Zoom Communications, Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 31, 2019 (fiscal 2020 third quarter); comparisons are with the same periods in 2018 unless noted. Amounts below are in U.S. dollars.
Business context
Zoom sells subscriptions to a video-first communications platform spanning meetings, phone, webinars, chat, and related services. Revenue is driven mainly by paid hosts and additional products. The filing describes unaudited interim results.
Key financial results
| Metric | Three months ended Oct. 31, 2019 | Nine months ended Oct. 31, 2019 |
|---|---|---|
| Revenue | $166.6 million; up 85% | $434.4 million; up 93% |
| Gross profit / gross margin | $135.7 million / 81% (81% prior year) | $351.6 million / 81% (82% prior year) |
| Operating income (loss) | $(1.7) million | $2.1 million |
| Net income (loss) | $2.2 million | $10.0 million |
| Net margin | About 1.3% | About 2.3% |
| Operating cash flow | Not provided for the quarter in the presented cash-flow statement | $115.3 million, versus $35.3 million |
| Free cash flow (non-GAAP) | Not provided | $87.2 million, versus $17.2 million |
- Quarterly revenue growth reflected new customers (about 61% of the increase) and existing customers (about 39%). For the nine-month period, existing customers contributed about 55% of the increase and new customers about 45%.
- Operating expenses rose to $137.4 million in the quarter and $349.4 million for nine months, principally reflecting higher headcount, sales and marketing, and stock-based compensation. Nine-month stock-based compensation was $46.5 million, compared with $4.6 million.
- At October 31, cash and cash equivalents were $230.9 million and marketable securities were $580.5 million, totaling $811.4 million. Current assets were $1,019.4 million and current liabilities $317.8 million. The filing reported no outstanding convertible preferred stock or convertible notes; operating lease liabilities totaled $55.9 million.
- Nine-month investing cash outflow was $496.1 million, largely due to net purchases of marketable securities. Financing cash inflow was $596.6 million, including IPO and private-placement proceeds. The company reported $115.3 million of operating cash flow.
- Deferred revenue was $201.6 million, current and noncurrent combined. Remaining performance obligations were $517.0 million, of which 64% was expected to be recognized over the next 12 months.
Material changes and management commentary
- Revenue grew rapidly, while gross margin was broadly stable. Quarterly operating results moved from a $1.1 million operating loss to a $1.7 million loss; nine-month operating income rose to $2.1 million from $0.7 million.
- Cash and marketable securities increased substantially following the April 2019 IPO and concurrent private placement. The IPO also converted preferred stock and convertible notes into common stock.
- Customer metrics expanded: customers with more than 10 employees increased to about 74,100 from 44,400; customers generating over $100,000 of trailing-12-month revenue rose to 546 from 277. Trailing 12-month net dollar expansion rate was above 130% in both periods.
- Management said available cash, securities, and operating cash flow should meet needs for at least the next 12 months. It expects spending to increase in research and development, sales and marketing, general and administrative functions, and infrastructure. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Zoom disclosed past security vulnerabilities and identified security, privacy, service reliability, and data-center capacity as material business risks.
- OFAC and BIS issued warning letters in June 2019 concerning potential sanctions and export-control violations; no fines or penalties were assessed. Future violations could result in penalties.
- The company accrued $31.3 million for potential sales and other indirect tax liabilities, up from $20.8 million at January 31, 2019. The ultimate exposure is uncertain.
- Stock-based compensation increased sharply after the IPO and employee equity programs; this is a substantial expense and dilution consideration.
- The filing describes $21.0 million of undiscounted future lease commitments for office leases not yet commenced, in addition to recorded lease obligations.
- Management reported effective disclosure controls and no material litigation that it believed would adversely affect the business. Risks also include competition, customer retention and conversion of free users, international expansion, regulation of Zoom Phone, and a dual-class share structure concentrating voting control.
Important facts for investors to verify
- Whether revenue growth, customer expansion, and retention remain strong, and how much growth comes from new versus existing customers.
- Whether rising sales, research, and infrastructure spending—and especially stock-based compensation—allow operating profitability and margins to improve.
- Cash conversion and liquidity trends, including the effect of deferred revenue, contract-acquisition costs, capital spending, and marketable-security purchases.
- Developments in the $31.3 million indirect-tax contingency and any future regulatory action related to export-control matters.
- Progress in addressing security and reliability risks, and the financial and customer impact of any incidents.
- The effect of lease commitments and equity issuance, and the governance implications of Class B shares carrying greater voting power.