Zoom's Q3 revenue up 367% as demand shows no signs of slowing

Zoom's third quarter results crushed estimates and the company raised its outlook for fiscal 2021.

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Zoom Video Communications' third quarter revenue surged a whopping 367% from a year ago as the company now has 433,700 customers with more than 10 employees.

The company reported third quarter net income of $198.4 million, or 66 cents a share, on revenue of $777.2 million. Non-GAAP earnings for the third quarter were 99 cents a share.

Wall Street was expecting Zoom to report third quarter revenue of $694 million with non-GAAP earnings of 76 cents a share. 

For the fourth quarter, Zoom is projecting revenue between $806 million and $811 million with non-GAAP earnings of 77 cents a share to 79 cents a share.  For the fourth quarter, analysts were modeling revenue of $730 million and $2.4 billion for fiscal 2021.

Zoom sees strong demand ahead and said that revenue for fiscal 2021 will be between $2.57 billion and $2.58 billion.

CEO Eric Yuan said the company continued to strengthen its market position. "We aspire to provide the most innovative, secure, reliable, and high-quality communications platform to help people connect, collaborate, build and learn on Zoom," he said.

The company is aiming to leverage its momentum to become more of a platform and ecosystem. Last month at Zoomtopia, Zoom launched its platform play with Zoom for Apps, apps that are built into the video conferencing experience, an OnZoom, a marketplace for content creators. This year's Zoomtopia, which was virtual due to the COVID-19 pandemic, highlighted how Zoom has become the go-to platform for remote work and education. Zoom supports more than 3.5 trillion annualized meeting minutes, and sees well over 300 million daily meeting participants.    

Zoom ended the quarter with $1.9 billion in cash and equivalents. Zoom reported 1,289 customers contributing more than $100,000 in trailing 12 months revenue.

There were a few nits in the quarter. Notably, Zoom's gross profit in the third quarter was 66.7%, down from more than 80% pre-pandemic. Gross margins have taken a hit from cloud computing costs as Zoom scales its service and fell from 72.2% in the second quarter. In addition, Zoom's torrid growth from a year ago was only up 17% sequentially from the second. The sequential growth jump from the first to second quarters was 40%.

CFO Kelly Steckelberg addressed cloud costs. Steckelberg said: 

Non-GAAP gross margin in the third quarter was 68.2% compared to 82.9% in Q3 last year and 72.3% last quarter. The impact on our gross margin is partially due to the dramatic increase in usage related to the pandemic as we are experiencing a higher percentage of free users, including those in over 125,000 K-12 educational institutions that went back to school in the fall. It is also due to the continued higher utilization of public cloud services.

Zoom also said that Amazon Web Services is its preferred cloud service provider. In a statement, Zoom said it has inked a multi-year agreement with AWS and will collaborate on new tools for enterprise customers. Zoom earlier this year said it would also deploy on Oracle Cloud

The company also is seeing momentum internationally. 

zoom-q3-international-2020.png

Yuan also noted some key customer wins such as Peloton. He said:

Peloton is the leading interactive fitness platform. In Q3, Peloton consolidated to one vendor buying both Zoom Meetings and Zoom Rooms to provide a more feature-rich video communication service to their employees. We are honored to have Peloton commit to a longterm engagement where they will deploy services across all locations and employees. A global customer increasing their commitment with Zoom is Rakuten. Rakuten is a global leader in internet services with 1.4 billion members around the world. Impressed by the simplicity in the Zoom technology, the ease of scaling the service and the feature-rich application, Rakuten has committed to the full Zoom UCaaS deployment.   

The big question for Zoom is how it can maintain its growth rates as the COVID-19 pandemic eases. Steckelberg said:

First of all, the working trends, it started pre-pandemic have certainly accelerated during this period of time. And while we all hope for a vaccine as soon as possible, I think that remote work trends are here to stay. And we're excited about some of the features and functionality that we announced at Zoomtopia, for example, to enable this and to support customers and employees that are thinking about eventually going back to work likely in some sort of a hybrid work environment. So these are things like Smart Gallery, which are really meant to enable better communications when people -- some of the employees are working remotely and some of them are in the office. We're really looking towards supporting an environment like that and believe that our -- especially our upmarket customers are going to continue to want to provide that flexibility to their employees.   

Here's a quick look at Zoom's 2020: