Zoom Communications, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended July 31, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars. The company provides a subscription-based, video-first communications platform.
Financial performance and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue, 2019 / 2018 | $145.8M / $74.5M; up 96% | $267.8M / $134.6M; up 99% |
| Gross profit, 2019 / 2018 | $117.9M / $61.6M | $215.8M / $110.0M |
| Gross margin, 2019 / 2018 | 81% / 83% | 81% / 82% |
| Operating income, 2019 / 2018 | $2.3M / $3.4M | $3.8M / $1.7M |
| Net income, 2019 / 2018 | $5.5M / $3.8M | $7.8M / $2.5M |
| Net income per share, diluted | $0.02 / $0.00 | $0.02 / $0.00 |
- Operating expenses rose to $115.7M in the quarter, up 99% year over year. Sales and marketing was $79.7M; research and development was $15.1M; general and administrative was $21.0M.
- Six-month net cash provided by operating activities was $53.4M, versus $17.1M. Capital expenditures were $20.9M, producing company-defined free cash flow of $32.5M versus $7.1M.
- Six-month investing cash outflow was $448.5M, primarily from net purchases of marketable securities; financing cash inflow was $545.1M, mainly from the IPO and private placement.
- At July 31, cash and cash equivalents were $213.9M and marketable securities were $541.4M, or $755.3M combined. Current assets were $916.1M and current liabilities $229.0M.
- No outstanding convertible notes or other conventional borrowings were reported at quarter-end; the notes converted to common stock in the IPO. Operating lease liabilities totaled $53.4M, with $25.5M of additional, not-yet-commenced leases disclosed.
Material changes versus the prior comparable period
- Revenue growth came from both new and existing customers: approximately 61% and 39%, respectively, of the quarterly increase; for the six-month increase, approximately 62% and 38%.
- Quarterly cost of revenue grew 115%, faster than revenue, and gross margin declined by 2 percentage points to 81%. Operating income fell year over year despite revenue nearly doubling, as spending increased to support growth.
- Stock-based compensation rose to $18.1M for the quarter and $24.7M for the six months, compared with $1.1M and $2.0M, respectively, in 2018. The filing also reports substantial unrecognized compensation expense tied to options, RSUs and the employee stock purchase plan.
- The April 2019 IPO and concurrent private placement generated $542.9M in net financing cash proceeds; preferred stock and convertible notes converted into common stock. The company adopted lease accounting, recording right-of-use assets and liabilities.
- Business metrics strengthened: customers with more than 10 employees increased to approximately 66,300 from 37,200; customers contributing more than $100,000 of trailing-12-month revenue increased to 466 from 228. Trailing-12-month net dollar expansion rate was over 130% in both periods.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided in the supplied filing. Management expects continued investment in research and development, sales and marketing, general and administrative functions, and international expansion. It expects available cash, securities and operating cash flow to cover needs for at least 12 months.
- Management cautions that growth may slow and quarterly results may fluctuate. Key dependencies include customer acquisition, renewals and expansion; competition and pricing; platform reliability; and the ability to manage rapid growth and expenses.
- Security and privacy are material risks. The filing discusses prior software vulnerabilities and a July 2019 security-researcher blog, and warns that service interruptions or actual or perceived security incidents could damage customer trust and growth.
- Zoom disclosed potential export-control and sanctions violations involving access or use in restricted jurisdictions. OFAC and the Commerce Department’s BIS issued warning letters as their final enforcement responses; no fines or penalties were assessed as of July 31, 2019.
- The company accrued $29.2M for potential sales and other indirect tax liabilities, up from $20.8M at January 31, 2019. Outcomes and ultimate exposure remain uncertain.
- The company reported a history of losses, though it was profitable in the periods shown; the U.S. tax benefits of losses remained subject to a full valuation allowance. Its dual-class structure gave Class B holders 97.8% of voting power as of July 31.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether rapid revenue growth can continue while gross margin and operating profitability remain under pressure from hosting, hiring, sales and marketing costs.
- The effect of stock-based compensation, future equity-plan share increases, and dilution on per-share results and ownership.
- Customer retention, paid-host conversion, expansion rates and large-customer concentration as the business scales.
- Progress on security, privacy and service reliability, including the response to disclosed vulnerabilities and any subsequent incidents.
- Changes in the $29.2M indirect-tax contingency and any further consequences related to export-control or sanctions compliance.
- Lease commitments, including leases not yet commenced, and the continued adequacy of liquidity as spending and international operations grow.