Zoom Q4'19 Earnings Teardown

Zoom released its Q4'19 earnings on 3/5/2020. You can find the earnings press release here.

Here are the main takeaways

• Share Price Up: Zoom was up nearly 100% YTD due to Coronavirus and companies and institutions pushing remote video conferencing.
• Exceptionally High Valuation: However, its current valuation at $114/share suggests ~25x EV/NTM ARR which is the highest among all Public SaaS companies and 2x what it was trading at in Dec '19 when it was 13x EV/NTM ARR.
• Implied IRR in 5 years: Our very simple model (not to be taken as investment advice!) implies 6.7% IRR if you hold Zoom for 5 years and assume a 25x entry NTM ARR multiple and a 10x current ARR multiple (roughly what Adobe trades at which is $12b ARRR growing 21% with 36% LTM FCF % -- roughly what we think Zoom would look like at Scale).
• ARR deceleration: The business reported Q1'20 results of roughly $752m ARR growing 78% YoY down from the 108% YoY growth rate back in Q1'19 (72% growth persistence).
• Likely uptick in Q2'20 Earnings: Its worth noting that the earnings are only for Nov-Jan '20 so doesn't include the chunk of February and presumably March where there's a huge uptick in new and paid users of Zoom -- Berstein estimates that Zoom added 2.22m active users in Jan and Feb '20 which exceeds the 1.99m active users in all of 2019. I suspect the Q2'2020 numbers will show some sort of revenue acceleration.
• #1 Rule of 40: The 14% FCF suggests 92% rule of 40 (ARR growth % + Current FCF %) which is the highest rule of 40 of ALL public SaaS companies. This is what makes Zoom so incredible -- the growth combined with profitability (thank you low R&D in China!)
• Strong Retention: Reported >130% net dollar retention for customers with >10 employees -- this is a bit misleading for apples to apples comparisons with other SaaS companies as they basically ignore all the small SMB customers but I suspect the customers >10 employees makes up a bulk of their revenue.