Zoom rides working from home trend to forecast-beating quarter

Via Financial Times

Zoom confirmed on Tuesday it has been one of the biggest corporate winners from the coronavirus crisis, as the video conferencing service reported a surge in new business that far exceeded even the most optimistic Wall Street expectations.

The US company’s revenue soared by 169 per cent to $328m in the three months to the end of April, as employers around the world signed on as customers to cope with an enforced move by most of their staff to working from home.

The news briefly lifted the company’s stock market value above $61bn — an increase of $42bn from the start of the year — before the shares fell back in after-market trading. 

The massive increase in demand for Zoom’s video conferencing app made its performance over the past three months “one of, if not the greatest quarter in enterprise software history”, said Alex Zukin, a software analyst at RBC Capital Markets. The revenue surge was also reflected in its underlying profitability, with free cash flow topping $250m in the last three months, or more than double the amount the company generated in the previous 12 months combined.

The boom in new business came despite the weaknesses in Zoom’s privacy and security arrangements revealed in recent weeks. The flaws brought a wave of negative publicity and warnings from some employers for their staff not to use the service.

Eric Yuan, chief executive, said the company had opened its service to consumers “with good intentions” as the pandemic hit “without fully thinking through” the consequences. Many of the new personal users had struggled to deal with a service designed for businesses with sophisticated IT departments, he said, adding: “As CEO I think I should have done a better job.”

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However, the uproar — which included complaints from US politicians and a review by the Federal Trade Commission — did not prevent Zoom from greatly expanding its market during the quarter. The company said it now had more than 265,000 paying customers with 10 or more employees, up 354 per cent from a year ago.

Despite the jump in new business, Zoom’s latest figures revealed that the coronavirus crisis had put a strain on its business model, which was designed mainly to serve large employers.

The cost of meeting the new level of consumer demand pushed its gross profit margin down from 80 per cent to 69.4 per cent in the quarter as it spent heavily on cloud services from Amazon Web Services and Oracle to handle the soaring traffic. The number of people attending meetings over the service on any one day peaked at 300m in April, up from 10m in December last year, the company said.

Zoom also revealed that it has become far more reliant on smaller customers who pay only month-to-month rather than buying annual subscriptions. The proportion of its revenue that comes from these customers has risen to 30 per cent from 20 per cent before the crisis, exposing the company to what it said was likely to be higher customer churn in future.

The shift to more short-term business added to questions about how lasting the pandemic-induced video conferencing boom would prove be, though Mr Yuan said he believed the potential market was now far bigger than it had been before the pandemic.

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The CEO said Zoom’s main goals now were to maintain the quality of its service as it adjusted to a much higher level of demand than it expected, and to accelerate attempts to cross-sell a new voice service to its much bigger base of video conferencing customers. 

In a call with analysts after the earnings, the company laid out a comprehensive vision that involves selling a full range of video, voice and chat services to a wider customer base that includes businesses, consumers and “prosumers”, said Mr Zukin at RBC.

The wave of new business in the latest quarter pushed Zoom’s growth rate to more than double its level before the crisis hit, and topped most analysts’ forecasts for revenue of a little over $200m. The company also predicted its revenue for the year as a whole would reach up to $1.8bn, up from $623m in 2019. Its pro forma earnings per share of 20 cents were up from 3 cents a years before and topped estimates of 9 cents.


Line chart of Share price ($) showing Zoom shares have surged nearly 500% since their IPO

The news pushed Zoom’s shares up more than 3 per cent in after-market trading, capping a powerful rally on the back of the boom in video conferencing. That lifted the company’s market value to $61bn, up $42bn from the start of the year.

The revenue surge confirmed that Zoom had been able to sign up a raft of new paying customers for its services, rather than being weighed down by the many non-paying consumers who have turned to its service to stay in touch with friends and family.

The company said it now had more than 265,000 paying business customers with 10 or more employees, up 354 per cent from a year ago.

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