Zoom has been one of the biggest winners of the pandemic-era shift to virtual, but current numbers show that its growth is slowing. A new business model hopes to turn that around.
Zoom’s stock valuation took a bit of a dive after hours Monday afternoon as the financial world reacted to their projection that 2022 fiscal year revenues would be less than many Wall Street analysts had anticipated. While the massive jump in users and profits during the first two years of the pandemic would be very difficult for the video-conferencing giant to perpetuate, it looks like there were some surprises in the fourth-quarter earnings call for investors and analysts alike.
Zoom had plenty of good news to share and posted significantly higher revenue this year than last. For the 2021 fiscal year, its GAAP (Generally Accepted Accounting Principles) income from operations for the fiscal year was $1.06 billion, compared to $659.8 million in 2020 — and that’s taking into account the costs associated with the $85 million class-action lawsuit settled in August 2021. Nonetheless, fourth-quarter reporting was significantly out of step with the record growth posted in previous quarters, with GAAP income from operations actually declining 2 percent year-over-year — from $256.1 million in the fourth quarter of 2020 to $251.8 million this time around.
The consistent slowdown of Zoom’s growth is part of a larger trend hitting virtual event tech firms as the pandemic appears to be lifting, and it’s one that CFO Kelly Steckelberg acknowledged during the company’s earnings call on Monday. Though at this point individual online users of Zoom are showing strong retention past the 16-month mark, growth in the event-related channel of Zoom clients is, she said, expected to be “flattish” in 2022.
Zoom Shifts to Enterprise Communications
In response to this trend, Zoom is “in the middle of a multiyear strategy” that intends to reorient it from a virtual meeting software provider to a fuller-service communications platform. CEO Erik S. Yuan identified unified communications, hybrid work support, and business workflow as key areas of expansion for Zoom, announcing that “in fiscal year 2023 we plan to build out our platform to further enrich the customer experience with new cloud-based technologies and expand our go-to-market motions, which we believe will enable us to drive future growth.”
Zoom’s confidence in its direction has some data to back it up, according to the customer metrics it shared in the fourth-quarter report. Clients who had more than 10 employees jumped approximately 9 percent as compared to the same quarter in 2020. In line with its strategic direction, Zoom also highlighted a new target market — that of “Enterprise clients”, or “distinct business units who have been engaged by either Zoom’s direct sales team, channel partners or independent software vendor partners.” The number of Enterprise clients jumped 35 percent year over year in 2021, with a trailing 12-month net dollar expansion rate of 130 percent.
To that end, Zoom has been dropping significant R&D cash on new product development, with the hope that the investment will pay off in the acquisition of new clients who may no longer need to depend as much on Zoom Meetings to do business. Despite its plans to expand into new territory, Yuan emphasized that Zoom will continue to be poised to integrate well with other vendors. He expect the primary driver for near-term growth to be unified communications platforms like Zoom Contact Center, which aims to offer intuitive UI across features like voice and video calls with text chats. To that end, several new features for the Zoom Events and newly launched Contact Center platforms are now either available or in beta testing.
Hybrid work and business workflow platforms are also in the works, with the expectation that these will push Zoom’s expansion into new markets that will sustain growth into the middle term. Doing so will mean facing stiff competition from Microsoft, which already offers integrated file sharing, email, calendar, chat, and video conference functions through its 365 suite.
Banking on Brand Awareness and Low Cost
During the call, both Steckelberg and Yuan continually highlighted the strong brand awareness that Zoom has acquired in the last two years. The idea is that the high visibility and familiarity that Zoom offers can be deployed to lead clients to new products as they come online.
This factor may present more nuance than Zoom would like to admit. Several security and privacy issues — including highly visible acts of Zoombombing in the early stages of the pandemic — may have compromised the brand’s reputation. Some IT personnel may be convinced that Microsoft has better security and prefer its products for sensitive and internal communications.
However, Zoom can offer a strong incentive for choosing its services: affordability.
Despite the proposed enhancements to its products, Steckleberg stated that there are currently “no plans to increase prices across the board,” and that its rates are significantly lower than those offered by any of its competitors. However, that doesn’t necessarily mean that Zoom Events or other avenues will be positioned as a downmarket option for integrated workflows or hybrid workplace services. Because Zoom has been able to grow its functionality over time, she insisted the lower price “does not reflect the quality of the product.” The expectation, Yuan says, should be “better product, better price, much better service.”
Wiggly stock prices aside, Zoom has made a lot of money in the last couple of years. Because of its robust balance sheet, it’s well positioned to fund the future innovations it believes will propel future growth. The direction it’s moving in reinforces the industry-wide understanding that as we adjust to the new, new normal, things will not return to the way they were pre-pandemic. As Yuan asserted Monday evening, “We really expect the future to be hybrid.”