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Zoom’s Growth May Halt Soon: How the Company Plans to Save its Recurring Revenue

  • Jackson Reynosa - SUBTA
  • Sep 2, 2021
  • 6 minute read

Zoom reported new revenue highs in its quarterly earnings call. The company’s Q2 revenue increased 54% year over year (YoY) to more than $1.02 billion, according to the investor report on Aug. 30. 

While this exceeded the company’s initial predictions ($990 million expected), it is a relatively small gain compared to Zoom’s dramatic revenue increases at the beginning of the pandemic.

Throughout 2020, individuals and enterprises embraced remote communication, leading to Zoom’s hypergrowth. Revenue grew 355% YoY from Q2 2019-2020, per the report. 

Now, the company has settled back into “a much more reasonable growth period,” as one reporter said in the Q&A portion of the investor meeting. This deceleration in growth has troubled investors and even led to a 14% dip in Zoom’s stock following the meeting. 

Here’s what you need to know about Zoom’s fluctuating revenues and its plans to rebound from the recent decline.

What’s Changed from 2020 to Now?

Zoom tripled its revenue in 2020. During the pandemic, the company was able to acquire new users based on clients’ urgent needs to “keep the lights on” in their businesses, as Zoom’s Chief Financial Officer, Kelly Steckelberg, phrased it in the report. 

Now, as workers return to the office, Zoom’s products have been seen as less of a “necessity” and more as a “desire” for many companies.   

As a byproduct of shifting consumer habits, Zoom meetings are trending down. Individuals are not using Zoom to the extent they once were, and the company is seeing more churn. Usership is especially down in Zoom’s online segments (meetings, rooms, and events) in Europe, the Middle East, and Africa, per the report. 

SUBTA CEO and Co-Founder, Paul Chambers, weighed in on the situation at hand. “Growth slowing for Zoom right now isn’t surprising as more people return to work and summer vacations kick in,” Chambers said. “From here, Zoom really needs to focus on continuous innovation.”

In an effort to attract new customers and retain old ones, Zoom is bringing new products to the table.   

“You can see [Zoom] starting to push things further with the introduction of apps into their ecosystem, and creating new products that allow their customers to work the way they want to work,” said Chambers.

The company is currently introducing Zoom Events — a platform entirely dedicated to online experiences. Zoom’s virtual conference, Zoomtopia, will take place on this channel on September 13 and 14.

Additionally, Zoom purchased Five9 — a leading customer-engagement platform — in July to track customer-satisfaction levels and engage with users across different channels (meetings, phone, events, etc). This could allow the company to improve its customer retention strategy — something Zoom could leverage to experience consistent growth in the future.

“This will also be a space where AR (augmented reality) and VR (virtual reality) start to emerge more in the coming years, which is what we see Facebook starting to do with Horizon Workrooms,” Chambers added.

An Increase in Recurring Revenue Despite an Uncertain Future

Due to shifting consumer habits, Zoom expects Q3 revenue to fall between $1.015 to $1.02 billion – on par with Q2.

Yet, Zoom’s stock was down significantly the morning after the earnings call, as many investors are wary of the company’s economic sustainability in a post-pandemic world. The loss of individual users on its online segments (meetings, rooms, and events) is impacted by erratic consumer trends influenced largely by Covid-19.  

“This is an important lesson for other subscription businesses in always keeping a keen eye on retention and how seasonality and outside forces can quickly affect your business,” said Chambers.

Demand can shift at any given point in time, which is why subscription businesses should remain poised for fluctuations and focused on bigger goals. The pandemic ultimately made a lasting impact on the future of online work, which could be promising for Zoom’s future — unless the company struggles to innovate and adapt.

Corporate executives plan to decrease office use by 30% in the future, according to a McKinsey survey. This initiative would entail many people moving back home to work. 

“More than 20 percent of the workforce could work remotely three to five days a week as effectively as they could if working from an office,” another McKinsey study concludes, meaning that Zoom could remain an integral piece of office software in the future.

While the future remains uncertain, the company is celebrating some Q2 wins. Last quarter, Zoom focused on its customer acquisition strategy, and it paid off. New users made up 74% of the incremental revenue, while existing customers contributed to only 26% of the incremental revenue, according to Steckelberg in the report.

A majority of the company’s Q2 revenue came from mid-to-large sized companies. Zoom had over 500,000 clients with more than ten employees (a 36% YoY increase), which made up 64% of the company’s quarterly revenue. Furthermore, enterprise customers — businesses that generate over $1 million in revenue yearly — increased 70% YoY for the company. 

Zoom’s attention to its market demand led to an increase in recurring revenue plans. By garnering more business from enterprises, the company was able to make up for the revenue deficit imposed by its online product sales decline.

Anticipating & Planning for the Future of Digital Communications

Steckelberg reassured investors in the Q&A portion of the earnings call by saying, “We want everyone focused on the long-term potential of the business.” 

While revenue seems to be plateauing, the company has no intention of being complacent.

Zoom for Education Will Remain Free

The company expresses no interest in drawing conversions from freemium users in the education sector. This aligns with Zoom’s mission to remain community-oriented and supportive to schools that rely on its platform.

“We never thought about monetizing education,” said Zoom’s CEO, Eric Yuan, in the Q&A portion of the meeting. 

While this is an initiative inspired by the company’s values, it also serves as a gateway to meet new customers who are introduced to Zoom for the first time through education.

Innovation, Innovation, Innovation!

Zoom’s communication solutions become all the more important as the company prepares new products and services for ongoing consumer trends. As the world gets used to a largely remote workforce, new problems will arise every day – and Zoom plans to provide solutions.

An example of this is Zoom Events, which looks to leverage the fact that 45% of business events will occur virtually in the future.

Reaching Consumers Where They Are

Zoom is heavily focused on increasing its customer-acquisition rate. 

The company has $468 million in operating cash flow. A portion of this has been allocated to customer-acquisition opportunities. “We are absolutely continuing to invest in our sales capacity[;] we are focused on certain regions especially where we see lots of opportunities like Asia-Pacific (APAC),” said Steckelberg in the Q&A portion of the earnings call. 

“We are continuing to invest in marketing as we move into the post-pandemic era. We are continuing now to think about how we can invest more in specific product marketing around Zoom Phone around Zoom Rooms,” added Steckelberg.

With new products and acquisitions in its back pocket, Zoom looks to sustain its growth even in a time where people are back to interacting offline – at least for now.

Key Takeaways: 

  • Zoom’s Q2 revenue increased 54% YoY to $1.02 billion. It predicts potential losses in Q3.
  • Zoom users are churning at a higher rate than in 2020. 
  • Zoom’s earnings report is a prime example of why monitoring retention is important, especially when outside forces fluctuate a business’ growth.

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