Zoom Earnings Follow-Up
Last week Zoom (NASDAQ: ZM) reported Q4 and FY 2022 results.
In their prepared remarks, they communicated a change in reporting metrics going forward. To more closely align with how management views the business, Zoom will now segment the business into Enterprise and Online and report the number of Enterprise Customers and the Net Dollar Expansion rate for Enterprise Customers.
source: Zoom Q4 2022 earnings deck
In conjunction with this, they will continue to report the number the number of customers with >10 employees through the end of this year before retiring that metric.
Coincidentally (or not), Zoom also reported that the number of customers with >10 employees fell sequentially for the first time in Q4, from 512k in Q3 to 510k.
So, yes, the cynic in me finds it a convenient time to shift reporting from one (shrinking) customer segment to another (growing) customer segment. It’s not great that the business lost customers in that segment — I believe this is what caused the stock to trade down in the wake of the report.
That said, the shift does make sense to me, and it more closely aligns with my thesis for the stock (can grow faster for longer than is currently being discounted due to superior product taking share in growing market) and where I would prefer the business invest in growth (in the enterprise). Whether I’m viewing through bias-confirming rose-colored glasses or not, time will tell.
However, you’ll remember that our assessment of the unit economics of Zoom’s business relied on the previously favored customers >10 employees metric which will be going away. As such, I’ve re-run the analysis with management’s new preferred metrics. Again, you can say this is cherry-picking segments of the business that are outperforming, but we can only work with what management will give us and make a decision on whether to throw-in with them or not.
Plus, I’ve been extra-conservative this go-round, attributing 100% of sales & marketing spend to CAC for the Enterprise business (meaning you’d get all the business from “online” customers — which is still 50% of total revenue — for no up-front cost). Below are tables comparing the unit economics for the new reported metrics vs. the old which was included in my write-up a couple weeks ago.
The Enterprise segment (top, Q4 run-rate) looks like a slightly more attractive business than the employees >10 customers segment (bottom, Q3 run-rate), and actually perhaps quite a bit more attractive when you consider that I conservatively lumped 100% of sales & marketing expense into CAC this time vs. only ~2/3rds last time.
Zoom Enterprise Unit Economics, Q4 2022 run-rate:
Zoom Customers >10 Employees Unit Economics, Q3 2022 run-rate:
Again, nothing to write home about, but confirmation that Zoom is still growing profitably on a unit by unit basis, with very conservative inputs.
All in all, despite the surprise of negative sequential growth in the customers >10 employees segment, I’m incredibly bullish on the stock at today’s price of $108.49, which with $5 billion in cash puts the enterprise value at $27 billion.
That’s 17x last year’s FCF for a hugely cash generative secular grower. I think in the bear case you get 20% annualized returns on the stock for the next 5 years based on 20x FY2027 projected EBIT of $3.88bn.
Ark laid out the bull thesis better than I could here. Please read it before you laugh.
Cathie Wood and her team take a lot of heat for some of their forward looking projections, but overall I find them well-reasoned, and their pitch on Zoom particularly compelling.
Finally, management agrees the stock is undervalued, with the board newly authorizing a $1 billion share repurchase, which of course we love.
In this environment, the combination of sustainable secular growth plus return of capital helps me sleep well at night.
I have 5% of my stock portfolio (~1.33% net worth) currently invested in the stock. I typically limit my position size to 5% at cost but I will admit I have not been as bullish on a stock as I am on Zoom at these prices and in this environment.
More to come on the macro environment in later posts, but I’m anticipating a hot CPI print on Thursday, perhaps combined with more negative news flow out of Ukraine, has the makings of putting in a bottom later this week, if it’s not in already.
Disclosure: I own shares of ZM
Disclaimer: nothing published in this newsletter is financial advice. The author may be long or short any of the securities or assets discussed at any time before or after publishing.