Zoom’s Profit Margin Decreases as Free Users Increase

On Monday, Zoom Video Communications declared that its gross profit margins are decreasing due to the increase in the number of free users.

According to the details, shares of the company, which have risen about sevenfold this year fueled by the dramatic rise in demand in video conferencing for work, school, or socializing due to the coronavirus pandemic, fell 5% after the bell, in spite of positive fourth-quarter forecasts.

Even though, zoom runs some of its own data centers, but it also relies on cloud computing services from outside retailers such as Amazon and Oracle Corp, meaning it must tolerate costs for free users.

Those bills, driven in part by a jump in free users in the 3^rd quarter as millions of students and teachers started new school semesters, pushed down Zoom’s gross profit margins to 66.7%, below analysts’ estimates of 72.1%, and its pre-pandemic average of around 80%.

Chief Financial Officer Kelly Steckelberg said that we expect gross margins to be constant with Q3 into the next financial year before starting to improve towards our long-term target margin.

Zoom said it had 433,700 customers with more than 10 employees, a 485% increase from the year before but only a 17% increase from the fiscal 2^nd quarter, compared to the 40% growth rate between the company’s first and second quarters.

An analyst at Rosenblatt Securities Ryan Koontz stated that slower sales to commercial customers could mean Zoom is losing out to reputable tech giants.

According to him, Cisco and Microsoft are rooted in the larger enterprise segment, so Zoom has a much harder job selling against them than they do in the small business space which is largely unpenetrated.

Zoom still estimate 4^th quarter revenue of between $806 million and $811 million, above estimates of $730.1 million.

It forecast adjusted earnings of 77 cents to 79 cents per share, compared to estimates of 66 cents.

Income for the 3^rd quarter ended on October 31^st increased 367% to $777.2 million, beating analysts’ average estimate of about $694 million.

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