Zoom is struggling to get consumers to pay, and the stock is falling

Zoom Video Communications Inc. is struggling to get people to pay for its video conferencing service in the third year of the COVID-19 pandemic, contributing to a subdued outlook and a drop in its share price on Monday.

ZM Zoom,
-2.07%
executives cut their profit and revenue guidance for the fiscal year on Monday afternoon, and Zoom Chief Financial Officer Kelly Steckelberg blamed the stronger U.S. dollar — a problem that many global tech companies have highlighted in recent earnings reports — but also a drop in the “online business , or the more casual Zoom user.

“Our revenue was impacted by the strengthening of the US dollar, the performance of the online business and, to a lesser extent, weighted sales at the end of the quarter,” Steckelberg said in a statement included in the results.

In an interview with MarketWatch and on a conference call Monday afternoon, Steckelberg acknowledged that individuals and small businesses have changed their habits. Many are not flocking to the service as often or for as long as during the height of the pandemic, when many Americans worked almost exclusively from home and socialized with friends for the service. The rise of in-person meetings, vacations and hybrid work schedules have changed the post-pandemic business cycle for Zoom, executives admit, and it’s harder to get users to pay.

“The big challenge is new customer additions,” he said.

Zoom recently installed a 40-minute limit on users with a Basic or free subscription, which Mizuho Securities analyst Siti Panigrahi said could be a way to push more users to become paying subscribers. Steckelberg told MarketWatch that the timeframe has had a “significantly positive impact” so far, but admitted on the conference call that it was “not enough to overcome the macro dynamics.”

The news wasn’t all bad — Zoom’s business, which sells subscriptions to larger organizations, grew 27% to $599 million. Corporate customers improved 18% to 204,100 last year through deals with UCLA, Warner Bros. Discovery Inc. WBD,
-7.43%
and more, plus bigger deals. Zoom Phone licenses hit a record of nearly 4 million, up more than 100% year-over-year.

“It was a mixed quarter, with the business proving strong,” Steckelberg told MarketWatch.

The ongoing friction between workers who want to continue working from home and employers like Apple Inc. AAPL,
-2.30%,
GOOGL of Alphabet Inc.,
-2.53%

GOOG,
-2.58%
Google and Facebook parent company Meta Platforms Inc. META,
-2.92%
— all of which sit on acres of unused commercial real estate and require workers to come in at least twice a week — could have a profound impact on Zoom. A group of Apple employees on Monday started a petition asking CEO Tim Cook for a more flexible working policy.

The company also faces stiff competition from Microsoft Corp. MSFT,
-2.94%,
Cisco Systems Inc. CSCO,
-2.03%,
Google and many other corners.

M Science software analyst Charles Rogers believes that users are not switching to other platforms, but cutting the service due to inflation and looser pandemic guidelines. It also saw more troubling results internationally than in the US, with a second consecutive quarterly decline in the European region and consecutively flat sales in the Asia-Pacific quadrant.

Read more: Zoom faces a threat from Microsoft Teams, but how big is the risk?

Zoom posted second-quarter net income of $45.7 million, or 15 cents per share, on revenue of $1.1 billion, up from $1.02 billion a year ago. After adjusting for stock compensation and other effects, Zoom reported earnings of $1.05 per share, up from $1.36 per share last year. Analysts polled by FactSet had expected adjusted net income of 94 cents per share on revenue of $1.12 billion.

Zoom executives said they now expect full-year adjusted earnings of $3.66 to $3.69 per share on revenue of about $4.39 billion, down from $3.70 to $3.77 per share on sales of 4, 53 to $4.55 billion. For the third quarter, they expect 82 to 83 cents per share on revenue of about $1.1 billion, while analysts on average had expected 92 cents per share on sales of $1.15 billion, according to FactSet.

Shares of Zoom fell nearly 9% in after-hours trading after the results were announced, after closing down 2.1% at $97.44. Zoom stock is down 47% so far in 2022. The broader S&P 500 SPX,
-2.14%
it has fallen 13% this year.

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