Business context and reporting period
Zoom Video Communications, Inc. (Nasdaq: ZM) filed this unaudited Form 10-Q for the quarter ended July 31, 2022, the second quarter of fiscal 2023. Zoom sells subscriptions to its unified communications platform, including Meetings, Phone, Chat, Webinars, Events and Contact Center. Comparisons below are with the corresponding 2021 periods unless noted.
Financial results and position
| Metric | Three months ended July 31, 2022 | Six months ended July 31, 2022 |
|---|---|---|
| Revenue | $1.099 billion, up 7.6% | $2.173 billion, up 9.9% |
| Gross profit / margin | $825.8 million / 75.1% (74.4% prior year) | $1.638 billion / 75.4% (73.4% prior year) |
| Operating income / margin | $121.7 million / 11.1% (28.8% prior year) | $308.8 million / 14.2% (26.3% prior year) |
| Net income / diluted EPS | $45.8 million / $0.15 ($317.1 million / $1.04 prior year) | $159.4 million / $0.52 ($544.6 million / $1.78 prior year) |
| Operating cash flow | Not separately reported for the quarter | $783.4 million ($1.001 billion prior year) |
| Free cash flow, non-GAAP | Not separately reported for the quarter | $730.5 million ($909.3 million prior year) |
Quarterly revenue increased by $78.0 million, primarily from subscriptions to new customers. Gross margin improved, which management attributed mainly to greater internal data-center efficiency. Operating expenses rose sharply: quarterly R&D increased 109.6% and sales and marketing 47.7%. Stock-based compensation was $255.5 million for the quarter and $464.9 million for the six months.
Profit fell substantially year over year, reflecting higher operating costs, strategic-investment losses instead of prior-year gains, and higher income taxes. The six-month strategic-investment loss was $71.1 million, mainly unrealized losses on publicly traded equity securities. The effective tax rate was 49.4% for the quarter and 31.9% for the six months, versus 2.1% and 1.5% in the comparable prior-year periods.
At July 31, Zoom held $937.4 million in cash and equivalents and $4.583 billion in marketable securities, or approximately $5.52 billion combined. Total liabilities were $2.057 billion; the balance sheet lists no borrowings or other debt, though it includes lease liabilities. Current assets were $6.414 billion and current liabilities $1.867 billion. Shareholders’ equity was $5.990 billion.
Six-month operating cash flow declined by $217.9 million year over year. Management cited lower net income and unfavorable changes in operating assets and liabilities, partly offset by higher noncash adjustments, especially stock-based compensation. Investing cash use was $508.4 million; financing cash use was $388.8 million, including $425.9 million of stock repurchases.
Material changes and operating indicators
- Enterprise customer count reached approximately 204,100, up from 173,000 a year earlier. Customers generating more than $100,000 in trailing-12-month revenue numbered 3,116 versus 2,278; these customers contributed 26% of revenue versus 20%.
- Trailing-12-month net dollar expansion for Enterprise customers was 120%, down from more than 130% a year earlier.
- Remaining performance obligations totaled $3.213 billion, including $1.401 billion billed and $1.812 billion unbilled; Zoom expected to recognize 61% over the next 12 months.
- Zoom acquired Solvvy, a customer-support automation company, for $121.2 million in cash. The acquisition added conversational AI capabilities; $94.9 million was allocated to goodwill and $26.7 million to intangible assets.
- Under a February 2022 authorization for up to $1.0 billion in repurchases, Zoom bought back 4.1 million shares for $425.9 million in the six-month period. $574.1 million remained authorized at July 31.
Outlook, risks and contingencies
Management expects revenue growth to generally decline in future periods as pandemic-related demand tapers and market penetration rises. It expects cost of revenue to increase in dollars but remain relatively flat as a percentage of revenue for the remainder of the fiscal year. It expects R&D, sales and marketing, and general and administrative expenses to rise in both dollars and as a percentage of revenue. Management believes cash, cash equivalents, marketable securities and operating cash flow will be sufficient for at least the next 12 months.
Management cited inflation, possible recession, a stronger U.S. dollar and the Russia-Ukraine war as sources of uncertainty. The stronger dollar weighed on quarterly revenue; the war affected EMEA revenue. Pandemic normalization could slow or reduce user growth and demand. Competition, customer retention and expansion, security and service reliability, and the ability to execute new products and enterprise sales are also key risks.
Government investigations by the DOJ and SEC concerning privacy, security, encryption, usage metrics and related disclosures remain ongoing; outcomes and potential financial exposure are uncertain. A U.S. privacy class-action settlement of $85 million received final court approval in April 2022, but two objectors appealed. A separate class action involving users outside the settlement class was filed in May 2022 and Zoom moved to dismiss it. The company says it cannot estimate a reasonably possible loss range for the securities and other pending privacy litigation. The filing also reports a voluntary self-disclosure to U.S. export-control authorities in March 2022.
Controls and procedures were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. The filing cautions that controls cannot provide absolute assurance.
Important facts for investors to verify
- Whether revenue growth and Enterprise expansion stabilize as pandemic-related demand fades; monitor the 120% net dollar expansion rate and large-customer contribution.
- Whether substantial planned expense growth and stock-based compensation continue to pressure operating and net margins.
- Cash generation and liquidity, including the effect of collections, deferred revenue, buybacks and marketable-security valuations.
- Developments and potential financial or reputational consequences from government investigations, privacy litigation and the settlement appeal.
- Effects of foreign exchange, macroeconomic conditions and geopolitical disruption on demand and international results.
- Solvvy integration and the commercial contribution of newer offerings, including Contact Center, Whiteboard and Zoom IQ for Sales.