Zoom results - my thoughts

Investment Analysis Clubs Saul’s Investing Discussions
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Many of us were disappointed by Zoom’s results, and their lack of sequential growth of revenue. I reduced my position in the pre-market on Tuesday and continued to reduce it by a total of about 30%. Others said, look, revenue was up by 367%!

My thoughts about it are that year-over-year revenue gains seem to me to now be irrelevant as far as understanding how the company’s business is currently doing, as it’s coming off such a high base. What counts is sequential growth. What do I mean by that?

Look at this:


 **Q1    Q2      Q3      Q4            YR** 

**Revenues** 

**2019          60     75      90      106** 

**2020         122    146     167      188** 

**2021         328    664     777**

**Year-over-Year % Revenue Increase** 

**FY 2020          103     96      85     78** 

**FY 2021          169    355     367**

**Sequential % Revenue Increase** 

**FY 2020          15     20      14    13** 

**FY 2021          74    102      17**

You see that in Q2 they grew revenue by $336 million and 102% sequentially,

but in Q3 they grew revenue by only $113 million and by only 17% sequentially, which is an enormous slowdown, but yoy the percent growth was 367% which was meaningless in understanding how their business is doing.

Think of it this way: Next quarter, if they miss their guidance by a huge amount, like $40 or $50 million, and come in flat with this quarter at say $780 million of revenue, with 0% sequential gain… however, since they only had $188 a year ago they’d still be up 300% yoy, which would be meaningless.

In fact, if they had some huge scandal or business problem, and half their customers left, and if they lost half their revenue sequentially, they’d still be UP by 100% yoy! [780/2 = 390. 390 divided by last year’s revenue of 188 = up 100%+] Year over year is truly irrelevant for understanding how the business is doing right now.

The question is, what can possibly move the needle for them right now with such huge revenue from Zooming? They say that Zoom phone and OnZoom aren’t big enough to even break out yet, or maybe even next year. I’m sure revenue will keep increasing, but it won’t be by huge amounts the way we are used to.

Best,

Saul

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17% quarterly is 87% annually if my math is not all screwed up. Can Zoom continue to grow at that rate? Answer that question and you can ignore Y/Y comparisons which just now are meaningless.

Denny Schlesinger

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As per usual, Saul hits the nail on the head. Piggy backing off of Saul’s point, the other thing that has been bothering me regarding Zoom’s Quarter over Quarter (QoQ) rev growth is that, revenue growth in the last month of Q3 was probably lower than 17%, possibly much lower.

The number 17% can be thought of as the average of Month 1 of Q3, Month 2 of Q3, and month 3 of Q3. Some combination of 3 numbers gave us 17%, which of course we can only guess at. Like, probably a worst case scenario would be, 34% growth in month 1, 17% growth in month 2, and 0 % growth in month 3.

Whereas, Q2 was very recent, where we saw QoQ rev growth of 102% sequentially, way higher than 17%. Similar thinking tells us that some set of 3 numbers, month1, month2, and month3 gave us 102%. Whatever these numbers are, I can guess that Q2 Month 3 was probably a much bigger number than Q3 Month 1.

Anyway, my point is that Revenue growth totally fell off a cliff, and there is some chance that it’s not done falling yet. ZM’s QoQ rev growth for Q4 may very well be much lower than 17%.

At the end of the day, Zoom is still a great company, and it still accounts for 20% of my portfolio right now. But I used to have it at 30% of my portfolio, and I most likely plan to trim it down to somewhere between 10-15%.

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I’ve been having the same thoughts, however, if it is able to maintain the 17% QoQ, that’s inline with what CRWD is growing which would continue to be a GREAT stock to hold. However, if it lowers as ExponentialDave thinks, that could be a problem. I’m not as convinced that growth will slow that much but been thinking a lot recently and will probably continue to do so about lowering my overall exposure to ZM.

Worst case is I’ll probably have to move my holdings around to an account that I can buy/sell in after hours in case it falls a lot more like ED thinks.

Lots to consider…

Long ZM

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Hi Saul,

I just received a text on my phone from the state of California.
“New public health stay at home order in your area. Covid 19 is spreading rapidly.”

In what scenario would Zoom lose half their customers, miss their guidance by a huge amount, or lose half their revenue?

Zoom guided to $806- $811 million for Q4. They are very cautious with guidance.
Even though Q3 churn was significantly less than their estimates, the company maintained the same model for Q4.

Finishing Q4 at $900 million is far more likely, which would be +$132M or +16% sequentially.

Even though the company is firing on all cylinders, I agree that we won’t see this year’s exponential growth rates ever again.

In my opinion, the stock price is not likely to increase as quickly as some of our other companies.
This is directly related to the market questioning the ongoing growth story.
Your doomsday examples exemplify this pessimism towards Zoom’s future prospects.

For this reason I am trimming my oversized position.

Thanks
JT

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Looking at the sequential revenue increases, Zoom appears to be a flash-in-the-pandemic-pan, returning to its pre-pandemic growth rates (from Saul’s post):


Sequential % Revenue Increase                                                                      
           Q1     Q2    Q3    Q4  
FY 2020    15     20    14    13             
FY 2021    74    102    17

Some here may recall my initial resistance to ZM because it had to compete against the business bundle gorillas of Cisco and Microsoft. Then the pandemic sparked new usage for groups like families, and Zoom was the main beneficiary. But, that is probably mostly over now. Families will keep their licenses, but most of the people who would do so have already bought, I think.

So, from where does new growth come? I see two possible areas, neither of which are easy:

  1. Actively go after big business business. Someone posted this is only 18% of Zoom’s business today. But, that’s a long hard sell. Rumor is MS practically/literally gives Teams away for Office 360 subscribers. WebEx pricing is pretty competitive, see https://www.webex.com/pricing/unified-index-081220201.html

Webex free tier provides for meetings up to 50 minutes and with 100 participants. Same fullscreen layout with 4 variations, screen sharing (including mobile), chat, notes, raise hand, polling, breakout sessions, virtual backgrounds, interactive white-boarding, end-to-end encryption, HIPAA/BAA compliance, and even recording to your own computer. If you need more than 100 participants, cloud recordings or an alternate host (important for businesses), or FedRamp, or you want the service to call you, then you’re at $13.50/month or $26.95/month - or negotiating an enterprise deal with Cisco).

Does Zoom have a better sales force than Cisco? Remember Cisco may already be selling networking appliances to most of these larger businesses, so it’s easy for an existing salesperson to bring up video conferencing versus a Zoom salesperson coming in cold.

  1. Convert Zoom’s free customers to paying customers. This is really hard, too. As we see, video conferencing is being priced as a commodity, with Zoom and Cisco offering quite fully featured free tiers in the hopes that they can convert some number of users to paid plans. But, competing on the free tiers means less and less reasons to pay to upgrade. I don’t see any huge growth here. Zoom can’t make their free tier less appealing in an attempt to squeeze money out of users since they can move to WebEx or someone else’s free tier.

I’m surprised that I’m talking myself into selling out of Zoom completely. Just in terms of the numbers and business growth potential, it looks like even the “second tier” stocks people discuss here will grow faster/more.

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ExponentialDave,

I wouldn’t try to speculate on month-to-month changes in ZmZM (or any companies)growth rates.

ZM guided for Q4 at $811m, a QoQ increase of 4.4%. If they beat by the same % as last the beat their Q3 guide then the QoQ growth rate will again come in at 17% again. I don’t think the sequential growth rate is falling anywhere near as sharply as it did from Q2->Q3, if at all.

Like Denny said, 17% QoQ growth is very good and it should remain that high for at least 1 or 2 more Q’s.

Bnh

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I think the real question here is how quickly are they innovating and launching new features and becoming an actual platform, is the team capable of excellent execution moving forward? Based on their ZoomTopia and launch of the Zoom Apps I’m confident that they are rapidly innovating and very capable to leverage the brand status they have managed to achieve during the pandemic.

The real issue I see, which is not only with ZM but other discussed on this message board companies like DDOG, SHOP and even DOCU is the price appreciation of the stock and increased P/S. I don’t think the price of these companies will move as much as before until their valuations become closer to the valuation of other companies in the SaaS field, despite their higher growth rates.

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Folks, I just went through the latest Docusign CEO’s Q&A session at UBS conference. He said a lot of interesting things about DOCU obviously, but what I’ve found worthwhile to post it on our board and in this specific thread is this paragraph from his reply:

“And I think our business will be very different than others. I talked a lot with the Zoom CEO there, and he thinks he’s going to have a more dramatic slowdown, because for a lot of the activities that people are doing to get back to the office. They’ll stop doing Zoom meetings; we’ll do them in person. We think that once you’ve gone to signature, you’re not going to change the properties and say let’s now route this piece of paper around back in the office. None of those are going back. The question is where the rate of change of new ones, maybe be a little bit slower?”

What he says to my understanding is that the ZM’s slowdown post-Covid will be more dramatic than Docu’s. Doesn’t mean that growth will fall of a cliff, but this is an additional data point or more like an opinion which - together with other data/thoughts - leads me to think that probably the “normalized” growth would be less than 50-60% as I thought few days ago and more like around 30%. This is in line with what Rico/Chris wrote few days ago. I obviously could be wrong here.

Nevertheless, after pondering about latest earnings for few days, I cut my position in ZM by 50% and now it sits at around 10%. I put most of the proceeds into DOCU as I liked their acceleration in most of the relevant metrics. I don’t have the same level of confidence in Docu like I do in CRWD, but I think they should be able to grow in 50s for a while. What I also like about Docu is that they are super-dominant player in their market and there is no Teams, Google Meet, Webex etc type of competition here. Adobe (Nr 2) is very far from Docu in terms of market share.

I plan keeping a sizeable position in Zm as I still believe that this is superb company and the management team is one of the best I’ve ever seen.

Best,
V

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Many of us were disappointed by Zoom’s results, and their lack of sequential growth of revenue… in Q3 they grew revenue by only $113 million and by only 17% sequentially

This raises a couple questions for me. Saul, were you expecting Zoom to continue growing at 100% sequentially or close there to it? If so, why? Q2 was a full quarter of Zoom/WFH/lockdown life spanning from May-July. The business did not see any serious material boost from Q2 to Q3 besides for schools which are primarily given away for free, I believe. I will admit I was hoping and expecting more revenue than $777M, but I was not expecting their revenue to come close to ever doubling again QoQ.

Secondly, why do you consider 17% QoQ growth to be a disappointment? Did you expect a bigger COVID boost for this quarter or do you believe this is the best it will get for them and assume growth will seriously slow down from 17% QoQ? If so, why? The reason I ask this is because as others have pointed out, 17% sequential growth is up there with the best of them. For reference, Crowdstrike has grown between 12-22% sequentially for the last 11 quarters. Last quarter it was 17%. The average for these 11 quarters was also 17%. Datadog has grown between between 7-21% sequentially for the last 10 quarters. Last quarter it was 10%. The average for these 10 quarters was 15%.

If Zoom were to grow 17% sequentially over the next year, this would put it up there with the best of breed. Not to mention, Zoom is also now growing off a base of $800M of quarterly revenue while CRWD/DDOG/others are closer to the $150-300M quarterly run rate. All the more impressive, in my opinion. Assuming even 15% QoQ growth for the next five quarters would give them revenue of over $5.1B next year. Maybe you believe that is far too ambitious, which I would understand.

Although, it does not appear like Zoom is done growing at a 17% QoQ clip. As Bnh pointed out, if they beat by the same % as last quarter, then the Q4 QoQ growth would be 17% once again. I would be quite pleased with this. The idea that revenue growth totally fell off a cliff as Dave suggested does not make much sense to me given their guidance.

So, my big question is, why the disappointment with 17% sequential growth? This is right up there with the best of them, and on top of it all, Zoom is growing off a much larger base. If you are concerned about their ability to sustain this, then that is a different conversation altogether.

Anyways, I hope you do not interpret this as an attack of any form. I am simply trying to peel back the onion to understand how you are thinking through this. Thanks for sharing your thoughts.

Cheers,

Rex

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Ultimately, I think Zoom’s biggest problem will be that once the vaccine is out hopping on a Zoom call will be a terrible reminder of the long, dark, year and a half people spent indoors avoiding the modern plague. While I am confident that at least 30% of WFH will remain, I think the overall volume of video calls will be reduced significantly. I know I will use my WFH days to work on items that take focus and concentration. And save my meetings for in-person.

My best guess, 30% of the usage goes away in a year.

And for people who have high hopes for a Zoom app platform, I don’t think it will have anything close to the utility that iOS apps had. Mobile computing with GPS was a game-changer. Zoo with apps is meh.

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in Q3 they grew revenue by only $113 million and by only 17% sequentially…

This raises a couple questions for me. Saul, were you expecting Zoom to continue growing at 100% sequentially or close there to it?

Rex, that form of argument is called setting up a ridiculous straw man to argue against. “continue growing at 100% or more…” Who are you kidding? No one expected 100% or more! That would have been revenue of over One Billion Three Hundred Million Dollars!!! in a quarter!!!

Many of us were looking for revenue of $825 to $850 million, which would have been 24% to 28% sequential growth. Some were thinking that if all went wonderfully Zoom might come in at $875 million, which would have been 32% growth. Instead they came in well below all of anyone’s estimates at $777 million and 17% growth.

So, my big question is, why the disappointment with 17% sequential growth?

If you don’t see what’s disappointing about going from 102% growth to 17% growth in a single quarter, I simply don’t know what to say to you.

Sorry,

Saul

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While I am confident that at least 30% of WFH will remain, I think the overall volume of video calls will be reduced significantly.

golfcaddy,
Zoom charges by the seat, not the volume of calls. If half the people or a third are still working from home, the customer company will still keep all its seats so the guy in the office can still be on a conference call with the guys working from home. The volume of calls doesn’t matter. And most companies will probably keep their huge conferences online where they got five to ten times as many participants as they used to get with in-person calls.
Saul

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Okay, Zoom growth is going to slow, but let’s not get carried away. Assuming we all go back to the office, do we all go back to the same office? Not for me, and I suspect not for many. We have offices all over the country and the world.

Other than people walking into my office, I had very few in person meetings. Similarly, my firm cut down on business travel well before covid. I used to have telephone conferences all day. Those calls are now mainly Zoom calls and will continue to be Zoom calls now. How about calls with people outside your firms? I think the vast majority of those calls will also continue to be Zoom calls. If 20% more of the workforce works from home on a rotating basis going forward (accelerated shift as a result of covid), you will need to do Zoom calls with the group that includes them. I don’t think the cut back will be nearly as big a people think. People will continue to use Zoom.

Mike

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What Zoom offers is a very singular product. I mean it’s not diversified offering like Google, Amazon, Facebook,Microsoft where their products are suitable for most people. So their TAM is massive. Zoom is not for everyone. I personally don’t like to do video calling. It feels awkward and different than real person to person meeting. When in person, there’s moment of silence, I can look away and pretend to think. In Zoom, you just stare each other in silence. It’s not just Zoom. I tried video calling on the phone. It’s not my thing. I prefer voice and messaging app. For this reason, Zoom’s TAM is very limited. Zoom was growing at 100% per year without COVID. COVID brought Zoom a little more than 2 years worth of growth into a single year. 200% to the power 2.3 (2^2.3 = 500% increase). Let’s assume originally Zoom can continue grow at 100% for 5 more years. and Zoom can resume 100% growth after COVID, its stock has to flat line for 2 years before go up again because of the limited TAM. The more a company grows, the less growth is left. It’s life and death in everything. It borrowed 2 years of growth from the future. This is the best case scenario. or worst, the stock continue its current down trend which started since Oct 21,2020 BEFORE the Nov 29, earning. Mr.Market knows something and is very efficient in normal market condition.

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I for one expected Zoom to handily beat expectations because I estimated that new corporate users would continue to sign up at an accelerating rate or at least at a rate comparable to the prior quarter or nearly that. It did not happen. My best guess is that those who were motivated to sign up by this year’s events have ,for the most part ,done so and the “bloom is off the rose” so to speak. Individual users were never going to be a preponderant contributor to revenue so I believe that nothing has changed there.

FWIW I’ve been selling ZM for the past few days taking ZM from 20% to 16% to13% of my portfolio and another reduction today to 9%. I was concerned even prior to the earnings report but in my usual timid fashion I procrastinated.

I’m not sure where to put the proceeds. . I need over 100K for taxes. Some will go to increase DOCU and some to TDOC . Maybe I’ll nibble at SNOW which I have liked from the outset because of its startling numbers.That however could be an artifact of its relative newness. And perhaps there are big traders trying to entice us poor fools so they can make a quick buck. There is also a thought that AYX may rejuvenate as a number of folks have suggested.

I will have to sleep on it.

cheers

draj

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Awhile back I read the following on this board, and saved it in my “investing advice” folder:

I have spent the last 31 years of my life studying leadership. What I know is that companies grow or shrink to the size of their leadership, almost regardless of products and markets. If a leader of a $1 billion company has the vision breadth, depth, executive skill and passion to lead a $100 billion, he will find where the TAM is and bring his company along.

Consider an online bookstore company in the late 1990s with thousands of upstart competitors doing online sales. Some asked, how big can Amazon become by selling books? A few knew he might eventually sell other online retail products. No one saw that Jeff Bezos could expand that company into AWS, kindle, prime, and much more, and become a multi trillion dollar company.

It’s not sufficient to have a wonderful idea or a wonderful product.

For awhile longer, I’m personally going to bet on a guy that:

  • Found their customer base explode in the span of a few weeks
  • Brokered deals with AWS and Oracle to keep user experience virtually flawless
  • Made the brand so popular that NO ONE wants to use WebEx or Teams or Skype or FaceTime or Blue Jeans
  • Kept his integrity during attacks on his character/heritage, and within a week or two made it a non-existent part of the story
  • Was open/transparent about their security issues and within a few weeks made them a non-existent part of the story

Brandon

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Reality vs Perception

I joined a top Fortune 500 Company after a long career at MSFT. Neither does MSFT use ZM or my present company. AFAIK, GOOG also banned ZM and productivity has not been affected in any of these companies where the vast majority of employees are WFH. All these companies are doing very well and are being extremely productive through the pandemic.

Does that reflect something about the mission critical need for ZM in enterprises? Keeping in mind that ZM’s main target are enterprise customers. And I don’t see how they are going to monetize the free customer base that signed up during the pandemic.

I started reducing my ZM position in the last few weeks and have been buying a lot of DOCU and some CRWD. CRWD is an exceptionally large holding for me now. While adoption of DOCU immediately helps in cutting costs and supports working from anywhere. Once businesses adopt DOCU they are not going to go back to the old ways of signing documents. I personally have signed a few documents with DOCU and almost would have worked for DOCU a couple of years back ( but said no to the interview, probably a bad decision in hindsight).

Cheers!

ronjonb

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Is it possible that, while Zoom may have added everything it can in the short term, they are signing up those enterprise customers now? These deals don’t happen overnight, especially when these companies already have something in place. Given how quickly companies and individuals had to shift, it seems to me, that those who didn’t have to shift right away could take their time. If we aren’t going back to the good ol’ days, and virtual meetings will be the norm, then there will be continued adoption of the best technology by anyone and everyone who requires a better experience. Why would any new companies ever sign up with Cisco when Zoom and Zoom Phone are available?

I have trimmed my position a few times, and will continue to reduce, but I don’t think we’re done here. I think it will be difficult to monetize free users going forward, but if the technology is as good as we think it is, over time, enterprise will make the shift. It just takes time. If anyone can do it, I believe this is the team that can. Am I crazy to think we could see a reacceleration in the coming months, as things go back to normal? This was a great company before the pandemic, too. Beth Kindig had a great observation that what made FAANG stocks what they are is their ability to reach everyone on the planet. Zoom did that in months. I know we have to look at the numbers, and what is happening now, but are we being too hasty here?

Does anyone know what the average length of a WebEx (or Microsoft or Google or Blue Jeans) contract is?

I can’t find anything on whether or not the Peloton partnership includes all of their live video distribution, or just the company’s internal communications? Did they share this?

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For long time reader on this board, I think it’s understood that we should never fall in love with a stock or a company. I know some people developed emotional attachment to companies after a long time of holding and never want to sell. for example: Apple, Amazon, Tesla. But do not equate company size with investment performance. Big number as result of compounding. Investment return is the % change in share price not because the market cap is big. Big market cap is the result not the cause of good investment return.

When the growth prospects changed, in ZM’s case, the stock priced in so much growth that future growth may not be the best and certainly there are better opportunities out there. For some of us, when we move out of ZM, it doesn’t mean we say: the CEO or company is bad. Sometimes bad things happen within the company. It’s not the case for ZM. In fact, ZM offers a great product to help many people to connect in one of the most difficult time in recent history. That is why it grew so much 2 quarters ago.(100% QoQ!)Many people agreed its growth is too ahead of itself. That’s why it’s share went down so much in the past 2 months.

We are not trying to find the next Amazon and ride it out 20 years to find out. We are trying to obtain the best possible return consistently in a predictable way. To do that, we concentrate in a couple stocks (5 to 10) and watch them closely and adapt according to conditions. The reward is these kind of investors obtain extraordinary annualized return. It’s not a one time trick. It’s a skill developed through experience, observations, and logical, independent thinking. This is why this board is special. There are lots of sensible people here. It’s not a yahoo board where people think subjectively and believe things what they want to be.It’s self deceiving.

For those of us finally decided to move on from ZM, we are not being hasty. We are quite slow actually, 2 months slower than the market. That’s okay. We are not timing the market. We are not bag holders. We don’t have to 100% accurate in when to get in and out of a stock. We just need to be correct about future return.

If stock price moved too fast in a short period of time, we have to look deeper.

Let’s ask a question, can Zoom becomes a trillions dollar company and how long does it take from now?

This calculation is estimate and not 100% correct so if there are any major mistakes in the math, please point it out.
It took aggressive Jeff Bezo’s AMAZON 21 years to reach 1 trillion in Sep, 2018 since IPO! How do I know it’s Sep, 2018? I just use the ratio of 1 trillion over current market cap 1.58 T and multiple the ratio to current stock price to get the price when it’s 1 trillion. Find that price on the chart, there’s how I obtained the date Sep, 2018. I also confirmed this date with article: https://www.cnbc.com/2018/09/04/amazon-hits-1-trillion-in-ma…

Amazon market cap: :

Dec, 1997: ~2.5 B (Stock price $5)
Sep, 2018: ~1 trillion. (Stock price $2000)

Stock price increase:400 times

Time frame: 21 years

1.?^21 = 400, to solve for ?, do reverse experiential: 400^(1/21) - 100% = 33% annualized return.

33% annualized return is decent return but not the best. Many concentrated portfolio here can generate 50% to 100% per year depending on new opportunities! And I do believe US will keep pumping out excellent new IPO every year. This is a reason I don’t invest in Mega caps with close to 1 trillion dollar cap!

You know how tough it is to reach 1 trillions for ZM in same time frame as Amazon?

ZM started market cap: ~20B.
Goal: Reach 1 trillion
Question: how long?

For ZM to reach $ 1 trillion means 50 times increase. ! Using amazon’s average growth rate of 33%, it’ll take ZM about 14 years! 1.33 ^ ? = 50. Solve for ?. I just use use a simple calculator. Using formula to solve for the ? exponent is more complicated so I just try different numbers for ? until I get close to 50. In this case, ? is 14 years.

The problem is ZM stock already went up 6 times in the first year.There are 13 years left. So remaining growth to reach 1 trillion is 50 times divided by 6 = 8.3 times increase for a duration of remaining 13 years. 1.?^13 = 8.3, solve for ?. 8.3 times increase over 12 years is 8.3^(1/12) -100% = 17.7% return per year for the next 13 years! See, if company grew too ahead, later growth will be slower! Remember, this is assuming ZM is as good as AMAZON and grow to 1 trillion in the same speed and same time frame. 17.7% per year return is horrible! Amazon is a monster. Jeff Bezo is brutal. Why do you think ZM can grow as fast as Amazon to reach 1 trillion in the same time without a diverse product offering? You know AMAZON sell everything now with a logo of A to Z to represent its business model vs ZM’s video and phone?

My conclusion it’s extremely hard for ZM to reach one trillion dollar in the same time frame as Amazon. ZM’s best case is to reach the status of Adobe and Salesforce and becomes a mid cap company IMHO. Therefore ZM’s future annualized increase in share price per year will be less than 17.7% for the next couple years. Those new investors buying ZM now will be sitting in dead money for a long time. This is how a look at investments with a big picture not speculating what will happen.

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