Video conferencing platform Zoom (NASDAQ:ZM) beat analyst expectations in Q1 FY2024 quarter, 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.
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
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.
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'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.
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.
Product Success
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Zoom Video's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 112% in Q1. That means even if they didn't win any new customers, Zoom Video would have grown its revenue 12% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Zoom Video's customers are satisfied with their software and are getting more value from it over time. That is good to see.
Profitability
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 76.1% in Q1.
That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like Zoom Video to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Zoom Video's free cash flow came in at $396.7 million in Q1, down 20.8% year on year.
Zoom Video has generated $1.07 billion in free cash flow over the last twelve months, an impressive 24.3% of revenues. This extremely high FCF margin is a result of Zoom Video asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Zoom Video's Q1 Results
Sporting a market capitalization of $20.6 billion, more than $5.6 billion in cash and with positive free cash flow over the last twelve months, we're confident that Zoom Video has the resources it needs to pursue a high growth business strategy.
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.
Is Now The Time?
Zoom Video may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Zoom Video we will be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there.
Zoom Video's price to sales ratio based on the next twelve months is 4.8x, 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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