Zoom Video Communications, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 31, 2020; financial statements are unaudited. Comparisons are with the three and nine months ended October 31, 2019, unless otherwise noted.
Business context and results
Zoom provides a subscription-based, video-first unified communications platform. Management attributed exceptional demand growth primarily to pandemic-related remote work and education. The filing cautions that usage and growth may change as the pandemic’s effects diminish.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $777.2 million | $166.6 million | $1,768.9 million | $434.4 million |
| Gross profit | $518.5 million | $135.7 million | $1,214.2 million | $351.6 million |
| Gross margin | 67% | 81% | 69% | 81% |
| Operating income (loss) | $192.2 million | $(1.7) million | $403.7 million | $2.1 million |
| Net income | $198.6 million | $2.2 million | $411.7 million | $10.0 million |
| Diluted EPS | $0.66 | $0.01 | $1.38 | $0.03 |
Quarterly revenue increased 367%; nine-month revenue increased 307%. New customers accounted for approximately 81% of the quarterly revenue increase and 75% of the nine-month increase. Revenue from outside the Americas was 31% of quarterly revenue, versus 19% a year earlier.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $1,071.8 million, compared with $115.3 million; free cash flow, a non-GAAP measure defined as operating cash flow less property and equipment purchases, was $1,013.3 million versus $87.2 million.
- At October 31, 2020, cash and cash equivalents were $730.5 million and marketable securities were $1,141.4 million, or approximately $1.87 billion combined. The cash flow statement also includes $298.2 million of restricted cash, which is not freely available.
- Total assets were $3.05 billion; current liabilities were $1.41 billion and total liabilities were $1.55 billion. Deferred revenue was $854.7 million in total. The filing shows no borrowings or debt balance.
- Management said available cash, cash equivalents, marketable securities, and expected operating cash flow should meet needs for at least 12 months.
- Nine-month investing cash outflow was $673.4 million, primarily reflecting net marketable-security purchases, capital expenditures, and the Keybase acquisition. Financing cash inflow was $296.2 million, mainly from employee equity transactions.
Material changes and management outlook
- Higher third-party cloud hosting, telephony, and data-center costs, along with free-user usage, reduced gross margin to 67% in the quarter from 81%. Management expected cost of revenue to rise in absolute dollars as capacity expands; margin could improve over time depending on scale and the mix of free and paid users.
- Operating expenses rose substantially with hiring, sales-force expansion, security and privacy work, and customer acquisition. Management expected research and development, sales and marketing, and general and administrative expenses to increase in both dollars and as a percentage of revenue for the rest of the fiscal year.
- Management expected revenue growth to generally decline in future periods. It warned that user growth may slow or decline as pandemic-related conditions ease, and that many free users may not convert to paid plans. No specific financial guidance figures are provided in the supplied filing text.
- Trailing 12-month net dollar expansion for customers with more than 10 employees was greater than 130%. Customers with more than 10 employees numbered approximately 433,700, versus 74,100 a year earlier. Customers generating more than $100,000 in trailing 12-month revenue numbered 1,289, versus 546.
- Remaining performance obligations were $1.63 billion; the company expected to recognize 72% over the next 12 months.
Unusual items, commitments, and risks
- Keybase was acquired for $42.9 million in cash. A separate $20.0 million employee holdback is conditional on continued service and will be treated as compensation over one to three years.
- Nine-month general and administrative expense included a $23.3 million non-cash stock donation and a $9.8 million one-time payment for past use under an MPEG LA license. The company also recorded $7.0 million of current-period license costs in cost of revenue.
- Non-cancelable purchase obligations with terms of 12 months or longer increased by $468.4 million from the amount in the prior annual report, mainly for third-party cloud hosting. Additional uncommenced operating leases carried $37.9 million of undiscounted future payments.
- Privacy- and security-related class actions, securities litigation, and derivative actions were pending; the company said it could not estimate a reasonably possible loss or range. A proposed FTC settlement, approved by commissioners for public comment but still subject to final action, imposed no fine or penalty and would require security-program measures and periodic third-party assessments. Management did not expect a material financial impact once final.
- Other key risks include pandemic-driven demand reversal and capacity costs, service outages and reliance on cloud providers, competition, privacy and cybersecurity exposure, and evolving regulation. The company reported an accrued $53.8 million for potential sales and other indirect taxes.
Investor verification points
- Verify whether paid-customer retention and conversion of pandemic-era free users support revenue after remote-work and school demand normalizes.
- Track hosting and infrastructure costs, free-versus-paid usage mix, and gross-margin recovery against management’s expectations.
- Assess the cash availability distinction between unrestricted liquidity and restricted cash, and monitor hosting purchase commitments and capital spending.
- Follow the final FTC settlement, privacy and securities litigation, and developments in the $53.8 million indirect-tax contingency.
- Review dilution from stock-based compensation and equity awards; nine-month stock-based compensation expense was $179.6 million.