Zoom Stuck in Single-Digit Purgatory for a While

Zoom reported late Monday that revenue grew 5% year over year for its fiscal third quarter ended October and it projected a further deceleration of 3% growth for the current quarter ending in January. For the quarter that included 2020’s holiday period, by contrast, Zoom’s revenue surged 369% year over year. 

The pandemic’s pull-forward effect on Zoom’s business has been well understood for a while. But duration has been the bigger question mark. Zoom has been scrambling to build up a larger base of business customers that are more durable than the masses of consumers who jumped on in 2020 to pay $15 a month for the only face-to-face conversations that were advisable then. That side of the business—which Zoom calls its online segment—came to account for more than half the company’s total revenue in the heart of the pandemic compared with less than a quarter before. Its slowdown continues to hurt Zoom’s overall growth. Online revenue still accounts for about 47% of the company’s trailing 12-month total, but that segment saw revenue fall 9% year over year in the most recent quarter. 

Zoom expects the online segment to stabilize in mid-2023, based on the growing percentage of those users opting into longer-term subscription deals. But the company’s effort to grow its enterprise side with new service offerings such as “Zoom Rooms” is running headlong into the same macroeconomic slowdown that has corporate tech managers pulling back their spending.

Everyone in the cloud sector is feeling the impact, from platform service titans such as

Amazon

and

Microsoft

to application software providers such as

Salesforce,

which has been laying off workers ahead of its own fiscal third quarter results next week. Zoom’s enterprise revenue grew 20% year over year in the October quarter—a deceleration of 7 percentage points from the July period. 

Analysts are skeptical the company can outrun the slowdown. Zoom is on track to end the current fiscal year with 7% total revenue growth, and Wall Street currently expects it to remain in single-digit territory until the fiscal year ending in January of 2026, according to FactSet. Zoom’s shares slipped about 4% Tuesday following the results. They already were off 86% from their late 2020 peak.

Such anemic growth is less-than-ideal territory for a cloud company, and Zoom’s growing investments in both R&D and its sales capabilities also put some pressure on operating margins, which hit 40% in the heart of the pandemic but are now trending back to the low 30% range. This with low single-digit growth puts Zoom below the so-called “Rule of 40” ideal that says a cloud software company’s growth rate plus profit margin should add up to at least 40%. Peter Weed of Bernstein Research projects Zoom will remain below this level for the next two years, “and even at the end of that period only barely scratching back.” 

There is never a pandemic around when you really need it. 

Write to Dan Gallagher at [email protected]