Zoom Video Stock Drops Despite Earnings Beat and Guidance Raise

Zoom Video Communications (NASDAQ: ZM) turned in strong third-quarter fiscal 2020 results after the market closed on Thursday.

Despite beating Wall Street’s revenue and earnings expectations and increasing its full-year guidance on both the top and bottom lines, the videoconferencing specialist’s stock dropped 8.9% in after-hours trading on Thursday. We can likely attribute the market’s initial reaction to disappointment that revenue growth is slowing.

Since the company’s initial public offering (IPO) in April, its shares have gained 93.5% through the regular trading session on Thursday, though that tally could shrink on Friday.

Here’s an overview of Zoom’s quarter, along with its guidance for the fourth quarter and full year.

Image source: Zoom Video Communications.

1. Revenue soared 85%

Zoom’s quarterly sales grew 85% year over year to $166.6 million, exceeding the $156 million that analysts were expecting. Growth was driven by the company winning new customers and expanding the services it provides to existing customers. While this is very robust revenue growth, it’s slower than the second quarter‘s 96% and first quarter’s 103% year-over-year growth rates.

Here’s a look at key customer metrics:

Customer Metric

Fiscal Q3 2020

Change (YOY)

Customers with more than 10 employees

74,100

67%

Customers contributing revenue of more than $100,000 in trailing 12 months

546

97%

Trailing-12-month dollar expansion rate for customers with more than 10 employees

Above 130% (for the sixth consecutive quarter)

N/A

Data source: Zoom Video Communications. YOY = year over year.

2. Adjusted operating income rocketed 1,231%

Loss from operations under generally accepted accounting principles (GAAP) widened 55% year over year to $1.7 million. Adjusted for one-time items, operating income landed at $21.3 million, up 1,231% from the year-ago period.

3. Adjusted EPS surged 800%

GAAP net income was $2.2 million, or $0.01 per share, compared to a net loss of $0.6 million, or $0.01 per share, in the year-ago quarter. Adjusted for one-time items, net income came in at $25.2 million, or $0.09 per share, up from net income of $2.1 million, or $0.01 per share, in the third quarter of last year.

Wall Street had been looking for adjusted earnings per share (EPS) of $0.03, so Zoom zoomed by the profit expectation.

4. Operating cash flow jumped 240%

Operating cash flow jumped 240% year over year to $61.9 million and free cash flow (FCF) soared 442% to $54.7 million.

5. A better-than-expected outlook for Q4 and full-year fiscal 2020

For the fourth quarter, Zoom guided for revenue between $175 million and $176 million, which, at the midpoint, represents 5.3% sequential growth. It expects adjusted EPS to be approximately $0.07. Going into the earnings report, Wall Street had been modeling for Q4 adjusted EPS of $0.04 on revenue of $165.2 million.

The company increased its full-year guidance on both the top and bottom lines. It now projects revenue in the range of $609 million to $610 million, up from its prior outlook of $587 million to $590 million. It also expects adjusted EPS of about $0.27, up from $0.18 to $0.19. Going into the report, analysts had been anticipating full-year adjusted EPS of $0.19 on revenue of $588.7 million.

The bottom line

Zoom Video Communications had another great quarter. Granted, revenue growth decelerated, but 85% year-over-year growth is still torrid. I think the market overreacted, especially considering how much better than expected the company is doing from a profit standpoint.

With cash and cash equivalents of $811.4 million at the end of the quarter, Zoom has plenty of money to fund growth initiatives.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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