Zoom Communications, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended April 30, 2020. Zoom’s fiscal year ends January 31. Comparative period is the three months ended April 30, 2019. Amounts are U.S. dollars.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $328.2 million | $122.0 million | +169% |
| Gross profit / margin | $224.5 million / 68% | $97.9 million / 80% | Margin down 12 percentage points |
| Operating income / margin | $23.4 million / about 7% | $1.6 million / about 1% | Improved |
| Net income | $27.1 million | $2.2 million | Increased |
| Diluted EPS | $0.09 | $0.00 | — |
| Operating cash flow | $259.0 million | $22.2 million | Increased |
| Free cash flow (non-GAAP) | $251.7 million | $15.3 million | Increased |
Revenue growth reflected increased demand during the COVID-19 pandemic: new customers accounted for approximately 71% of the increase and existing customers approximately 29%. Americas contributed 75% of revenue, EMEA 16%, and APAC 9%.
Costs of revenue rose 330%, faster than revenue, principally due to $70.8 million of additional third-party cloud hosting, PSTN, and data-center costs. Higher usage by free users and reliance on public cloud capacity reduced gross margin. Operating expenses were $201.1 million, up from $96.3 million; stock-based compensation was $28.8 million versus $6.7 million.
Liquidity: Cash and cash equivalents were $488.7 million and marketable securities were $616.7 million at April 30, for $1.105 billion combined. The company reported $1.1 billion of principal liquidity sources and believes these, together with operating cash flow, will cover needs for at least 12 months, including the Keybase acquisition. Cash-flow-statement cash, cash equivalents, and restricted cash totaled $758.1 million; this includes $267.1 million restricted pending remittance of international employee stock-sale proceeds, with a corresponding liability.
Debt and balance sheet: The filing reports no borrowings or debt balance. Total liabilities were $1.166 billion, including $551.8 million of current and noncurrent deferred revenue. Total assets were $2.068 billion and stockholders’ equity was $901.6 million. Current assets were $1.783 billion versus current liabilities of $1.034 billion.
Operating cash flow benefited materially from working-capital movements, including a $322.9 million increase in deferred revenue and a $167.3 million increase in accrued expenses and other liabilities; receivables and deferred acquisition costs were significant cash uses. Investing activities used $63.0 million, including net marketable-security purchases, an $8.0 million equity investment, $7.3 million of property and equipment, and a $5.0 million convertible note. Financing provided $228.1 million, mainly restricted proceeds from international employee stock sales, not recurring operating cash.
Material changes and business metrics
- Customers with more than 10 employees increased to approximately 265,400 from 58,500 a year earlier.
- Customers generating more than $100,000 of trailing-12-month revenue rose to 769 from 405. These customers represented 23% of quarterly revenue, compared with 29% a year earlier.
- Trailing-12-month net dollar expansion rate for customers with more than 10 employees exceeded 130% in both periods.
- Headcount increased to 2,854 from 1,958 at April 30, 2019.
- Accounts receivable, net, rose to $257.5 million from $120.4 million at January 31, 2020; the credit-loss allowance increased to $8.3 million from $5.2 million.
Outlook, commentary, risks, and unusual items
- No quantified financial guidance is provided in this filing. Management expects cost of revenue to rise in absolute dollars as capacity expands; it expects R&D and sales and marketing expenses to increase in absolute dollars for the rest of the fiscal year, and G&A expenses to increase in absolute dollars.
- Management cautions that pandemic-related usage may not translate into lasting paid customers. Free Basic users generate no revenue while adding capacity costs; customer mix shifted toward consumers and smaller organizations, potentially increasing future non-renewals. Demand and cost forecasts are unusually uncertain.
- The company had $18.0 million of non-cancelable cloud-hosting purchase obligations with terms of 12 months or longer, and $8.9 million of undiscounted payments for office leases not yet commenced.
- A May 2020 MPEG LA license agreement includes a $9.8 million payment for past use, recorded in Q1 general and administrative expense, plus $9.8 million of royalties for use through December 31, 2020.
- Q1 interest income and other, net included a $2.5 million remeasurement gain on a strategic equity investment; the investment’s carrying value was $13.5 million at April 30. A $5.0 million convertible note investment was also made.
- Zoom announced its cash-funded acquisition of Keybase on May 7, 2020, intended to strengthen security and support development of end-to-end encryption. The purchase consideration is not stated in the provided filing text.
- Privacy- and security-related consumer and securities class actions were pending. The company says it cannot estimate a reasonably possible loss or range of loss. It also disclosed a $38.3 million accrual for potential sales and other indirect tax liabilities.
- Operational risks include service capacity, outages, reliance on third-party cloud providers, security and privacy concerns, intense competition, and the possibility of post-pandemic declines in usage and renewals. A partial service outage in May 2020 occurred after the reporting period.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Most important facts for investors to verify
- Whether pandemic-driven customer growth and usage convert into durable paid subscriptions, renewals, and expansion.
- Whether hosting and infrastructure costs stabilize enough to recover gross margin from 68%, particularly as free-user demand and cloud-provider dependence evolve.
- The quality and sustainability of operating cash flow, including the sizable contribution from deferred revenue and accrued liabilities and the distinction between available and restricted cash.
- Developments, potential costs, and any estimated exposure from privacy/security litigation and indirect-tax contingencies.
- Keybase purchase consideration and integration costs, and the timing and cost of security enhancements and end-to-end encryption.
- The effects of rising stock-based compensation, share issuance, and the dual-class voting structure on dilution and shareholder influence.