Zoom Earnings: Phone and Contact Center Still Hold Key to Growth

Narrow-moat Zoom ZM reported strong fiscal second-quarter results that were meaningfully ahead of our expectations on both the top and bottom lines, while the full-year outlook was raised approximately in line with upside in the quarter. We see two important new and positive disclosures in that Zoom phone reached roughly $500 million on an annualized run rate basis and Zoom contact center surpassed 500 customers in just six quarters. Enterprise remains solid but continues to decelerate, while significant improvements in the online business seem to have plateaued even as management sees no change in the overall demand environment. We modestly lowered our estimates for revenue growth over the next several years based on continued deceleration in enterprise and a pause in online improvements. As a result, we are lowering our fair value estimate to $89 per share, from $95 previously. However, we still see shares as undervalued.

Revenue grew 3.6% year over year as reported, or 4.5% in constant currency, to $1.139 billion, compared with the top end of guidance of $1.115 billion. Enterprise growth continues to outpace overall growth and was up 10% year over year. The online business has shown signs of improvement, with online average monthly churn ticking down to 3.2%, from 3.6% a year ago and is basically at historical levels. That said, management indicated some moderation around this business. Europe and Japan remain sluggish but both seem to be bottoming, as both regions grew sequentially for the first time in more than a year. Customers with more than $100,000 in trailing annual revenue grew 18% year over year against a challenging 37% growth comparison last year.

Zoom’s profitability remains impressive, but we think margins do not have much room to expand from current levels. In the second quarter, non-GAAP operating margin was 40.5%, compared with 35.8% a year ago, and the midpoint of guidance at 36.6%. Headcount reductions last quarter contributed to margin strength.