Zoom Video Communications Inc. executives trimmed their annual outlook Monday afternoon, sending shares lower in extended trading.
Zoom ZM, -2.07% posted fiscal second-quarter net income of $45.7 million, or 15 cents a share, on revenue of $1.1 billion, up from $1.02 billion a year ago. After adjusting for stock compensation and other effects, Zoom reported earnings of $1.05 a share, down from $1.36 a share last year. Analysts surveyed by FactSet had expected adjusted net income of 94 cents a share on revenue of $1.12 billion.
The better-than-expected earnings were undercut, however, by a chopped forecast for the full year. Zoom executives said they now expect full-year adjusted earnings of $3.66 to $3.69 a share on revenue of roughly $4.39 billion, down from $3.70 to $3.77 a share on sales of $4.53 billion to $4.55 billion. For the third quarter, they expect 82 to 83 cents a share on revenue of about $1.1 billion, while analysts on average had been projecting 92 cents a share on sales of $1.15 billion, according to FactSet.
Zoom Chief Financial Officer Kelly Steckelberg blamed a stronger U.S. dollar — a problem many global tech companies have called out in recent earnings reports — but also a decline in “the online business,” or the more casual Zoom user.
Simply put, individuals and small businesses aren’t flocking to the service as often or for as long as they did during the peak of the pandemic, when most Americans were working almost exclusively from home, socializing with friends over the service, and taking staycations. An increase in one-on-one meetups, vacations and hybrid work schedules have altered the post-pandemic business cycle for Zoom, executives acknowledge.
“While we saw continued momentum with our Enterprise customers, and our non-GAAP operating income came in meaningfully higher than our outlook, our revenue was impacted by the strengthening of the U.S. dollar, performance of the online business, and to a lesser extent sales weighted to the back end of the quarter,” Steckelberg said in a statement included with the results.
During a webinar presentation for analysts late Monday, Steckelberg said Zoom has “implemented initiatives focused on driving new online subscriptions, which have shown early promise but were not enough to overcome the macro dynamics in the quarter.”
“The big challenge is new customer additions,” she said.
Among the initiatives with promise is converting free users to paying customers. Mizuho Securities analyst Siti Panigrahi sees potential upside in Zoom’s decision last month to limit meetings hosted by Basic (free) users to 40 minutes. He believes the change will force some free users to upgrade to a paid Pro plan for $14.99 a month, or $149.90 annually.
The so-called 40-minute change so far has had a “significantly positive impact,” Steckelberg told MarketWatch.
Enterprise customers, by contrast, improved 18% to 204,100 over the past year through contracts with UCLA, Warner Bros. Discovery Inc. WBD, -7.43% and others, as well as longer deals. Zoom Phone licenses hit a record of nearly 4 million, up more than 100% year-over-year. “It was a mixed quarter, with enterprise proving to be strong,” Steckelberg told MarketWatch.
Zoom shares declined nearly 9% in after-hours trading following release of the results, after closing with a 2.1% decline at $97.44.
The ongoing friction between employees who wish to continue to work from home and employers like Apple Inc. AAPL, -2.30%, Alphabet Inc.’s GOOGL, -2.53% GOOG, -2.58% Google and Facebook parent company Meta Platforms Inc. META, -2.92% — all of whom are sitting on acres of unused commercial real estate and asking workers to come in at least twice a week — could have a profound impact on Zoom.
A group of Apple employees on Monday launched a petition asking CEO Tim Cook for a more flexible work policy.
Then there is Microsoft Corp.’s MSFT, -2.94% Teams, a competing service embedded within enterprises as part of the software giant’s sprawling installed base of licensees. It has displaced Zoom at some companies, according to Citi Research analyst Tyler Radke.
M Science’s software analyst Charles Rogers believes users aren’t jumping to other platforms but cutting the service because of inflation and more relaxed COVID guidelines. “I do think [Zoom is] likely more impacted internationally as APAC was flat [quarter over quarter] and EMEA down for the second consecutive quarter,” he told MarketWatch.
Zoom’s stock is down 47% so far in 2022. The broader S&P 500 index SPX, -2.14% has slid 13% this year.