Video conferencing platform Zoom (NASDAQ:ZM) beat analysts' expectations in Q2 FY2024, with revenue up 3.57% year on year to $1.14 billion. The company also expects next quarter's revenue to be around $1.12 billion, slightly below analysts' estimates. However, it raised its full-year operating profit and EPS guidance. Zoom made a GAAP profit of $182 million, improving from its profit of $45.8 million in the same quarter last year.
Zoom Video (ZM) Q2 FY2024 Highlights:
- Revenue: $1.14 billion vs analyst estimates of $1.11 billion (2.18% beat)
- EPS (non-GAAP): $1.34 vs analyst estimates of $1.06 (26.4% beat)
- Revenue Guidance for Q3 2024 is $1.12 billion at the midpoint, below analyst estimates of $1.12 billion
- The company reconfirmed revenue guidance for the full year of $4.49 billion at the midpoint
- Free Cash Flow of $289.4 million, down 27% from the previous quarter
- Net Revenue Retention Rate: 109%, down from 112% in the previous quarter
- Customers: 3,672 customers paying more than $100,000 annually
- Gross Margin (GAAP): 76.6%, up from 75.1% in the same quarter last year
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.
The company became a household name during the Covid pandemic and today it's used not only for business meetings but also by teachers to conduct classes, by developers to write code together, and by lawyers in court.
Zoom didn’t invent video conferencing, it just made it a lot less painful. The platform works reasonably well even on a spotty internet connection, is easy to use, cheap and works across mobile and desktop. The company is notoriously customer obsessed and Yuan, the CEO, has been known to personally write to disgruntled users for feedback.
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.
And that is important because there is a lot of competition in the video conferencing space from products like Google Meet, Microsoft (NASDAQ:MSFT) Teams, Cisco (NASDAQ:CSCO) Webex or upcoming startups like Around.co.
As you can see below, Zoom Video's revenue growth has been unremarkable over the last two years, growing from $1.02 billion in Q2 FY2022 to $1.14 billion this quarter.
Zoom Video's quarterly revenue was only up 3.57% year on year, which might disappoint some shareholders. However, its revenue increased $33.3 million quarter on quarter, a strong improvement from the $12.4 million decrease in Q1 2024. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that Zoom Video is expecting revenue to grow 1.42% year on year to $1.12 billion, slowing down from the 4.87% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 2.37% over the next 12 months before the earnings results announcement.
Large Customers Growth
This quarter, Zoom Video reported 3,672 enterprise customers paying more than $100,000 annually, an increase of 92 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Zoom Video's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 109% in Q2. This means that even if Zoom Video didn't win any new customers over the last 12 months, it would've grown its revenue by 9%.
Despite falling over the last year, Zoom Video still has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Zoom Video's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 76.6% in Q2.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, sales and marketing, and general administrative overhead. Zoom Video's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Zoom Video is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Zoom Video's free cash flow came in at $289.4 million in Q2, up 30.3% year on year.
Zoom Video has generated $1.14 billion in free cash flow over the last 12 months, an impressive 25.6% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Zoom Video's Q2 Results
Sporting a market capitalization of $19.7 billion, more than $6.03 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Zoom Video is attractively positioned to invest in growth.
It was good to see Zoom Video beat analysts' revenue estimates this quarter, driven by more enterprise-grade contract wins than expected. Furthermore, it raised its adjusted operating profit and EPS guidance for the full year. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its net revenue retention decreased. Overall, this was a mixed quarter for Zoom Video, but the market seems to be happy with the results. The stock is up 6.18% after reporting and currently trades at $71.43 per share.
Is Now The Time?
When considering an investment in Zoom Video, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Zoom Video, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there.
Zoom Video's price to sales ratio based on the next 12 months is 4.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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