MarketWatch First Take: Zoom’s astounding quarter shows it expects to be a force even after workers go back to the office

MarketWatch First Take: Zoom’s astounding quarter shows it expects to be a force even after workers go back to the office

3 Jun    Finance News

Zoom Video Communications Inc. on Tuesday managed to assuage the fears of investors that the growth of the popular videoconferencing service would be strong only while people are sheltering in place.

Zoom ZM, +1.92% reported a massive first-quarter earnings beat with stunning sales growth of 169% Tuesday, numbers that somewhat justify the company’s market capitalization tripling so far this year. The real story, though, was the company’s forecast, which nearly doubled annual earnings expectations and almost tripled revenue projections from guidance provided just three months ago.

Aleksandr Zukin, an analyst with RBC Capital Markets, said on a conference call that he believed Zoom had one of the best all-time quarters in enterprise-software history, if not the greatest.

“But with that opportunity also comes a question, which is, ‘Where does Zoom go from here?’” he said.

Zoom has become synonymous with videoconferencing during the COVID-19 pandemic, with the name of its company becoming accepted vernacular for the act of speaking with others on video itself. Zukin’s question, though, has been key for Zoom, which has deep-pocketed rivals like Cisco Systems Inc. CSCO, +1.27% , Microsoft Corp. MSFT, +1.13% and Alphabet Inc. GOOGL, +0.51% GOOG, +0.51% , and the potential for free users to go away after the crisis, and for paying customers to potentially check out rival services.

Eric Yuan, founder and chief executive of Zoom, countered that Zoom now knows the total addressable market for the company is bigger than it previously thought. He said there are a lot of opportunities to pursue, but for now, its top priority is to keep its service up and running and double down on security and privacy, after “Zoom bombs” that interrupted school lectures and work calls marred its otherwise spectacular popularity.

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Chief Financial Officer Kelly Steckelberg described the company as taking a “conservative approach” with its guidance, not typically something a CFO says about that type of increase. Steckelberg also said that the company’s guidance takes into account escalated “churn” rates — the amount of people who stop using the service.

While she told analysts that it was “too early” to tell what the impact would be of cities starting to open up, she noted that “most people are taking their time to go back to work” even after restrictions are eased. Companies such as Twitter Inc. TWTR, +1.16% have told its employees they could work from home for the rest of the year.

For some investors, Zoom’s shares — trading approximately 2,433 times its fiscal 2021 earnings expectations heading into the report — are just too frothy, especially with the remaining questions of whether it turns more of its free customer base into future paying ones, or adds more users to its big corporate accounts. However, if videoconferencing habits and allegiance to Zoom’s software have permanently taken hold in the past few months, this could be the start of a dominant run for the young company.

Based on the astounding forecast and results, Zoom seems confident that it will continue flying high while everyone is stuck at home, and will be better for it once they aren’t.

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