The shares of video conferencing company Zoom fell by 16 percent on Aug. 31 following the firm’s second-quarter earnings announcement. Though the earnings beat expectations, it indicated slow growth, triggering a sudden decline in share price.
Zoom reported adjusted earnings per share of $1.36 for Q2. This was higher than analysts’ earnings expectations of $1.16, according to financial market data provider Refinitiv. Total revenues were reported to be $1.02 billion, which was also higher than the expected $991 million. In the quarter ending July 31, 2021, Zoom’s revenue rose by 54 percent year on year, which, though impressive, was still less than the previous quarter’s revenue growth of 191 percent. Zoom also announced a 31 percent YoY revenue growth for the next quarter.
Adjusted earnings per share are expected to be at $1.07 to $1.08 for the upcoming quarter, with revenue in the range of $1.105 to $1.020 billion. This is better than analyst expectations of $1.09 billion earnings and $1.01 billion in revenues. The company has also raised its full fiscal year revenue projections from $3.98-$3.99 billion to $4.005-$4.015 billion. The higher revenue estimate results from a recent increase in COVID-19 cases. Many companies are delaying reopening offices, conditions ideal for a videoconferencing company like Zoom.
Despite Zoom’s better-than-expected results, many investors are worried about the future growth of the company once the pandemic eases off. The growth rate of customers spending more than $100,000 a year with the company lowered from 160 percent in the first quarter to 131 in the second quarter. In an earnings call with analysts, Zoom CFO Kelly Steckelberg said that the company was seeing “challenges” as people have started socializing in person more rather than spending time in front of a computer.
“We are wary of a potential demotion for Zoom from hyper-growth to growth at a reasonable price,” Citi analyst Tyler Radke told Yahoo Finance. However, not all analysts are wary about Zoom’s future. In an email to Forbes, market analyst Adam Crisafulli called the stock’s decline “overdone.” He stated that Zoom’s enterprise business is still growing despite a slowdown in individual and small business segments.
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“A lot of the big pandemic beneficiary companies posted underwhelming second-quarter earnings reports, but Zoom was one of the best… It clearly isn’t blowing away Wall Street like it did during the course of the pandemic, and that may be considered a knee-jerk negative, but its business is actually proving to be resilient,” Crisafulli said.
Some analysts are optimistic about Zoom with its recent announcement to buy Five9, a service that automates call center services with virtual assistants. The deal is expected to be closed in the first half of next year. In a note to clients, Bank of America analyst David Bartus said that he is bullish on Zoom’s Five9 deal, calling the company a “top pick.”
“The control of internal and external communications should also better position Zoom to open the platform for application developers and create a marketplace. With a $5 billion cash position and 36% operating margins, we also believe Zoom has an attractive opportunity to do more potential M&A, outspend competitors, and extend its leadership position,” Bartus said in a note. Zoom is currently trading at $298 per share, down from the peak of $588 from last October.
Privacy Lawsuit
Zoom recently agreed to pay $85 million in a lawsuit that accused the company of violating user privacy. The class-action suit stated that Zoom shared the personal data of users with third parties like Google, Facebook, and Linkedin. The company was also blamed for allowing hackers to disrupt online meetings with disturbing content, including pornography and inappropriate language, a practice called “zoombombing.”
According to the settlement, the company will pay subscribers a 15 percent refund on their core subscriptions or $25 whichever is higher. Users who have not paid for an account can claim $15. Zoom also committed to ramping up security, promising to notify users about sharing data with third parties.
“The privacy and security of our users are top priorities for Zoom, and we take seriously the trust our users place in us. We are proud of the advancements we have made to our platform, and look forward to continuing to innovate with privacy and security at the forefront,” the company said in a statement.
Though the preliminary settlement has been filed, it still needs the approval of U.S. District Judge Lucy Koh from San Jose, California. The next hearing on the case is scheduled for October.
