Zoom Video Communications (ZM 1.57%) stock declined 8.3% in Monday's after-hours trading session, following the videoconferencing specialist's release of its second-quarter results for fiscal 2023.
Investors' displeasure is largely attributable to management lowering its full-year guidance for both revenue and earnings. Other factors that likely weighed on shares were the third-quarter outlook coming in lighter on both the top and bottom lines than Wall Street had expected, as well as second-quarter revenue falling short of both the analyst consensus estimate and the company's own guidance.
On the positive side, the former pandemic tech stock darling's second-quarter profit comfortably exceeded both the Street's projection and management's outlook.
Below is an overview of Zoom's quarter, along with its outlook, centered around five metrics. Keep in mind that the company had challenging comparables because the year-ago period was still getting a decent boost from the pandemic, as many folks still weren't back to their usual pre-pandemic routines with respect to working from offices and socializing in person.
Image source: Getty Images.
1. Revenue rose 7.6%
For the second quarter of fiscal 2023, which ended on July 31, Zoom's revenue increased 7.6% year over year to $1.1 billion. This result was lower than the $1.12 billion analysts were expecting and the company's guidance of $1.115 billion to $1.12 billion.
For context, in the first quarter, Zoom's revenue grew 12% year over year to $1.07 billion.
The company's Q2 revenue was hurt by "the strengthening of the U.S. dollar, performance of the online business, and to a lesser extent sales weighted to the backend of the quarter," CFO Kelly Steckelberg said in the earnings release.
Here are the key customer metrics:
| Customer Metric | Fiscal Q2 2023 | Change (YOY) |
|---|---|---|
| Enterprise customers | 204,100 | 18% |
| Customers contributing revenue of more than $100,000 in trailing 12 months | 3,116 | 37% |
| Net-dollar expansion rate for enterprise customers in trailing 12 months | 120% | Result was "above 130%" in year-ago quarter |
Data source: Zoom Video Communications. YOY = year over year.
For context, last quarter, the number of enterprise customers rose 24% year over year to 198,900, and the number of enterprise customers contributing more than $100,000 in trailing-12-month revenue jumped 46% to 2,916. So, the year-over-year growth in both these metrics slowed sequentially, though both are still good results.
The 120% net-dollar expansion rate means that existing customers expanded their spending with the company by an average of 20% year over year. This metric also edged down from the first quarter, when it was 123%. Nonetheless, 120% is still a solid result.
2. Adjusted operating income fell just over 7%
Income from operations under generally accepted accounting principles (GAAP) was $121.7 million, down from $294.6 million in the year-ago period. Adjusted for one-time items, operating income came in at $393.7 million, down 7.3% year over year.
3. Adjusted EPS declined 23%
GAAP net income was $45.7 million, or $0.15 per share, down from $1.04 per share in the year-ago period. Adjusted net income landed at $323.5 million, or $1.05 per share, down 23% year over year.
Wall Street had been looking for adjusted earnings per share (EPS) of $0.93, so the company easily beat this profit expectation. It also surpassed its own guidance of $0.90 to $0.92.
4. Operating cash flow dropped 45%
In fiscal Q2, operating cash flow declined 45% year over year to $257.2 million. Adjusted free cash flow decreased 51% to $222.1 million.
Zoom ended the period with $5.5 billion in available cash, cash equivalents, and marketable securities.
Data by YCharts. Shares got a huge boost from the earlier stages of the pandemic, which drove a surge in the number of people using the company's services for working, learning, and socializing from home.
5. Fiscal 2023 revenue is now expected to grow about 7.1%
Management issued third-quarter guidance and revised downward its full-year outlook.
For Q3 (August through October), management guided for revenue between $1.095 billion and $1.1 billion, growth of 4.2% to 4.7% year over year. It also expects adjusted EPS of $0.82 to $0.83, a decline of 26% to 25%.
Going into the release, Wall Street had been modeling for Q3 adjusted EPS of $0.90 on revenue of $1.15 billion. So, Zoom's guidance for both the top and bottom lines fell short of the analyst consensus estimate.
For full-year fiscal 2023, management expects the following:
- Revenue of $4.385 billion to $4.395 billion, down from the prior range of $4.53 billion to $4.55 billion.
- Adjusted EPS of $3.66 to $3.69, down from $3.70 to $3.77.
The updated full-year outlook represents expected annual revenue growth of 7% to 7.2% and an adjusted EPS decline of 28% to 27%.
A mixed report
It's understandable that investors are not pleased with Zoom's full-year guidance cuts. However, in the longer-term scheme of things, these downward revisions aren't that large. Moreover, it seems probable that after missing its own Q2 revenue guidance, management is now being very conservative with its full-year outlook.
While the company's cash flows are down from the year-ago period, they remain robust; and its key customer metrics indicate that it's still nicely growing its enterprise business.
