Many companies have posted the occasional big quarter. These outsized periods may come when a business sells part of itself, or, through some arcane noncash financial hijinks, it posts impressive numbers that appear prodigious when compared to their regular operating results. (Like when Uber recorded huge profits in its March 31, 2018 quarter.)
The Exchange explores startups, markets and money. You can read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.
And then there’s Zoom, the cloud video comms company that went public in April, 2019. It just turned in a quarter so extraordinary that you might presume it was inflated, or otherwise somehow faux. But what makes Zoom’s Q2 earnings data so damn interesting and impressive is that it appears that the company has managed to just grow more than anyone expected or perhaps thought possible, in less time, while making more money than anticipated.
Rereading the Zoom results this morning, I can confidently say that I haven’t ever read a more impressive earnings document. Zoom had a strong Q1, but it had a bonkers Q2.
Let’s dig into the numbers to understand what the world’s most impressive COVID-bump looks like.
A monster Q2
At the end of its Q1, Zoom told investors that it expected to generate revenue “between $495 million and $500 million” in Q2 2020 and “between $1.775 billion and $1.800 billion” for its full fiscal year, which is offset by one month from the calendar year.
Before its Q2 report, investors had expected a bit more, with average estimates for Q2 2020 revenue coming in at $500.5 million. Regarding its fiscal year, analysts expected the company to generate $1.81 billion in revenue.
Instead, in its fiscal second quarter, Zoom generated revenue of $663.5 million, a gain of 355% compared to the year-ago period and far more than Zoom’s own estimate or those of analysts. Zoom raised its full-year revenue estimate to “between $2.37 billion and $2.39 billion,” again far ahead of its own expectations and those of Wall Street.
What drove that simply insane pace of revenue growth? Huge customer demand. The company simply flew in the quarter as the world stayed home and needed more cloud communications tooling.
Zoom reported around “370,200 customers” of more than 10 workers, up nearly 460% compared to the year-ago period. Across the same timeframe, the number of Zoom customers worth more $100,000 in revenue grew 112%, a more modest pace, indicating that smaller customer growth was key to Zoom’s revenue expansion.
But don’t think that smaller customers means bad economics. Zoom also reported that its “12-month net dollar expansion rate” for all customers of 10 or more employees was “above 130% for the 9th consecutive quarter.”
Getting the picture? This is bonkers stuff.
But while growth is the leading religion of Silicon Valley, Zoom is heretical in its ability to not only make money, but make more money as it scales, something usually reserved for incumbents, as challenger companies and startups burn cash to expand.
Not Zoom. During its epic period of growth, the company’s profit metrics soared:
- Operating cash flow grew to $401.3 million, up from $31.2 million in the year-ago quarter. (Free cash flow rose similarly.)
- GAAP operating income rose to $188.1 million from $2.3 million in the year-ago quarter, while non-GAAP operating income grew to $277 million from $20.7 million over the same timeframe.
- Net income was a similar story, growing from $5.5 million in the year-ago period to $185.7 million in the most recent quarter.
I have never seen numbers like that in a quarter that was not juiced by the divestment of something big. It’s just unbelievable.
Investors reacted to the news as expected, pushing Zoom’s value up 38.4% this morning ahead of regular trading. Precisely how the revenue gains and market cap shift shake out into a new revenue multiple for Zoom is going to be fascinating. But we’ve just seen a quarter for the history books, at least when it comes to SaaS and cloud.
For startups, here’s your high-water mark. Zoom just showed what a COVID-tailwind can do to an already public company, because the world needed its service to function. How well are you doing? If not as well as Zoom, or even as well as you’d like, is your service a need-to-have, or a nice-to-have?