrill Lynch – Analyst
“And Eric, which use case is new use cases and most excited about and surprise you the most? That’s it for me. Thank you.”
Eric Yuan – Founder and Chief Executive Officer
"My golly, if I talk about new usage, it probably can speak for four or five minutes. I’ll give you several. Like, you see the problem next, you can use Zoom for the virtual property tour. During the last 10 weeks, we have closed over 50% of the newly launched properties in Singapore over Zoom.
And also, the CSK, a corporate law firm in Florida, to have virtual trial by jury. And also, like Source Coast Community services, which is the, you know, largest and the mental health service provider in California also use Zoom to offer mental health. And mental health, it’s become a very big problem. A lot of new users like that.
So, every day, I feel very, very excited to see so many new use cases. It’s very cool."
REMOTE WORK
Pat Walravens – JMP Securities – Analyst
“So, my question is, so Eric, when everyone’s working from home, how do you make where you work an attractive place to work?”
Eric Yuan – Founder and Chief Executive Officer
"So, speaking workplace, I think for now, I think that for the foreseeable future, you know, we all need to work from home, but we’ve got to think about the long-term planning. So, meaning after the pandemic crisis over, what the new working, you know, place look like? You know, I – we talk with many customers, partners, we believe, in terms of the working from home, which stream will stay.
I’m not saying all of us will keep working from home. It’s very, very likely it’s a hybrid. Meaning twice a week or three days a week, you can send all employees back at home. And, you know, some other time, you know, we all keep working in office.
And also, you can further consolidate a lot of the small offices, right? You do not need to have offices everywhere anymore… And for us, even for the workplace today, you look at a lot of the companies, it is a very big open space. I think that may not work anymore in the future.
Good news, we do have time for next 10, maybe 12 months, we can optimize what’s the future workplace look like.
My take: Eric Yuan sees hybrid working as the long term future, and sees a time frame of 10-12 months to cement Zoom’s position in this future. Perhaps the next 12 months is critical for Zoom’s execution of this vision, while the current ‘Covid’ environment lasts. But with Yuan as CEO, I have confidence in them doing so.
At the end of the day if Zoom is executing as it is and continues to do so, what do ratios matter. For me Saul as per his Knowledgebase sums it up:
"Somehow, EV/S never enters into my consideration.
Perhaps that’s because I don’t sell out of a stock because the stock price has gone up. Ever. That’s not a sufficient reason to me, no matter what it does to the EV/S. If my position has become too big I’ll trim my position around the edges. Again, consider Shopify. The stock price is about six times what it was when I bought it two years ago at $27, up 500%. I’ve trimmed it innumerable times, but it is still one of my largest positions (4th) at 11.5%. If I was watching EV/S, I would have sold out when the stock price went from $27 to $47 in a few months. That’s just not my way of investing. I added in the $40’s. (It’s now $161)."
I too was starting to get a little skittish about Zoom’s valuation after the major pop yesterday, but the thing that kept me from taking some money off the table is that I believe Zoom has significant and unrealized opportunities to monetize their platform. Right now, the platform is analogous to a newspaper that only carries the content people have subscribed to read, but does not contain advertising. What happens when Zoom starts to sell its subscribers to advertisers? Similarly, Zoom is gathering huge amounts of information about its subscribers. Not in a sinister way as far as I can tell, but they certainly know a lot about the membership of communities of interaction, and probably also about some of the topics of that interaction. That is valuable information that they have yet to monetize. And then there are the opportunities to do things such as partnering with content providers to host movie watch parties, etc. All of this to say that there is a lot more to the Zoom story to come, and a lot more to it than whether they can grow the number of subscribers to support the current multiples.
Dorset, Long Zoom
Right now, the platform is analogous to a newspaper that only carries the content people have subscribed to read, but does not contain advertising. What happens when Zoom starts to sell its subscribers to advertisers?
Okay, do you really think that Eric Yuan, who is one of the most customer-obsessed CEOs on earth, would ever consider annoying users with advertisements, or violating their trust by selling their data?
They’re already profitable. Cash flow positive. No debt.
They don’t need some piddly amount of revenue from advertising, and the huge headaches that go along with that.
Instead, they’re hiring sales people like mad, trying to sign up as many customers as possible, because this is just the beginning of land and expand.
Chris
I would be extremely leery of any attempts by Zoom to monetise subscriber information, even if anonymised. This company has just come through a serious subscriber security concern and responded well to that. IMHO, the last thing it should do is to create any doubt or appearance of ‘selling’ subscriber information going forward. It needs to maximise subscriber security ‘feelgood’ and do nothing to compromise that.
Folks, for those who are uncertain as to ZM valuation -
this guy https://seekingalpha.com/article/4372019-zoom-next-tesla makes an investment case for share price of 650.
In a nutshell he thinks that Zoom can make 10 EPS next year, so applying 65 PE multiple u get 650 SP. I don‘t know if ZM will make 10 EPS next year but if it will, current price of around 430 looks like 43 Forward PE which is… ridiculously cheap, right?
For what it`s worth and best regards,
V