As much as Zoom Video (ZM) would like to distance itself from the individual and small group videoconferencing business that made it a rousing success during the pandemic, the company’s weak Q2 report showed that leaving the past behind can be difficult. Categorized as the Online segment by ZM, this once booming business has fallen on hard times as people forgo Zoom meetings to get together in person. After decreasing by about 4% last quarter, revenue for the Online segment fell by 9% yr/yr in Q2.
While detrimental to ZM, this ongoing drop-off on the consumer side is hardly unexpected. In fact, for the past several quarters, ZM has intently focused on diversifying its business by expanding its enterprise customer base. A major aspect of that strategy revolves around adding new capabilities, such as Zoom Phone and Zoom Contact Center. The company has enjoyed some success during this transition, as illustrated by the Enterprise segment becoming a larger portion of total sales. On that note, Enterprise represented 54% of total revenue in Q2, compared to 52% last quarter, and 46% in the year-earlier quarter.
In Q2, Sales & Marketing expenses jumped by 35% to $286 mln, representing approximately 26.0% of sales, compared to 20.7% in Q2 of last year. Due to ZM’s efforts to expand its product portfolio, Research & Development costs surged by 81% yr/yr to $98 mln, accounting for about 8.9% of sales, versus 5.3% in the year-earlier quarter.
If there was more confidence that ZM’s investments would pay off and reignite its growth, then investors may give the company the benefit of the doubt. The problem, though, is that Enterprise revenue growth slowed to 27% from 31% last quarter as it added fewer than expected new enterprise customers.
ZM ended the quarter with 204,100 enterprise customers, up 2.6% from Q1, and up 18% on a yr/yr basis. In Q1, the company generated new enterprise customer growth of 24%.
During the earnings conference call, CEO Eric Yuan sought to downplay the deceleration in growth, commenting that the headwinds were mainly related to the strengthening dollar, softness in the Online segment, and timing issues related to bookings. While those factors are playing a significant role, CFO Kelly Steckelberg disclosed that ZM lowered its FY23 revenue guidance by $150 mln, with $115 mln of that total related to macroeconomic conditions.
It was undoubtedly a rough quarter, but there were a couple bright spots. Zoom Phone continues to perform well with the number of customers with 10K paid seats or more soaring by 112% yr/yr. Also, non-GAAP gross margin expanded by 270 bps yr/yr to 78.9%, driven by ZM’s increasing usage of co-located data centers. Overall, though, the discouraging quarterly report is creating more skepticism and doubt regarding ZM’s prospects in a more normalized world.