It’s no surprise that Zoom's revenue and cash generation growth has been stunning, but when we view the latest earnings through our NLP Insights Platform it returned surprising scores in terms of overall sentiment, margin and in particular, guidance which show a downward trend, so we explore further.

Doug DeMuth
September 21, 2020

Has Zoom Video Communications Peaked?

Has Zoom Video Communications Peaked?

Since the onset of COVID19,  Zoom Video Communications (ZM) has been a stock market darling for justifiable reasons.  Revenue and cash generation growth has been stunning, and Zoom has a highly attractive business model that boasts minimal capital spending requirements and an extremely high return on equity. The company’s lofty trading metrics are understandable.

Thus we were a bit surprised to see relatively pedestrian scores registered on the Amenity NLP Insights Platform:

Amenity Score: Zoom (ZM)

Margin Stands Out for the Wrong Reasons

While Zoom’s explosive revenue growth has driven significant margin improvement in 2020, Amenity’s Margin Score has registered deteriorating sentiment surrounding margins:

Margin Score: Zoom (ZM)

Management has guided toward an expectation of lower margins in the future, as was covered in the company’s most recent earnings conference call:

Kelly Steckleberg, CFO, Zoom Video Communications, Inc.
We expect operating margins to decrease from the peak in Q2 over the balance of this year as our hiring and spending catch up with a much greater scale of our business.
So, you should expect the operating margins to decrease incrementally each quarter going forward as we are continuing to, as you said, invest in R&D, invest more in our sales and marketing teams as well.

Lack of Clarity on Guidance

Perhaps more disappointing, although not to the ZM share price, has been commentary with regard to guidance:

Discussion from the company’s most recent conference call matches this sentiment, when an analyst asked the following question:

Shebly Seyrafi, FBN Securities, Inc., Research Division
But if I assume that your customer count is at least flattish Q-to-Q, your average customer count is going to be up around 16% Q-to-Q, which implies that your ARPU is implicitly going to be down 13% Q-to-Q. And so, my question is I've never seen a double digit decline in your ARPU before, what would drive that?

Management’s response was unclear with regard to customer count and altogether underwhelming:

Kelly Steckleberg, CFO, Zoom Video Communications, Inc.
I think it's more around the uncertainty around the churn and what's going to happen with the overall economy. That's really the uncertainty there and why we're guiding flat from Q3 to Q4 that Q3 and Q4 revenue will be flat modestly up from Q2.

The following is an example of a Deception extraction that ties-in to the Guidance Score:

Kelly Steckleberg, CFO, Zoom Video Communications, Inc.
And we've had a significant increase in our mass market customers where there just remains limited visibility in terms of the long-term contribution for those customers.

We would also point out that over the last the company’s Deferred Revenue and Contract Acquisition Cost figures trended down in the most recent quarter from the FQ1’20. As shown below, cash inflows from Deferred Revenue declined meaningfully, and Deferred Contract Acquisitions Costs did not move down with the same velocity. This could have an impact on both future revenue and margins:

While it seems clear that the demand for Zoom’s product offering will remain in great demand for the foreseeable future, we wonder if the current enterprise value of over $120B has not overshot its business trajectory.

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About Amenity

Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.

This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.

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