Zoom posts huge revenue, earnings beats

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down Zoom’s Q1 earnings report with JMP Securities Senior Analyst Pat Walravens.

Video transcript

ALEXIS CHRISTOFOROUS: Zoom is a big mover this morning after the video-conferencing service absolutely blew past Wall Street expectations with its earnings report. Quarterly revenue up 169%. It earned $27 million versus just about $200,000 in the same quarter last year. Also, Zoom doubling its previous guidance for sales this fiscal year and tripling its profit forecast. It's now forecasting to take in upwards of $1.8 billion this year. Let's talk more about this now with Pat Walravens who covers Zoom at JMP Securities. So, Pat, I mean, we all knew this report was going to be good, but did you expect it to be this good?

PAT WALRAVENS: No, I have-- and thank you for having me, by the way. And no, I've never seen anything like it, and I've been covering the software industry for 20 years.

So we knew that the adoption had been massive. They told us that their number of daily meeting participants had gone from 10 million to 300 million in March. And we're all living through it, right? Our IPO meetings are now on Zoom. Our children are going to school on Zoom. We're connecting with our parents and our friends on Zoom. But the big question heading into this was how is that going to translate into revenue and bookings? And it absolutely blew away what anyone was expecting.

BRIAN SOZZI: Pat, let me read this quote from you on the earnings call from Zoom founder Eric Yuan. Quote, "I truly believe video is a new voice. Video is going to change everything about the communication. The way for us to work, live, and play is completely changed. From that perspective, a huge opportunity, a lot of opportunities ahead of us."

I agree with Eric there, but they did note in the conference call-- the CFO, I believe-- that the demand or usage started to slow down a little bit in May as economies start to open. So is the opportunity that big?

PAT WALRAVENS: Yeah, so that's-- you know, video is the new voice. I thought that was great.

Here's one way to think about it. So they divide their revenue between companies who have 1 and 10 employees-- they call that prosumer-- and then customers who have more than 10 employees, and that's just their regular business.

If you look at that 1 to 10 employee business this quarter-- so heading into the quarter, that was about $150 million a year business, 1 to 10 employees. In the quarter, they added $250 million in new revenue. So that is now a $400 million business.

The bigger part-- so where you have, you know, more than 11 employees, heading into the quarter that was a $600 million business, and they added about $300 million a year. So the real question they have and the reason the guidance wasn't very good-- so the guidance is basically flat with what this quarter was for the next two quarters, and the reason for that is because they're worried that that 400-- all those small users, those prosumers-- might go back down a lot as the economy reopens.

So, you know, when we can actually go to a bar or restaurant, are we still going to be doing Zoom cocktails? Me, probably not.

I love to do yoga. Right now I'm doing yoga on Zoom. Am I going to keep doing yoga on Zoom? No. I'm going to go back to the studio.

Our IPOs are being done on Zoom right now. Will that continue? Now that might. You know, a lot of our business meetings are being done on Zoom. How much of those will continue? Some amount of them. So that's-- I don't think Zoom knows the answer to that question, and that's why there was a little bit of caution from the CFO in that response.

ALEXIS CHRISTOFOROUS: You know, Pat, also I just have to mention on that earnings call I thought it was pretty funny that the CEO, Eric Yuan, had the same issue a lot of us do. When he started to talk, he was muted. He had to unmute.

PAT WALRAVENS: I know.

ALEXIS CHRISTOFOROUS: That was kind of a real moment there. But one of the other areas possibly for concern here has to do with the company's explosive growth because there is the cost of that extra bandwidth which Zoom has to buy from Amazon and Oracle. Is that eating into their margins enough for you to be concerned?

PAT WALRAVENS: So the margins went from, you know, the low 80s down to the low 70s. And it'll gradually work its way back, but it's going to be awhile, and the reason is exactly what you said. , They have so much free usage and so much volume that they couldn't use their own data centers. They had to shift to the cloud, Amazon and Oracle. Nice little win for Oracle, by the way. And that's just more expensive.

They're going to work through that over time, right? Over time, this is fundamentally an 80% plus gross margin business. It'll be fine.

The thing you have to worry about with Zoom is people turning off near term, and longer term, it's competition, right? So my morning meeting at our firm was on Zoom. We're doing this on Google meetings. My meeting after this is on Microsoft Office 365. My teenage daughter uses FaceTime all the time, and FaceTime now has the ability to have a lot more faces in there. My 12-year-old daughter's on Houseparty. There are a lot of these kinds of solutions coming, and the trick for Zoom is how do they stay ahead of everyone else?

ALEXIS CHRISTOFOROUS: That is the challenge. Pat Walravens of JMP Securities, thanks so much for being with us today. Be well.

PAT WALRAVENS: Thank you for having me.