What’s the story?
On Tuesday, shares of Zoom Video Communications (NASDAQ:ZM) dropped 7.4%. Why did Zoom stock drop? The cloud communications leader warned that growth would slow.
Why should you care?
Zoom’s sales increased 21% year over year to $1.1 billion in its fiscal 2022 fourth quarter, which ended on Jan. 31. That was a significant slowdown from the 35% growth Zoom experienced in the third quarter and the 54% sales increase it reported in the second quarter.
The number of firms with more than 10 workers on the video conferencing software increased 9% from the previous year to 509,800. However, that represents a drop from 512,100 clients at the end of the third quarter.
Zoom will focus more on expanding its corporate accounts in the year ahead, perhaps due to the downturn in its small-business customer growth. The video chat software provider will submit two new metrics: the number of enterprise clients on its platform, as well as their net dollar expansion rate.
Zoom ended fiscal 2022 with a year-over-year growth of 35%, or roughly 191,000 enterprise customers. Those customers’ trailing-12-month net dollar expansion rate was 130%. In other words, they spent 30% more than the year before on Zoom’s services.
In short, Zoom’s adjusted net income increased 8% to $393.6 million, or $1.29 per share. That exceeds analysts’ projections calling for per-share profits of $1.06.
In the future year, Zoom’s growth is expected to slow even more as people return to conventional jobs. In fiscal 2023, management predicts revenue will climb by less than 11%, to about $4.54 billion.
Moreover, Zoom’s profit margins will take a hit from its growth investments. The company guided for its adjusted earnings per share to decrease by approximately 30% to $3.48. Still, CEO Eric Yuan believes these expenditures will bolster Zoom’s positio in the increasingly competitive cloud communications industry.
“To sustain and enhance our leadership position, 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.”
Zooming out, we see why Zoom stock dropped. Investors are worried growth will slow and margins will tighten.