ZM • 10-Q • Q3 2023 • Positive

Zoom's Enterprise Push Shows Promise as Revenue Growth Stabilizes at 3.2%

November 21, 2023 • 1 min read

TL;DR

Zoom's Q3 results reveal a strategic shift paying off as Enterprise revenue grew 8% YoY to $659M while Online business declined 2%. Total revenue reached $1.137B, up 3.2% YoY, marking a stabilization after several quarters of deceleration. Enterprise customers >$100K grew 13% YoY to 3,731, demonstrating strong enterprise penetration. The company's AI initiatives and platform expansion suggest potential reacceleration in FY25.

Financial Performance Overview: Revenue grew 3.2% YoY to $1.137B, with Enterprise segment showing 8% growth to $659M. Gross margin improved 130bps YoY to 75.3%, while operating margin expanded significantly to 19.9% from 13.7%. Free cash flow generation remained robust at $453.7M (39.9% of revenue). The stabilizing growth rate and improving profitability metrics suggest Zoom's enterprise strategy is gaining traction while maintaining strong cash generation.
Strategic Initiatives and Operational Changes: Zoom is aggressively expanding its enterprise platform with AI-powered features including Zoom AI Companion, now included at no additional cost for paid users. The company launched Team Chat Clips and AI-powered sales tools, indicating a shift from pure video conferencing to comprehensive enterprise collaboration. Management highlighted 70% of Enterprise customers now use multiple products, showing successful platform expansion strategy execution.
Market Position and Competitive Dynamics: Enterprise customers >$100K increased 13% YoY to 3,731, with net dollar expansion rate at 105% despite macro pressures. Zoom's competitive position strengthened in large enterprises, evidenced by 462 customers contributing >$1M in TTM revenue. The company is successfully differentiating through AI integration and platform breadth, though Microsoft Teams remains a significant competitor.
Operational Efficiency and Profitability: Operating margin expanded 620bps YoY to 19.9%, driven by disciplined cost management and improving scale economics. R&D investments remained robust at 11.2% of revenue while sales efficiency improved with S&M expenses declining as percentage of revenue. The company maintained strong cash conversion while investing in AI capabilities, demonstrating operational discipline.
Growth Catalysts and Material Risks: Key growth drivers include AI-powered features, international expansion (APAC revenue +10% YoY), and deeper enterprise penetration. Primary risks include Microsoft Teams competition, macro headwinds affecting IT budgets, and potential cannibalization of Online segment. Management expects reacceleration in FY25 driven by enterprise momentum and new product adoption.

Revenue

$1.137B (+3.2% YoY, +0.7% QoQ) with Enterprise $659M (+8% YoY) and Online $478M (-2% YoY)

Rd Spend

$127.4M ( of revenue, YoY)

↑ 11.2%

Net Income

$141.2M ( YoY) representing net margin

↑ +11.3%

Gross Margin

(+130bps YoY) driven by infrastructure optimization

↑ 75.3%

Free Cash Flow

$453.7M ( of revenue, YoY)

↑ 39.9%

Operating Margin

(+620bps YoY) reflecting operational efficiency

↑ 19.9%

Growth Indicators

Enterprise ARR: $2.65B ( YoY)

↑ +8%

Customer Count ↑Enterprise customers >$100K: 3,731 (+13% YoY)

Retention Metrics ↑Net dollar expansion rate: 105% for Enterprise customers

Key Risks

Microsoft Teams competition intensifying in enterprise segment
Macro headwinds affecting IT budgets and sales cycles
Online segment decline indicating market saturation
Currency fluctuations impacting international revenue

Key Opportunities

AI Companion adoption driving platform stickiness and potential monetization
Contact Center penetration <1% of enterprise customers
International expansion, particularly in APAC (+10% YoY)
Multi-product adoption expansion potential in enterprise accounts

Bottom Line

Zoom's Q3 results demonstrate successful execution of its enterprise transformation strategy, with stabilizing growth and expanding profitability. The company's AI initiatives and platform expansion are driving differentiation, while enterprise customer metrics show strong upmarket traction. Key metrics to watch include Enterprise customer growth, multi-product adoption rates, and AI feature monetization. The stabilization in growth rates combined with margin expansion suggests potential reacceleration in FY25, though macro headwinds remain a near-term constraint.