CC transcript (TMF)
First analyst in Q&A: “You just delivered one of, if not the, greatest all-time quarter in enterprise software history.”
The Raw Numbers
^^ = Accelerating, !! = highlight
Revenue 328.2M +169% !!!! - Americas +150% - APAC + EMEA +246% !!!! (25% of rev) Deferred Rev 552M +270% !!!! RPO 1.1B +184% !!!! - Current RPO 772M +222% !!!! Adj Op Inc 54.6M +565.9% !!!! ... margin 16.6% (vs 6.7%) +990bps Adj Gross Margin 69.4% -1150bps, -1480bps seq Adj Inc 58.3M +555.1% Adj EPS 0.20 +566.7% Opex 201.1M +108.7% CFFO 259.0M +1066.7% !!!! FCF 251.7M +1545.1% !!!! ... margin 76.7% (vs 12.5%) +6516bps !!!! Cash 1.1B Enterprise Custs 265.4K +354%, +224% seq !!!! - Custs >100K (TTM) 769 +90% [This is fine, see below] - Global 200 custs +200% seq !!!! $NER >130%
- supported 100K K-12 schools for free, across 25 countries
- corporate donations to COVID-19 focused charities
- also launched Zoom Cares philanthropic arm, to focus on education, climate change & social equity
- huge explosion in customers, especially international
- had major focus on security & privacy betterment, with multiple updates to app
- acquired Keybase to accelerate integrating end-to-end (E2E) encryption
- partnered with Secure Code Warrior for improving its developers' best practices in security & privacy
- several major schools have removed their restrictions in using Zoom after security/privacy improvement
- will be opening multiple R&D centers in USA, with ~500 empl expected [EXCITING! I pontificate more on R&D below.]
- 71% of growth is new custs, 29% of growth in existing custs expanding
- NOTE: custs >100K figures were in TTM (actual spend) not ARR (annualized out)
- >500 new lands at ARR > 100K (so will show up in Custs >100K over next 1-3Qs)
- peaked at >300M daily meeting participants in April, compared to 10M last December
- 20x increase in annualized meeting minutes run rate (100B in Jan to >2T in April)
- had to lean on AWS heavily to help scale, and now Oracle cloud
- new banking customer deployed 175K licenses this Q
- non-enterprise custs (<10 empl) ramped up to 30% of revenue (+1000bps seq!)
- will continue to expand into education, telemedicine, and telehealth markets
- assuring consistent video experience was #1 focus - opportunities to up-sell & monetize will flow from that
- company and CEO have finally taken full responsibility for lack of focus on security, and also for having consumer users yet not tailoring Zoom for them (those w/o IT depts)
The already successful Zoom is... way way more successful now. It just about went up sequentially what it went up YoY last earnings report... meaning we just fast-forwarded a year of growth into 1/2 a quarter. Customers and usage exploded over the prior Q, into 20 times the usage by 30 times the participants. All those new customers means cash, blowing up FCF yield to ~77%. That is not a typo. It rose 65 percentage points YoY, and 62.5 of that was sequentially. This won't continue, as a lot of upfront payments came in from all these new customers, and the higher ratio of monthly subs (now 30%, from 20% last Q). But that is a lot of cash to put to good use now. Add in the full effect they'll get from this next upcoming Q, and their entire business has been fast-forwarded >2 years in a quarter and a half. I am in shock after reading this report, it is that astounding. The fact we haven't yet seen a full quarter of The New Zoom is... a word that is more than astounding.
Let's look at things Q over Q (Q4 to Q1), as YoY is pretty meaningless given how rapid this has taken place.
Revenue growth +78% to +169% (2.17x).
Adj Op inc growth +292% to +555% (1.9x).
Gross margin 84.2% to 69.4%.
Adj Op margin 20.4% to 16.6%.
Adj EPS 0.15 to 0.20.
FCF margin 14.1% to 76.7%.
Customers 81.9K to 265.4K (3.24x)
Customer growth +61% to +354% (5.8x).
Customer >100K growth +86% to +90%.
Revenue growth rate more than doubled in a half a quarter. Revenue nearly rose as much sequentially (+74.3%) as it did YoY in the prior earnings report (+78%).
Operating income, of course, couldn't keep up with that. They had lots of expanded infrastructure to support the massive increase in traffic, and huge number of new accounts they supported for free (like those 100K schools). So while revenue growth rate grew 2.17x, op inc growth rate grew 1.9x. Hence the op margins retreating a bit, from 20.4% to 16.6%. FCF yield, on the other hand, is just eye-poppingly insane. This company, founded in 2011, and IPOing just over a year ago, has 77% FCF margin from revenues growing 169%. This company is now flush with cash.
Customer growth rate more than quintupled YoY. Let that sink in -- the GROWTH RATE... quintupled. Zoom more than tripled its customer base sequentially. We expected a huge increase, but that is a massive influx of new customers. They may continue to trickle in from here, depending on how long stay-at-home lasts. Yes, not all these customers will stay beyond the pandemic, especially those in that 10% chunk of revenue after small custs (<10 empl) grew from 20% to 30% of the mix. But as things ease, the subsidized free users are as well, so income will then ratchet back up.
Custs >100K growth Q to Q looks disappointing compared to overall customers, but it is not; do not let it deceive you. It is customers spending 100K <b>over TTM</b>, not using an estimated annual run rate (ARR), so all that massive cust growth in the last month of the Q isn't represented in that metric at all. They then mentioned 500+ of new custs will have ARR >100K, so that TTM-based growth rate should explode as those customers reach that amount over the coming Qs.
It looks like we might see nearly 250% revenue gain after Zoom has had 3 full months of this stay-at-home, instead of only a month and a half. Guidance for next Q was $495-500M, more than DOUBLE Wall St's expectations. At the high end, that means ~243% rev growth YoY next Q. (Last few Qs of revenue = 122M, 146M, 167M, 188M, 328M.) A little bit of a beat and you hit 250%.
Zoom is, quite simply, one of the most interesting public companies I think we will see in our lifetime of investing. The entire globe ran straight into a world-wide pandemic, but Zoom ran headlong into the opportunity of a lifetime. They stepped up and their platform delivered -- outside of a few brief outages, which is typical (and which the competition sure suffered from as well). From here, they (or outside partners building it on their underlying tech) can easily develop highly-tailored video tools from here to address specific market verticals and needs. Picture anything that enterprises or consumers need around person-to-person video communications or live interactive broadcasting. Earnings calls. Contract agreements. College classes. Live sporting events. Remote evaluations. Couples counseling. Town hall meetings. Court room proceedings. Board meetings. One-on-one consultations. Job interviews. Family gatherings. Company-wide meetings. Speeches. Virtual conferences. Virtual concerts. The list goes on and on. Anywhere your voice is, Zoom wants to be there. Zoom just aced the land. Now comes the expand.
This pandemic brought them a lot of immediate customers, a intense amount of increased traffic, and a lot of scrutiny. They executed superbly. They built their platform to scale, and it did just that (20x the usage! 30x the users! In a month and a half!). And from there, they nimbly addressed & corrected most of the many many flaws that all that scrutiny uncovered.... some of them minor (zoombooming, due to uneducated users not using security features - a sign of poorly designed UX); some of them major (lack of end-to-end encryption, issues in how they installed on Macs, routing some calls through China accidentally, secretly sending user tracking data to Facebook - all signs of a very lackadaisical approach to security and privacy). They ultimately responded to the majority of those challenges and calls to action perfectly. Competition always existed, and the rising tide of the situation rose all boats. New competing products are appearing -- but there is no way Facebook or Google are going to be trusted video platforms for enterprises. Consumers? Sure, those that don't care about privacy will use those free platforms, knowing their data is sold. Enterprises? Only to reach their Facebook-using customers.
CEO: “In terms of opportunity, I do not think we needed to have a specific consumer strategy. Our strategy is, offer one service. No matter where you are, no matter what you do, no matter which device, we just help you to stay connected. ... That's a huge opportunity.”
One important unsolved issue that remains is that Zoom needs to start offering true E2E encryption. That's still a bit up in the air, as they may only offer it to paid customers, in the guise of preventing criminal activity. (We'll have to see how it is implemented from here.) But Zoom just more than tripled its customers in a single Q, so the customers clearly don't care about that right now. The sensational headlines weren't enough to deter very many from their platform, since it is so easy to use and just works. (And, let's be fair, if it was for E2E, customers cannot get solid E2E capabilities in the competitors' platforms either - not at the scale of attendees that Zoom normally handles.) If you want more technical details, see this Wired article on where things stand as of June 3.
CFO: “Our global brand awareness has spread more quickly and we have expanded into more countries than we had originally planned for FY '21.”
They have clearly won against the competition thus far, and have built the premier video conferencing platform, with a brand name becoming synonymous with video conferencing. The brand boost to Zoom during this pandemic is immeasurable! This, in turn, allowed them to capture the lion's share of the massive influx of new customers that were suddenly stampeding to web video conferencing. From here, there are several revenue impacts easily visible on the immediate horizon. Higher education appears poised to heavily adopt remote learning this fall. Zoom Phones and Zoom Rooms are just getting started (though Rooms may not be that attractive as long as stay-at-home lasts). And they have a lot of run-way internationally, which is only 25% of rev.
Let's look past all that, as it's way more exciting to think about where it can all go from there, beyond the immediacy of this pandemic and the visible growth yet remaining. [Hey, I'm a technologist, and cannot help but be thinking about where the underlying technologies in our hypergrowth stories are going next.] One of the things that intrigues me most about modern web communications providers like Zoom is ... Where does it all goes from here? What are these web communication platforms going to look like in 10 years? A large benefit of the pandemic and how it fast-forwarded Zoom is that they are now flush with a lot of cash, to use in developing whatever the next generation of video communications is, and then the generation after that (and so on, and so on). With all that FCF flowing to R&D starting now (especially into those 2 new USA-based R&D centers), imagine what can be coming next: Expanding to new devices! [Zoom for vehicles! Zoom for Roku and Amazon Fire and SmartTVs!] Holographic 3D projection of the person in AR! Simulated attendees appearing in VR! A real-life Sims environment via VR, where you can virtually shake hands with someone! Take anything you've seen in sci-fi movies around communication, then picture Zoom at the forefront, getting us there. (Ok, maybe not "beam us up, Scotty" from Star Trek - not sure Zoom will be splitting us into particles and be instantaneously shooting us from location to location.)
Anyhow, enough dreaming. Zoom. Just... wow. I've never seen a company just leapfrog a year of growth like that before, and it'll be MORE than a year of growth this coming Q. And not sure I ever will again. There is a reason Zoom is up 224% YTD. Sure wish I would have caught on sooner, but I have little to complain about, being up 80% across all purchases over past 3 months.
What a ride. WOOO.