Zoom Video (ZM) is expected to report results on its fourth quarter on Monday, February 27, with a conference call scheduled for 5:00 pm EDT. What to watch for:
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ON THE SIDELINES: Bernstein believes Zoom continues to be a well-loved product by enterprise customers, and while there is much worry about competitive inroads by Microsoft Teams (MSFT), the base of users remains durable. Due to there being few new customers remaining in the market post-COVID pull-forward in demand, most growth is expansion within customers, the firm notes. According to its checks, there are bright sports, such as contact center doing better than anticipated. However, there are also larger challenges to upsell in the current base, both due to bundle pricing that extracts limited price expansion on adoption, and little opportunity for seat-based expansion due to macro, Bernstein adds.
In the Online business, the firm sees continued deterioration in web metrics, suggesting the painful shrinking revenue base is not over – estimated down maybe 2%-3% quarter-over-quarter. And the read forward to Q1 2024 suggests this trend will continue at least one more quarter, Bernstein says. The firm keeps a Market Perform rating on the shares with a price target of $88.
Last month, MKM Partners moved to the sidelines on the name, downgrading Zoom Video to Neutral from Buy with a price target of $75, down from $100. The firm stated that her bullish thesis had been based on expectations of post-pandemic normalized growth of 10%, transition to enterprise growth from online, international expansion, and adjacent product growth in Phone, Chat, IQ, Contact Center, Rooms, Events, and Whiteboard products. But given the macro pressures on the Enterprise business, MKM sees limited upside on Meetings because of the market saturation of video-paid seats and low net new logo adds.
WORKFORCE REDUCTION: Earlier this month, Zoom Video’s CEO Eric Yuan announced via a blog post that, "We have made the tough but necessary decision to reduce our team by approximately 15% and say goodbye to around 1,300 hardworking, talented colleagues… As the world transitions to life post-pandemic, we are seeing that people and businesses continue to rely on Zoom. But the uncertainty of the global economy, and its effect on our customers, means we need to take a hard – yet important – look inward to reset ourselves so we can weather the economic environment, deliver for our customers and achieve Zoom’s long-term vision. Each organization across Zoom will be impacted by these changes."
The CEO also said that, “I am reducing my salary for the coming fiscal year by 98% and foregoing my FY23 corporate bonus. Members of my executive leadership team will reduce their base salaries by 20% for the coming fiscal year while also forfeiting their FY23 corporate bonuses."
Following the news, RBC Capital raised the firm’s price target on Zoom Video to $95 from $85, keeping an Outperform rating on the shares. The company’s 15% staff reduction was a "surprising and confusing move" as the company is one of the names where more growth than margin would appeal more to investors, the analyst tells investors in a research note. The firm adds, however, that there’s also a chance that this could be more of a re-prioritization, where Zoom uses the extra cash to accelerate investments in more strategic areas. RBC Capital still maintains however that the future of work will likely be hybrid, and Zoom should be a "critical component to enabling that hybrid future."
Despite seeing the workforce reduction at Zoom Video as an "incremental positive," Citi kept a Sell rating on the shares with a $67 price target. The firm still sees downside risk to growth heading into 2023, with rising competition further slowing Enterprise growth and small business online revenue continuing to decline. Zoom’s shift toward profitability amid decelerating growth is logical given its growth rates are of a mature software company, Citi said.
OUTLOOK: During the company’s last earnings call, Zoom Video said it saw fourth quarter earnings per share of 75c-78c, with consensus at 80c, and revenue for the quarter of $1.10B-$1.11B, with consensus at $1.10B. The company also raised its 2023 earnings per share guidance to $3.91-$3.94 from $3.66-$3.69, with consensus at $3.95. On the flip side, Zoom Video lowered its 2023 revenue view to $4.37B-$4.38B from $4.39B-$4.40B, with consensus at $4.38B.
Published first on TheFly
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