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Zoom’s future depends on convincing customers they need it for more than video chatting

·Technology Editor
·5 min read
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Zoom (ZM) has been a Wall Street darling throughout the pandemic. But that all seemingly changed Monday as the company reported its Q2 2021 earnings. (The company refers to this period as "fiscal Q2 2022.")

While Zoom beat analysts’ expectations on revenue and earnings, its growth has slowed significantly since the start of the pandemic. On top of that, the company missed earnings expectations for the current quarter.

Zoom stock fell by more than 10% in after hours trading and was down 16% by Tuesday morning.

Zoom served as a lifeline for average people trying to stay sane and connected to friends and family while cooped up in their homes. It proved essential for everything from weddings and birthdays to keeping businesses and their employees in touch for more than a year.

That was never going to be the case forever, and Monday’s earnings are the first concrete signs of that change. But Zoom isn’t going down without a fight. It knew this was coming, and has already laid out plans for its post-pandemic life.

Those plans include app integrations to better compete with Microsoft’s (MSFT) Teams platform, Zoom-powered events, and its recent purchase of Five9’s intelligent cloud contact center.

App integrations and virtual events

According to Forrester vice president and principal analyst James McQuivey, Zoom needs to tread carefully so that it doesn’t become the next Skype or Kleenex. In other words, the company needs to be both how people refer to video chatting, Zooming, while also being the actual service they use. After all, you might say you’re going to Xerox something, but actually use a copier made by HP.

To do that, Zoom has to continue to expand its app integrations and find new ways to make video chatting a viable option for businesses.

App integration will ensure you use Zoom for more than jumping on a quick video call, and turn the software into a destination app similar to Microsoft’s Teams, which offers everything from video chatting to group planning and document editing.

Microsoft has seemingly made taking down Zoom one of its main goals in the productivity space, so Zoom will need to keep innovating if it hopes to remain the go-to video app for businesses around the world.

Zoom CEO Eric Yuan attends the opening bell at Nasdaq as his company holds its IPO, Thursday, April 18, 2019, in New York. The videoconferencing company is headquartered in San Jose, Calif. (AP Photo/Mark Lennihan)
Zoom CEO Eric Yuan attends the opening bell at Nasdaq as his company holds its IPO, Thursday, April 18, 2019, in New York. The videoconferencing company is headquartered in San Jose, Calif. (AP Photo/Mark Lennihan)

Beyond its integrations, though, Zoom is working to expand beyond your normal video chatting experience. Rather than facilitating business meetings or online learning sessions, Zoom has launched its events experience through which users can do everything from take remote yoga classes to attend conferences.

And in July, the company announced the purchase of Five9, a cloud contact center to assist companies with customer support capabilities.

"I’m particularly bullish on Zoom events,” RBC Capital Markets software equity analyst Rishi Jaluria told Yahoo Finance Live on Tuesday.

“The fact of the matter is even as companies are eager to return to in person conferences...conferences of the future are going to be hybrid in nature. I think companies have realized if they have a true hybrid approach and have true virtual participation they can reach a much broader audience than they could before,” Jaluria added.

Slamming the brakes on growth

In its Q2 earnings release, Zoom said for the current quarter it expects revenue of between $1.015 billion and $1.020 billion and earnings per share of between $1.07 and $1.08. Analysts polled by Refinitiv had predicted $1.013 billion in revenue and earnings per share of $1.09.

Perhaps more problematic for the company, though, is its significant slowdown in year-over-year revenue growth. In Q2 2020, Zoom saw its year-over-year revenue explode 355%. But in Q2 2021, revenue growth slowed to 54% year-over-year.

The slowdown was even starker when compared to the 191% growth Zoom saw in Q1 2021.

It’s not just revenue growth, though. User growth exploded for Zoom throughout the pandemic, with the number of customers with 10 or more employees skyrocketing 458% from 66,300 in Q2 2019 to 370,200 during the company’s Q2 2020.

That stratospheric increase, though, was never going to last. In its latest quarter, Zoom reported a 36% increase in customers with 10 or more employees, topping out at 504,900 such subscribers.

What matters for Zoom now is how it can sustain growth at a more realistic rate than it saw during the worst of the pandemic. What’s more, it needs to hold on to the customers it gained during the last year and a half.

“It's just incredibly difficult for people to understand how to evaluate this thing,” McQuivey told Yahoo Finance.

“Even if everyone who's currently on Zoom continues to use Zoom for the next five years, they're not going to use it as frequently. And that's going to create fewer revenue opportunities to upsell and expand and into deeper relationships, both on the enterprise side and the smaller organization,” McQuivey added.

Zoom will continue to face harsh comparisons in the coming quarters as its growth evens out and more users are able to get back to some semblance of pre-pandemic life. And that was always going to be the case. Now it’s up to Zoom to figure out how to grow without the artificial boost from the pandemic, and retain the customers it has.

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