Zoom Video Communications (ZM 1.57%) stock is up 0.6% in Monday's after-hours trading as of 7:46 p.m. ET, following the cloud-based communications company's release of its results for the third quarter of fiscal 2024 (ended Oct. 31).
The stock's modest rise is attributable to the quarter's revenue and earnings exceeding Wall Street's consensus estimates and management increasing annual guidance on the top and bottom lines. A main reason for investors' tepid response is likely concern about the continued deceleration in the enterprise segment's year-over-year revenue growth.
Here's a look at Zoom's Q3 and guidance centered around five key metrics.
1. Revenue edged up 3.2%
For fiscal Q3, Zoom's revenue rose 3.2% year over year (and 3.5% in constant currency) to $1.14 billion. This result was higher than the $1.12 billion analysts were expecting and the company's guidance range of $1.115 billion to $1.120 billion.
Growth was driven by Zoom's enterprise business, whose revenue grew 7.5% year over year to $660.6 million. The online segment's revenue was down 2.4% to $476.1 million.
The enterprise business's year-over-year revenue growth continued its deceleration. In Q1 and Q2 of the current fiscal year, this metric was 13% and 10%, respectively. For the full fiscal year of 2023, it was 24%.
| Customer Metric | Fiscal Q3 2024 | Change YOY |
|---|---|---|
| Enterprise customers | 219,700 | 5% |
| Customers contributing revenue of more than $100,000 in trailing 12 months | 3,731 | 14% |
| Net-dollar expansion rate for enterprise customers in trailing 12 months | 105% | Down from 117% in the year-ago period |
| Online segment average monthly churn | 3% | An improvement of 10 basis points (0.10 pp) |
| Percentage of online business MRR* from online customers with a continual term of service of at least 16 months | 73.2% | Up 250 basis points (2.50 pp) |
Data source: Zoom Video Communications. Fiscal Q3 2024 ended Oct. 31, 2023. YOY = year over year. *MRR = monthly recurring revenue. pp = percentage point.
The 105% net-dollar expansion rate for enterprise customers means that existing enterprise customers expanded their spending with the company by an average of 5% year over year. This is not a robust result.
This metric has been declining. In Q1 and Q2 of this fiscal year, this metric was 112% and 109%, respectively. Management has said enterprise customers have been cautious in their spending for a while due to uncertainties in the macroenvironment.
2. Adjusted operating income grew 17%
Income from operations under generally accepted accounting principles (GAAP) was $169.4 million, up 194% from the year-ago period. Adjusted for one-time items, operating income landed at $447.1 million, up 17% year over year.
3. Adjusted EPS jumped 21%
GAAP net income was $141.2 million, or $0.45 per share, up 181% from the year-ago period. Adjusted net income came in at $401.2 million, or $1.29 per share, up 21% year over year.
Wall Street had been looking for adjusted earnings per share (EPS) of $1.00, so the company zoomed by this profit expectation. It also sped by its own guidance of $1.07 to $1.09 per share.
4. Operating cash flow soared 67%
The quarter's operating cash flow surged 67% year over year to $493.2 million. Free cash flow jumped 66% to $453.2 million.
Zoom's balance sheet remains robust. The company ended the quarter with $6.5 billion in available cash, cash equivalents, and marketable securities, and no long-term debt.
5. Fiscal 2024 adjusted EPS is now expected to rise about 13%, up from 6% to 7%
Management issued Q4 guidance and raised its annual outlook.
| Metric | Fiscal Q4 2024 Guidance |
Fiscal Q4 2024 Projected Change YOY* |
Prior Fiscal 2024 Guidance | Current Fiscal 2024 Guidance | Fiscal 2024 Projected Change YOY* |
|---|---|---|---|---|---|
| Revenue | $1.125 billion to $1.130 billion |
0.6% to 1.1% |
$4.485 billion to $4.495 billion | $4.506 billion to $4.511 billion |
2.6% to 2.7% [Prior: 2.1% to 2.3%] |
| Adjusted EPS | $1.13 to $1.15 | (7.3%) to (5.7%) | $4.63 to $4.67 | $4.93 to $4.95 | About 13% [Prior: 5.9% to 6.9%] |
Data source: Zoom Video Communications. *Calculations by author.
Going into the release, Wall Street had been modeling for Q4 revenue and adjusted EPS of $1.13 billion and $1.00, respectively. So, Zoom's revenue guidance came in about in line with expectations, while its profit outlook was notably better than analysts had been expecting.
A mixed bag
In short, Zoom Video Communications' report was a mixed bag. The positives included adjusted EPS growing a solid 21%, operating and free cash flows continuing to be strong, and management notably raising its bottom-line guidance for the year. However, for the company to grow profits over the long term, it will need to halt and reverse the year-over-year deceleration in the enterprise business's revenue growth, which stems largely from the declining net-dollar expansion rate.
