Is Zoom's profit rise set to slow?

Zoom, the videoconferencing company, has produced an extraordinary surge in profits and sales. Can it keep up the momentum? Matthew Partridge reports

Zoom founder Eric Yuan © Kena Betancur/Getty Images
Zoom’s founder and CEO Eric Yuan sees more growth ahead
(Image credit: Zoom founder Eric Yuan © Kena Betancur/Getty Images)

Thanks to “blowout earnings” – more than double the expected total – in its second quarter, Zoom’s shares have hit a record high, says Kari Paul in The Guardian. The company is now worth more than $100m. Sales rose by 355% year-on-year to $663.5m in the three months to 1 August, also eclipsing analysts’ estimates. Despite facing “intense criticism” over privacy, the videoconferencing company has benefited from a huge jump in users as countries have locked down. Zoom has become “nearly synonymous” with video hangouts. It is used for happy hours, teaching in schools and events.

Zoom may have surpassed expectations, but its management certainly doesn’t think that this is a one-off, says Nico Grant on Bloomberg. The company predicts that the “explosive growth” will continue, with overall sales of $2.4bn in the fiscal year that ends next January, implying that revenue “would almost quadruple in just one year”. It is also confident that this period of “hyper growth” will last beyond the peak of Covid-19, with any churn from users cancelling their accounts as restrictions ease “manageable”.

A tailwind for software

Zoom’s rise has also been powered by the boom in “software as service”, says James Titcomb in The Sunday Telegraph. This is where companies chose to invest heavily “in online business software’, which allows them to keep operating while workers are not in the office. The fact that such software is operated online means that it can “more quickly introduce the latest developments in machine learning and automation”. In a “landmark moment” for the sector, customer-relationship software maker Salesforce became the world’s first software-as-a-service company to enter America’s Dow Jones Industrial Average.

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What’s more, says Dan Gallagher in The Wall Street Journal, while subscription-based software business models are generally popular with investors because of the their “high growth potential” and their “predictability”, Zoom’s “user-friendly service” and “relatively modest” price of $15 a month has also impressed small businesses and consumers, with over a third of revenue now coming from either firms with fewer than ten employees or individuals. Nonetheless, while it’s clear that the service is not a fad, it “remains impossible to know just how many small Zoomers will stay on the service when they no longer have to”.

The firm’s assumption that all new users will stick with the service may prove optimistic, says Richard Waters in the Financial Times. Still, any churn may be balanced by the fact that many of its larger customers are “moving beyond immediate business needs” to make longer-term plans for operating with more remote workers. There are also hopes that it can exploit the fact that many big companies are now considering updating all their communications – including voice systems – to cross-sell other services, helping it become a “full-scale communications company”.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri