Zoom Video (NASDAQ:ZM) Surprises With Q1 Sales, Gross Margin Improves

Radek Strnad /
2023/05/22 4:10 pm EDT

Video conferencing platform Zoom (NASDAQ:ZM) reported Q1 FY2024 results beating Wall St's expectations, with revenue up 2.94% year on year to $1.11 billion. The company expects that next quarter's revenue would be around $1.11 billion, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Zoom Video made a GAAP profit of $15.4 million, down on its profit of $113.7 million, in the same quarter last year.

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Zoom Video (ZM) Q1 FY2024 Highlights:

  • Revenue: $1.11 billion vs analyst estimates of $1.08 billion (1.95% beat)
  • EPS (non-GAAP): $1.16 vs analyst estimates of $0.99 (16.7% beat)
  • Revenue guidance for Q2 2024 is $1.11 billion at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $4.48 billion at the midpoint
  • Free cash flow of $396.7 million, up 116% from previous quarter
  • Net Revenue Retention Rate: 112%, down from 115% previous quarter
  • Customers: 3,580 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 76.1%, in line with same quarter last year

"The Zoom platform is designed to support limitless human connection to empower the modern workday and strengthen customer relationships. Our customers see Zoom as mission-critical in how they collaborate internally and externally across the globe,” said Eric S. Yuan, Zoom Founder and CEO.

Started by Eric Yuan who once ran engineering for Cisco’s video conferencing business, Zoom (NASDAQ:ZM) offers an easy to use, cloud-based platform for video conferencing, audio conferencing and screen sharing.

Work is becoming more distributed, both across geographies and devices. In order for businesses to keep functioning efficiently, they need to be able to communicate as well as they did when the teams were co-located, which drives the demand for integrated communication platforms.

Sales Growth

As you can see below, Zoom Video's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $956.2 million in Q1 FY2022, to $1.11 billion.

Zoom Video Total Revenue

Zoom Video's quarterly revenue was only up 2.94% year on year, which might disappoint some shareholders. But the revenue actually decreased by $12.4 million in Q1, compared to $15.9 million increase in Q4 2023. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.

Guidance for the next quarter indicates Zoom Video is expecting revenue to grow 1.19% year on year to $1.11 billion, slowing down from the 7.63% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 1.75% over the next twelve months.

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Large Customers Growth

You can see below that at the end of the quarter Zoom Video reported 3,580 enterprise customers paying more than $100,000 annually, an increase of 109 on last quarter. That is a bit less contract wins than last quarter and also quite a bit below what we have typically seen over the past couple of quarters, suggesting that the sales momentum with large customers is slowing down.

Zoom Video customers paying more than $100,000 annually

Key Takeaways from Zoom Video's Q1 Results

With a market capitalization of $20.6 billion, more than $5.6 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were also happy to see it topped analysts’ revenue expectations, even if just narrowly. Adjusted operating income and free cash flow beat more convincingly. We also enjoyed seeing Zoom improve their gross margin this quarter. Guidance was solid, with next quarter's revenue and adjusted operating profit guidance both slightly ahead. Additionally, full year revenue and adjusted operating profit guidance were both raised and are ahead of Consensus, which was a big bright spot. On the other hand, it was unfortunate to see the slowdown in new contract wins and the revenue retention rate deteriorated, although the latter also beat expectations. Overall, it seems to us that this was a solid quarter for Zoom Video. The company is up 5.76% on the results and currently trades at $75.61 per share.

Zoom Video may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.