The News: Zoom (ZM) reported its fiscal Q1 2022 earnings after the closing bell on Tuesday, beating analysts’ expectations on the top and bottom line with revenue soaring 191% year-over-year.
The video conferencing company saw stratospheric growth during the pandemic, and investors are closely watching its performance in the coming quarters as the pandemic wanes and people begin meeting more in person.
Here are the most important numbers from the report compared with what analysts were expecting as compiled by Bloomberg.
- Revenue: $956 million versus $910.2 million expected
- Earnings per share: $1.32 versus $0.99 expected
The company’s stock was down about 3% after the announcement. There are signs that growth is beginning to slow for the company, with Q4 year-over-year growth coming in at 369%, far higher than Q1. Read the full earnings news piece on Yahoo Finance.
Analyst Take: This quarters earnings would be instantly viewed as remarkable, had the company not come off a quarter of 369% growth. However, I’ll be first to say this quarter was still excellent, and last quarter my prediction of an upcoming inflection point, how now arrived. Let’s break down Q1
First of all, the results were strong, once again exceeding the expectations that had been placed on the company for its fiscal Q1. However, with each passing quarter, there seem to be more skeptics asking if the run-rate growth can be maintained. Many saw this quarter as a material slowdown, and it was dropping from that 369% growth to a mere 191%. This outcome is what I expected, and as we start crossing over pandemic quarters YoY, I see this trend of slower, but still robust growth continuing.
I believe its important to for outsiders to start thinking more reasonably about the future as the company continues to grow toward a $4 billion run-rate. New focuses around enterprise customers, net sales expansion, product diversification, and retention must be in focus.
A post-pandemic world will be good to Zoom, but there is unlikely to be another global event like the Covid-19 pandemic to accelerate its growth at the exponential pace of the past five quarters.
Zoom Customer Metrics in the Spotlight
Heading into the earnings, I was paying close attention to customer metrics. Paying customers, conversions of its freemium model, and larger account wins all high on the list. Here are a few of the details from the earnings release:
- Approximately 497,000 customers with more than 10 employees, up approximately 87% from the same quarter last fiscal year.
- 1,999 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 160% from the same quarter last fiscal year.
- A trailing 12-month net dollar expansion rate in customers with more than 10 employees above 130% for the 12th consecutive quarter.
While the company often touts as many as 300 million daily meeting participants, I like to look at those generating revenue and the trajectory of that revenue. 87% growth in paying customers in companies over 10 is a tangible sign of adoption by Zoom’s core markets, the SMB. This SMB adoption is an area where I feel Zoom can continue to be sticky and won’t face as fierce of competition from Microsoft, Google, and Cisco. Some may say this growth pales in comparison to the 470% growth in the same metric last quarter, but it is important to remember that this quarter was the first that fully overlapped with the pandemic boom for Zoom.
On a more positive note, in this quarter the company saw 160% growth of its $100,000 TTM customers, taking its large customer number to 1999. This marked an improvement from the 156% growth to 1,644 customers it touted last quarter. I see these numbers as especially important because it reflects not just users, but companies that are making a substantial commitment to Zoom. I’m steadfast that this large customer segment is an important number to watch closely in the future.
Finally, the net dollar expansion rate of companies greater than ten remained at 130% this quarter, indicated that the freemium conversion model to paid is working well. This up-sell rate is enormous for Zoom, seeing those trying the service move over to paid models.
Overall Impressions of Zoom Results and a Look Ahead
This quarter outpaced expectations, but saw a notable growth pull back from its Q4. The stock did see a nice jump after hours, after first falling a few percentage points. While the stock is well off its mid-pandemic highs, it has firmly established itself as a long-term player in the collaboration space.
I also want to reiterate some of my thoughts about what lies ahead for Zoom from my earnings research last quarter as I see little change and maintain these views into Q2.
As we advance, I’m looking for growth to stabilize into the mid-double-digits. That is more realistic as the reopening of schools, certain workplaces, and mobility behavior changes. This doesn’t mean much of the behavior that has been created amidst the Covid-19 pandemic isn’t here to stay in some shape or form. And this plays well for Zoom.
I’m also keeping an eye on formidable competition that will continue to challenge Zoom. Microsoft has seen massive growth in the past year and has some distinct advantages based upon its full integration into the Office365 productivity suite, as well as its CRM. Salesforce purchasing Slack is likely to shift the collaboration landscape a bit. And Cisco Webex and Google are both keen on building their respective businesses. As I suggested above, all formidable.
However, Zoom is here to stay. It is running its race and has performed well because the solution works well. I expect diversification into new products as it has with the Zoom phone, Zoom Rooms, and additional investments in its platform. Its share price growth and strong results make its cash and balance sheet position even stronger, opening up the possibility to strategic acquisitions if and when those opportunities arise. I don’t see that as a top priority, but Eric Yuan and company are in a position to pounce if the right opportunity presents itself.
With the upcoming quarter for Zoom targeting revenue just under a billion, the growth rate from last year is likely to be more in the 50% range, although I wouldn’t be surprised to see a few upward revisions.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
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