Zoom's Q3 Earnings: 3 Investors Weigh In

On Nov. 22, Zoom (ZM 1.46%) reported earnings for its fiscal 2022 third quarter, which ended on Oct. 31. Despite a strong quarter of growth and a robust year of earnings so far, the stock is now down by nearly 50% year to date.

In this segment of Backstage Pass, recorded on Nov. 22, Fool contributors Brian Withers, Trevor Jennewine, and Rachel Warren discuss Zoom's recent financial performance and their personal takes on the company's long-term growth trajectory. 

Brian Withers: Let me comment on the Q4. So, 19% sounds like a disappointing growth number for Zoom. Even the 35% that they hit this quarter. I looked -- it looks like the market isn't moving on the news, which means, I think, the company did a nice job of setting the stage and talking about realistically where they're going.

The other thing to remember is these two quarters, this Q3, that they had a 35% growth, and Q4, which they're projecting a 19% growth, on top of the [laughs] 366% growth in Q3 [fiscal 2021] and 369% growth last Q4.

Most companies who quadrupled their revenue the last quarter would see a decline, and nope, not Zoom. They're continuing to churn through it.

Trevor Jennewine: Yeah. That was my point exactly. The revenue growth last year was just tremendous, so the fact that it does look a little bit disappointing when you see figures like mid-30s or even high teens. But in comparison to what they did last year, I think it's actually pretty impressive that they're still growing like that. Overall, I think a lot of the metrics for this company are moving in the right direction. Gartner just recognized Zoom as a leader in meeting solutions and a leader in the unified communications-as-a-service industry. I think they're getting that analyst recognition. They've got a big market opportunity. They are really disrupting that whole corporate communications space. I think there's still plenty of upside for this company.

Withers: Rachel, you've been quiet. You've taken all this in. How do you feel the quarter went?

Rachel Warren: I'm pleased. I get that some of these numbers might kind of throw investors off a little bit at first, but I think this is good news all around. I was scrolling through the press release while you guys were chatting so I could see any particular high points that stuck out to me.

I think this number -- number of customers contributing more than $100,000 in trailing 12-month revenue, up 94% year over year -- I think that's exceptional. You're comparing this to the year-ago period, which is still, one could argue, the height of the pandemic. That's a 94% jump from then.

Clearly, even though Zoom is navigating this changing work environment where more and more companies are perhaps going hybrid, some are going fully remote, but many are still not, and others are going back to the office and still using Zoom in the office -- I think it's to be expected there might be a little bit of an adjustment for Zoom. But clearly, not much of one.

I think that this is a really great point to keep in mind -- that that number is so much higher than in the year-ago period. Another thing that stuck out to me was, net income for the three-month period was about $340 million. In the third quarter of 2020, that was $198.4 million. Again, a huge jump in the bottom line.

It's targeting about $4.1 billion in revenue for the full year, while last year, the company's full-year revenue was about $2.7 billion. That's a big jump. Things are maybe not moving at the pace they were at the height of the pandemic. But I don't think that that's even realistic to expect, and even so, these are all the kind of numbers I think investors would want to see. So I'm pleased.

I think Zoom was down a little bit in after-hours trading, and the stock has obviously been a little bit beaten down in the past months. But ... if investors were maybe worried to see, how is Zoom doing now that "the Great Resignation" is underway, and companies are sort of adjusting back to in-office work in some cases, I don't think there's anything here that should make investors worried. As an investor in Zoom, I'm quite pleased. That's my take.

Withers: Yeah. I think this is their first billion-dollar quarter. I'm trying to remember... no, they did have a billion-dollar revenue last quarter. But their [fiscal] year ending Jan. 31, 2020, which was before the pandemic came into full force, they had $660 million in revenue for the full year. And now they're hitting billion-dollar quarters every quarter. That's just super-solid. Our race car is turning into a tank -- that's how I explained it. [laughs]

Warren: I love that analogy. Also, I think it's important to remember -- Zoom was a pretty high-growth company before the pandemic. I can't remember the numbers off the top of my head, but this is something I've written about in the past. You look back, I think a lot of investors started paying more attention to Zoom during the pandemic, and I totally get that. But this was a company that had a really robust history of growth before that was ever in the picture.

Withers: Yeah, their full year ending January 2020 was only 88% [laughs] prior to the pandemic. There's a couple of slides that Trevor didn't show -- and Trevor, you did a great job highlighting. I'm excited to see all that you brought forward.

This was the number Rachel was talking about, this $100,000 and 94%. So they have about 2,500 customers paying more than $100,000. They didn't release the number, and maybe it will be in the earnings transcript: Last quarter, they talked about the number of customers that were paying more than $1 million in annual revenue, and that number was up significantly.

The other thing I wanted to show you is this thing on the right here. They split their customer segments into two groups. The green is 10 employees or fewer, and the blue here is more than 10 employees, so 11 and up.

So the large companies -- and it kind of makes sense that large companies that have grown throughout the post-pandemic and smaller companies and individuals have become a smaller portion of their overall. I think you're going to see the benefits of these large customers becoming a larger portion of their revenue, and much more stable.

You started out with this slide, Trevor, this 130%, and I was just going to put an emphasis on this. This, to me, is really the story in this company, is -- you start off in one department or one area, and then they continue to grow and expand. I know the CFO, last quarter or the quarter before, faced a question from an analyst that talked about, "Hey, what's the deal? Are you still growing? Doesn't everybody have a Zoom account with you already in the Fortune 500?" And she said, "Well, they may have Zoom accounts, but they may not have enterprise-level agreements." So, I think, Trevor, where you're saying that Zoom Phone had a significant uptick, what I'm guessing that the sales team is doing is bundling. There was a Saturday Night Live skit about Spectrum. The guy called in to cancel Spectrum and they wanted to install a landline. [laughs] It was very amusing. But they're throwing it in as an add-on to help with the enterprise contract. I bet it's saving these companies money, which is why they're signing up, even though they may not be fully back in the office or whatever.

When you say Zoom Phone, just so that folks understand, it isn't necessarily replacing the physical phone on people's desks. It's replacing the back-office capabilities so that it integrates with the Zoom tools. It is, to me, more of a representation of not "Zoom is taking off," [but] "Zoom is becoming a communication platform and not just a video platform."

Warren: Yeah. Another thing that I thought was interesting here was that number for the full year I've found in the press release. They are targeting 54% revenue growth for the full year. It's pretty great as we're adjusting to not being at the height of the pandemic. 54% makes me very happy. I'm sorry, Trevor wants to say something. [laughs]

Jennewine: I think that's a great point. To build on something Brian said earlier: So, the customers with over $100,000 in annual revenue, they represent 22% of all revenue now, which is up from 18%. I think that's good to see those big, stable customers -- spend from those customers increasing. Those are the customers that aren't going to churn.

I think they are building their business out in a good way. I did glance through the prepared remarks again, looking for the million-dollar number, and they don't have that in at least the prepared remarks. Maybe somebody will ask that question on the call. Maybe they're not going to be reporting that this time, but still good to see strong growth in those customers paying over $100,000.

Withers: Not only are they profitable to an amazing amount -- I think, Rachel, you mentioned it was $300-and-something million -- almost a third of what they collect on the top-line flows through to the bottom line. This is an incredibly profitable business and they have tons of cash for optionality.

There we go. You can see their cash balance over here on the left-hand side is increasing significantly. Operating cash flow: $395 million. That's a number even Toby would like. Then free cash flow, $375 million. Those are just really impressive. Then, I did want to see, I've been wondering about the share price. Let's just graph the share price here over the past couple of years. It obviously took off during the pandemic and it's come down significantly over the last ... if you've been a Zoom shareholder since a little over a year ago.

But look at the price-to-sales ratio. This blows my mind. This is the lowest price-to-sales ratio that the company has ever had. So now that it's collecting $1 billion dollars in revenue every quarter, it's dropping a third of that to the bottom line, its cash flow is tremendous, [and] it's got $5 billion on the balance sheet in cash and marketable securities, the market is saying that it's worth less than it was pre-pandemic. Just blows my mind.

I'll make it even a little bigger for you. There you go. We're down to -- you can see, this is the lowest valuation that Zoom has ever been. I'm a big Zoom bull, and I think that the market is going to come around and this company is going to continue to grow. 19% growth in the next quarter on top of a quadruple from last year, that says that this company has a valuable service.

Jennewine: Yeah. I think that number will re-accelerate as we get further out past the pandemic where we're not comparing it to that hyper-growth from last year.

Withers: Yeah, and as more companies come back into the office. And I'm not surprised they didn't call out Zoom Rooms, but as companies figure out their new hybrid strategy, which is likely more and more as I read articles, it's very unlikely that everybody is going to be back in the office at the same time in the foreseeable future. So I think Zoom will play a role in people's day-to-day business lives forever.

Jennewine: Yeah, and I think Zoom Rooms is a big part of that hybrid strategy. I'm with both of you guys. I think this company has a bright future.