Will Zoom Ever Soar Again?

Will Zoom Ever Soar Again?
Will Zoom Ever Soar Again?

Summary

Latest results helped by low expectations and a stock buyback, though growth remains sluggish.

Nobody expects much from Zoom Video Communications these days. Sometimes that works to the company’s advantage.

The videoconferencing wunderkind that shot to fame during the early days of the pandemic has been experiencing a long and painful comedown since. Revenue growth has been in the low single-digit percentage range for the last six quarters, culminating in just 2.6% growth for the fiscal year ended January, according to the company’s fourth-quarter results reported late Monday. That makes Zoom the slowest growing among cloud-software companies generating more than $1 billion in annual revenue, according to data from S&P Global Market Intelligence. Workday—a notably larger cloud provider—said Monday that its annual revenue grew nearly 17% over the same period.

Zoom hasn’t even been able to break into the market’s artificial-intelligence party—despite its best efforts. The company announced a generative AI tool called Zoom AI Companion in September, and said less than two months later that more than 125,000 of its customers were using it. But Zoom’s stock price has slumped nearly 7% over the last six months—a notable laggard on the BVP Nasdaq Emerging Cloud Index that has jumped nearly 16% in that time.

A weak stock at least set a better stage for Zoom’s quarterly results Monday. The shares jumped more than 10% in after-hours trading following the report and conference call, which is a nice change considering the stock has fallen after 10 of the last 12 reports, according to FactSet. Zoom’s adjusted operating income for the quarter beat Wall Street’s targets while billings—a measure of business transacted during the period—exceeded analysts’ forecasts by the widest margin in a year. Zoom also took the occasion to announce its second-ever share buyback plan, this one worth $1.5 billion.

Zoom’s heady growth days have hardly returned. The company projected $4.6 billion in revenue for the current fiscal year, which would amount to 2% growth and was slightly below Wall Street’s already anemic projections. But the company seems to have finally stabilized the consumer side of its business, where revenue was flat in the fiscal fourth quarter after seven straight quarters of declines. This segment is made up of individuals and small businesses that rushed onto the service early in the pandemic but have been slowly melting away since.

Zoom’s enterprise segment that sells to large business customers has been doing a little better, but has also felt the pain of corporate budget crunches and competition with much larger players such as Google and Microsoft, which embed videoconferencing features into their larger suite of software offerings. That segment could do better in the new fiscal year. On Monday’s call, Zoom Chief Financial Officer Kelly Steckelberg said the majority of the company’s customers had a “renewal event" in the recently ended year, meaning fewer will be up for renewal this year. “So we expect that to have a much lower impact in FY ’25," she said.

In the meantime, Zoom’s investors will need to take comfort in the company’s relatively strong earnings and cash flow that has helped it amass a war chest of about $7 billion in cash and equivalents—the fourth largest among cloud software companies. That fuels the buyback, and could help the company land a decent acquisition, if such an opportunity arises. Tyler Radke of Citigroup called the results “better than feared" in a note Thursday, adding that “we’d expect [the] stock to retrace recent underperformance." A Zoom call with a satisfactory conclusion has been a long time in coming.

Write to Dan Gallagher at dan.gallagher@wsj.com

 

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