Zoom reported second-quarter earnings last week, which beat consensus expectations for eps but missed on revenues, sending shares of the video-telephony software company down 16%.
Revenue grew 8% on a year-over-year basis, slowing down in response to churn in non-enterprise online customers as small businesses reacted to the recessionary environment by slashing budgets. ARK Invest said in a recent insight that it underestimated the online churn that would take place as brick-and-mortar businesses reopened.
“Yet, our Zoom investment thesis hinges on our projection that the majority, if not all, of Zoom’s business by the end of 2026 will be focused on enterprise customers,” ARK wrote. The investment management firm said it maintains its high conviction in Zoom and its potential to become a leading communications platform for enterprise-to-enterprise communication.
Zoom’s enterprise business remains strong. The number of customers generating $100,000 or more in trailing twelve-month revenue grew 37% year-over-year, and the total number of enterprise customers grew 18% to ~204,000 customers. Total enterprise revenue grew 27% and now represents 54% of total revenue.
“We believe enterprise customers will continue to rise as a percent of revenues. Total remaining performance obligations (RPO) and current RPO grew 37% and 21% year-over-year, respectively,” ARK wrote. “In our view, the strong RPO growth juxtaposed against muted revenue growth confirms that Zoom’s userbase and business model are moving toward enterprise customers and longer, higher-value contracts. We also believe that Zoom’s new President, Greg Tomb, will harness more than 20 years of experience at Google Cloud, Google Workspace, and SAP to accelerate adoption of Zoom’s suite of enterprise products.”
“That said, we estimate that Zoom’s online weakness has or should peak this year. Management guided to a 7.5% year-over-year decline this fiscal year and noted that approximately 70% of the online segment has crossed the 16-month retention threshold at which management believes churn decreases significantly. We believe churn in this segment should normalize by the end of 2022 as customers with a preference for physical communications churn over the next two quarters,” ARK added.
ARK noted that newer products, particularly Zoom Phone and Contact Center, continue to outperform Zoom’s core video communication products. According to Zoom management, during the second quarter, the number of Zoom Phone users grew 33% sequentially and 100% year-over-year. With 4 million seats, Zoom Phone now accounts for ~10% of total revenue, but only 1% of the total available market. Launched just six months ago, Zoom Contact Center won a 1,000-seat deal last quarter –– its largest so far –– and the average seat count has reached triple digits, according to ARK.
Zoom is a top holding in the ARK Innovation ETF (ARKK ) and the ARK Next Generation Internet ETF (ARKW ), which weighs Zoom at 8.05% and 7.29%, respectively, according to the funds’ websites.
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