Zoom Communications, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended April 30, 2022. Amounts are U.S. dollars; financial statement figures are unaudited. Zoom sells subscriptions to its unified communications platform, including Meetings, Phone, Chat, Webinars, Events and Contact Center.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $1,073.8 million | $956.2 million | +12% |
| Gross profit / margin | $812.0 million / 76% | $691.2 million / 72% | Margin +4 percentage points |
| Operating expenses | $624.9 million | $464.9 million | +34% |
| Operating income / margin | $187.1 million / 17% | $226.3 million / 23% | Income -17% |
| Net income | $113.7 million | $227.5 million | -50% |
| Diluted earnings per share | $0.37 | $0.74 | -50% |
| Operating cash flow | $526.2 million | $533.3 million | -1% |
| Free cash flow (non-GAAP) | $501.1 million | $454.2 million | +10% |
Gross margin improved primarily because of greater use of internal data-center capacity and lower third-party cloud-hosting rates. Operating expenses rose substantially, especially research and development (+121%) and sales and marketing (+48%); higher personnel costs and stock-based compensation were significant contributors. General and administrative expense fell 24%, largely reflecting lower prior-year litigation settlement expense.
Balance sheet and liquidity
- Cash and cash equivalents were $1.407 billion and marketable securities were $4.319 billion at April 30, 2022: approximately $5.726 billion combined.
- Total assets were $7.957 billion; total liabilities were $2.009 billion; stockholders’ equity was $5.948 billion.
- The balance sheet presents no borrowings or other conventional debt. It does include operating lease liabilities of approximately $101.2 million, current and noncurrent.
- Current assets of $6.564 billion compared with current liabilities of $1.809 billion. Deferred revenue totaled approximately $1.331 billion, current and noncurrent.
- Cash from operations was $526.2 million. Investing activities used $42.3 million and financing activities used $133.2 million, including $132.4 million of share repurchases.
- Remaining performance obligations were $2.990 billion; Zoom expected to recognize 63% as revenue over the next 12 months.
Management said existing cash, cash equivalents and marketable securities, together with operating cash flow, should cover needs for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing text.
Business trends and comparison with prior year
- Revenue increased 12%, which management attributed predominantly to subscriptions from new customers. Americas revenue rose to $728.4 million; APAC to $148.8 million; EMEA was essentially flat at $196.6 million.
- Enterprise customers increased to approximately 198,900 from 160,300. Customers generating more than $100,000 of trailing-12-month revenue increased to 2,916 from 1,999; their share of quarterly revenue rose to 24% from 19%.
- Trailing-12-month net dollar expansion rate for Enterprise customers declined to 123% from more than 130% a year earlier.
- Net income fell despite revenue and gross-margin growth, reflecting sharply higher operating expenses, $36.4 million of net strategic-investment losses, foreign-exchange losses within other expense, and a higher income-tax provision. The effective tax rate was 20.9%, compared with 0.6%.
- Operating cash flow was slightly lower year over year, while free cash flow increased partly because property-and-equipment purchases declined to $25.0 million from $79.1 million.
Outlook, risks and unusual items
- Management expected cost of revenue to increase in absolute dollars but remain relatively flat as a percentage of revenue for the rest of the fiscal year. It expected research and development, sales and marketing, and general and administrative expenses to increase in both dollars and as a percentage of revenue.
- Zoom warned that user and revenue growth may slow as the effects of COVID-19 taper and people return to offices and schools. It also cited competition, customer retention and conversion of free users, execution of enterprise sales, and continued investment needs as important uncertainties.
- In February 2022, the board authorized a stock repurchase program of up to $1.0 billion, expiring in February 2024. Zoom repurchased 1.224 million shares for $132.4 million during the quarter; $867.6 million remained authorized at April 30.
- Net losses on strategic investments were $36.4 million, driven primarily by $35.8 million of unrealized losses on publicly traded equity securities. Unrealized losses on available-for-sale securities contributed $27.3 million to other comprehensive loss.
- Privacy and security-related government investigations by the DOJ and SEC remained ongoing; Zoom said it was cooperating and could not predict outcomes or potential financial exposure. Securities and derivative litigation also remained pending. A privacy class-action settlement of $85 million received final court approval on April 21, 2022; two objectors appealed in May.
- In May 2022, Zoom acquired a private conversational-AI technology company to expand Contact Center capabilities. Consideration was to be paid in cash, but the filing text does not provide a clear purchase price.
- Management identified possible effects from the Russia-Ukraine war and related sanctions, though customers in Russia, Belarus and Ukraine were an immaterial portion of revenue and net assets for the quarter. Other disclosed risks include cybersecurity and privacy, regulatory and export-control compliance, foreign-exchange exposure, inflation and economic conditions, and reliance on data-center and cloud infrastructure.
Important facts for investors to verify
- Whether enterprise expansion and new-product adoption can offset slowing growth and the decline in net dollar expansion rate.
- Whether higher research, sales and marketing spending translates into durable revenue growth and supports operating margins.
- The progress and potential consequences of government investigations and privacy/security litigation, including the settlement appeal and any unrecorded exposure.
- The value, terms and expected integration effects of the May conversational-AI acquisition, which are not quantified in this filing.
- The performance and valuation of strategic investments, stock-based compensation trends, and the pace of share repurchases relative to cash generation.