Zoom's Q1 lives up to hype, crushes estimates and outlook doubles Wall Street view

There was some question whether Zoom's move to become a household name would turn up in the financials. Zoom's first quarter figures put that question to rest.
Written by Larry Dignan, Contributor

Zoom Video Communications became a household name during the COVID-19 pandemic and the shift to remote work -- and its first quarter reflected the sea change, with sales growth of 169%.

The company crushed Wall Street estimates with first-quarter revenue of $328.2 million, up 169% from a year ago. The company ended the quarter with 265,400 customers with more than 10 employees.

In addition, Zoom reported first quarter net income of $27 million, or 9 cents a share. Non-GAAP earnings were 20 cents a share.

Wall Street was expecting non-GAAP first-quarter earnings of 9 cents a share.

As for the outlook, Zoom projected second-quarter revenue of $495 million to $500 million with non-GAAP earnings between 44 cents a share and 46 cents a share. For fiscal 2021, Zoom projected revenue between $1.77 billion and $1.8 billion and is based on demand for remote work.

Non-GAAP fiscal 2021 earnings will be between $1.21 a share and $1.29 a share.

Zoom's outlook for the second quarter is more than double what Wall Street was expecting for revenue. For fiscal 2021, Zoom's revenue is about double.

For the second quarter, Wall Street was expecting Zoom to report revenue of $223.8 billion with non-GAAP earnings of 11 cents a share. For fiscal 2021, Wall Street was modeling Zoom non-GAAP earnings of 45 cents a share on revenue of $935.2 billion.

In a statement, Zoom CEO Eric Yuan said the company was humbled by its adoption around the world. Yuan added that Zoom had an "unprecedented number of free participants." Those free customers are upselling opportunities later.

Zoom shares have had a torrid run and seem to be holding gains. 


Zoom also said 769 customers contributed more than $100,000 in trailing 12 months revenue. What's also clear from Zoom's first quarter is that its business model scales well. 

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On a conference call with analysts, Yuan said:

I am proud to see that our platform is serving a critical role beyond our original vision in enabling communication and collaboration for businesses, schools, consumers and the global community to stay connected and operational during the COVID-19 pandemic. Navigating this process has been a humbling learning experience, giving us a newfound appreciation for what it means to be a video communications technology provider in times of need. And work-from-home and social-distance initiatives have meaningfully accelerated the adoption and traffic on the Zoom Video Communications platform. We have seen many use cases, not only from enterprises to maintain work productivity as part of the business continuity plans, but also from first-time consumer users, for personal and social use to connect with friends and families when physical gathering is not possible.

Yuan said that Zoom has seen usage stay at elevated levels even as COVID-19 stay-in-place restrictions have lifted.

What a difference a quarter makes

Since Zoom last reported earnings on March 4, the world has changed dramatically amid the COVID-19 pandemic, move to remote work, and economic fallout. When Zoom reported its fourth-quarter earnings on March 4, the company didn't mention the COVID-19 pandemic in its press release. Yuan said the company added customers and executed well.

As work-from-home arrangements became the norm as countries locked down their economies, Zoom went from and enterprise video collaboration platform to one of those rare companies that became a verb. We don't Skype. We don't Microsoft Teams. We don't Google Meet. We don't WebEx. We Zoom even when we're using another platform, say Blue Jeans or GoToMeeting. Zoom became a public company with a go-to-market strategy that relied on the upsell, viral demand, and word of mouth. Zoom had buzz and then some.

Enter Zoom happy hoursZoom birthdays. Zoom doctor appointments. Even Zoom funerals. Families stayed connected, educational institutions went to class virtually and enterprises realized that they could maintain productivity and sales with the help of collaboration tools like Zoom. Even UK parliament ran on Zoom. Zoom quickly rushed out differentiating features such as backdrops that weren't exactly green screen quality, but good enough. Folks even discovered Zoom fatigue as usage surged.

But Zoom's transition from enterprise video conferencing company to household name and part social network brought more attention. Hackers began to poke holes in Zoom's infrastructure. Some enterprises and organizations dropped Zoom due to security concerns—and likely good deals from rivals.

Security concerns gave rivals an opening. Usage of Microsoft Teams surged as the software and cloud giant ramped up marketing and added new features. Google rushed to make Google Meet a common part of the G Suite experienceVerizon bought Blue Jeans for its enterprise unitFacebook launched Workplace Rooms for B2B and Messenger Rooms for consumers in a bid to give video conferencing a social twist. In addition, Zoom's infrastructure providers also became strong rivals. Zoom runs its own data centers, but also burst to the cloud. Given the big three cloud providers all have video collaboration tools, Zoom cut in Oracle Cloud as a partner.

This tale could have been one of an upstart making a technology mainstream and getting squashed by giants, but Zoom's response to its security issues was swift and decisive even as best practices were written on the fly. Zoom is now publishing encryption white papers to lay the groundwork for future video conferencing

Add it up and Zoom's handling of its security issues went well and gave more enterprise customers the confidence to make the company a go-to provider. 


Cloud partners AWS, Oracle and CEO mentors help Zoom scale

On the conference call, Yuan said that Zoom's data centers couldn't have scaled to handle traffic surges, so AWS was able to provision the "majority of the new service we needed." 

"Immediately during the crisis, our long-time partner, AWS and its CEO, Andy Jassy, enabled us to meet this rapidly increasing demand. As our demand increased and we had limited visibility into the growth, AWS was able to respond quickly by provisioning the majority of the new service we needed," explained Yuan. 

In April, Zoom added Oracle for support. "We also provisioned a number of servers in the Oracle cloud as the demand for Zoom continued to increase," said Yuan.

Zoom CFO Kelly Steckelberg explained that the increased demand and cloud costs hurt gross margins. Steckelberg said: 

Non-GAAP gross margin for the first quarter was 69.4% compared to 80.9% in Q1 last year and 84.2% last quarter. Although in early March, we originally guided lower based on an increase in usage of our platform. Our gross margin was further impacted by the elevated demand, especially higher levels of free meeting minutes, including those from K-12 schools in March and April. Higher incremental costs also resulted from leveraging the public cloud providers, which is critical to our ability to meet the sudden exponential growth in usage as the crisis spread and government instituted day -- stay-in-place policies around the world. 

Steckelberg said that Zoom will build more capacity in its data centers and gain efficiencies and likely bring gross margins back to the mid-70% range in the next several quarters.

On security, Yuan said that issues during the quarter threatened Zoom's reputation and mentors helped him manage through it.

"During this period of unprecedented usage growth and negative PR, as the CEO of the Zoom, I was also facing tremendous pressure and I reached out to the high-tech community and received great support from fellow CEOs, and many of them are my mentors," said Yuan. "With that, our users trust us to deliver the best and most secure video-first communications platform. I believe our results will continue to make us a stronger company for our customers and the global community."

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