Zoom earnings skyrocket as use booms amid coronavirus

Rosenblatt Securities Managing Director & Senior Analyst Ryan Koontz joins Yahoo Finance’s Zack Guzman to break down Zoom's latest earnings report.

Video transcript

ZACK GUZMAN: We are watching Zoom shares zooming higher by about more than 5% today after the company reported earnings after the bell yesterday. Importantly, it delivered on mostly all fronts here. The company doubled its revenue guidance for the fiscal year, that being noteworthy as well as just the general trend. Of course, shares have more than tripled here year to date as people have shifted to working from home. And Zoom has solidified itself as a leader in the videoconferencing space. But a lot of questions now surround whether or not the company can maintain that performance moving forward, especially as it seems like things improve and businesses start to reopen and whether or not that shift will be sustained in working from home.

Here to answer that is Ryan Koontz, Rosenblatt Securities Managing Director and Senior Analyst joins us now. And Ryan, importantly, you boosted your price target on Zoom to $210 a share from $150. What was your take on the quarter and whether or not you think that Zoom can keep this up?

RYAN KOONTZ: Yeah, incredible performance, really outpacing their own expectations and most of the Street. You know, clearly a big beneficiary of COVID, work from home, educate from home, happy hour from home, and just absolutely-- their business absolutely exploded. Perhaps more importantly, their guidance for Q2 was even up 240% year over year, even further acceleration.

The company had a little challenge in terms of guiding second half, saying we're going to assume it remains basically flat in the second half, as we have some churn out from the consumer and small business side. And they really remain focused on the big enterprise opportunity, which is where the company is really focused on. So that's what investors really pay attention to, I think, is how-- how do they track on the enterprise.

ZACK GUZMAN: Yeah, I guess that's the important point here, right? Because obviously if they benefited from the shift to home, it's very important whether or not it maintains moving forward. They've noted that churn though, when you talk about customers contributing more than 1,000-- $100,000 in trailing year revenue up 90% from the same quarter last fiscal year. But they did note that churn in the second half of this year is expected to be higher, as customers who only purchase about monthly subscriptions. That's going to be going up.

So when you look at it, how are they positioned in terms of maybe maintaining things, even if they do lose some customers that were only here for the work from home period?

RYAN KOONTZ: Sure, yeah, I mean, it really comes down to a big battle between Zoom and Microsoft and their Teams product as well as Cisco Webex, who's the big incumbent. So it's really merging to be the big three there. Zoom, certainly with these kind of results, has the financial resources to invest in the business, build out those enterprise channels, really make a big run here. I think they're going to be very successful in the kind of mid-market space, clearly with schools and education, health care, and things like that. But we'll see how they do in enterprise. I think that's where investors are really going to focus their attention.

ZACK GUZMAN: Yeah, and as we opened, you boost your price target. But you kept a neutral rating on the stock. Is that more indicative of maybe how far, you know, the valuation relative to its peers might have run here. Obviously, when you're dealing with a stock that's tripled in a year, it becomes the main question. So how do you judge Zoom versus the valuations we're seeing applied to its competitors?

RYAN KOONTZ: Yeah, I mean, it's trading at near 35 times this year's revenue, which is quite-- quite difficult to stomach, I think, for some investors. You know, I think a lot of the enterprise success is built into that multiple. And you know, from-- from my perspective, I need to see a little more progress on the enterprise front before I get a lot more constructive on the stock, quite honestly.

ZACK GUZMAN: When you say progress, though, what are the most important metrics you'll be watching there as we try and gauge whether or not it can keep this up? Because we have heard analysts crowning Zoom, basically saying it was the strongest quarter they've seen out of any enterprise software. We heard that from one analyst. Another one saying that nothing like this has ever been done, basically delivering for years in a quarter. I mean, what are we talking about when you try and put that in relative terms and how hard it is to keep progress like that up?

RYAN KOONTZ: Well, the consumer and small business side isn't all that sticky. So I don't think you get as much credit as in that segment as you do in the enterprise, where that's where the big dollars are, the better margins, lower cost of sales, a much more sticky business. So that's where I'm really focusing my attention in terms of assessing the company. Even in Q2, I think they could show some much better results in enterprise as more of those new enterprise contracts are applied for a full quarter that were recently signed. So I'd really be paying attention to the metrics coming out of Q2 and seeing how they progress. But I'm expecting some pretty good numbers. But let's see it translate to the bottom line.

ZACK GUZMAN: Well, lastly, before we let you go. We always talk about competition in the space and what most companies like this have to really protect themselves against people shifting away to a Microsoft Teams or a Cisco Webex. When we're talking about that, what are you seeing out of Zoom that might make them be able to defend the lead that they've clearly established here in 2020?

RYAN KOONTZ: Yeah, I mean, they've built a brand. I mean, being in the right place at the right time here and having that easy to use position in the market, the adoption. I mean, that's a marketing brand you can't pay enough for. So that's a huge lever. And now they've got to really build up those enterprise channels for the company going forward.

I mean, it's-- it's not-- it's not an easy road to do, to head down that path. But you know, I think you know, they've got a very good shot. You know, they've got great momentum. And you know, we'll see. We'll see. I think there was a lot of buzz, you know, a couple of months ago, a month or so ago about the security issues. And I think they've done a great job putting those in the rear-view mirror here and addressing most of those.

ZACK GUZMAN: Yeah.

RYAN KOONTZ: And as they further penetrate the enterprise, there's gonna be a lot of scrutiny. And I think they're up to the task there.

ZACK GUZMAN: All good points. I mean, not a lot of things that you can think about using, whether it's after work happy hour, a business meeting, or just hanging out with friends. And nonetheless, Zoom has solidified themselves doing all those things here this year. But Ryan Koontz, appreciate you taking the time, Rosenblatt Securities Managing Director and Senior Analyst, thanks again.

RYAN KOONTZ: Thank you.