Zoom's revenue skyrocketed up 367%
But its CFO says free users and increased cloud spending are eating into its gross margins
/NOVOSTIVL/ Zoom reported third quarter earnings on Monday that beat Wall Street's expectations, reporting revenue of $777.2 million, a 367% increase from a year prior.
Of note, however, is that Zoom showed lower gross margins in this most recent quarter, coming in at 68.2% compared to 72.3% in the quarter before. On an earnings call, CFO Kelly Steckelberg told Wall Street analysts that this was due to a higher base of free users during the quarter, including K-12 schools, who are given complimentary access to Zoom.
She also said that it's partially attributable to "the continued higher utilization of public cloud services." Indeed, earlier this year, Zoom increased spending on Amazon Web Services, and inked a new deal with Oracle for its public cloud services to support its huge influx of users. And later on Monday afternoon, Amazon Web Services announced that it was now Zoom's "preferred cloud provider," signalling closer collaboration between the two companies.
When asked which had a greater impact, Steckelberg said both free users and higher public cloud usage contributed equally to the lower gross margins. She added that she expects gross margins to stay around this level for the next few quarters before it "starts coming back towards our long term targets."
Zoom has previously faced questions about how it plans to monetize its free users, or otherwise convert them to paid users. It recently launched a new events platform for users to monetize their online events. Through the end of 2020 there is no additional fee to try out the OnZoom events platform, but Zoom says that it plans to revisit the possibility of taking a cut of ticket sales next year.
However, Zoom thinks the overall trends of remote work will continue to work in its favor, even when things start to open up and businesses can safely call employees back. The company raised full year revenue guidance to $2.575 to $2.58 billion, which would represent approximately 314% year-over-year growth.
"Our higher outlook for FY21 is based on our current perspective of the business environment," Steckelberg said. "Although we remain optimistic on Zoom's outlook, please note that the impact and extent of the COVID-19 pandemic and its associated economic concerns remain largely unknown."
She did note that churn was lower than expected, meaning fewer customers stopped using Zoom than anticipated. As customers start to use Zoom's other products like its cloud telephony system, they're getting more embedded into the ecosystem, she said. She also said Zoom is working to convert customers paying monthly to annual contracts.
"People [are] continuing to see the value in Zoom, people [are] embracing this remote work and assuming this is how this is going to be for a very long time, as well as the efforts that we're making to help people see the value and convert from monthly to annual," she said. "We can't predict the pandemic. And so we're taking what we believe is a prudent approach."