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Zoom Video: Muted Outlook Offsets Earnings Beat

Published 05/23/2023, 03:24 PM
Updated 07/09/2023, 06:31 AM
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Zoom Video Communications (NASDAQ:ZM) shares are mostly flat on Tuesday despite the videoconferencing company beating analyst expectations across the board and offering a better-than-expected full-year outlook.

Zoom reported earnings per share of $1.16 a share to easily top the expected $0.99. Revenue rose 3.7% year-over-year to $1.11 billion, again ahead of the consensus at $1.08 billion. Net income for the first quarter was $15.4 million.

The company said its Americas revenue jumped 8% YoY to offset 8% and 5% declines seen in EMEA and APAC regions, respectively.

Solid Results and Guidance Fail to Excite Investors

For this quarter, Zoom Video said it expects to report adjusted EPS of $1.05 (up or down a cent) on revenue of $1.11 billion to $1.12 billion. The second-quarter forecast came in line with the analyst expectations for earnings of $1.05 on revenue of $1.11.

The company also reported operating cash flow of $418 million and free cash flow (FCF) of $397 million, below the $501 million reported for the same period last year.

On a full-year basis, the video communications company sees adjusted earnings at $4.28 per share (up or down 3 cents) on revenue of $4.48 billion (up or down $10 million). This compares to the analyst expectations for earnings of $4.21 a share on sales of $4.45 billion.

“The solid start to the year has enabled us to raise our outlook for fiscal-year 2024 while continuing to invest in innovations such as AI to help make interactions more meaningful and communications more effective,” Zoom Chief Executive Eric Yuan said in a statement.

Speaking on the earnings call, the company’s CFO Kelly Steckelberg said Zoom now serves almost 216,000 enterprise customers, which generated about 29% of total sales. She specifically mentioned new customers in health care, education, and the government.

The number of customers contributing more than $100,000 in trailing 12 months revenue rose 23% YoY to 3,580, said Steckelberg.

“As we look to reignite growth and maintain strong profitability, we are committed to doing so in the right way,” Steckelberg added on the call.

The growth trajectory was a big topic on the earnings call as analysts continue to be worried about a deceleration in top-line numbers. Zoom continues to experience a post-COVID hangover with shares down 87% from the all-time high in 2020.

"We continue to believe FY24 will be yet another transition year for ZM, and expect growth to re-accelerate in FY25,” Mizuho analysts said in a client note.

Investing in AI ‘for a Few Years’

During the earnings call, analysts were unsurprisingly interested to hear from the management about the AI-focused projects at Zoom. CEO Yuan confirmed that the company has been investing in AI “for a few years.”

“Two of the largest acquisitions, right, you know, Solvvy and Kites, right, all of them are AI-based. Internally, we also have an AI team as well because we understand the importance of AI, you know, in particular recently by the generative AI momentum,” Yuan said on the call.

Last week, Zoom announced it has rolled out the updated version of its Zoom IQ, a tool that assists users by reading meeting summaries with customers. Zoom IQ can also record meetings and break the content into chapters and highlights.

“Today we’re announcing that we’re evolving the capabilities of Zoom IQ to become a smart companion that empowers collaboration and unlocks people’s potential by summarizing chat threads, organizing ideas, drafting content for chats, emails, and whiteboard sessions, creating meeting agendas, and more,” the company said in a blog post.

As AI is predicted to increase profit margins in nearly every industry, Zoom’s push into generative AI has been widely expected. In March, it announced a partnership with ChatGPT-developer OpenAI. A few days ago, Zoom also said it has partnered with AI startup Anthropic to integrate its Claude AI assistant into Zoom’s productivity products.

“Anthropic’s Constitutional AI model is primed to provide safe and responsible integrations for our next-generation innovations, beginning with the Zoom Contact Center portfolio,” said Smita Hashim, chief product officer at Zoom.

The company said its Zoom IQ tool will soon have AI-powered features, including chat and email compose, as well as providing quick meeting summaries.

The AI push is one of the biggest reasons why Mizuho is bullish on ZM stock, as their analysts said the video communications company “is emerging as a Generative AI player in the collaboration and customer experience space.”

Summary

Zoom Video Communications stock reacted in a muted manner despite the video communications platform topping Q1 analyst expectations and offering a better-than-expected full-year outlook.

Moreover, the company’s management also doubled down on plans to incorporate AI into its products. Zoom recently announced several startup acquisitions aimed at faster rollout of AI-powered tools.

. . .

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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