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No Surprise, Zoom Destroys Analyst Estimates in Fiscal Q1
by Daniel Newman | June 3, 2020

The News: Zoom shares rose as much as 7% before dropping back to baseline after the videoconferencing software company reported major revenue growth during its fiscal first quarter on Tuesday.

Here’s how the company did:

  • Earnings: 20 cents per share, adjusted
  • Revenue: $328.2 million

Analysts surveyed by Refinitiv had expected 9 cents in adjusted earnings per share and $202.7 million in revenue for the quarter, which ended Apr. 30. Comparing analysts’ estimates with results is not necessarily straightforward given the presence of a pandemic during the quarter, making it more difficult for analysts to accurately predict how companies will perform. Read the full news piece on CNBC.

Analyst Take: Zoom had a blowout quarter, beating revenue by more than $125 Million and doubling analyst EPS estimates. For a multi-billion dollar per quarter company, that delta may have seemed understandable, but for a company that delivered $328 Million in the most recent quarter that is a massive beat on revenue–almost to the point that made it surprising that analysts didn’t adjust expectations higher. 

Growth Came From All Areas

Zoom has arguably been the darling of Covid-19, if there could be such a thing. From the moment China was hit, Zoom responded quickly and it was a missile from that moment forward. The company has seen growth in micro businesses, mid-size companies and has jettisoned to more than 750 customers paying over $100,000 per year for its services. 

With now more than 265k customers over 10 employees, Zoom has become a staple in businesses of all sizes and this has been the catalyst of growth for the company. The results show this and the adjusted guidance that took analyst estimates of under a billion to over $1.8 Billion for the full year is a clear reflection that the company expects this trajectory to continue through the remainder of its fiscal year. 

Where Zoom May Run Into Trouble

Zoom has been a rocket. But the company did talk about 30% of its revenue coming from small customers with less than 10 employees. This one is going to be an area to watch. As the economy reopens and companies are able to get back to more usual business practices, will these micro companies continue to spend the money on Zoom subscription? 

It is worth noting that I don’t see the use of Zoom by these organizations fading, but rather some users in this group opting to use the free version of Zoom that offers a good set of features at a great price for small business.

I also think Zoom will continue to see increased competition from the likes of Cisco and Microsoft. Zoom has benefitted from being an appliance and its ease of use it well documented. But as Zoom has faced some question marks with its security and support, the growth the company has seen in large enterprise could meet resistance as bigger companies with more resources and more hook into CIOs are able to meet security and support requirements. 

I expect Zoom to take its massive growth in value and cash flow and invest in these areas to quell any risks. 

Overall Impressions of Zoom Video’s Fiscal Q1 Earnings

I don’t believe there was much question as to what we would see from Zoom in this quarter. While the company has suffered from some challenges that could be expected at this rate of growth, it has largely been able to overcome those challenges and the market has been quite forgiving. 

The long-term guidance is also extremely positive as the company is pushing to double what analysts had expected. This is certainly going to provide some justification to the price of the stock. 

My biggest questions about the company and its overall strategy will be answered more visibly as the economy starts to return to normal and physical events and business travel resume along with in-person education. How much will the learnings we had during the Covid-19 shutdown lead to continued use of video services? I believe we will ultimately find balance, which will mean Zoom is here to stay, but this rate of growth is likely going to slow in the coming quarters. 

Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

Read more analysis from Futurum Research:

DXC’s Q4 and Fiscal 2020 Results: The Good, The Bad, and the Takeaways

Cisco Deepens its Cloud and Internet Intelligence with ThousandEyes

Zoho’s Bold Stance on Privacy

Image: Zoom
Daniel Newman