Top Takeaways From Zoom's Q3 Earnings Report

Despite Zoom's (ZM -0.82%) falling share price in recent months, the company's quarterly earnings reports are stronger than ever. In this segment of Backstage Pass, recorded on Nov. 22, Fool contributors Trevor Jennewine and Brian Withers discuss the highlights of the company's third-quarter report. 

Trevor Jennewine: I'm sure most viewers are familiar with Zoom, it's a video-first communications company. Before we dive in, I wanted to just go through their products real quick since we have a little extra time today. As part of their unified communications platform, they have Zoom Meetings, which is the video conferencing solution. But there's also a Zoom Rooms which pairs that Zoom Meetings with hardware.

Basically lets corporate offices or classrooms, turn themselves into conferencing suites or collaboration suites. That's particularly valuable when you have a hybrid workforce situation. There's also Zoom Phone, which is the cloud-based phone system that consolidates your video and voice communications into a single app, eliminates the need to buy and maintain that expensive onsite hardware, then there's the Zoom developer platform where third-parties can integrate Zoom Video phone chat into different applications.

Those integrations are available to the Zoom app marketplace, and that includes they have integrations with companies like Salesforce, Microsoft, Google, Atlassian.

There's also a newer category, the Zoom Apps. Those are products that are accessible directly within Zoom Meetings. I just wanted to review that real quick and then we're going to hit on the company's third quarter earnings results, which they released today after the market close.

Revenue came in at $1.05 billion. That was up 35%, beat on the top line based on management's guidance. GAAP earnings were $1.11 per diluted share. That was up $0.68, beat on the bottom line. The non-GAAP figure was also $1.11 per diluted share. In non-GAAP terms that was only up 12%.

Free cash flow came in at $375 million, I left the million off there, $375 million, that is down 4% from the prior year. One of the big reasons there is a decrease in deferred revenue. But I have a slide that I'm going to show in just a minute that makes me think that it's not that big of a deal. Some other highlights.

Zoom has over 512,000 customers now. That was up 18%. These are customers with at least 10 employees. 18% growth is a deceleration from the 36% growth in the previous quarter. Then when you look at customers with over $100,000 in annual revenue, there are 2,057 of those. That's up 94%.

Again, that's a deceleration from 131% growth in the previous quarter. Then the expansion rate came in at 130% for the 14th consecutive quarter and I have some slides that I pulled out of their earnings presentation that I was going to go through.

Fourteenth consecutive quarter, that's pretty strong. Expansion the way that they define it, that includes attrition or any down-sells, upsells. Customers are consistently spending more, that's encouraging. Another thing that they mentioned, I briefly glance through their prepared remarks. Zoom Phone actually delivered triple-digit growth than the most recent quarter. There are now 30 customers with over 10,000 Zoom Phone seats.

They also mentioned strong growth in Zoom Rooms. Those two platforms represent a pretty big growth opportunity for the company. I think at their most recent Investor Day, they mentioned that Zoom Rooms had about 5% penetration and the other one had about 4% penetration. 

Getting that land and expand and growth strategy, getting their customers to make use of those platforms is an opportunity for the company. This looks at their revenue from international perspective. I thought it was worth noting that the Americas revenue grew 30% in the quarter.

The rest of the world was up 47%. They're growing more quickly in international markets. On the right-hand side, you can see that Americas revenue still comprises about 67% of total revenue. They still have room to grow there. Then this slide is the remaining performance obligation.

I mentioned that deferred revenue dropped a little bit, but there's still strong growth and RPO, that's up 51% over the prior year to about $2.5 billion. I thought that was a metric worth including.

Brian Withers: Yeah. Trevor, do you mind diving into this slide a little bit and just explaining what the blue is versus the green and what is RPO and what are we looking at? Because I think this is a really important metric when you're looking at Zoom.

Trevor Jennewine: When you're looking at cash flow, if you have deferred revenue, that's revenue that you basically already been paid, but it's for services that you haven't delivered yet. You can't recognize that cash as revenue because you haven't delivered the services. But there's also the sort of the flip side of that situation where a customer signs up for a service or they're contractually obligated, but they haven't actually given you the money yet.

You haven't delivered service and they haven't given you the money, and that would be the unbilled portion, so you see 39% growth in deferred revenue.

That's the money you have for services that have not been rendered and then 64% growth in unbilled that's the money you don't have yet for services you haven't rendered yet. But the clients have indicated that they would like to purchase.

Brian Withers: Then the stuff on the right-hand side is exactly the same. You see this exactly the same two dollar number figures, $1,631 and $2,458, but it cuts it a little bit differently and I cut you off. Go ahead and explain the right-hand-side.

Trevor Jennewine: Nope. That's exactly the case. The same dollar figures, it's just looking at current versus non-current. Going to be recognized this term versus going to be recognized further out. The fact that non-current is growing quickly, I think that's a good sign for the company. What are your thoughts on that, Brian?

Brian Withers: Yeah. I was going to say the non-current is typically and you may see it in the little footnote there is typically 13 months and beyond. The fact that part of the business is growing at significantly higher than the overall average, since the customers are signing longer and larger contracts.

They're locking in Zoom as the video solution for their company for an extended period of time. Let me tell you, you lock in Zoom like that. I think there's real chance that they're going to continue to come around and then reup as their contract comes to an end in two or three years.

Trevor Jennewine: There's was a slide during the Investor Day, I believe, that showed how the retention rate improved the longer they keep a customer on the platform, the retention rate improves tremendously. I think the churn was below 4% once they've had a customer on the platform for 18 months or so.

Brian Withers: That churn that you talk about, it's really in the first few months of a contract and it's more. They lose more of what they've picked up through the pandemic. As customers like you and me, that used to call grandma and our friends and whatnot maybe on a month to month contract or are we signed up for a year. Those are more likely to churn the enterprise level contracts, those large ones are at a much lower churn rate.

Trevor Jennewine: Then I threw the outlook on here for the fourth fiscal quarter and full year. For the next quarter, they're looking for revenue about $1.05 billion. That would be up 19%.

They're looking for non-GAAP earnings per share of between $1.06 and $1.07 at the high end, that is down 12%. A drop in non-GAAP earnings per share. The full-year guidance $4.07 to $4.08 billion, that is a slight raise.

They beat on the top and bottom line and they raise their full-year guidance slightly, which is encouraging.