Earnings Report Review for Zoom (01Mar2022) - good quarter but ... ...

Zoom released their learnings in the after-hours of 28 Feb 2022.  The after-hours price fell to $130.00 a drop of 1.96% when it closed at 7.59pm EST.

Zoom 1 Day Chart (from Yahoo Finance)

Zoom did not have a bad quarter and the drop is largely due to the lower guidance provided for the next fiscal year.

Zoom beat both EPS and Revenue as per 28 Feb 2022 earnings

The forecasted quarterly EPS and Revenue stood at $1.07 and $1.05B.  The actual came out better at $1.29 and $1.05B for EPS and revenue respectively.  For beating the market forecast, it is proven once again that the guidance can weigh heavier on the market sentiments.

Zoom's FY22 performance overview

Now, let us look into some of the highlights for Zoom <as per their earnings slide>:

• There is a 55% year on year revenue
• Non-GAAP operating margin stands at a commendable 40.4%
• Adjusted Free Cash Flow margin stood at a good 38.0%

Comparing Q4FY21 to Q4FY22, these are the highlights

• 66% increase in customers contributing over $100K in trailing 12 months revenue (comparing Q4FY21 to Q4FY22)
• 9% increase in customers with more than 10 employees 
• 35% increase in enterprise customers but the TTM net dollar expansion rate for this group of enterprise customers is 130% for FY22.  This means that the enterprise customers are increasing their spending with Zoom.
• There is also growth proportionately for online customers (25% in Q4FY20 to 50% in Q4FY22) compared to Enterprise customers.

Growth in all regions

• Year on year, good revenue growth is seen in all regions (Americas, EMEA and APAC). APAC and EMEA grew a total of 23% and Americas grew 2%. 
• Year on year, APAC grew from $118M to $155M, EMEA grew from $171M to $200 and Americas from $593M to $717M.
• Based on GAAP results, the Q4FY22 quarter saw a 21% YoY growth at $1,071M.  
• Q4FY22 cash position is better compared to Q4FY21 ($5.4B vs $4.2B) with $209M in operating cash flow and $274M in adjusted free cash flow.

Outlook for Q1 and Fiscal Year 2023 outlook:

Q1/FY2023 outlook

• The FY23 revenue forecast is $4.53 - $4.55B with non-GAAP operating income $1.43 - $1.45B, weighted average share count at 312 million and non-GAAP EPS between $3.45 to $3.51

Extract from WSJ:

Zoom forecast total revenue between $1.07 billion and $1.08 billion in the first quarter of the 2023 fiscal year, below analysts’ expectations of $1.1 billion. The high-end of its guidance would mean sales growth of roughly 12%.

For the year, the company said it expects revenue to range from $4.53 billion to $4.55 billion, up about 11% for its recently completed fiscal 2022.

Zoom has provided a forecast revenue growth of 11% (based on completed FY22).  This is much lower than the market's expectation. Revenue grew from $2.651B (FY21) to $4.099B (FY22) - 55% growth but for FY2023, the revenue growth forecast is a "very modest" 11%.

GAAP to Non-GAAP reconciliation

With a 55% increase in YoY revenue, we see growth in both GAAP and non-GAAP operating margins (25.9% and 40.4% respectively).

Net income (GAAP) attributable to common shareholders has increased from $671M to $1,375M, a solid 104% increase YoY.  

We see an improvement of EPS (GAAP net income per share diluted) from $2.25 (FY21) to $4.50 (FY22).

Some concerns:

Stock-based compensation expenses (SBCE) and related payroll taxes grew from $290M (FY21) to $504M (FY22).  This is a whopping 73.4% increase. 

We are expecting more shares dilution in the coming year (weighted average share count 309M to 312M).  This leads to a drop in EPS.  From FY21 to FY22, we have already seen an increase in weighted average shares by about 7.6 million.  For FY22, the dilution will. be lesser and a portion of it is likely for SBCE.

Cash Flow 

We see a significant drop in cash flow from operations, $399M (Q4FY21) to $209M (Q4FY22). This is something that we need to monitor for the next quarter. For FY, the cash flow from operations improved from $1,471M (FY21) to $1,605M (FY22).

We also see a significant increase of net cash used in investing - from -$1,562M (FY21) to -$2,859M (FY22).  We need to monitor the profitability of the investments made.

In the end, FY22 ended with an adjusted free cash flow (non-GAAP) margin of 38.0%, a drop from 52.5% in FY21.  Let us monitor this.

Historic Metrics for last 2 years

From the chart above, revenue continues to grow but it seems to be plateauing.  With the recovery of the economies from Covid, this is expected and revenue growth may not be sustainable.  However, the management has advised with 11% revenue for the next fiscal year, meaning that there is still potential for growth. We also see an increase in spending by enterprise customers.  The next quarter's earnings will be important to confirm if they have peaked in terms of revenue generation.

Both Operating cash flow and FCF for Q4FY22 were amongst the lowest for the last 2 years.  This trend is worrying despite the growing enterprise customers.  There is also concern from customers > 10 employees.  Next quarter's update may lead to a decline though enterprise customers continue to continue largely for revenue.

Conclusion

The lesser than expected guidance for FY23 led to the aftermarket price drop despite beating the quarterly focus in both EPS and revenue.  There are some increases in costings like SBCE but the growth of net income is larger.  It is likely the stock should suffer in the short term due to guidance.  Pre-market price has dropped to $129.00 -3.60 (-2.71%) as per 04:28AM EST, 01 Mar 2022.

There are potential for some profits for short term trade as this is a company that is still making profits.  With the world learning to live with Covid, it is likely to transit into a hybrid of work from home arrangements.  Zoom will have her part to play but business travel is likely to resume gradually with management turning to Zoom as an alternative.  This is one stock that can benefit from black swan events when movements are restricted.  Zoom is likely to remain a part of our immediate future.  Personally, I will monitor this as there are other equities with more potential for upside, especially with the Fed's pending interest rate hike.

As always, please research before investing.