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Zoom (NASDAQ:ZM) Beats Q2 Sales Targets But Stock Drops


Full Report / August 30, 2021
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Video conferencing platform Zoom (NASDAQ:ZM) reported Q2 FY2022 results topping analyst expectations, with revenue up 53.9% year on year to $1.02 billion. Zoom made a GAAP profit of $317 million, improving on its profit of $185.9 million, in the same quarter last year.

Zoom (ZM) Q2 FY2022 Highlights:

  • Revenue: $1.02 billion vs analyst estimates of $990.2 million (3.15% beat)
  • EPS (non-GAAP): $1.36 vs analyst estimates of $1.16 (17.2% beat)
  • Revenue guidance for Q3 2022 is $1.018 billion at the midpoint, above analyst estimates of $1.01 billion
  • The company reconfirmed revenue guidance for the full year, at $4.01 billion at the midpoint
  • Free cash flow of $455 million, roughly flat from previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Customers: 504,900 customers with more than 10 employees
  • Gross Margin (GAAP): 74.4%, up from 72.2% previous quarter

Started in 2011 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.

It is likely that remote and hybrid models of work are here to stay and video conferencing tools are the clear beneficiaries of it.

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's revenue growth has been incredible over the last year, growing from quarterly revenue of $663.5 million, to $1.02 billion.

Zoom Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 53.9% year on year. But the growth did slow down a little compared to last quarter, as Zoom increased revenue by $65.2 million in Q2, compared to $73.7 million revenue add in Q1 2022. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Analysts covering the company are expecting the revenues to grow 19.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter Zoom reported 504,900 enterprise customers with more than 10 employees, an increase of 7,900 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 customers with more than 10 employees

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 Net Revenue Retention Rate

Zoom'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 130% in Q2. That means even if they didn't win any new customers, Zoom would have grown its revenue 30% year on year. That is a great retention rate and a clear proof of a great product. We can see that Zoom's customers are very satisfied with their software and are using it more and more over time.

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's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 74.4% in Q2.

Zoom Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Key Takeaways from Zoom's Q2 Results

Sporting a market capitalization of $101 billion, more than $5.1 billion in cash and with positive free cash flow over the last twelve months, we're confident that Zoom has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth Zoom delivered this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see the slowdown in new contract wins. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is down -7.15% on the results and currently trades at $322.65 per share.

Is Now The Time?

When considering Zoom, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Zoom is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins aren't as good as other tech businesses we look at, the good news is its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Zoom given its price to sales ratio based on the next twelve months is 24.6. There is definitely a lot of things to like about Zoom and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $410.4 per share right before these results, implying that they saw upside in buying Zoom even in the short term.

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