Document10-Qtruefalsefalse10/31/20192020Q3Zoom Video Communications, Inc.0001585521--01-31Non-accelerated FilerfalsetruetrueFALSEYes111,794,527164,607,288P3YP4YP4YRelated Party TransactionsIn September 2016, we entered into a service agreement with Veeva Systems Inc. (“Veeva”), a cloud-based business solutions company. The chief executive officer of Veeva serves as a director on our board of directors. Revenue recognized from services provided to Veeva was $0.3 million for the three months ended October 31, 2019 and 2018, and $1.0 million for the nine months ended October 31, 2019 and 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________
FORM 10-Q
___________________________________________________________________
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2019
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38865
___________________________________________________________________
Zoom Video Communications, Inc.
(Exact name of registrant as specified in its Charter)
___________________________________________________________________
| | | | | |
Delaware | 61-1648780 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
55 Almaden Boulevard, 6th Floor
San Jose, California 95113
(Address of principal executive offices and Zip Code)
(888) 799-9666
(Registrant’s telephone number, including area code)
___________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | | ZM | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | Smaller reporting company | ☐ |
Emerging growth company | ☒ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of November 22, 2019, the number of shares of the registrant’s Class A common stock outstanding was 111,794,527 and the number of shares of the registrant’s Class B common stock outstanding was 164,607,288.
Zoom Video Communications, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended October 31, 2019
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition; business strategy and plans; and objectives of management for future operations, including our statements regarding the benefits and timing of the roll out of new technology, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: our future financial performance, including our revenue, cost of revenue, gross profit, margins, and operating expenses; trends in our key business metrics; the sufficiency of our cash and cash equivalents, investments, and cash provided by sales of our products and services to meet our liquidity needs; our ability to become the ubiquitous platform for communications; our ability to attract new customers and retain existing customers; our ability to successfully expand into our existing markets and into new markets; our ability to effectively manage our growth and future expenses; and the impact of recent accounting pronouncements on our unaudited condensed consolidated financial statements.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
PART I—Financial Information
Item 1. FINANCIAL STATEMENTS
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| | | | | | | | | | | |
| As of | | |
| October 31, 2019 | | January 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 230,874 | | | $ | 63,624 | |
Marketable securities | 580,526 | | | 112,777 | |
Accounts receivable, net of allowances of $5,193 and $2,071 as of October 31, 2019 and January 31, 2019, respectively | 95,770 | | | 63,613 | |
Deferred contract acquisition costs, current | 39,609 | | | 26,453 | |
Prepaid expenses and other current assets | 72,620 | | | 10,252 | |
Total current assets | 1,019,399 | | | 276,719 | |
Deferred contract acquisition costs, noncurrent | 40,792 | | | 29,063 | |
Property and equipment, net | 53,848 | | | 37,275 | |
Operating lease right-of-use assets | 53,308 | | | — | |
Other assets, noncurrent | 20,710 | | | 11,508 | |
Total assets | $ | 1,188,057 | | | $ | 354,565 | |
Liabilities, convertible preferred stock, and stockholders’ equity (deficit) | | | |
Current liabilities: | | | |
Accounts payable | $ | 3,202 | | | $ | 4,963 | |
Accrued expenses and other current liabilities | 128,064 | | | 32,256 | |
Deferred revenue, current | 186,537 | | | 115,122 | |
Total current liabilities | 317,803 | | | 152,341 | |
Deferred revenue, noncurrent | 15,062 | | | 10,651 | |
Operating lease liabilities, noncurrent | 50,132 | | | — | |
Other liabilities, noncurrent | 32,543 | | | 39,460 | |
Total liabilities | 415,540 | | | 202,452 | |
Commitments and contingencies (Note 8) | | | |
Convertible preferred stock, $0.001 par value per share, zero and 158,104,540 shares authorized as of October 31, 2019 and January 31, 2019, respectively; zero and 152,665,804 shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively | — | | | 159,552 | |
Stockholders’ equity (deficit): | | | |
Preferred stock, $0.001 par value per share, 200,000,000 and zero shares authorized as of October 31, 2019 and January 31, 2019, respectively; zero shares issued and outstanding as of October 31, 2019 and January 31, 2019 | — | | | — | |
Common stock, $0.001 par value per share, 2,000,000,000 and 320,000,000 Class A shares authorized as of October 31, 2019 and January 31, 2019, respectively; 109,311,196 and zero shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively; 300,000,000 Class B shares authorized as of October 31, 2019 and January 31, 2019; 166,915,262 and 90,327,435 shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively | 275 | | | 89 | |
Additional paid-in capital | 786,778 | | | 17,760 | |
Accumulated other comprehensive income (loss) | 651 | | | (135) | |
Accumulated deficit | (15,187) | | | (25,153) | |
Total stockholders’ equity (deficit) | 772,517 | | | (7,439) | |
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) | $ | 1,188,057 | | | $ | 354,565 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | | | Nine Months Ended October 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 166,593 | | | $ | 90,121 | | | $ | 434,407 | | | $ | 224,717 | |
Cost of revenue | 30,845 | | | 16,843 | | | 82,849 | | | 41,476 | |
Gross profit | 135,748 | | | 73,278 | | | 351,558 | | | 183,241 | |
Operating expenses: | | | | | | | |
Research and development | 17,573 | | | 8,893 | | | 46,410 | | | 22,206 | |
Sales and marketing | 96,048 | | | 53,454 | | | 239,741 | | | 130,769 | |
General and administrative | 23,806 | | | 11,994 | | | 63,264 | | | 29,591 | |
Total operating expenses | 137,427 | | | 74,341 | | | 349,415 | | | 182,566 | |
(Loss) income from operations | (1,679) | | | (1,063) | | | 2,143 | | | 675 | |
Interest income, net | 3,231 | | | 477 | | | 6,753 | | | 1,376 | |
Other income, net | 978 | | | 128 | | | 2,921 | | | 214 | |
Net income (loss) before provision for income taxes | 2,530 | | | (458) | | | 11,817 | | | 2,265 | |
Provision for income taxes | 319 | | | 140 | | | 1,851 | | | 378 | |
Net income (loss) | 2,211 | | | (598) | | | 9,966 | | | 1,887 | |
Undistributed earnings attributable to participating securities | (4) | | | — | | | (2,493) | | | (1,887) | |
Net income (loss) attributable to common stockholders | $ | 2,207 | | | $ | (598) | | | $ | 7,473 | | | $ | — | |
Net income (loss) per share attributable to common stockholders: | | | | | | | | | |
Basic | $ | 0.01 | | | $ | (0.01) | | | $ | 0.03 | | | $ | 0.00 | |
Diluted | $ | 0.01 | | | $ | (0.01) | | | $ | 0.03 | | | $ | 0.00 | |
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders: | | | | | | | |
Basic | 273,316,850 | | | 85,645,323 | | | 219,295,445 | | | 83,198,339 | |
Diluted | 292,771,122 | | | 111,000,300 | | | 241,512,569 | | | 109,303,996 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | | | Nine Months Ended October 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | $ | 2,211 | | | $ | (598) | | | $ | 9,966 | | | $ | 1,887 | |
Other comprehensive income: | | | | | | | |
Unrealized gain on available-for-sale marketable securities, net of tax | 719 | | | 85 | | | 786 | | | 142 | |
Comprehensive income (loss) | $ | 2,930 | | | $ | (513) | | | $ | 10,752 | | | $ | 2,029 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2019 | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | | | | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | Shares | | Amount | | | | | | | | |
Balance as of July 31, 2019 | — | | | $ | — | | | | 273,486,167 | | | $ | 272 | | | $ | 760,990 | | | $ | (68) | | | $ | (17,398) | | | $ | 743,796 | |
Issuance of common stock upon exercise of stock options | — | | | — | | | | 2,740,291 | | | 3 | | | 3,842 | | | — | | | — | | | 3,845 | |
| | | | | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | | — | | | — | | | 21,946 | | | — | | | — | | | 21,946 | |
Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | 719 | | | — | | | 719 | |
Net income | — | | | — | | | | — | | | — | | | — | | | — | | | 2,211 | | | 2,211 | |
Balance as of October 31, 2019 | — | | | $ | — | | | | 276,226,458 | | | $ | 275 | | | $ | 786,778 | | | $ | 651 | | | $ | (15,187) | | | $ | 772,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2018 | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | | | | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Deficit |
| Shares | | Amount | | | Shares | | Amount | | | | | | | | |
Balance as of July 31, 2018 | 152,665,804 | | | $ | 159,552 | | | | 86,396,013 | | | $ | 84 | | | $ | 9,164 | | | $ | (474) | | | $ | (30,252) | | | $ | (21,478) | |
Issuance of common stock upon exercise of stock options | — | | | — | | | | 2,358,809 | | | 3 | | | 727 | | | — | | | — | | | 730 | |
Stock-based compensation expense | — | | | — | | | | — | | | — | | | 2,652 | | | — | | | — | | | 2,652 | |
Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | 85 | | | — | | | 85 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (598) | | | (598) | |
Balance as of October 31, 2018 | 152,665,804 | | | $ | 159,552 | | | | 88,754,822 | | | $ | 87 | | | $ | 12,543 | | | $ | (389) | | | $ | (30,850) | | | $ | (18,609) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 31, 2019 | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | | | | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated Deficit | | Total Stockholders’ (Deficit) Equity |
| Shares | | Amount | | | Shares | | Amount | | | | | | | | |
Balance as of January 31, 2019 | 152,665,804 | | | $ | 159,552 | | | | 90,327,435 | | | $ | 89 | | | $ | 17,760 | | | $ | (135) | | | $ | (25,153) | | | $ | (7,439) | |
Conversion of convertible preferred stock to common stock upon initial public offering | (152,665,804) | | | (159,552) | | | | 152,665,804 | | | 153 | | | 159,399 | | | — | | | — | | | 159,552 | |
Conversion of convertible promissory notes and accrued interest to common stock upon initial public offering | — | | | — | | | | 426,223 | | | — | | | 15,344 | | | — | | | — | | | 15,344 | |
Issuance of common stock upon initial public offering and private placement, net of underwriting discounts and commissions and other offering costs | — | | | — | | | | 15,819,646 | | | 16 | | | 541,483 | | | — | | | — | | | 541,499 | |
Issuance of common stock upon exercise of stock options, net of repurchases | — | | | — | | | | 16,487,350 | | | 17 | | | 6,002 | | | — | | | — | | | 6,019 | |
Issuance of common stock reserved for charitable donations | — | | | — | | | | 500,000 | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | | — | | | — | | | 46,790 | | | — | | | — | | | 46,790 | |
Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | 786 | | | — | | | 786 | |
Net income | — | | | — | | | | — | | | — | | | — | | | — | | | 9,966 | | | 9,966 | |
Balance as of October 31, 2019 | — | | | $ | — | | | | 276,226,458 | | | $ | 275 | | | $ | 786,778 | | | $ | 651 | | | $ | (15,187) | | | $ | 772,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 31, 2018 | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | | | | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Deficit |
| Shares | | Amount | | | Shares | | Amount | | | | | | | | |
Balance as of January 31, 2018 | 152,665,804 | | | $ | 159,552 | | | | 82,609,638 | | | $ | 80 | | | $ | 6,517 | | | $ | (531) | | | $ | (32,737) | | | $ | (26,671) | |
Issuance of common stock upon exercise of stock options | — | | | — | | | | 6,145,184 | | | 7 | | | 1,399 | | | — | | | — | | | 1,406 | |
Stock-based compensation expense | — | | | — | | | | — | | | — | | | 4,627 | | | — | | | — | | | 4,627 | |
Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | 142 | | | — | | | 142 | |
Net income | — | | | — | | | | — | | | — | | | — | | | — | | | 1,887 | | | 1,887 | |
Balance as of October 31, 2018 | 152,665,804 | | | $ | 159,552 | | | | 88,754,822 | | | $ | 87 | | | $ | 12,543 | | | $ | (389) | | | $ | (30,850) | | | $ | (18,609) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Nine Months Ended October 31, | | |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 9,966 | | | $ | 1,887 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Stock-based compensation expense | 46,532 | | | 4,627 | |
Amortization of deferred contract acquisition costs | 25,939 | | | 14,362 | |
Depreciation and amortization | 11,589 | | | 4,459 | |
Amortization of operating lease right-of-use assets | 4,840 | | | — | |
Provision for accounts receivable allowances | 3,976 | | | 1,493 | |
Other | (1,577) | | | 17 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (36,886) | | | (27,775) | |
Prepaid expenses and other assets | (22,439) | | | (6,450) | |
Deferred contract acquisition costs | (50,824) | | | (32,875) | |
Accounts payable | (1,118) | | | 369 | |
Accrued expenses and other liabilities | 53,485 | | | 22,644 | |
Deferred revenue | 76,579 | | | 52,583 | |
Operating lease liabilities, net | (4,724) | | | — | |
| | | |
Net cash provided by operating activities | 115,338 | | | 35,341 | |
Cash flows from investing activities: | | | |
Purchases of marketable securities | (629,107) | | | (49,159) | |
Maturities of marketable securities | 164,140 | | | 43,547 | |
Purchases of property and equipment | (28,132) | | | (18,121) | |
Purchase of equity investment | (3,000) | | | | — | |
Net cash used in investing activities | (496,099) | | | (23,733) | |
Cash flows from financing activities: | | | |
Proceeds from initial public offering and private placement, net of underwriting discounts and commissions and other offering costs | 542,492 | | | — | |
Proceeds from international employee stock sales to be remitted to employees and tax authorities | 48,547 | | | | — | |
Proceeds from exercise of stock options, net of repurchases | 5,584 | | | | 2,714 | |
Proceeds from issuance of convertible promissory notes and derivatives | — | | | | 15,000 | |
Principal payments on capital lease obligations | — | | | (92) | |
Net cash provided by financing activities | 596,623 | | | 17,622 | |
Net increase in cash, cash equivalents, and restricted cash | 215,862 | | | 29,230 | |
Cash, cash equivalents, and restricted cash – beginning of period | 65,968 | | | 36,821 | |
Cash, cash equivalents, and restricted cash – end of period | $ | 281,830 | | | $ | 66,051 | |
Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: | | | |
Cash and cash equivalents | $ | 230,874 | | | $ | 63,707 | |
Restricted cash, current included in prepaid expenses and other current assets | 48,647 | | | 200 | |
Restricted cash, noncurrent included in other assets, noncurrent | 2,309 | | | 2,144 | |
Total cash, cash equivalents, and restricted cash | $ | 281,830 | | | $ | 66,051 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ZOOM VIDEO COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.Summary of Business and Significant Accounting Policies
Description of Business
Zoom Video Communications, Inc. and its subsidiaries (together, “Zoom,” the “Company,” “we,” “us,” or “our”) provide a video-first, unified communications platform. Our platform combines video, audio, phone, screen sharing, and chat functionalities. We were incorporated in the state of Delaware in April 2011 and are headquartered in San Jose, California.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal 2020, for example, refer to the fiscal year ending January 31, 2020.
Initial Public Offering and Private Placement
On April 23, 2019, we completed our initial public offering (“IPO”), in which we issued and sold 9,911,434 shares of our Class A common stock at $36.00 per share, resulting in net proceeds of $340.8 million after deducting underwriting discounts and commissions. On April 18, 2019, the underwriters exercised their option to purchase an additional 3,130,435 shares of our Class A common stock at $36.00 per share. This transaction closed on April 23, 2019, resulting in additional proceeds of $107.1 million, net of underwriters’ discounts and commissions. In connection with the IPO:
•all of the shares of convertible preferred stock outstanding automatically converted into an aggregate of 152,665,804 shares of Class B common stock;
•outstanding convertible promissory notes and accrued interest automatically converted into 426,223 shares of Class A common stock based on the IPO price of $36.00 per share; and
•Salesforce Ventures LLC purchased 2,777,777 shares of Class A common stock from us at $36.00 per share in a concurrent private placement. We received aggregate proceeds of $100.0 million and did not pay any underwriting discounts or commissions with respect to the shares of Class A common stock that were sold in this private placement.
Deferred offering costs consist primarily of accounting, legal, and other fees related to our IPO. Prior to the IPO, all deferred offering costs were capitalized in other assets, noncurrent in the condensed consolidated balance sheets. After the IPO, $6.4 million of deferred offering costs were reclassified into stockholders’ equity (deficit) as a reduction of the IPO proceeds in the condensed consolidated balance sheets. We capitalized $2.4 million of deferred offering costs within other assets, noncurrent in the condensed consolidated balance sheet as of January 31, 2019.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting, and include the accounts of Zoom Video Communications, Inc., its subsidiaries, and a variable interest entity (“VIE”) for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including certain notes required by GAAP on an annual reporting basis. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of operations, statements of comprehensive income, statements of convertible preferred stock and stockholders’ equity (deficit), and statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year or any future period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our final prospectus dated April 17, 2019 (“Prospectus”) filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include, but are not limited to, the estimated expected benefit period for deferred contract acquisition costs, the accounts receivable allowances, the useful lives of long-lived assets, the incremental borrowing rate for operating leases, the valuation of derivative liabilities, the value of common stock and other assumptions used to measure stock-based compensation expense, sales and other tax liabilities, and the valuation of deferred income tax assets and uncertain tax positions. Actual results could differ from those estimates.
Summary of Significant Accounting Policies
Our significant accounting policies are discussed in Note 1. “Summary of Business and Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Prospectus. There have been no significant changes to these policies during the nine months ended October 31, 2019, except as noted below:
Restricted Cash
Historically, restricted cash consisted of certificates of deposit collateralizing our operating leases and corporate credit cards, and was included in prepaid expenses and other current assets and other assets, noncurrent in the condensed consolidated balance sheets.
In the third quarter of fiscal year 2020, we received $48.5 million of cash from proceeds on international employees’ sales of our common stock. The amount is held in our bank account until it is remitted to the employees and the tax authorities. Due to the restrictions on the use of the funds in the bank account, we have classified the amount as restricted cash included in prepaid expenses and other current assets, and a corresponding amount included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
Equity Investment
In the third quarter of fiscal year 2020, we made a $3.0 million strategic investment in a private limited liability company in the business of designing and developing video communications hardware. We do not have a controlling financial interest in the investee nor the ability to exercise significant influence over the operating and financial policies of the investee. The investment is included within other assets, noncurrent in the condensed consolidated balance sheets. Dividend income, unrealized and realized holding gains or losses, and impairment charges would be reported in other income, net in the condensed consolidated statements of operations. The maximum loss we could incur for this investment is its carrying value.
We have elected to measure this investment, which does not have a readily determinable fair value, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (i.e., using the measurement alternative). At each reporting period, we perform a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. If this qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying amount, the investment would be written down to its fair value.
As of October 31, 2019, the carrying amount of this investment is $3.0 million. We have not recognized any impairments nor any downward or upward measurement alternative adjustments to its carrying amount.
Leases
All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at commencement. For short-term leases (an initial term of 12 months or less), an ROU asset and corresponding lease liability are not recorded and we record rent expense in our condensed consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred. ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of fixed payments not yet paid over the lease term. We use our incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as our leases
generally do not provide an implicit rate. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We currently do not have any finance leases.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating whether the adoption of this standard will have a material impact on our condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (ASC 840), and makes other conforming amendments to GAAP. ASU No. 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via an ROU asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the annual periods in fiscal years beginning after December 15, 2018, and interim periods therein. We adopted the standard as of February 1, 2019 using the modified retrospective method of applying the new standard at the adoption date. Under this approach, we will continue to report comparative periods presented in the period of adoption under ASC 840. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which allows us to (1) carry forward the historical lease classification, (2) not reassess whether any expired or existing contracts contain leases, and (3) not reassess indirect costs for any existing leases. This election allows us to account for lease components (e.g., fixed payments or variable payments that depend on a rate that can be determined at commencement, including rent for the right to use the asset) together with nonlease components (e.g., other fixed payments that deliver a good or service, including common area maintenance costs) in the calculation of the ROU asset and corresponding liability. Adoption of this standard resulted in the recording of ROU assets and lease liabilities of $40.5 million and $43.0 million, respectively, with no material impact on retained earnings as of February 1, 2019. See Note 7 for further details.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU No. 2018-07 is effective for the annual periods in fiscal years beginning after December 15, 2018, and interim periods therein, using a modified retrospective approach. We adopted ASU No. 2018-07 as of February 1, 2019, and our adoption did not have a material impact on the condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The standard no longer requires disclosure of the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; however, public companies will be required to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the annual periods in fiscal years beginning after December 15, 2019, and interim periods therein, with early adoption permitted. We adopted ASU No. 2018-13 as of February 1, 2019, and our adoption did not have a material impact on the condensed consolidated financial statements.
2. Revenue Recognition
Disaggregation of Revenue
The following table summarizes revenue by region based on the billing address of customers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | | | | | | | Nine Months Ended October 31, | | | | | | |
| 2019 | | | | 2018 | | | | 2019 | | | | 2018 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue |
| | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | | | | | | | | | | | |
Americas | $ | 133,864 | | | 81 | % | | $ | 73,619 | | | 82 | % | | $ | 349,122 | | | 81 | % | | $ | 184,334 | | | 82 | % |
Asia Pacific (“APAC”) | 13,661 | | | 8 | | | 7,646 | | | 8 | | | 36,189 | | | 8 | | | 18,466 | | | 8 | |
Europe, Middle East, and Africa (“EMEA”) | 19,068 | | | 11 | | | 8,856 | | | 10 | | | 49,096 | | | 11 | | | 21,917 | | | 10 | |
Total | $ | 166,593 | | | 100 | % | | $ | 90,121 | | | 100 | % | | $ | 434,407 | | | 100 | % | | $ | 224,717 | | | 100 | % |
Contract Balances
We receive payments from customers based on a billing schedule as established in our customer contracts. Accounts receivable are recorded when we contractually have the right to consideration. In some arrangements, a right to consideration for our performance under the customer contract may occur before invoicing to the customer, resulting in an unbilled accounts receivable. The amount of unbilled accounts receivable included within accounts receivable, net of allowances in the condensed consolidated balance sheets was $10.8 million and $7.2 million as of October 31, 2019 and January 31, 2019, respectively.
Contract liabilities consist of deferred revenue. Revenue is deferred when we have the right to invoice in advance of performance under a customer contract. The current portion of deferred revenue balances are recognized over the next 12 months. The amount of revenue recognized during the three months ended October 31, 2019 and 2018 that was included in deferred revenue at the beginning of each period was $75.5 million and $38.4 million, respectively, and $109.2 million and $47.8 million during the nine months ended October 31, 2019 and 2018, respectively.
Remaining Performance Obligation
The terms of our subscription agreements are monthly, annual, and multiyear and we may bill for the full term in advance or on an annual or monthly basis, depending on the customer preference. As of October 31, 2019, the aggregate amount of the transaction price allocated to our remaining performance obligations was $517.0 million, which consists of both billed consideration in the amount of $201.6 million and unbilled consideration in the amount of $315.4 million that we expect to recognize as revenue. We expect to recognize 64% of our remaining performance obligations as revenue over the next 12 months and the remainder thereafter.
3. Cash Equivalents and Marketable Securities
As of October 31, 2019 and January 31, 2019, our cash equivalents and marketable securities consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2019 | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | | | | | | |
| (in thousands) | | | | | | |
Money market funds | $ | 99,494 | | | $ | — | | | $ | — | | | $ | 99,494 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cash equivalents | 99,494 | | | — | | | — | | | 99,494 | |
Commercial paper | 48,841 | | | — | | | — | | | 48,841 | |
Agency bonds | 78,963 | | | 12 | | | (84) | | | 78,891 | |
Corporate and other debt securities | 296,419 | | | 597 | | | (37) | | | 296,979 | |
U.S. government agency securities | 106,224 | | | 143 | | | (2) | | | 106,365 | |
Treasury bills | 49,428 | | | 22 | | | — | | | 49,450 | |
Marketable securities | $ | 579,875 | | | $ | 774 | | | $ | (123) | | | $ | 580,526 | |