November 4, 2020

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Zooms parabolic rise continues in Q3 no landing in sight

Zooms parabolic rise continues in Q3 no landing in sight

Zoom’s parabolic rise continues in Q3, no landing in sight Phil Wainewright Tue, 12/01/2020 - 08:14

Zoom continues to grow even as its Q3 earnings show some leveling off - but enterprise progress seems solid

(Photo by SpaceX on Unspl


Video meetings platform Zoom smashed expectations for a third quarter in succession in earnings released after hours yesterday, achieving a $3 billion annual run rate as quarterly earnings hit $777.2 million. But its stock dropped 10% in early trading today as Wall St reacted with a case of Zoom fatigue, apparently worried about decelerating momentum, rising costs, and uncertainty about how the company will fare in the year ahead. Enterprise performance was nevertheless encouraging, with the number of customers who’ve spent more than $100,000 over the past year soaring in the quarter by 300 to 1,289. This category now represents almost a fifth of Zoom’s revenues. In prepared remarks, CEO Eric Yuan cited wins at interactive fitness platform Peloton, a big unified communications deal at global Internet services provider Rakuten, and the deployment of Zoom to 200,000 teachers and 1.2 million students by Israel’s Ministry of Education. The education sector remained one of the strongest growing verticals, pipped by government, which posted the strongest quarter-to-quarter growth. The downside of Zoom’s appeal to education is the cost the company incurs by providing free services to schools, along with increased use of public cloud services while it builds out its own data center capacity. CFO Kelly Steckelberg commented: We ended the quarter with an annualized run rate of 3.5 trillion meeting minutes, approximately 75% growth quarter-over-quarter. We are thrilled that a significant percentage of the usage was from both paid and free participants in the education sector, as millions of students and teachers returned to the classroom virtually. In a separate announcement, Zoom also reasserted its partnership with AWS as its “preferred cloud provider,” revealing a new multi-year agreement to rely on Amazon as an extension to its own data centers. Although Zoom turned to Oracle for additional support during the spike in demand for its services as lockdown began in March, the new deal confirms AWS as its first port of call for support. Zoom Q3 by the numbers Zoom again lifted its guidance for the current year, but continued to hold off making projections for the year ahead, citing uncertainty about the progress of the pandemic and its impact on the economy and work patterns. More on that below, but first here are the topline numbers in brief:

Total Q3 revenue exceeded both the company’s own guidance and analyst forecasts at $777.2 million, up 367% on the same quarter a year ago and surpassing a $3 billion annual revenue run-rate. Year-over-year growth in APAC and EMEA was 629%, while the Americas saw 300% growth. GAAP net income was $198.4 million, or $0.66 per share, compared to $2.2 million, or $0.01 per share a year ago. The non-GAAP equivalent was $292.2 million, or $0.99 per share, up from $25.2 million and $0.09 per share a year ago. Cash holdings at the end of the quarter totaled $1.9 billion. Fiscal 2021 guidance rises once again, with total revenue seen reaching as high as $2.58 billion, equivalent to around 314% growth for the year. Zoom now has 1,289 customers who spent more than $100,000 on its services in the past 12 months, an increase of 301 over the prior quarter and more than double the same quarter a year ago (up 136%). This segment accounts for 18% of total revenue. It now has 433,700 customers with more than 10 employees, an increase of 63,500 over the prior quarter and 485% more than the 73,700 reported a year ago. Trailing 12-month net dollar expansion rate for these customers remained above 130% and they accounted for 62% of revenue. As in Q2, new customers accounted for 81% of revenue growth during the quarter, with the remainder coming from subscriptions added by existing customers.

Asked about the outlook into next year as the pandemic subsides, Steckelberg expressed confidence that “remote work trends are here to stay.” She pointed to some of the new functionality announced at the company’s recent Zoomtopia annual conference that she said would support people in a hybrid environment, where some will work remotely while others return to the office. In particular she cited the potential for Smart Gallery, which uses AI to resize participants' video images and place them in a virtual setting, to help businesses ensure people can participate in those hybrid working environments on equal terms: How they’re going to create an inclusive environment, if they have an employee workforce that is now split between remote and people working in the office? That’s why I’m so excited about for example, Smart Gallery, which is really going to enable and empower an experience that’s beneficial, and really maintains this, I will call the democratization of communication, that’s been created as we’re all working from home — all of our squares the same size on this screen. She also said the company is continuing to recruit to build up its R&D resource, where spend has not kept up with the rapid growth in revenues and now stands at 3% of revenue. “We would really like that to be closer to our long term target margin of 8% to 10%,” she explained. My take With CEO Eric Yuan absent due to what was described as a personal conflict, CFO Steckelberg was in the hot seat for this earnings call. Matters inevitably focused even more than usual on financial metrics, with product getting less attention. There was little reference to the OnZoom virtual events platform announced at Zoomtopia, which is still in beta and hasn’t had pricing announced, and none at all to the Zoom Apps initiative, which we judged to be of most strategic interest for the enterprise market. We look forward to learning more about these initiatives in due course. Nevertheless, there continues to be solid progress in enterprise accounts, which will stand Zoom in good stead once this year’s parabolic growth in consumer, education and small business accounts begins to fade. It will be Zoom’s success in building a solid enterprise customer base that will assure a safe landing from this year’s astonishing trajectory. Quite where it will land though is still impossible to chart at this point in its journey.

Disclosure - Oracle is a diginomica premier partner at time of writing

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Collaboration sharing and digital productivity

Author: Phil Wainewright

Date: 2020-12-01


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