Zoom Video Communications Inc (NASDAQ:ZM) posted a mixed quarterly print, marked by a solid first-quarter beat on revenue and profit margins and higher full-year 2024 revenue guidance, UBS said in a note as it reaffirmed its 'Neutral' rating for the stock.
While its 1Q earnings were positive, the broker said the results were offset by a “material step-down” in the company’s growth outlook for its Enterprise segment, which accounts for 57% of revenue and is the main growth engine.
“In our view, the story of the quarter was the combo of the improved trajectory of the down-market Online segment, which is expected to finally stabilize in 2Q/Jul after seven straight quarters of post-COVID sequential declines, and the material step-down in outlook for the Enterprise segment,” the analysts wrote.
Zoom’s guidance implies Enterprise segment year-over-year growth of just 6% for 2Q, down from 27% in the year-ago quarter, and another sequential decline in net revenue retention (NRR), the analysts noted.
“Zoom pinned the blame on internal sales disruption associated with the RIF (reduction in force), re-org and sales comp changes (a reminder to be cognizant of these risks for Salesforce, DocuSign and others that have done material RIFs),” they said. “We believe that Zoom also saw incremental macro softness, which impacted invoicing durations/DR and cash flow.”
Although Zoom signaled some month-to-date May improvement in sales execution in its mid-market and small and medium business segments, the analysts said an up-market recovery will take longer, hence the cautious Enterprise guide.
“While Zoom is targeting a growth acceleration in FY25 as sales investments in FY24 bear fruit, we’re modeling 3.2% c/c growth in FY25 from 3.0% c/c in FY24,” the analysts added.
UBS said it has raised its price target for Zoom to $75 from $70 based on an assumed calendar year 2024 embedded value/free cash flow multiple of 12 times, from 10 times previously.
Zoom’s shares were down 6.6% at $66.72 by 2pm in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com