Zoom Communications, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended October 31, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars. The interim financial statements are unaudited.
Business context and operating metrics
Zoom sells subscriptions to its communications platform, including Meetings, Phone, Rooms, Webinars, Events and related products. The company reported approximately 512,100 customers with more than 10 employees, up from 433,700 a year earlier. Customers generating more than $100,000 of trailing-12-month revenue numbered 2,507, versus 1,289; these customers represented 22% of quarterly revenue, compared with 18%. Trailing-12-month net dollar expansion for customers with more than 10 employees was above 130% in both periods.
Financial results
| Metric | Three months ended Oct. 31, 2021 | Year-over-year | Nine months ended Oct. 31, 2021 | Year-over-year |
|---|---|---|---|---|
| Revenue | $1,050.8 million | +35% | $3,028.5 million | +71% |
| Gross profit / margin | $779.8 million / 74% | Margin: 67% prior year | $2,231.3 million / 74% | Margin: 69% prior year |
| Operating income / margin | $290.9 million / 28% | $192.2 million / 25% | $811.8 million / 27% | $403.7 million / 23% |
| Net income | $340.4 million | $198.6 million | $885.0 million | $411.7 million |
| Diluted EPS | $1.11 | $0.66 | $2.89 | $1.38 |
Quarterly revenue growth came primarily from new customers (about 74% of the increase); existing customers contributed about 26%. For the nine-month period, existing customers contributed about 60% of the increase and new customers about 40%.
Cash flow: Nine-month operating cash flow was $1,395.9 million, versus $1,071.8 million. Capital expenditures were $111.8 million, yielding company-defined free cash flow of $1,284.1 million, versus $1,013.3 million. Investing activities used $2,367.1 million, mainly reflecting net purchases of marketable securities. Financing activities provided $20.9 million.
Liquidity and debt: At October 31, Zoom held $1,322.4 million in cash and cash equivalents and $4,095.5 million in marketable securities, or approximately $5.42 billion combined. Current assets were $6,112.7 million and current liabilities $1,691.4 million. The balance sheet reports lease liabilities but no borrowings or other interest-bearing debt.
Deferred revenue totaled $1,186.1 million, current and noncurrent. Remaining performance obligations were $2,456.5 million, of which the company expected to recognize 67% as revenue over the next 12 months.
Material changes and unusual items
- Quarterly gross margin rose to 74% from 67%; management attributed the improvement primarily to data-center efficiencies and lower third-party cloud-hosting rates.
- Operating expenses increased: quarterly research and development rose 131% and sales and marketing rose 54% year over year. For the nine months, general and administrative expense included a $66.9 million legal-settlement charge, net of estimated insurance recoveries.
- Strategic-investment gains were $122.4 million in the quarter and $154.5 million for the nine months, largely unrealized gains on public and private equity investments. These gains contributed materially to reported pretax income and net income.
- Zoom paid $85.0 million into escrow for a proposed settlement of U.S. privacy class actions; the court had preliminarily approved the settlement, with a final approval hearing scheduled for April 7, 2022.
- Stock-based compensation expense was $114.8 million for the quarter and $315.9 million for the nine months.
Outlook, commentary and risks
Management said it expects revenue growth to generally decline in future periods and warned that user growth may slow or decline as pandemic-related remote work and schooling taper. It expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars and as a percentage of revenue for the remainder of the fiscal year. The filing provides no clear numeric revenue or earnings guidance.
Management cited continued investment in product development, security, sales capacity, international expansion and infrastructure. Pandemic-related usage—including free Basic and K-12 users—can increase hosting costs without generating revenue; future paid-user retention and renewals remain uncertain. Other highlighted risks include competition, service interruptions, cybersecurity and privacy matters, regulatory scrutiny, and the potential volatility of strategic-investment valuations.
The company said its cash, cash equivalents, marketable securities and expected operating cash flow should be sufficient for at least the next 12 months. DOJ and SEC investigations concerning privacy, security, encryption, usage metrics and related matters remained ongoing; the company could not predict their outcome or potential financial exposure. The FTC settlement requires security-program and assessment measures, but imposed no fine.
Key facts for investors to verify
- How much reported earnings growth is attributable to recurring operations versus strategic-investment gains, and how investment values change in subsequent periods.
- Whether revenue growth, customer expansion, renewals and large-customer contribution remain durable as pandemic-related demand normalizes.
- Whether gross-margin improvement persists as usage, data-center capacity and cloud-hosting costs evolve.
- The final status and total financial impact of the privacy class-action settlement, and the outcomes of ongoing DOJ and SEC investigations.
- The effect of rising operating expenses and stock-based compensation on future margins and shareholder dilution.