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Earnings Outlook: Will Zoom be able to withstand workers returning to the office?

More employees are returning to work, which could bode ill for Zoom Video Communications Inc.

When the videoconferencing company reports third-quarter earnings Monday afternoon, sales are expected to grow more than 30% and top $1 billion for the second consecutive quarter as many businesses remain committed to Zoom
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-1.92%
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However, COVID-19 vaccinations means fewer people are working remotely and not in need of the videoconferencing service at the levels of last year, especially at smaller companies.

With pandemic restrictions lifting world-wide except for Continental Europe, Mizuho Securities analyst Siti Panigrahi would not be surprised to see “elevated churn” among companies with fewer than 10 employees. Zoom’s management, accordingly, has “already de-risked” the situation by “embedding higher churn expectation,” he wrote.

“We expect Zoom to deliver top-line growth driven largely by enterprise segment [more than 10 employees and more than $100,000 revenue],” Panigrahi said in a note Nov. 15 that rates Zoom’s stock as buy with a price target of $350.

Competition has also slowly eroded Zoom’s growth rate. Pat Walravens, equity research analyst at JMP Securities, points out monthly visits to Zoom plunged 27% to 2.06 billion in September 2021 from a peak of 2.81 billion in March 2021. Meanwhile, Microsoft Corp.’s
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competitive Teams software has expanded to more than 250 million active users, Walravens said in an Oct. 19 note.

Then there is the aftermath of a failed $14.9 billion acquisition of cloud contact center software company Five9 Inc.
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-5.63%
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after Five9 shareholders scuttled the all-stock bid largely as a result of Zoom’s descending share price.

For more: Zoom and Five9 may not be broken up forever

Buying Five9 “presented an attractive means to bring to our customers an integrated contact center offering,” Zoom Chief Executive Eric Yuan wrote in a blog post. “That said, it was in no way foundational to the success of our platform, nor was it the only way for us to offer our customers a compelling contact center solution.”

Proxy advisory company Institutional Shareholder Services had recommended shareholders vote down the proposal, which was reviewed by a branch of the Justice Department over potential foreign participation, according to a letter dated Aug. 27 that was sent to the Federal Communications Commission.

What to expect

Earnings: Analysts on average expect Zoom to report earnings of $1.09 a share, compared with net income of 66 cents a share a year ago. Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of $1.09 a share on average.

Revenue: Analysts on average expect Zoom to report $1.02 billion in first-quarter revenue, up from $777 million in the same quarter a year ago. Estimize contributors also predict $1.02 billion on average.

Stock movement: Zoom’s stock is down 25% this year, while the S&P 500 index
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has climbed 25%.

What else to look for

The age of COVID has permanently changed the ways individuals and corporations communicate, and Zoom will be a constant cornerstone. The only question is whether the company has reached its zenith.

“Where we are today in the pandemic cycle, we believe ZM’s core business is close or near full penetration,” Evercore ISI analyst Peter Levine said in an Oct. 28 note that rates Zoom shares as in line with a price target of $255.

“If you have not already provisioned your employees with a ZM license, it’s unlikely at this point we will see meaningful upside to offset an uptick in churn, We expect a rotation among the investor base from high-growth momentum investors to more of a GARP/secular investor base, and these transitions take time to play out.”

In addition, the decision by Five9 shareholders to reject Zoom’s $14.9 billion acquisition offer should have investors realigning their growth expectations, Levine wrote.

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