Market jitters over Zoom’s slowing growth, but positive signs remain for long term

Derek du Preez Profile picture for user ddpreez November 23, 2021
Zoom’s shares fell on Monday as the company eases into the Vaccine Economy and growth slows.

virtual meeting

Zoom became the unexpected poster child of the COVID-19 pandemic, with people around the world using the video communications platform to maintain relationships and get work done. 

The company saw huge amounts of growth during 2019, with revenues jumping over 300% in some financial quarters. However, this was never going to be sustainable, as the world enters the Vaccine Economy and companies began to shift their focus to long term hybrid work strategies. 

And this is what we are beginning to see evidence of, with growth slowing in Zoom's Q3 earnings. The market may be nervous, as the company's shares dropped by 6% on Monday, but there is plenty to be optimistic about looking at the long term trends. 

For instance, the higher end of Zoom's customer base is growing, with more customers signing deals worth over $100,000, and with the vendor expanding deals with existing customers. These two factors suggest that traction is being gained in the enterprise and that customers already with Zoom are happy with the product. 

It hasn't been totally smooth sailing this quarter though, given Zoom's acquisition of Five9 fell through, after the cloud-based contact center provider's shareholders rejected the deal. Whilst Zoom CEO Eric Yuan said that the deal wasn't critical to Zoom's contact center ambitions, it certainly threw a spanner in the works. 

But let's dig into the numbers. For Q3 FY22, Zoom reported: 

  • Total revenue of $1.05 billion, up 35% year over year

  • GAAP net income was $340.3 million, or $1.11 per share, up from $198.4 million 

  • Zoom raised its financial outlook for Q4 to between $1.051 billion and $1.053 billion. Total revenue for fiscal year 2022 is expected to be between $4.079 billion and $4.081 billion. 

Commenting on the quarter, Zoom CEO Eric Yuan pointed to the product announcements from the company's virtual Zoomptopia event and recent high-profile customer wins as evidence of a positive future for the vendor. He said: 

Whether it's the ability to virtually whiteboard in and around the meeting, or utilize AI to transcribe or translate a meeting live, Zoomtopia demonstrated that previously futuristic capabilities have arrived. We are working hard to develop and deploy the technologies of the future to address current business needs and reimagine how we communicate and work in a flexible hybrid world.

Now let me recognize a few big wins for the quarter. We are excited to have Carrier Global Corp, the leading global provider of healthy, safe, sustainable and intelligent building and cold chain solutions, as a long standing Zoom Meetings customer and now, a new Zoom Phone customer as well. 

Following several months of extensive vendor reviews of leading UCaaS vendors, Carrier selected Zoom Phone to modernize their phone systems for a large portion of their nearly 53,000 employees across 180 countries. We are so thankful that Carrier choses Zoom to deliver an increasingly comprehensive, secure, innovative and integrated set of communications services

In addition to Carrier, we had many other upsells this quarter. For example, one of the world's largest global retailers decided to add 20,000 Zoom Phone licenses to their existing Meetings, Rooms, and Webinar footprint in order to better manage their global offices, distribution centers, and retail locations. This demonstrates our strong value add to the retail vertical and builds upon previous success stories like Tapestry and Target.

Long-term trends

As noted above, whilst Zoom's share price took a hit on Monday, some of the trends in the numbers highlighted by CFO Kelly Steckelberg point to a company that has positive outlook for the longer term, despite stiff competition in a rapidly changing market. 

For instance, Steckelberg highlighted that most of the growth was driven by Zoom's direct and channel business, rather than online, which suggests larger, relationship-led deals taking place. 

Equally, existing customers are buying more and Zoom is seeing growth in its bigger deals. Steckelberg said: 

The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, with existing customers accounting for 26% percent of the incremental revenue, up from nineteen percent a year ago.

We saw 94% year-over-year growth in the up-market as we ended the quarter with 2,507 customers generating more than one $100,000 in trailing 12 months revenue. These customers represented 22% of revenue, up from 18% in Q3 of last year. We exited the quarter with approximately 512,100 customers with more than ten employees, up 18% year-over-year.

In addition to this, customers with more than 10 employees represented 66% of revenue, up from 64% last quarter. Steckelberg said: 

These trends suggest that our customers with more than ten employees are expanding their use of our platform and adding more products and seats, aligned with our go-to-market strategy.

Our net dollar expansion rate for customers with more than ten employees exceeded 130% for the 14th consecutive quarter as existing customers increased their spend with Zoom and we saw strong upsells of Zoom Phone and Zoom Rooms. 

For Q4, we expect this metric to be modestly below the 130% mark as the denominator of this trailing twelve month metric reflects a significant growth in our customer base.

The strategy is to sell the existing install base, which by definition just means these customers are going to grow larger and larger and contribute more over time.

My take

A somewhat of a mixed bag for Zoom, but to be honest, it should be what is expected. The levels of growth that Zoom saw during the early phases of the pandemic are not sustainable as things stabilize. But what's important now is a product that focuses on availability, reliability and user experience - Zoom ticks a lot of those boxes compared to some of its competitors. If larger customers continue to buy and those same customers continue to buy more, shareholders should remain happy for the time being. 

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