Zoom Video Communications missed the second quarter fiscal 2023 revenue forecasts and lowered its fiscal 2023 outlook, attributing the disappointing results to macroeconomic factors.
The company identified enterprise spending as a bright spot, while its “online” business — mainly consumers and casual using Zoom in a personal context — declined even though it was expected to be flat year over year. The company is ramping up efforts to convert free usage to paid subscriptions, officials said.
“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,” CFO Kelly Steckelberg said.
The company also said, for the second consecutive quarter, that gross margins improved, and it said those gains to optimizing its usage of the public cloud.
Breaking Down the Results
For the quarter that ended July 31, total revenue was $1.1 billion, reflecting an 8% growth rate, vs. the $1.12 billion that analysts were forecasting. The lower figure — approximately $16 million below the low end of the company’s guidance to Wall Street — was driven by the strong U.S. dollar, weaker-than-expected new online sales, and enterprise bookings weighted toward the end of the quarter, Steckelberg said. In the first quarter of fiscal 2023, year-over-year revenue growth had been 12%.
Growth in the enterprise segment was strong: Revenue grew 27% year over year, and represented 54% of total revenue, up from 46% one year ago.
Zoom defines an enterprise customer as a distinct business unit that has been engaged by Zoom’s direct sales team, channel partners, or independent software vendor partners, and its performance metrics increasingly focus on those enterprise customers.
“As the majority of our revenue has shifted back to the enterprise and we have moved beyond the pandemic buying patterns, we are returning to more normalized enterprise sales cycles with linearity weighted towards the back end of the quarter,” Steckelberg said. “This contributed to higher than expected deferred revenue in Q2.”
While Americas and APAC revenue grew 12% and 10% year over year, respectively, EMEA was negatively impacted by the war in Ukraine, the strengthening dollar, and online performance; EMEA revenue declined 8% year over year.
For the full fiscal 2023, the company forecast revenue between $4.385 billion and $4.395 billion. Those figures, representing 7% growth, were reduced by approximately $150 million vs. the company’s previous guidance. Its assigns $35 million of that decrease to the stronger dollar and $115 million to broader macroeconomic factors.
The full-year forecast assumes the enterprise business will grow in the low to mid-20s while online will decline 7% to 8%; previous guidance the company provided had the online business as flat.
There was good news in terms of earnings. On a non-GAAP basis, the company earned $394 million, exceeding the high-end expectation of $365 million. Non-GAAP earnings per share were $1.05, 13 cents above the expected results.
Cloud Spend Management Boosts Margins
Non-GAAP gross margins for the quarter were 78.9%, an improvement from 78.6% in the preceding quarter and 78.6% in the year-earlier quarter. “The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co-located data centers,” Steckelberg said. “Given the improvements we are seeing so far this year, we expect gross margins to be approximately 78% for the remainder of the year which is higher than our previous view.”
Once again, Zoom’s results demonstrate the importance of an active, aggressive approach to managing cloud spending — especially for a company with a vast amount of cloud usage. Zoom has stated publicly in the past that it uses cloud infrastructure from both AWS and Oracle.
Zoom Product Strengths
Zoom cited a number of areas of product strength that contributed to its enterprise results:
- The number of customers with 10,000 or more paid Zoom Phone seats increased 112% year over year.
- The company recorded its largest Zoom Phone deal — twice — in the quarter with retail and bank customers, both of which purchased more than 125,000 seats.
- One of the largest (though unnamed) U.S. healthcare providers chose Zoom Meetings and Zoom Phone to deliver telehealth services to caregivers and patients.
- UCLA expanded its existing Zoom usage with 15,000 Zoom Phone licenses.
The results provide a clearly mixed picture: solid enterprise results, growth in a tough environment, a changing product/revenue mix weighted more toward the enterprise, and strong attention to cost management in the all-important cloud infrastructure that supports Zoom’s business. And Steckelberg acknowledged as much, noting how the macro environment is top of mind.
“Zoom is not immune to the global downturn, but the situation is more complex than meets the eye,” she said.
Later in the call, she added: “We recognize that the revenue results are disappointing and below our expectations, as we navigate the current environment.”
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