On Monday evening, "pandemic darling" Zoom Video Communications (ZM) released the firm's fiscal first quarter financial results.
For the three month period ended April 30th, Zoom Video posted an adjusted EPS of $1.16, which easily beat the consensus view, on revenue of $1.105B. GAAP EPS hit the tape at $0.05. The revenue print also beat Wall Street, while showing year over year growth of 3.7% (+5% in constant currency). First quarter enterprise revenue increased 13% to $632M, as the number of customers contributing $100K+ in trailing 12 months' revenue was up 23%.
As revenue grew 3.7%, the cost of that revenue increased 3.1% to $263.947M. This put gross profit at $841.417M (+3.6%) on a gross margin of 76.1%, up from 75,6% for the year ago comp. Operating expenses increased significantly to $831.675M +33.1% as expenses for Research & Development, Sales & Marketing and General & Administrative all saw some serious inflation. This left GAAP operating income at $9.742M on a GAAP operating margin of 0.9% (down from 17.4%). Adjusted operating income landed at $422.321M (+5.7%) on an adjusted operating margin of 38.2% (up from 37.2%).
Why the huge gap between GAAP and adjusted performance? Stock based compensation expense increased 31% to $278.048M, litigation expenses swung from a net credit to net debit of $52.5M, and restructuring expenses increased from zero to $73.18M. While an argument can be made over whether or not stock based compensation expense should be recorded as an ordinary expense - I think it should be, especially once firms are past the infancy stage - there is no doubt that expenses related to litigation and corporate restructuring are legitimate adjustments.
Fundamentals
For the quarter reported, Zoom Video generated operating cash flow of $418.487M. Out of this came purchases of property and equipment of $21.826M. That left free cash flow of $396.661M (free cash flow margin of 35.9%). The firm does not pay a dividend and did not repurchase any common stock during the period.
Turning to the balance sheet, Zoom ended the quarter with a cash position of $5.597B and current assets of $6.568B. Current liabilities add up to $1.844B, leaving the firm with an absolutely gargantuan 3.56. Total assets amount to $8.536B including just $304.2M worth of goodwill. This is no problem. Total liabilities less equity comes to $2.012B including a very small amount of deferred revenue. This balance sheet is in excellent shape.
Guidance
For the current quarter, Zoom expects to drive total revenue of between $1.11B and $1.15B, which brings the midpoint above the $1.1B that Wall Street had in mind. In constant currency, the firm sees this as $1.12B to $1.125B. Adjusted operating income is seen at $405M to $410M, and adjusted EPS is seen in a range spanning from $1.04 to $1.06. Consensus was for $106M, so this might be a reason why the stock is selling off this morning.
For the full year, the firm sees total revenue at $4.465B to $4.485B. This is versus a consensus view that was for $4.46B, so this is a positive. In constant currency, this is seen by the firm as $4.495B to $4.515B. Adjusted operating income is seen at $1.63B to $1.65B and full year adjusted EPS is seen at $4.25 to $4.31. Wall Street was looking for about $4.22.
Wall Street
I have only come across six sell-side analysts that are rated at four stars or better at TipRanks and have also opined on ZM since these earnings were released. Across these six analysts, there are five "hold" or hold-equivalent ratings and one "buy" rating. One of the "holds" did not set a target price, so we are working with just five targets.
Across the five, the average target price is $80.80 with a high of $95 (Matthew Harrigan of Benchmark) and a low of $65 (Tyler Radke of Citigroup). I don't think I am going to knock off the high and low as potential outliers as that would leave us with an average of just three targets.
I Am Impressed
Is growth slowing down? Of course. Still, I think Wall Street may be misreading this stock. The stock trades at just 16 times forward looking earnings, with the S&P 500 trading at more than 18 times... meaning that decelerating growth is priced in. Free cash flow generation is strong. The firm is not returning capital to shareholders. The balance sheet is better than fortress-like.
In addition, earlier this year, 50% of office workers had returned to working full time on premises. That was a significant post-pandemic milestone. I saw over the weekend that by at least one measure, that percentage had dropped back down to 42% and by another, it never got beyond 49%. Either way, the white collar return to the office movement has stalled. That's a positive for Zoom Video.
Remote work has become part of white collar culture. While I believe that most workers will have to actually show up a certain percentage of the time, I also believe that very few will have to return to working all day long, five days a week at the location of their employer. I think this selloff may be a gift.
Readers will see that last August, Zoom Video left a gap unfilled as the share price fell out of bed. From there a downward sloping Pitchfork model developed from whence the stock recently tried and failed to break out of.
My opinion is that the shares can be initiated here. If the stock can retake and hold its 21 day EMA (exponential moving average) and 50 day SMA (simple moving average), then I'll have a trade.
Should the shares fail there, price deterioration down to the recent $60 lows becomes likely. After purchasing my first tranche today, I will have no problem adding down to that level. At first my target price will be the filling of that August 2022 gap ($95) and my panic point will be 8% below my net basis when I am done adding.
