Zoom Video Communications (NASDAQ: ZM) reported its financial year 2022 (FY2022) fourth-quarter results earlier this week.
During Zoom’s earnings call, management expressed optimism around the company’s new product, Zoom Contact Centre, and the strong growth trajectory of Zoom Phones. The earnings call transcript is worth a read for more insight into the business but in this article, I want to specifically dive into some of Zoom’s key numbers and earnings projections and share my views on the company’s current stock price.
Sequential growth decelerates but is expected to pick up in FY2023
Zoom was one of the major beneficiaries of COVID-19 lockdowns as people resorted to video conferencing tools to communicate.
But since peaking in 2021, Zoom’s growth rate has been decelerating due to a combination of churn and slower customer wins. In fact, Zoom reported a sequential decline in the number of customers who employed more than 10 employees in the fourth quarter of FY2022. This was a result of churn as some of these customers did not renew subscriptions as social-distancing measures were relaxed.
The table below shows Zoom’s revenue figures on a quarterly basis:
Zoom’s sequential revenue growth has been on a steady decline since the 102% spike seen in the second quarter of FY2021. Zoom is also projecting flat sequential growth for the first quarter of FY2023. Although the trend above looks worrying, I believe that Zoom’s sequential growth will start to improve in the second half of FY2023 as customer churn reduces.
This is because the world is now crossing the 2-year anniversary of the start of COVID-induced lockdowns in many parts of the world. This is a period when some of Zoom’s customers will decide whether or not to renew their contracts.
Zoom’s customer base is usually very sticky. But in this unique situation, churn is especially high as some customers who started subscribing to Zoom during the lockdowns do not intend to stick around after COVID.
Once Zoom moves past this relatively higher churn period, the company’s churn rate will likely decrease. Beyond this, new customer wins can also start to improve Zoom’s top-line, rather than just replace leaving customers.
Growth in remaining performance obligation
Another good sign is that there was a sequential acceleration in Zoom’s RPO (remaining performance obligations) growth. RPO essentially refers to revenue that Zoom will recognise in the future.
The table below is a compilation of the company’s RPO over the past 12 quarters.
RPO growth accelerated in the fourth quarter of FY2022 compared to the previous sequential quarter. This is a sign of successful customer wins which sets Zoom up nicely for the future.
Management guidance for FY2023
Zoom’s management also provided guidance for FY2023 that indicates around 10.8% growth in revenue for the year. The table below shows Zoom’s full-year revenue growth rate and guidance for FY2023.
Taking into account the projections for revenue of US$1.07 billion in the first quarter of FY2023, revenue for the remaining three quarters of FY2023 will need to grow sequentially in order to hit management’s revenue projections for the year. Based on my calculations, Zoom’s revenue will have to increase by slightly more than 4% sequentially each quarter, starting from the second quarter of FY2023.
I believe Zoom can achieve growth by winning customers for its core product of video conferencing or selling some of its newer less-penetrated products such as Zoom Phones and Zoom Contact Centre. It is also worth pointing out that Zoom has exceeded its own projections every quarter since its IPO.
My thoughts on valuation
Zoom’s stock price has cratered from a peak of more than US$560 seen in October 2020 and the company currently has a market capitalisation of around US$36 billion.
At the current stock price of US$122, Zoom has an enterprise value-to-free cash flow (EV-to-FCF) ratio of around 21. This is a discount to other mature, highly-cash-generative software-as-a-service (SaaS) companies. The chart below shows Zoom’s EV-to-FCF ratio compared to these other SaaS companies such as Adobe (NASDAQ: ADBE), Salesforce (NYSE: CRM), and Servicenow (NYSE: NOW).
Although the projected revenue growth of 10% is nowhere near as fast as other software companies, Zoom is trading at what I believe to be an unfairly low valuation. Revenue growth can also possibly accelerate in the future given that Zoom Contact Centre is a new product (launched last month) that management is excited about and Zoom Phone is in a high-growth phase.
Zoom has become a value stock as much as a growth stock at the current stock price. Given this, I think there’s room for the stock to climb in the future.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia own shares of Zoom, Adobe and Salesforce.
