Zoom Communications, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended October 31, 2022; comparable periods ended October 31, 2021. Amounts below are in U.S. dollars. Zoom provides subscription-based unified communications products, including Meetings, Phone, Chat, Webinars, Events and Contact Center.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,101.9 million | $1,050.8 million | $3,275.2 million | $3,028.5 million |
| Gross profit / margin | $831.2 million / 75.4% | $779.8 million / 74.2% | $2,469.1 million / 75.4% | $2,231.3 million / 73.7% |
| Operating income / margin | $66.5 million / 6.0% | $290.9 million / 27.7% | $375.3 million / 11.5% | $811.8 million / 26.8% |
| Net income / margin | $48.4 million / 4.4% | $340.4 million / 32.3% | $207.8 million / 6.3% | $885.0 million / 29.2% |
| Diluted EPS | $0.16 | $1.11 | $0.68 | $2.89 |
| Operating cash flow | Nine months: $1,078.7 million | Prior-year nine months: $1,395.9 million | ||
| Free cash flow (non-GAAP) | Nine months: $1,003.1 million | Prior-year nine months: $1,284.1 million |
At October 31, 2022, cash and cash equivalents were $1.096 billion and marketable securities were $4.069 billion, totaling about $5.165 billion. Current assets were $6.142 billion and current liabilities $1.896 billion. The balance sheet does not show borrowings or other financial debt. Total liabilities were $2.081 billion, including $1.354 billion of current and noncurrent deferred revenue. Management said available liquidity and expected operating cash flows should cover needs for at least 12 months.
Material changes and operating drivers
- Q3 revenue grew 4.9% year over year; nine-month revenue grew 8.1%. Enterprise subscription revenue increased 20% in Q3 and 26% for the nine-month period, while Online subscription revenue declined 9% and 7%, respectively.
- Enterprise customers contributed 55.7% of Q3 revenue, versus 48.8% a year earlier. Trailing 12-month Enterprise net dollar expansion rate fell to 117% from 139%. Monthly Online customer churn improved to 3.1% from 3.7%.
- Operating income fell sharply as operating expenses increased: Q3 research and development rose 98.9%, sales and marketing 45.6%, and general and administrative 45.8%. Nine-month stock-based compensation expense was $767.7 million, compared with $315.9 million.
- Net income also reflected a reversal in strategic-investment results: Q3 recorded a $6.9 million loss versus a $122.4 million gain in the prior-year quarter; the nine-month period recorded a $78.0 million loss versus a $154.5 million gain.
- Gross margin improved, which management attributed mainly to efficiencies from expanding internal data-center capacity and transitioning away from third-party cloud hosting. Foreign exchange reduced revenue by $24 million in Q3 and $48 million over nine months.
- Nine-month operating cash flow declined 22.7% year over year. The filing attributes the decrease principally to lower net income and less favorable changes in operating assets and liabilities, partly offset by higher noncash adjustments, especially stock-based compensation.
- Zoom repurchased 11.0 million shares for $990.8 million during the nine months under a $1.0 billion authorization; $9.2 million remained at October 31, 2022.
Outlook, commentary and risks
Management said revenue growth had slowed and generally expects it to continue declining versus prior periods. It cited post-pandemic normalization, higher market penetration, competition, business maturation and macroeconomic uncertainty. Management expected cost of revenue as a percentage of revenue to remain relatively flat for the rest of the fiscal year, while research and development, sales and marketing, and general and administrative expenses were expected to rise both in dollars and as a percentage of revenue. The filing provides no specific numerical revenue or earnings guidance in the supplied text.
Management highlighted inflation, possible recession, currency fluctuations, and the uncertain effects of the COVID-19 recovery and Russia-Ukraine war. It reported that customers in Russia, Belarus and Ukraine represented less than 1% of consolidated revenue and net assets. Key business risks include slowing Online demand, customer retention and expansion, intense competition, service reliability, cybersecurity and privacy, international regulation, and the outcome of ongoing investigations and litigation.
Notable contingencies include ongoing U.S. Department of Justice and SEC investigations concerning privacy, security, encryption, usage metrics and related matters; the company says it is cooperating and cannot predict the outcome or financial exposure. A U.S. privacy class-action settlement required an $85 million escrow payment; appeals were subsequently settled subject to court approval. Related securities and derivative litigation and a separate international-user privacy class action remain matters to monitor; the company says it cannot estimate a reasonably possible loss range for certain cases.
Other items include the May 2022 all-cash acquisition of Solvvy for $121.2 million and unrealized losses on strategic investments. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Enterprise growth and expansion can offset continued Online revenue declines and the drop in Enterprise net dollar expansion rate.
- How operating expenses and stock-based compensation affect future operating margins and cash generation.
- The composition, duration and credit quality of marketable securities, including the reported $96.1 million of unrealized losses at October 31, 2022.
- Progress and potential financial or reputational consequences of the DOJ and SEC investigations, privacy litigation and settlement appeals.
- Execution and commercial contribution from new offerings, including Contact Center, Whiteboard, Mail and Calendar, and the Solvvy acquisition.
- Whether currency headwinds, post-pandemic demand normalization and macroeconomic conditions materially affect growth and collections.