5 Zoom Video Analysts Break Down Q2 Earnings: 'Growth Engine Has To Shift'

Zoom Video Communications Inc ZM shares dropped Tuesday after the telecommunication software company warned investors to expect headwinds in the second half of the year.

On Monday, Zoom reported second-quarter adjusted EPS of $1.36 on revenue of $1.02 billion. Both numbers exceeded consensus analyst estimates of $1.16 and $991 million, respectively. Revenue was up 54% from a year ago.

While Zoom still reported impressive revenue growth, the year-over-year growth was a sharp drop from the 191% revenue growth last quarter. Zoom also guided for revenue growth to continue to slow to just 31% in the third quarter.

Zoom is now guiding for third-quarter EPS of between $1.07 and $1.08 and revenue of between $1.015 billion and $1.02 billion.

“As we came through the back half of Q2, we started to see some additional churn there and that’s what’s evidenced in our guidance for the rest of the year and that’s what I think you’re seeing in the reaction to the stock,” Zoom CFO Kelly Steckelberg told CNBC Tuesday morning.

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Zoom's Troubling Churn: Morgan Stanley analyst Meta Marshall said churn in the company’s small- and medium-sized business (SMB) segment overshadowed solid enterprise numbers.

“We walked away from FQ2 remaining confident in longer term platform capabilities of Zoom and potential for the business to grow 20% in FY23, though are cognizant that elevated churn is likely to rein in more bullish assumptions for now,” Marshall wrote.

JMP Securities analyst Patrick Walravens said Zoom had tremendous success selling its Meetings product during the pandemic, but now its “growth engine has to shift to platform services.”

“All things considered, we see shares as fairly valued and think investors may see a better entry point in the future to own this high-quality name,” Walravens wrote.

Needham analyst Ryan Koontz said the quarter demonstrated evidence of pandemic revenue pull-forward in the SMB segment.

“We suspect ZM could face several more quarters of high churn in this micro segment before the more attractive growth rate in its > 10 employee and enterprise segments becomes more evident,” Koontz wrote.

Zoom's Phone Growth: RBC Capital analyst Rishi Jaluria said Zoom has plenty of large customer momentum, but conservative guidance spooked the market.

“Our take is guidance looks conservative, we were encouraged by commentary around Zoom Phone and large customers, and we continue to like the long-term potential of Zoom to become a broader platform,” Jaluria wrote.

KeyBanc analyst Steve Enders said 2 million Zoom Phone seats, healthy enterprise trends and positive commentary on hybrid work keep him positive on Zoom stock.

“We project Zoom Phone adoption contributes $248M revenue in FY22 and $503M in FY23 as the Company achieves 4M seats,” Enders wrote.

ZM Price Action: Zoom shares were down 16.47% at $290.25 late in Tuesday's trading session. 

Zoom Ratings, Price Targets:

• Morgan Stanley has an Overweight rating and $400 target.
• JMP Securities has a Market Perform rating.
• RBC Capital Markets has an Outperform rating and $450 target.
• Needham has a Hold rating.
• KeyBanc has an Overweight rating and lowered the price target from $428 to $398.