This week,
Zoom announced results for its fiscal year 2022 fourth-quarter, which ended January 31, 2022. Total revenue for the quarter was $1.071 billion, which was above the Streets expectations of $1.054 billion, equating to 21.4% year-over-year growth. The gross margin was also better than expected coming in at 78.3%, compared to the expected 74.9%, and up from 71.3% from the fourth quarter of fiscal year 2021. The boost in gross margins came from platform optimization and lower usage during the holiday season. The current quarter numbers painted a rosy-looking picture.
Looking ahead, future guidance paints a different picture. Zoom guided its 2023 revenue to range of $4.53-4.55 billion. The midpoint of this number represents 10.7% growth, which is well below the $4.7 billion the street had modeled. While the growth number is significantly lower than the gaudy growth numbers the company had been putting up, it’s important to understand that the COVID tailwinds it once enjoyed are now headwinds as it created unrealistic comps. With that being said, Wall Street had been expecting lower numbers, which is why the stock price is near a 52-week low.
The big question surrounding Zoom now is where does the company go? Was it just a product of the pandemic, or is there a bigger Zoom story to be told that will drive another wave of growth? I believe Zoom is at a crossroads, as it shifts from being the video company that allowed much of the world to work, learn, and be entertained from home to a platform company that can bring the Zoom experience to more people in more ways.
To do this, Zoom must leverage its video install base to shift into adjacent markets, some of which have a total addressable market (TAM) bigger than the meeting space it currently addresses. It can be difficult for a vendor to make such a shift. Zoom does have one big advantage, and that is that people generally really like the Zoom product. Zoom’s “Meet Happy” tagline wasn’t just a slogan – it was a lighthouse for the entire company to row to. The ease of use of the product has built high satisfaction, and that should give Zoom permission to at least have a discussion on moving into other areas.
Today, Zoom is at a bit of a crossroads. The company has grown to over $4.5 billion on the strength of primarily meetings, which is remarkable. Pre-pandemic, the entire meeting market wasn’t a lot more than that. Now, it needs to decide which adjacencies it wants to push into and how aggressively. I believe Zoom should prioritize the following:
- Contact center: By far, this is Zoom’s biggest opportunity. Many industry experts have tossed around a $24 billion TAM for CCaaS, which equates to converting every existing seat to the cloud. Businesses have been giving contact center seats to non-agents such as sales and marketing. I believe the true CCaaS TAM is closer to $50 billion, which creates a rising tide. Given Zoom’s go-to-market was around video, its initial success will come in specialty use cases where the visual medium is important. Also, the video-first approach should appeal to the new buying centers, buying Zoom sometimes to add the features it needs to increase its relevance to core contact center buyers. The good news is that even if Zoom’s execution is mediocre, the contact center will be its largest needle-moving new opportunity. (See related: Zoom's CCaaS Play: Conversational AI Might be Key to Success)
- Hybrid events: I believe we will see a return to live events, but almost every event will have a virtual component. The Zoom events platform was built to bring the benefits of Zoom (ease of use, high-quality video) to this industry as it’s a complete solution that lets organizations host events of all sizes. People can not only gather with Zoom Event, but it also provides ticketing, billing, registration, and other capabilities. This is currently an untapped market with no de-facto standard leader, so it’s wide open for someone to grab the reigns and lead the industry. The one issue Zoom will need to address is having the product by a true hybrid platform, where it can address the needs of live events, like Socio, which Cisco acquired.
- Hybrid work: When I think of hybrid work, I think of James Earl Jones in Field of Dreams saying, “People will come.” Some still question if people will want to return to the office, but all my research shows they do, albeit not full time. This emphasizes building hybrid workspaces, which mean hot-desking, conference room equipment, whiteboards, and other endpoints. As strong as Zoom has been in meetings, that hasn’t translated to Rooms and other office equipment. As people head back into the office, Zoom needs to use its meetings anchor to extend “Meet Happy” to the in-office experience.
- Zoom Apps: This is a long-term play for Zoom, but strong execution here can create an ecosystem, pull-through effect because the vertical application they use works with/or has Zoom integrated into it. Zoom does understand this and has been aggressively pushing its platform story. Right now, its ecosystem is relatively small, when compared to more mature markets like CRM, but Zoom is doing the right things and building out its partnerships.
- Phone: This is the most obvious adjacency and should be a relatively easy add to Zoom Meetings. Given the short period it’s had Zoom Phone on the market, the company has done an excellent job of adding subscribers. I do not think Phone carries the same TAM as the other areas listed above but execution here keeps many of its foes out of its accounts.
The company did the right thing in resetting its guidance and taking the drop in stock price in the chin. Now it can go do what it needs to do to fuel its next wave of growth.
