The News: Zoom reported better-than-expected quarterly earnings on Monday, while warning investors of a revenue slowdown at the video-chat company as the pandemic comes to an end.
Here’s how the company did:
Revenue increased 35% from a year earlier in the quarter, which ended Oct. 31, slowing from 54% growth in the prior period. Net income jumped 71% to $340.3 million, according to a statement.
For the fiscal fourth quarter, Zoom forecast adjusted earnings of $1.06 to $1.07 per share on $1.051 billion to $1.053 billion in revenue, which implies 19% growth. Analysts polled by Refinitiv had expected $1.05 in adjusted earnings per share and $1.02 billion in revenue. Read the full news story on CNBC.
Analyst Take: Zoom is now in its second quarter since its wild run of triple-digit revenue growth percentage took the stock soaring north of $500 a share during a wild pandemic that benefitted online meeting and collaboration technology. Last quarter the revenue growth slowed to 54%, and this quarter 35%. By any other standard, these would be great results, but 2020, played a spoiler for solid continuous growth as “good enough” for Zoom.
The market responded to these earnings by selling off heavily, but there wasn’t an immediately clear reason why the selloff was so intense, spiking to more than a 10% fall in the morning following these results despite the fact that the company beat expectations on both the top and bottom line.
With the stock already more than 50% off its pandemic driven highs, I think there has been strategic selling into a future that is more hybrid than fully remote. Investors can’t seem to wrap their arms around Zoom’s prospects beyond the pandemic, despite the fact that I’m confident it is here to stay with both enterprises and smaller companies continuing to use and pay for its products and services.
This quarter marked the second billion-dollar revenue quarter for Zoom, and the company outperformed both top and bottom-line expectations. However, as growth has retreated from wild high triple digits to very strong numbers the market has been unforgiving. The slow down in growth and market push back wound up ending the company’s bid to acquire Five9 as the share price fall wound up leading to Five9 shareholders deciding it was more lucrative to go at it alone (for now).
Revenue growth, as mentioned usurped 35%, and since we are comparing post-pandemic onset quarters, this is a healthy growth rate.
Heading into the earnings, I was once again 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:
In this quarter the company saw 94% growth of its $100,000 TTM customers, taking its large customer number to 2,500+. This marked a decrease from the impressive ~131% growth to 2,278 customers it touted last quarter. Despite the pull back in large customers, I see these numbers as especially important because it reflects not just users, but companies that are making a substantial commitment to Zoom. I have reiterated the importance of this number for several quarters now as the large customer segment is indicative of enterprise adoption and those customers tend to have room for growth in annual spend.
Finally, the net dollar expansion rate of companies greater than ten remained at above 130% this quarter. This string of net revenue expansion growth clearly indicates 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.
This quarter outpaced expectations, and after last quarter reset expectations to a more manageable level. The market, however, remains bearish on Zoom’s longer prospects based on these results. Reiterating from last quarter, I find the market’s reaction unreasonable, and suggest the following be taken to heart despite the emotional nature of investors.
“Barring another catastrophic global event, or an absolutely unexpected mega acquisition, Zoom will likely be delivering results more like these, and less like the 300%+ revenue growth that took place early in the pandemic.”
Law of large numbers led to more modest growth for AWS, Azure, Salesforce, and many other large enterprise tech and software plays. This is just part of the process.
Guidance in the upcoming quarter for Zoom puts the company at a similar run-rate to this quarter, and that the growth rate from last year is likely to be more in the 19% range, although I wouldn’t be surprised to see a slight upward revision.
The market reaction has less to do with Zoom and more to do with unrealistic optimism and expectations that follow a multi-year run from Zoom during a global pandemic. However, share price and market reaction aside, this was a good quarter for Zoom as the pandemic is nearing the rearview, and return to a new normal means more hybrid than pure remote work.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Zoom to Acquire Five9: Turns its Focus on the Contact Center
The original version of this article was first published on Futurum Research.
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