Zoom Video Communications, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 30, 2019 (three months; fiscal year ends January 31). The filing compares results with the three months ended April 30, 2018. Financial statements are unaudited. The company completed its IPO on April 23, 2019.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $122.0 million | $60.1 million |
| Gross profit / margin | $97.9 million / 80% | $48.4 million / 81% |
| Operating income (loss) / margin | $1.6 million / 1% | ($1.7) million / (3%) |
| Net income (loss) | $2.2 million | ($1.3) million |
| Operating cash flow | $22.2 million | $2.8 million |
| Capital expenditures | $6.9 million | $3.9 million |
| Free cash flow (non-GAAP) | $15.3 million | ($1.1) million |
- Revenue increased 103% year over year. Management attributed approximately 64% of the increase to new customers and 36% to existing customers.
- Operating expenses were $96.3 million, up from $50.1 million. Sales and marketing was $64.0 million; research and development was $13.8 million; general and administrative was $18.5 million.
- At April 30, cash and cash equivalents were $629.8 million and marketable securities were $107.4 million, totaling $737.2 million. Current assets were $866.3 million versus current liabilities of $194.4 million.
- Total liabilities were $279.3 million, including $51.7 million of operating lease liabilities. The filing reports no outstanding convertible notes at quarter-end: the notes converted to common stock in connection with the IPO.
- Deferred revenue was $149.3 million in total. Remaining performance obligations were $376.5 million, of which the company expected to recognize 64% within 12 months.
Material changes and notable items
- The IPO and concurrent private placement substantially increased cash and equity. The filing reports approximately $541.5 million in net proceeds, inclusive of the private placement, after underwriting discounts and offering costs. Preferred shares converted into Class B common stock, and the convertible notes converted into Class A shares.
- Net income improved from a loss a year earlier, but gross margin declined one percentage point. Operating expenses grew 92% overall, with substantial increases in sales and marketing and general and administrative costs.
- Stock-based compensation rose to $6.7 million from $0.8 million. The company reported $93.6 million of unrecognized compensation expense related to unvested options, expected to be recognized over a weighted-average 3.4 years.
- Adoption of the new lease standard on February 1, 2019 added right-of-use assets of $40.5 million and lease liabilities of $43.0 million at adoption, with no material retained-earnings impact.
- Full valuation allowances were recorded against deferred tax assets. Accrued sales and other tax contingencies were $27.0 million at April 30, compared with $22.0 million at January 31.
Outlook, commentary, and risks
- No quantitative revenue or earnings guidance is provided. Management said cash, cash equivalents, marketable securities and operating cash flow should be sufficient for at least the next 12 months. It expects increased spending on research and development, sales and marketing, general and administrative functions, and public-company costs.
- Management expects revenue growth to decline in future periods and cautions that historical growth is not indicative of future performance. The trailing 12-month net dollar expansion rate for customers with more than 10 employees was over 130% at both April 30, 2019 and January 31, 2019.
- Key business risks include competition and customer retention, service outages and dependence on third-party hosting and internet infrastructure, security and privacy issues, rapid growth and hiring needs, international and China-related regulatory and trade exposure, and uncertain indirect-tax obligations.
- The filing notes past software vulnerabilities and a January 2019 service outage lasting less than two hours. It also discloses voluntary submissions to U.S. authorities concerning potential export-control and sanctions violations; outcomes and potential penalties are uncertain.
- Subsequent to quarter-end, the company entered additional lease and sublease arrangements, expecting $14.8 million of rent payments through dates extending to fiscal 2030. Management reported no litigation expected to have a material adverse effect.
- The dual-class structure gives Class B shares 10 votes per share versus one vote per Class A share. Class B holders held 98.7% of voting power at April 30, 2019. The company also disclosed IPO-related lockups and potential future share-sale dilution.
Important facts for investors to verify
- Whether 103% revenue growth and expansion within existing customers can be sustained as management anticipates slower future growth.
- Whether sales and marketing, hiring, stock compensation and public-company costs can be managed while preserving or improving margins.
- The amount, timing and resolution of the $27.0 million indirect-tax contingency, and any further exposure from tax collection requirements.
- Developments in security, privacy, service reliability, and the export-control and sanctions disclosures, including any resulting costs or regulatory action.
- The effects of Class B voting control, equity-plan share reserves, IPO lockup expirations and potential sales by existing shareholders on governance and dilution.
- Cash-flow quality: operating cash flow benefited from increased deferred revenue, while IPO-related financing supplied most of the quarter’s cash increase.