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Zoom’s growth has softened since COVID-19 peak, but enterprise sales up and forecasts raised

Derek du Preez Profile picture for user ddpreez May 23, 2023
Summary:
The Zoom mania that was seen during the height of the pandemic has subsided, but the company does still have some positive signals for the future.

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

Zoom’s Q1 2024 results this week suggest a rebound for the digital communications and collaboration vendor, as it beat analyst expectations, saw a boost in its enterprise sales, and raised its full-year 2024 forecasts. The company experienced a surge in popularity during the COVID-19 pandemic as companies worldwide shifted to distributed work and sought out new collaboration tools - but has failed to continue the same momentum in the Vaccine Economy. 

Like many other zealous companies that saw significant growth during the pandemic, Zoom has undertaken an organizational restructure and laid off staff (1,300 in total). During the Q1 analyst call this week, CFO Kelly Steckelberg said that the layoffs had been a distraction for the company, but that trends were now broadly ticking upwards. She said: 

As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our Americas revenue grew 8% year-over-year, while EMEA and APAC declined by 8% and 5%, respectively. 

The decline in EMEA was primarily attributable to the outsized impact of the headcount reduction due to local regulations prolonging the process, the Russia-Ukraine war, and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar.

The overall numbers for Q1 2024 include: 

  • First quarter total revenue of $1,105.4 million, up 3% year over year as reported and 5% in constant currency

  • First quarter Enterprise revenue of $632.0 million, up 13% year over year

  • First quarter GAAP operating margin of 0.9% and non-GAAP operating margin of 38.2%

  • Number of customers contributing more than $100,000 in trailing 12 months revenue up 23% year over year

Discussing Zoom’s different online and enterprise business segments - essentially its consumer and business divisions - Steckelberg added: 

As I mentioned in the quarterly milestones, our Online business improved meaningfully in the quarter as it benefited from many initiatives including the price increase and buy flow optimization. In addition, we saw Online average monthly churn decrease to 3.1%, from 3.6% in Q1 of FY ‘23, and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected.

The number of enterprise customers grew 9% year-over-year to approximately 215,900. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q1 came in at 112%. We saw 23% year-over-year growth in the up-market as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 24% in Q1 of FY ‘23, and span diverse industries such as healthcare, education, government, and more.

Enterprise customers now representing almost a third of Zoom’s business will be pleasing to investors, as this spend is more predictable, typically has higher value and is more likely to expand over time. 

New features

CEO Eric Yuan took time during the earnings call this week to discuss Zoom’s recent acquisition of Wokvivo, an employee communication and engagement platform, as well as the vendor’s recent advancements in AI. On Workvivo, Yuan said: 

Their solution combines a social intranet and employee app into one central hub, forming the heart of a company's digital ecosystem.

Incorporating Workvivo's feature-rich technology into our all-in-one collaboration solution will allow us to offer Zoom customers a unified platform that keeps knowledge workers and frontline employees informed, engaged, and connected throughout the workday, regardless of in-person, remote, or hybrid work style.

Yuan added that Zoom’s approach to AI is to incorporate solutions that are ‘federated, empowering and responsible’. HE said: 

Federated means flexible and customizable to businesses’ unique scenarios and nomenclature.

Empowering refers to building solutions that improve individual and team productivity as well as enhance the customer experience. 

And responsible means customer control of their data with an emphasis on privacy, security, trust and safety.

Yuan pointed to the recently announced ZoomIQ, which is a set of in-beta features that use generative AI to support chat and email compose and meeting summary features. IT is also building new features that include summarizing long chat threads and brainstorming in Whiteboard. And on a new acquisition, Yuan added: 

Last week, we announced our strategic investment in Anthropic, an AI safety and research company working to build reliable, interpretable, and steerable AI systems. Our partnership with Anthropic further bolsters our federated approach to AI by allowing Anthropic’s AI assistant, Claude, to be integrated across Zoom’s entire platform.

We plan to begin by layering Claude into our Contact Center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in-beta Zoom Workforce Engagement Management. With Claude guiding agents toward trustworthy resolutions and powering self-service for end-users, companies will be able to take customer relationships to the next level.

My take

Zoom’s challenge going forward is building out a functional platform that solves a variety of problems for the enterprise, rather than being a single point solution that suffers from competition at the hands of much larger players that can invest strategically (e.g. Microsoft + Teams). That being said, Zoom’s key numbers are pointing in the right direction (enterprise sales and large contracts) and the company has a strong brand that people associate with reliable digital collaboration. 

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