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Zoom (NASDAQ:ZM) Beats Q3 Sales Targets, Stock Soars


Full Report / November 22, 2021
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Video conferencing platform Zoom (NASDAQ:ZM) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 35.1% year on year to $1.05 billion. Guidance for next quarter's revenue was surprisingly good, being $1.05 billion at the midpoint, 3.3% above what analysts were expecting. Zoom made a GAAP profit of $340.3 million, improving on its profit of $198.6 million, in the same quarter last year.

Zoom (ZM) Q3 FY2022 Highlights:

  • Revenue: $1.05 billion vs analyst estimates of $1.01 billion (3.06% beat)
  • EPS (non-GAAP): $1.11 vs analyst estimates of $1.10 (1.34% beat)
  • Revenue guidance for Q4 2022 is $1.05 billion at the midpoint, above analyst estimates of $1.01 billion
  • Free cash flow of $374.7 million, down 17.6% from previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Customers: 512,100 customers with more than 10 employees
  • Gross Margin (GAAP): 74.2%, up from 66.7% 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.

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 $777.1 million, to $1.05 billion.

Zoom Total Revenue

And unsurprisingly, this was another great quarter for Zoom with revenue up 35.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $29.2 million in Q3, compared to $65.2 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 14.7% over the next twelve months, although estimates are likely to change post earnings.

Large Customers Growth

You can see below that at the end of the quarter Zoom reported 512,100 enterprise customers with more than 10 employees, an increase of 7,200 on last quarter. That's in line with the number of contracts wins in the last quarter but quite a bit below what we have typically seen over the last year, suggesting that the sales slowdown we saw in the last quarter continues.

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 Q3. 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, licenses, technical support and other necessary running expenses was at 74.2% in Q3.

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. Trending up over the last year 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 Q3 Results

With a market capitalization of $74.6 billion, more than $5.41 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 enjoyed the positive outlook Zoom provided for the next quarter’s revenue. And we were also excited to see the really strong revenue growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 7.77% on the results and currently trades at $260.74 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. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its customers are increasing their spending quite quickly, suggesting that they love the product.

The market is certainly expecting long term growth from Zoom given its price to sales ratio based on the next twelve months is 16.5x. 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 $347.4 per share right before these results, implying that they saw upside in buying Zoom even in the short term.

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