Evercore ISI Analyst Peter Levine breaks down Zoom's latest earnings beat, the struggles it faces with growth amid the post-pandemic labor market, and the potential for automation and A.I. integration in the communication tech company.
SEANA SMITH: Take a look at shares at Zoom, they're down nearly 6% in extended trading. The company reporting revenue of 1.12 billion. That's up 4% year over year. Adjusted EPS coming in better than expected, $1.22. The estimate in the street was for $0.80 in terms of its full year forecast, adjusted EPS full-year forecast.
Also coming in stronger than what the street was anticipating, adjusted EPS, they see it as $4.11 to $4.18. The estimate was for 3.53. Let's talk about all this and what else we could expect here from Zoom. We have Peter Levine. He's an analyst at Evercore ISI. Peter, it's great to see you here.
So shares popping on the heels of this report. What's your initial take?
PETER LEVINE: Nailed it on the head. I think profitability came in better than expected. EPS, people wanted to see higher free cash flow margins, which they got, as well as operating leverage in the model. I think Q1 guidance and fiscal '24 guidance, I think, was a little disappointing. Came in well below the street. But again, I think they offset that with profitability and cost conscious, I think, initiatives.
JARED BLIKRE: And Peter, what did you think of the-- some of the numbers here regarding their enterprise customers? That was a metric that didn't quite live up to Wall Street expectations. 213,000 for the fourth quarter versus expectation of 216 and 1/2 thousand. And then customers contributing more than $100,000 in trailing 12 month revenue. Is that metric also a little bit light there?
PETER LEVINE: Yeah, it's been-- it's been trending downwards for the past couple of quarters. So it was a slight miss. I think the other important metric, I think, people should look for is the net retention rate of 115. That's been slipping below that 120 range to 115. Again, that just shows you that, I think, their ability to upsell customers is not as easy as I think they initially thought going into the year.
SEANA SMITH: And Peter, when you take into account the new offerings doesn't seem, at least as of yet, that it's big enough to offset some of the sales declines that we've been talking about, what do you think the timeline more realistically looks like on this process in terms of getting to that higher yielding growth?
PETER LEVINE: I think it could be a while. Listen. I think the next catalyst is Contact Center. I think the video market, which is their core business, is completely saturated. I think what they're doing Zoom Phone, I think is probably the next leg of growth. That should hit based on in the second half, call it 10% of revenue, it's a $500 million business, which they've scaled in two years, which is really impressive.
But that business has become commoditized. So I think the focus is really on Contact Center. And that's probably, I don't know, two, three years. That's an initiative that's longer term. So I don't really see the benefit from Contact Center coming in. And again, in a tighter market, cost-- companies are cutting costs. If you're seeing layoffs, that means you don't need that additional Zoom license.
On top of that, where we are in the pandemic anniversary in almost three years, if you haven't already provisioned your employees either on Zoom, or consolidated, or standardized on Teams, it's unlikely to happen. So I think the upsell I think is going to be a little tougher for them, especially in this market.
JARED BLIKRE: And Peter, just thinking about how some of the big tech giants are completely pivoting their business models to AI, just wondering. Because we see it's a natural fit for a lot of software companies, and there's always the me too bunch to kind of jump in at the last minute where it doesn't necessarily make sense. But is there an AI place to be made-- that case to be made for Zoom?
PETER LEVINE: Oh absolutely. For them, I believe so. I think anyone in the communications space definitely benefits. The Microsofts, the Zooms, the Five9s. With Zoom on the Contact Center, automating agents, live chat, incorporating AI into those workflows absolutely makes sense. And again, even with on the video side, augmenting the transcripts for videos, what they can do in terms of on the phone side with routing--
Yeah, so there's definitely a real use case for AI with Zoom in terms of a lot of automation as they move into other markets.
SEANA SMITH: So Peter, with automation taken into account, lots of focus on the cost cutting efforts at Zoom. We know that they did announce plans to lay off 15% of their staff recently. Do you think more cost cutting measures are going to be necessary here looking out to the rest of the year and maybe possibly into 2024?
PETER LEVINE: It's a possibility. I mean, we'll find out on the call where those cuts are coming from, if it's on sales and marketing, if it's in R&D. I think for Zoom, the initiative is R&D and building out their product portfolio. So the question becomes if they cut cost, they have five billion on the balance sheet, they don't have debt, they have market cap. So do they kind of pivot and maybe do an acquisition to kind of accelerate their go to market and then push products to market?
That's-- again, that's a question we'll have to hear on the call. But 15%, it's a tough decision, or a tough decision for them to make. But I think it's a tough call from an analysts point of view in terms of what their priorities are. But again, I'm hopeful that they'll give us some more color on the call.
SEANA SMITH: Peter, what do you think about a possible acquisition just in terms of the scenario, what would make sense here for Zoom? And in terms of that acquisition, who should they be targeting? Or what line of business do you think is really going to give them the boost here going forward?
PETER LEVINE: I think it's maybe their-- I mean, again we saw their failed acquisition attempt of Five9 almost two years ago. So I think it would be interesting if they do something in the Contact Center side. I mean, that's a very difficult and complicated asset to build organically, which is what they're doing. So I mean, if I was-- I would like to see them do more, I think, on the Contact Center side.
Perhaps they can do something on the phone side. But again, if you're thinking about the next leg of growth, which is still Contact Center, again, that asset itself and that market, they're still-- they have pricing power unlike voice and video where that's become a little bit more commoditized. Contact Center, again, still demands a premium.
So yeah. I think their focus should probably pivot more towards, I think, an acquisition on the Contact Center side. And again, I'm not recommending it or suggesting anything. But I think if I was them, thinking about cost, and the quickest way for them to go to market would be to acquire an asset on the Contact Center side.
JARED BLIKRE: All right, got to leave it there. But appreciate your insights here. Peter Levine of Evercore ISI.