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Zoom Earnings: Zoom Phone Hits 10% of Revenue and Online Business Begins to Recover

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Narrow-moat Zoom ZM reported strong fiscal first-quarter results ahead of our expectations on both the top and bottom lines, featuring revenue above the top end of guidance and non-GAAP profitability well ahead of the company’s outlook. Enterprise was solid but continues to decelerate, while the online business showed signs of life a couple quarters earlier than expected. Currency headwinds have eased even if the demand environment remains cautious based on uncertain macro conditions. Importantly, management disclosed that Zoom Phone revenue surpassed 10% of total, pointing to continued traction. Zoom lifted its outlook for the year, but mostly because of this first-quarter upside, so we are therefore holding our fair value estimate steady at $95 per share. Shares are undervalued, but we continue to prefer other wide-moat names across software.

Revenue grew 3% year over year as reported, or 5% in constant currency, to $1.105 billion, compared with the top end of guidance of $1.085 billion. Consistent with the last several quarters, enterprise revenue was a highlight, up 13% year over year, while online business has begun to show signs of improvement. Online average monthly churn improved to 3.1%, compared with 3.6% a year ago, while price increases further helped stabilize the business. Europe and Japan remain sluggish. Customers with more than $100,000 in trailing annual revenue grew 23% year over year against a challenging 46% growth comparison last year.

Zoom’s profitability remains impressive, but we think margins are at a short-term peak and do not have much room to expand from current levels. In the first quarter, non-GAAP operating margin was 38.2%, compared with 37.2% a year ago, and the midpoint of guidance at 34.8%. Management undertook a variety of cost saving, productivity, and efficiency measures that began in the fourth quarter and culminated with a substantial reduction in force of 15%, or 1,300 employees overall.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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