Shares of Zoom Video Communications (ZM) dropped in morning trading despite a strong third quarter earnings beat and better than expected fourth quarter guidance. While Zoom's revenue increased 85% on an annualized basis in Q3, revenue growth decelerated from the figure reported last quarter.
EARNINGS AND GUIDANCE: On Thursday after the market close, Zoom Video reported third quarter earnings per share of 9c and revenue of $166.59M, handily beating analysts' estimates of 3c and $154.86M. In a statement, CEO Eric Yuan said "Our third quarter was another strong performance for Zoom. Our execution helped drive revenue growth of 85% with increased non-GAAP profitability year-over-year and free cash flow of $54.7M. This execution also drove 67% growth in the number of customers with more than 10 employees and 97% growth of in the number of customers contributing more than $100K of TTM revenue."
While Zoom's revenue increased 85% on an annualized basis in Q3, year-over-year revenue growth last quarter was 96%, which was below 100% for the first time in at least a year. Zoom said it had 74,100 customers with over 10 employees at the end of the quarter, up 67% year over year. The growth rate in the prior quarter was 78%.
Looking ahead, Zoom sees fourth quarter EPS of approximately 7c on revenue of $175M-$176M, above the 4c and $165.15M analysts expect. The company also raised its fiscal 2020 EPS view to approximately 27c from 18c-19c and boosted its revenue view to $609M-$610M from $587M-$590M. Analysts currently expect EPS of 19c on revenue of $588.7M.
"For now our top priority is to focus on existing customers, to make sure they are very happy. This is pretty hard, actually," Yuan told analysts on a conference call discussing the quarterly results.
WHAT'S NOTABLE: Zoom competes with offerings from Microsoft (MSFT), Avaya (AVYA) and Cisco (CSCO), among others. During the the quarter, Zoom announced new appliances from companies like Poly that work with its Zoom Rooms product for conference rooms and said RingCentral (RNG) executive Ryan Azus had joined the company as chief revenue officer.
Zoom priced its IPO in April at $36 per share, valuating the business at $9.2B. The company joined a slew of other companies debuting on the stock market this year, including Peloton (PTON), which went public in September following the disappointing IPOs of Uber (UBER), SmileDirectClub (SDC) and Pinterest (PINS) earlier this year. In October, food-delivery startup Postmates, which was also expected to go public this year, told its IPO advisers that it is delaying its IPO due to market conditions, Recode's Theodore Schleifer reported, citing people familiar with the matter. Additionally, other high-profile startups like Lyft (LYFT) and Slack (WORK) have largely bombed on the stock market since going public this year, while WeWork (WE) recently pulled its IPO.
ANALYST COMMENTARY: Following the earnings report, Stifel analyst Tom Roderick said "investors have to separate fundamental results sometimes from the stock reaction that follows" given the stock's premium valuation. While he said he remains "incredibly bullish on the fundamental outlook" for the company, Roderick remains cautious on the near-term trading in Zoom shares given the "incongruous" reaction to a Q3 earnings and revenue beat and guidance for Q4 and FY20 that "checks in well ahead of the Street." Given the lower comparable terminal multiples for high growth stocks, Roderick lowered his price target on Zoom Video shares to $75 from $90.
RBC Capital analyst Alex Zukin also lowered his price target on Zoom Video to $75, noting that while the company beat on Q3 earnings and raised its guidance, the top-line outperformance was below that of Q2 and its billings and RPO growth rates diverged. Baird analyst William Power lowered his price target on Zoom Video to $85 from $100, saying that results were strong but below the prior two quarters causing the shares to trade lower. He said its current valuation is above the broader SaaS group, it is now in-line with the highest growth cohort but has stronger growth and profitability.
Meanwhile, JPMorgan analyst Sterling Auty said that the growth and margin scale that Zoom Video continues to demonstrate "is unprecedented in what we have seen in software historically." The stock is trading lower as the 86% revenue growth may not have lived up to some investors' expectations, but that "arbitrary threshold" is not a meaningful indicator of the health of the business, he contended. Generating this level of growth at a $660M-plus revenue run rate with 12.8% operating margins coming from breakeven less than two years ago shows the value of the franchise, the analyst added.
PRICE ACTION: In morning trading, shares of Zoom Video are down 8.5% to $63.81.