2023-10-27 10:36:29 ET
Summary
- Despite the stock's recent performance, ZM has put up solid results and guidance recently.
- The company is doing well with enterprise customers and seeing some nice upsell wins.
- The stock is very inexpensive and flush with cash.
Back in July , I placed a "Buy" rating on Zoom Video Communications, Inc. ( ZM ) saying, although it had risks, the stock was cheap and the company had a lot of cash to play around with. Since then, the stock is down about -18% versus nearly -9% for the S&P 500. Let's take a closer look at the name.
Company Profile
As a refresher, ZM operates a video communication and collaboration platform highlighted by its core Zoom Meetings product, which is also part of its all-in-one collaboration platform Zoom One. Zoom Meetings offers customers HD video, voice, chat, and content sharing that can be used from various devices, and which includes features such as integration with productivity and communication tools, as well as video breakout rooms, virtual backgrounds, and screen sharing. Zoom One also includes a cloud-based phone system; instant messaging; email; calendar; and Zoom Whiteboard, which is an interactive canvas.
The company also has several other solutions, including Zoom Spaces, which offers a software-based conference room system, and a platform to reserve and conference room bookings. It also can provide a virtual event management solution through its Zoom Events platform. In addition, ZM has solutions tailored to customer service contact centers, developers, and an AI solution that provides salespeople with actionable insights.
Solid Fiscal Q2 Results
There is no doubt that ZM was a big beneficiary of the pandemic and work from home, and as such saw a big pull-forward of demand during that period. Not surprisingly, that has led to slower revenue growth for the company. One of the big worries among investors has been with the push of companies to have workers return to the office that ZM would face pressure from gaining new enterprise clients, while there would be pushback from existing enterprise clients when contracts came up for renewal. So far, though, this does not appear to be the case.
For Q2, ZM saw its number of enterprise customers rise nearly 7% year over year to 218,100. The number of customers paying more than $100,000 rose nearly 18% year over year to 3,672 and now represents about 29% of its total revenue.
Trailing 12-month next dollar retention for enterprise customers, meanwhile, was 109%. The company has really been looking to upsell customers to its bundled Zoom One product, which it is seeing some success with. It has also been doing well selling Zoom Contact Center into some existing customers, as well as its Workvivo platform. As a reminder, Workvivo has been described as a corporate intranet or corporate Facebook that promotes employee engagement at a company. ZM bought the fast-growing company earlier this year and highlighted Dollar General Corporation ( DG ) as being a recent win in the quarter for the solution.
Where the company has seen some softness has been with smaller customers, which are primarily online self-service customers that pay with credit cards. Online average monthly churn was 3.2%. That was up 10 basis points quarter over quarter and down -40 basis points from a year ago. The company noted that the churn was near historic lows for the company.
Overall, ZM saw revenue grow 3.6%, or 4.5% in constant currencies, to $1.14 billion. That topped the analyst consensus for revenue of $1.11 billion. Enterprise revenue jumped 10.2% to $659.5 million, while online revenue fell -4.3% to $479.2 million.
Adjusted EPS, meanwhile, came in at $1.34, surpassing the consensus by 28 cents. Operating cash flow soared nearly 31% to $336.0 million.
Looking ahead, the company raised its guidance for the full year and now expects revenue of between $4.485-4.495 billion and adjusted EPS of between $4.63-4.67. That was above its prior outlook for $4.465-4.485 billion in revenue and adjusted EPS of between $4.63-4.67
For the third quarter, it is projecting revenue of between $1.115-1.120 billion and adjusted EPS of between $1.07-1.09. At the time, analysts were looking for revenue of $1.12 billion and adjusted EPS of $1.03.
Discussing the macro environment last month at the Citi Global Technology Conference , Head of IR Tom McCallum said:
"As the macro goes, I've talked to the salespeople last quarter when we're going into earnings, what the head of sales and a number of the regional salespeople told me is that it's gotten better than it was 6 months ago when people were just focused on cutting costs at all expense, just lay people off and that kind of thing. And it's gone back to more sort of last summer, which is still a challenging macro. Deal cycles are still long, lots of sign-offs, but it's not a sort of dire as it was sort of 6 months ago. And so I think that's better. I mean it's still a very challenging macro. And you see it in our business more, I think, on the online side and the international part of our business, international crosses both of those segments. But it shows up in the international numbers, which international used to be a good growth driver for us. Outside the U.S. was faster growing than in the U.S., but it has come back quite a bit. Starting in Europe, probably again, last summer is where we started seeing it. And it has spread a little bit to Asia, not nearly as much, but definitely see it in both of those. And we really need to get international kind of moving as well."
Overall, I think ZM is navigating a tough environment that includes not only a challenging macro, but also the pull forward of a lot of growth as a result of the pandemic. However, it's still growing nicely on the enterprise side of its business, and doing a nice job upselling customers on new products. While the company noted it is experiencing some softness in Europe, Microsoft ( MSFT ) unbundling Teams from its core 365 product in Europe at the start of October could provide a boost in the region moving forward.
Bundling Zoom One and selling Workvivo into its large customer base, meanwhile, continues to represent a nice opportunity for ZM. Meanwhile, the company has also introduced AI into its products that will do things such as provide summaries to meetings.
Valuation
SaaS companies are generally valued based on a sales multiple given their high gross margins and the companies wanting to pump money back into sales and marketing to grow.
In this regard, ZM is valued at an EV/S ratio of about 2.6x based on the FY24 (ending January) consensus for revenue of $4.5 billion. Based on the FY25 revenue consensus of $4.7 billion, it trades at an EV/S multiple of 2.4x.
It is projected to grow revenue 2.2% this year and 3.9% next year.
From an EBITDA perspective, it trades at 6.4x the FY24 and FY consensus of $1.8 billion.
ZM is one of the cheapest SaaS names around, albeit its current growth expectations are among the lowest. That said, the company is trading at what are typically very distressed levels, not a company growing revenue and generating a ton of cash.
Conclusion
While risks remain with ZM given the macro environment and the potential of weaker renewals, so far the company has navigated these issues well and there are positive signs with the company doing well upselling in the enterprise space. I like the moves ZM has made to have a more complete offering in other areas of communication and expect this to help drive future growth when the current environment improves.
In the meantime, investors are getting an incredibly cheap stock that is flush with cash and generating a lot of free cash flow. That can be used for a lot of things including buybacks and accretive growth acquisitions. I rate the stock a "Buy" and think it has potential upside to $100 from here, which would be about a 5x EV/Sales multiple based on FY25 numbers. That's well below the nearly 8x multiple where the average SaaS company was trading at this summer.
For further details see:
Zoom Stock Is Too Cheap To Ignore