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Zoom Video Stock Drops 7% Despite Earnings Beat and Strong Outlook

By Beth McKenna - Mar 4, 2020 at 8:47PM

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In light of the coronavirus, many investors probably wanted an even brighter outlook.

Zoom Video Communications (ZM -2.79%) turned in strong fourth-quarter and full-year fiscal 2020 results after the market closed on Wednesday.

Despite beating Wall Street's revenue and earnings consensus estimates and issuing better-than-expected guidance on both the top and bottom lines, the videoconferencing specialist saw its shares fall 6.7% in after-hours trading on Wednesday. We can probably attribute the market's initial reaction to disappointment that the outlook wasn't even better. Investors' expectations have increased significantly recently because of the fast-spreading novel coronavirus, COVID-19. The stock ran up 37% in February alone, as investors have been betting that the virus will drive increased demand for the company's videoconferencing products.

Since Zoom's initial public offering (IPO) in April at $36 per share, the stock has gained a whopping 224% through the regular trading session on Wednesday. Given Wednesday's after-hours trading action, that tally looks poised to shrink on Thursday. 

Here's an overview of Zoom's quarter, along with its guidance for the first quarter and full-year 2021. 

Image of a youngish casually dressed man on a computer screen and on a cell phone screen.

Image source: Zoom Video Communications.

1. Revenue soared 78%

Zoom's quarterly sales grew 78% year over year to $188.3 million, easily exceeding the $176.6 million analysts were expecting. Growth continues to be driven by the addition of new customers and expansion of the services the company provides to existing customers.

While this is great revenue growth, it represents a continuation of sequential year-over-year revenue deceleration. Last quarter, revenue increased 85% year over year, while this metric was 96% and 103% in the second and first quarters, respectively. For the full fiscal year, revenue surged 88% to $622.7 million. 

Here's a look at key customer metrics:

Customer Metric

Fiscal Q4 2020

Change (YOY)

Customers with more than 10 employees

81,900

61%

Customers contributing revenue of more than $100,000 in trailing 12 months

641

86%

Trailing-12-month dollar expansion rate for customers with more than 10 employees

Above 130% (for the seventh consecutive quarter)

N/A

Data source: Zoom Video Communications. YOY = year over year. 

2. Adjusted operating income rocketed 292%

Income from operations under generally accepted accounting principles (GAAP) jumped 92% year over year to $10.6 million. Adjusted for one-time items, operating income landed at $38.4 million, up 292% from the fourth quarter of last fiscal year.

3. Adjusted EPS surged 275% 

GAAP net income was $15.3 million, or $0.05 per share, compared with $1.2 million, or $0.01 per share, in the year-ago quarter. Adjusted for one-time items, net income came in at $43.2 million, or $0.15 per share, up from $10.0 million, or $0.04 per share, in the year-ago period.

Wall Street had been looking for adjusted earnings per share (EPS) of $0.07, so Zoom zoomed by the profit expectation, as has been its history since going public.

4. Operating cash flow jumped 129% 

Operating cash flow surged 129% year over year to $36.6 million. Free cash flow skyrocketed 367% to $26.6 million.

5. The outlook for Q1 and full-year fiscal 2021 was better than expected

For the first quarter of fiscal 2021, Zoom guided for revenue between $199 million and $201 million, which, at the midpoint, represents 6.2% sequential growth. It expects adjusted EPS to be approximately $0.10. Going into the earnings report, Wall Street had been modeling for Q1 adjusted EPS of $0.06 on revenue of $185.7 million. So Zoom's outlook on both the top and bottom lines crushed analysts' expectations. 

For the full fiscal year, the company guided for revenue of $905 million to $915 million, which, at the midpoint, represents growth of 46.1% year over year. It expects adjusted EPS to be between $0.42 and $0.45, representing growth of 20% to 29% year over year. Going into the earnings report, the Street had been modeling for fiscal 2021 adjusted EPS of $0.30 on revenue of $868.4 million. So Zoom's outlook on both the top and bottom lines crushed analysts' projections. 

The bottom line

Zoom Video Communications topped a fantastic year with a terrific quarter. The company is simply firing on all cylinders.

Long-term investors shouldn't be concerned about a pullback in the stock, as it's only natural after such a fast recent run-up. 

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Zoom Video Communications Stock Quote
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