Zoom Video Communications Inc. (NASDAQ: ZM) on Tuesday managed to confirm that the once-niche app maker has turned into a popular communications service. Along with massive first quarter earnings from a sales growth of 169%, the company’s Tuesday report also confirmed that its service would be strong only while people are sheltering in place.
The report indicated the rapid increase in paying customers since the beginning of the year. Results from its first quarter suggest that Zoom V. C. Inc. has become one of the biggest corporate winners during the COVID-19 pandemic. This result has tripled the company’s market capitalization in just three months, which far exceeded Wall Street expectations. What really interests investors was the future projections made by the company. The company expects its annual earnings to get doubled and revenue tripled in the coming quarters, all from the guidance of three months sales boost.
The company revenue was reported at around $328 million, a 169% increase. Primarily because employers have to enforce their staff to work from home, hence increased video conferencing. Zoom’s revenue surge was also observable in the company’s profitability having a free cash flow of over $250 million in just three months. The cash flow generated was more than double the company reported is the last 12 months combined. Analysts estimated the company’s revenue around $200 million with a profit of 9 cents on a share. Zoom clearly overmatched analysts’ expectations by reporting a profit of 20 cents on a share. The company estimates its adjusted profit for current fiscal year to reach in the range of $355 million to $380 million, i.e. $1.21 to $1.29 per share. The estimation is based on the fact that the company has more than 265,000 paying customers with more than 10 employees. A +350% increase in customer base from a year ago.
Tuesday report from the company, briefly lifted the company’s stock before going back to normal. A brief rise in the stock resulted in the valuation of company at around $61 billion. An increase from $42 billion from the beginning of the year. Zoom’s stock has more than tripled in a year, closing at a record high of $208.08 on Tuesday.
Number of people attending meetings and along with-it customer demand peaked to around 300 million in the month of April, from 10 million in the month of December. Due to the high level of demand and cloud service expenditures, the company’s gross profit margin slid down from 80% to 69.4% in a quarter.
Zoom’s sales soared in the first four months of the year due to the precautionary wave of stay-at-home orders for millions of employees and students worldwide. Zoom estimates that the trend will continue for the rest of the year and projects that revenue and profit will overmatch investors’ estimates.
Sales in the current quarter may reach $500 million & third and fourth quarter to be consistent with the current performance. In total, Zoom has estimated earnings of $1.8 billion this fiscal year, a growth of 300% as compared to last year.
Zoom’s Privacy Concern
Despite the weaknesses in Zoom’s privacy and security policies, the service has seen a huge growth in its non-paying customer base. The flaws in the service has brought a lot of negative publicity from employers and even some government agencies. This led to many organizations like Microsoft Corp., Apple Inc. etc. to ban Zoom from their IT infrastructure. Such companies have also issued warnings to their staff of not using Zoom’s services.
Zoom’s privacy flaws were exposed when trolled invaded meetings, classes, religious gatherings etc. The phenomenon was termed as “Zoombombing”. There were some cases where calls were routed through servers located in China even when no participants were from that region. It later was found out that users singed in using Facebook login were sending their metadata to Facebook Inc. Zoom has put an end to such practices and have pledged to bolster the privacy of its service. The company intends to do so by purchasing a secure-messaging company, Keybase, which will help Zoom bring high standards of encryption to its platform.
Zoom has assured that paid and corporate clients will get access to Zoom’s end-to-end encryption service. Zoom has also confirmed that the free users won’t have any encryption. Zoom’s CEO Eric Yuan said the encryption is not available for free users in order to help law enforcement agencies to detect & prevent any misuse of the service.
In a Nutshell
For some investors, Zoom’s shares which are trading at all-time highs are just too superficial. The question which investors are interested to know is whether Zoom will be able to convert its free customer base into paying ones. Alternatively, adding many more corporate accounts. However, if the trend of video conferencing is supposed to continue, this could be a dominant start in the niche part of the communication sector.