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Why Is Zoom Video (ZM) Down 12% Since Last Earnings Report?

It has been about a month since the last earnings report for Zoom Video Communications (ZM). Shares have lost about 12% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Zoom Video due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Zoom Q1 Earnings Beat, Enterprise Customers Drive Revenues

Zoom’s first-quarter fiscal 2025 adjusted earnings of $1.35 per share beat the Zacks Consensus Estimate by 13.45% and increased 16.4% year over year.

Revenues of $1.14 billion beat the consensus mark by 1.41% and increased 3.3% year over year on strong growth from Enterprise customers. Adjusting for foreign currency impact, revenues in constant currency were $1,143.6 million, up 3.5% year over year.

Revenues increased 4% in America and 2% in EMEA, while international market revenues from APAC decreased 2% year over year.

Quarter Details

Enterprise revenues were $665.7 million, up 5.3% year over year and represented 58.3% of total revenues. Customers contributing more than $100,000 in revenues in the trailing 12 months grew 8.5% to 3,883. These customers accounted for 30% of revenues, up from 29% in the year-ago quarter.

In the first quarter, as part of an effort to improve the customer experience and drive greater efficiency in operations, the company transitioned 26,800 Enterprise customers with low annualized revenue run rate (ARR) to Online.

The number of Enterprise customers at the end of the first quarter, after accounting for the transition, was approximately 191,000.

The company reported a trailing 12-month net dollar expansion rate for Enterprise customers of 99%.

As of the end of the quarter under review, the cumulative number of Zoom Rooms licenses purchased was over 2 million.

In the quarter, Zoom landed a major telecom customer on Workvivo, who bought approximately 100,000 seats. Workvivo was named Meta Platform’s only preferred migration partner for its customers as it retires Workplace from Meta.

Zoom witnessed additional traction in Zoom Contact Center as it reached 90 customers with over $100,000 dollars in ARR, representing 246% year-over-year growth. This was driven by its recently launched higher pricing tiers as well as its success in larger deals.

The company now has five customers with 100,000 or more Zoom Phone seats. Zoom AI Companion has grown significantly in just eight months with more than 700,000 customer accounts enabled as of date.

Non-GAAP Operating Details

Non-GAAP gross margin in the first quarter was 79.3%, which was slightly lower than 80.5% in the year-ago period, mainly due to investments in AI innovation.

Research and development expenses increased 9.8% year over year to $116.72 million. Sales and marketing expenses declined 4.9% to $264.58 million, while general and administrative expenses plunged 19.5% to $67.2 million.

Operating income rose 8.1% to $456.6 million year over year. The operating margin came in at 40% compared with the year-ago quarter’s operating margin of 38.2%.

Balance Sheet

Total cash, cash equivalents and marketable securities, as of Apr 30, 2024, were $7.4 billion.  As of Jan 31, 2024, cash, cash equivalents and marketable securities were $7 billion.

Net cash provided by operating activities was $588.2 million for the first quarter, up 40.6% year over year. Free cash flow was $569.7 million, up 43.6% year over year.

Guidance

Zoom expects second-quarter fiscal 2025 revenues to be between $1,145 and $1,150 million.

Non-GAAP earnings per share are expected in the range of $1.2 to $1.21.

In the second quarter, Zoom will incur one-time investments to upgrade the data center backbone and expects gross margins to dip to 78%.

For fiscal 2025, Zoom expects revenues in the range of $4.61-$4.62 billion.

Non-GAAP earnings per share are expected in the range of $4.99 to $5.02.

For fiscal 2025, the company continues to expect the gross margin to be approximately 79%.

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How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Zoom Video has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Zoom Video has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Zoom Video is part of the Zacks Internet - Software industry. Over the past month, Model N (MODN), a stock from the same industry, has gained 0.3%. The company reported its results for the quarter ended March 2024 more than a month ago.

Model N reported revenues of $65.11 million in the last reported quarter, representing a year-over-year change of +4%. EPS of $0.24 for the same period compares with $0.22 a year ago.

Model N is expected to post earnings of $0.36 per share for the current quarter, representing a year-over-year change of +2.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -29.4%.

Model N has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.

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Zoom Video Communications, Inc. (ZM) : Free Stock Analysis Report

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