Zoom Communications, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended July 31, 2023; fiscal year ends January 31. Amounts below are in U.S. dollars. The filing reports unaudited GAAP results unless otherwise noted.
Business context and performance
Zoom sells subscriptions to its unified communications and collaboration platform, including Meetings, Phone, Chat, Events and Contact Center. Q2 revenue was $1.139 billion, up 3.6% year over year. Growth came from Enterprise subscriptions, partly offset by weaker Online revenue.
- Enterprise revenue grew 10.2% in Q2 and 11.4% for the six-month period; Online revenue declined 4.3% and 6.1%, respectively.
- Enterprise customers were 57.9% of Q2 revenue, versus 54.4% a year earlier. Online customers represented 42.1%, versus 45.6%.
- Trailing-12-month Enterprise net dollar expansion rate was 109%, down from 120%. Online average monthly churn was 3.2%, improved from 3.6%.
- Revenue from customers contributing more than $100,000 in trailing-12-month revenue was 29% of total revenue, versus 26%; their count rose to 3,672 from 3,116.
Key financial metrics
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $1,138.7 million | $1,099.5 million | $2,244.0 million | $2,173.3 million |
| Gross margin | 76.6% | 75.1% | 76.4% | 75.4% |
| Operating income | $177.6 million | $121.7 million | $187.4 million | $308.8 million |
| Net income | $182.0 million | $45.8 million | $197.4 million | $159.4 million |
| Diluted EPS | $0.59 | $0.15 | $0.65 | $0.52 |
| Operating cash flow | Not provided for quarter alone | Not provided for quarter alone | $754.5 million | $783.4 million |
| Free cash flow (non-GAAP) | Not provided for quarter alone | Not provided for quarter alone | $686.0 million | $730.5 million |
Q2 operating margin was 15.6%, versus 11.1%; six-month operating margin fell to 8.4% from 14.2%, reflecting higher operating expenses. Q2 net income benefited from a $31.7 million gain on strategic investments and $41.1 million of other income, primarily investment yield. Six-month results included $33.9 million of investment gains and $72.3 million of other income, compared with investment losses and other expense in the prior-year period.
At July 31, cash and cash equivalents were $1.380 billion and marketable securities were $4.648 billion, totaling approximately $6.028 billion. Current assets were $7.051 billion and current liabilities $1.767 billion. The balance sheet reports no borrowings or other debt. Total liabilities were $1.921 billion, including deferred revenue and lease liabilities. Management said available liquidity and operating cash flows should meet needs for at least the next 12 months.
Material changes and unusual items
- Q2 gross margin improved by 1.5 percentage points, which management attributed mainly to expanded internal data-center capacity and hosting optimization.
- Six-month operating income declined despite revenue growth, as operating expenses rose 14.8%, including increases in R&D, G&A, stock-based compensation and restructuring costs.
- Zoom completed its February 2023 restructuring plan, which reduced the workforce by approximately 15%. Six-month restructuring expense was $73.0 million; the plan was complete as of July 31.
- Zoom agreed to a $150 million settlement of a securities class action, subject to court approval. Insurance is expected to cover $90 million; Zoom made net payments of $60 million in Q2 and recorded $52.5 million of expense in the first six months, in addition to $7.5 million accrued previously. The filing says no additional settlement charge was recorded in Q2.
- Zoom acquired employee-experience platform Workvivo in April for $221.8 million in cash. The preliminary allocation included $184.7 million of goodwill; Workvivo’s results were not material to the reported periods.
- Remaining performance obligations were $3.504 billion at July 31, of which 59% was expected to be recognized as revenue over the next 12 months.
Outlook, management commentary and risks
The filing provides no quantitative revenue or earnings guidance. Management cited elongated sales cycles, lower corporate spending and a stronger U.S. dollar; foreign exchange reduced revenue by $10.2 million in Q2 and $28.7 million for the six-month period. Management also noted that the Russia-Ukraine war affected EMEA revenue. It described future macroeconomic effects as uncertain.
Key risks include slowing overall growth, declining Online revenue, lower Enterprise expansion, competition and pricing pressure, service outages, cybersecurity and privacy issues, foreign exchange exposure, and regulatory or litigation outcomes. Ongoing DOJ and SEC investigations concern privacy, security, encryption, usage metrics and related matters; the company says it is cooperating and cannot predict their outcome. Privacy class-action settlement payments are being distributed, while derivative litigation remains pending. The company reported effective disclosure controls at July 31 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Enterprise growth can offset continued Online revenue declines, and whether the 109% Enterprise expansion rate stabilizes or falls further.
- Whether management’s restructuring delivers durable cost savings, particularly as six-month operating margin declined and stock-based compensation remains substantial.
- Final court approval and payment responsibility for the $150 million securities settlement, including the expected $90 million insurance contribution.
- How investment gains and interest income affect reported earnings, and the potential volatility of strategic-investment valuations.
- Workvivo integration, acquisition-related goodwill and any future material financial contribution.
- Whether cash generation remains strong: six-month operating cash flow and non-GAAP free cash flow were both lower year over year.