Zoom stock (ZM) fell up to 6% on Tuesday morning following a thorough thumping of Wall Street analyst profit estimates. The company's ticker page was the second most visited on Yahoo Finance in the early morning.
The videoconferencing company came into this earnings cycle looking to capitalize on artificial intelligence hype among investors. It managed to feed the AI beast, but analysts were quick to call out a more mixed quarter than first thought and tepid guidance.
"Zoom's Q2 results initially appeared quite solid, with a healthy top/bottom line beat with revenue upside coming from the Enterprise segment with ZM Phone strength.
That said, the upside was partially one-time driven with PSO revenue pull-forward, a softer Q3 billings and weaker 2H revenue outlooks," Citi analyst Tyler Radke said in a client note.
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Radke added he doesn't think Zoom's results have "bottomed" yet.
Here is what Zoom reported for Q2 versus estimates, according to Bloomberg data.
Revenue: $1.14 billion actual versus $1.11 billion estimated
Adjusted EPS: $1.34 actual versus $1.05 estimated
Free Cash Flow: $289.4 million versus $258.6 million estimated
Number of Enterprise Customers: 218,000 actual versus 219,350 estimated
Q3 Revenue Forecast: $1.12 billion actual versus $1.12 billion estimated
Though the company's overall forecast for the year came in higher than expected, the Q3 revenue guidance remained flat for a reason: Zoom is a seasonal business, execs argued.
"For the online churn metric, as a reminder, we expect Q2 and Q4 to be seasonally higher than Q1 and Q3," Zoom CFO Kelly Steckelberg told analysts on the company's earnings call. "So while it was up over Q1, it was down over Q4, and that's because of summer and winter holidays."
Additionally, CEO Eric Yuan defended Zoom's pricing power in an increasingly competitive environment that includes videoconferencing products from tech's biggest names, such as Microsoft (MSFT) with its Teams service.
"In terms of pricing power, most ... businesses, they still view employee experience as the No. 1," he told analysts. "Most of the customers we're talking with, they really appreciate the value and ease of use and quality of the Zoom service."
Zoom was expecting AI to boost its wins this year, especially when it comes to margins.
"For the full year, we expect non-GAAP gross margin to be approximately 79.7%, as we make additional investments in new AI technologies," Yuan said in his prepared remarks to analysts.
The company this summer also brought in a new chief technology officer, XD Huang, who came into the organization with distinct AI experience. He was previously in the same role for Azure AI at Microsoft.
"XD joins us at an optimal moment in our AI journey," Yuan said in his earnings call statement. "And, as we develop and deploy AI solutions, we strongly believe that technology should advance trust.
We are privileged to have countless customers rely on us for their communications needs. We don’t take that for granted. Earlier this month, we took the additional step in stating that Zoom does not use customer content to train our AI models or third-party AI models."
"Zoom shares traded nearly 4% higher on Monday afternoon after the company delivered upside to 2Q targets and lifted its full-year outlook. Enterprise momentum drove the quarterly upside, with the company achieving two milestones (Zoom Phone reached $500mn of annualized revenue and Zoom Contact Center surpassed 500 customers during the quarter).
Overall, Enterprise customer count continues to trend in a healthy direction (~7% y/y) while the Online business continues to see single-digit revenue declines on a y/y basis.
During the call, management also highlighted its ongoing investment in AI-powered solutions, which we believe will take center stage at the company's Zoomtopia conference on October 3-4. We maintain our Hold rating and $75 target price on ZM shares." (Source)
