Zoom’s share price tumbled this week upon the release of its third quarter 2023 earnings report, despite solid enterprise growth for the digital collaboration vendor. The company’s outlook for its online business (consumers and smaller groups of users) has been cut by nearly 8% for the year, which is likely what spooked investors.
However, it should be noted that in the areas that should deliver a solid, sustainable recurring revenue stream for Zoom (e.g. enterprise), the company is faring well. It could be argued that given Zoom’s origins, and the growth that it saw from its consumer user base during the peaks of the COVID-19 pandemic, observers are struggling to understand the company’s shift in priorities towards investment in large business buyers.
It could be argued that a decline in the company’s online business is less important if the company is growing in the enterprise market, which CFO Kelly Steckelberg said should increase by 20-25% this year. As we know, enterprise buyers are more likely to take a long-term view and buy more than one product at a time, favoring integrated suites of products (which is what Zoom is currently pushing with its UC platform).
Commenting on this week’s Q3 numbers, Zoom CEO Eric Yuan said:
As global organizations adapt to how, when and where work happens, human connection remains paramount. Zoom is purpose-built to make all kinds of connections possible, effective and meaningful.
We have developed and launched more than 1,500 features and enhancements on the Zoom platform this year, advancing how people connect with each other, their organization and their customers, ultimately, opening the doors wide for creativity and collaboration.
The key figures released this week are:
Total revenue for the third quarter was $1.109 billion, up 5% year over year. After adjusting for foreign currency impact, revenue in constant currency was $1.126 billion, up 7% year over year in constant currency.
Enterprise revenue was $614.3 million, up 20% year over year.
Online revenue was $487.6 million, down 9% year over year.
Approximately 209,300 Enterprise customers, up 14% from the same quarter last fiscal year.
A trailing 12-month net dollar expansion rate for Enterprise customers of 117%.
3,286 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 31% from the same quarter last fiscal year.
It’s those enterprise numbers that should be peaking peoples’ interests - number of enterprise customers is up, net dollar expansion rate is up, and customers bringing in more than $100,000 a year is up. All good indicators in my books.
CFO Steckelberg said:
The growth in revenue was primarily driven by strength in our enterprise business, which grew 20% year-over-year and represented 56% of total revenue, up from 49% a year ago.
We expect enterprise customers to comprise an increasingly higher percentage of total revenue over time. From a product perspective, we had strong growth in Zoom Phone coupled with contributions from Zoom Rooms and other products.
A full stack
diginomica covered Zoom’s recent product announcements from its Zoomtopia event, which included an expansion into email and calendar apps. The plan is to become the vendor that is a one-stop-shop for integrated digital collaboration. CEO Yuan said:
Zoom provides a full suite of communications solutions at an attractive total cost of ownership that enables Teams to do more with less and our new products like Zoom Contact Center and Zoom IQ for Sales enable revenue generation and drive productivity. The continued strength of our Enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments.
As we enable customers to drive greater efficiency, we also are focusing on our own efficiency. We have always been judicious with investments, prudent about spending and we have commanded robust margins since our IPO, so this is not a major shift for us. We will continue to drive innovation, customer value and platform expansion, balanced with an increasing emphasis on efficiency and profitability.
We continued to see strong traction with customers spending greater than $100,000 in trailing 12 months revenue, which was up 31% year-over-year. What’s more, these customers are increasingly seeing value in buying the whole platform, with thousands of customers already buying Zoom One packages. From an industry perspective, the largest deals came from tech, media and financial services, and we also had notable wins in retail, transportation and pharma.
More and more customers are moving towards our full UC stack, rather than just the Meeting or Phone, and that’s why we are very excited. Because if you look at all those offerings working together seamlessly, many customers are trying to consolidate their full UC stack.
Markets are fickle and the problem with being a public company is that analysts and investors look quarter to quarter, rather than over the long term. The surge in growth that Zoom saw during the pandemic amongst a consumer user base was never the company’s long-term strategy - but observers will look to the fall in the online users and publish Zoom accordingly. However, in my mind, the metrics that matter (in the enterprise business) are solid and suggest a positive outlook.
That being said, Zoom does still have its challenges. Whilst its integrated stack of unified communications tools is compelling, it depends on where organizations will see their center of gravity. For instance, will they more likely collaborate around Microsoft/Google applications because that’s where their content creation platforms are? And possibly their infrastructure too…
Time will tell, but in the medium term at least, I think Zoom has a compelling proposition.