Zoom Communications, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended July 31, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Comparisons are with the same periods in 2020.
Business context
Zoom generates revenue primarily from subscriptions to its communications platform, including Meetings, Phone, Rooms, Webinars, Events, and related offerings. The company attributed demand and usage in part to the COVID-19 pandemic, while cautioning that growth may slow as pandemic-related conditions recede.
Key financial results
| Metric | Three months ended July 31, 2021 | Year-over-year change | Six months ended July 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,021.5 | +54% | $1,977.7 | +99% |
| Gross profit / margin | $760.2 / 74% | +61%; margin 71% prior year | $1,451.5 / 73% | +109%; margin 70% prior year |
| Operating income / margin | $294.6 / 29% | $188.1 / 28% prior year | $520.9 / 26% | $211.5 / 21% prior year |
| Net income | $317.1 | $186.0 prior year | $544.6 | $213.1 prior year |
| Diluted EPS | $1.04 | $0.63 prior year | $1.78 | $0.72 prior year |
Quarterly revenue growth came mostly from new customers (about 74% of the increase); for the six-month period, existing and new customers contributed about 51% and 49% of the increase, respectively. Operating expenses rose substantially year over year, including R&D, sales and marketing, and general and administrative costs.
Cash flow, liquidity, and balance sheet
- For the six months, operating cash flow was $1,001.3 million, versus $660.3 million; capital expenditures were $92.0 million. Company-defined free cash flow was $909.3 million, versus $625.1 million.
- Investing cash outflow was $1,364.2 million, mainly reflecting net purchases of marketable securities of $1,183.1 million, property and equipment purchases of $92.0 million, and strategic investments of $86.9 million. Financing cash inflow was $65.1 million.
- At July 31, cash and cash equivalents were $1,931.4 million and marketable securities were $3,174.0 million, or $5.1 billion combined. Current assets were $5,835.1 million and current liabilities were $1,686.4 million.
- Total liabilities were $1,850.8 million. The balance sheet does not report a separate borrowings or debt balance.
Material changes and unusual items
- Gross margin increased year over year, which management attributed mainly to data-center efficiencies and lower third-party cloud-hosting rates, despite higher usage-related costs.
- General and administrative expense for the six months included a $66.9 million legal-settlement charge, net of estimated insurance coverage. The related proposed privacy class-action settlement is $85.0 million, subject to court approval.
- A $32.1 million gain on strategic investments was recorded in the quarter and six-month period, largely related to a publicly traded equity investment. The company invested $75.0 million in that company in June; its reported fair value was $107.1 million at July 31.
- Stock-based compensation was $201.1 million for the six months, compared with $85.6 million a year earlier.
Outlook, commentary, and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects revenue growth to generally decline in future periods and expects R&D, sales and marketing, and general and administrative expenses to increase in absolute dollars and as a percentage of revenue for the remainder of the fiscal year.
- Management said existing cash, cash equivalents, marketable securities, and operating cash flow should be sufficient for at least the next 12 months.
- Management warned that pandemic-related usage may taper, potentially slowing user growth or reducing paid hosts; free usage also adds capacity costs without directly generating revenue. The company identified customer retention, competition, service reliability, and security and privacy as significant business risks.
- Zoom agreed to acquire Five9 in a stock transaction, with each Five9 share to convert into 0.5533 Zoom Class A shares. Closing was anticipated in the first half of calendar 2022, subject to shareholder, regulatory, and other conditions.
- Government investigations by the DOJ and SEC concerning privacy, security, encryption, user metrics, and related matters remained ongoing. Zoom said it could not predict their outcome; adverse outcomes could result in fines, penalties, or other financial exposure.
- The FTC settlement requires a security program and periodic third-party assessments, but imposes no fine. The company also disclosed securities and derivative litigation and other privacy-related claims.
Important facts for investors to verify
- Whether the Five9 acquisition receives required approvals, closes on the anticipated timeline, and delivers expected benefits without materially diluting shareholders.
- Whether customer growth, renewals, and paid-host conversion remain resilient as pandemic-driven demand changes.
- Whether the proposed $85.0 million privacy-class settlement receives court approval and whether the $66.9 million recorded charge adequately reflects expected costs.
- Developments and potential financial or operational consequences from the DOJ and SEC investigations and other privacy and security proceedings.
- How spending growth, stock-based compensation, hosting costs, and investment gains affect recurring profitability and margins.