Mixed quarter for Zoom - enterprise growth solid, but revenue guidance lowered

Derek du Preez Profile picture for user ddpreez August 23, 2022 Audio mode
Summary:
Zoom is undergoing a structural shift in its business as it rides the wave of popularity it saw during the pandemic. Signs are still positive, but its short-term gains are dampening.

Image of an online video conference
(Image by Alexandra_Koch from Pixabay )

Cloud-based collaboration vendor Zoom saw its shares fall in extended trading this week, as it delivered a mixed bag of Q2 results. The company is in the process of shifting its focus to the enterprise market, taking advantage of the brand awareness it gained during the COVID-19 pandemic, but the demand it is seeing there isn’t currently compensating for dampened demand elsewhere. 

Despite solid gains with large customers, and a growing collection of customers paying more than $100,000 ARR, the market reacted negatively to the news that Zoom would be lowering its guidance for the full year. 

The key numbers are: 

  • Total revenue for Q2 2023 was $1.099 billion, up 8% year over year. This was $16 million below the lower end of Zoom’s previous guidance. 

  • GAAP net income attributable to common stockholders for the second quarter was $45.7 million, or $0.15 per share, compared to GAAP net income attributable to common stockholders of $316.9 million, or $1.04 per share in the second quarter of fiscal year 2022.

  • Approximately 204,100 Enterprise customers, up 18% from the same quarter last fiscal year.

  • 3,116 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 37% from the same quarter last fiscal year.

However, CFO Kelly Steckelberg warned that the company is looking at a weaker than expected full year performance. She said: 

For the full year of FY ‘23, we now expect revenue to be in the range of $4.385 billion to $4.395 billion, which would represent approximately 7% year-over-year growth. At the midpoint, this represents a decrease of approximately $150 million as compared to our previous full year guidance. Of this decrease, approximately $35 million is due to the stronger dollar and $115 million is attributable to the broader macroeconomic environment.

Additional insights

Despite the weaker forecast, Zoom President Greg Tomb took the opportunity to highlight a number of enterprise customer wins during the quarter, highlighting the vendor’s strategic direction (higher paying large businesses buying into the full Zoom platform). He said: 

We actually did have an exceptional sales quarter in the enterprise market. We had a number of great new wins, including one of the largest U.S. healthcare providers out there. I can’t give you their name yet, we will in the future, but they did choose Zoom Meetings and Zoom Phone to provide telehealth services to the broad number of caregivers and patients. I mean, they were just really impressed with Zoom’s strong integration between video and voice to support 40,000 plus employees and their external community for a wide variety of telehealth needs.

The next company I want to thank is Warner Bros. Discovery, a premier global media entertainment company. I want to thank them for partnering with Zoom on its global communications needs. Our partnership actually began before the merger with Discovery and really kicked into gear once these two iconic brands merged. And they have chosen to expand their meetings and phone deployment and we are really excited to deliver for them a full integrated suite of communication services.

Next, I’d like to thank Ancestry and you probably know Ancestry as the global leader when it comes to family history. I want to thank them for also expanding their relationship with Zoom. 

CFO Steckelberg said that the growth in revenue this quarter was primarily driven by the enterprise business (a good thing, given the longer term stability of enterprise buying cycles), but added that Zoom is still vulnerable to the current market conditions. She said: 

Zoom is not immune to the global downturn, but the situation is more complex than meets the eye. Our enterprise business continued to post strong growth, which we believe is because cloud migration and digital transformation continue to be a priority even when and perhaps especially when the economy slows. 

The headwinds we saw mainly relate to the streaming dollar, new online subscriptions and to a lesser extent, bookings linearity. We have implemented initiatives focused on driving new online subscriptions, which have shown early promise but were not enough to overcome the macro dynamics in the quarter.

We believe Zoom remains well positioned in this environment as customers look to increase productivity and collaboration while moving away from expensive legacy vendors. Our products are designed to drive efficiency and cost savings within organizations and are loved by both their employees and their customers. In addition, we have strong margins and cash flows as well as a large cash balance. Even still, we are taking a prudent and cautious approach in this environment with focused investments and hiring to drive innovation and customer happiness.

Steckelberg also highlighted that Zoom’s platform approach is paying dividends for the company. The company recently opened up its platform to all developers, with the aim of further fostering the ecosystem. Steckelberg said: 

Our platform strategy is playing out very well and Zoom Rooms and Zoom Phone are critical components of that strategy. In fact, Zoom Phone was a real star in Q2, hitting several milestones. The number of customers with 10,000 or more paid seats increased 112% year-over-year. In addition, we broke our record for the largest Zoom Phone deal twice in the quarter, first with a global retailer and then with a global bank, both with more than 125,000 seats. 

Deals like these led Zoom Phone to post a record quarter and surpassed 4 million seats in August. We are also seeing early traction for Zoom Contact Center and Zoom IQ for sales. Zoom Contact Center is only 6 months old, but has already had deal sizes reach seats that we did not expect until its second year. 

My take

My gut instinct is that despite the softer guidance, Zoom is still in a good position for the long-term. This is a vendor that saw huge growth during the pandemic, but a lot of this was consumers using the free or cheaper version of the platform at home. Zoom is doing the right thing by capitalizing on this popularity to double down on its enterprise buyers - but this structural shift takes time. The underlying trends are positive, with larger contracts being secured and enterprise customers buying multiple products at the same time. Focus on the long game and the rest will follow. 

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