Zoom makes big call on AI. Says it will pay off. Eventually

Zoom turned in a pallid set of first quarter results this week as it waits for its strategic bets on AI and datacentre upgrades to deliver.

The video conferencing company was critical in getting the business world through lockdown, and usage and its stock price shot up accordingly.

However, customer and investor enthusiasm has since waned. Customer growth has recently been in the single figures, with its stock price in the mid $60s, compared to a peak of $559 in 2020.

Hence a reinvention back in March, that saw it position itself as an everything app for online and hybrid workplaces with a Workplace collaboration platform. This revamp included a massive dose of AI, including transcription services as well as summaries of calls, documents, chat and email threads.

The company also got a boost when Workvivo by Zoom was named as Meta’s “only preferred migration partner” after the Facebook parent pulled the plug on its own Workplace platform.

Yesterday’s figures showed revenues of $1.14bn for the three months ending April 30, compared to $1.1bn a year ago.

Net income came in at $216.3 million, a big jump compared to the previous year’s $15.4m. However, the company preferred to highlight non-GAAP figures – stripping out irritants such as restructuring expenses and stock-based compensation costs – which showed net income coming in at $426.3m, compared to $353.3m last year.

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The firm also highlighted enterprise revenues that were up 5.3% on the year, with approximately 191,000 enterprise customers, despite transitioning some 26,800 lower grade customers to its “online” customer pool.

Speaking to analysts, CFO Kelly Steckelberg said non-GAAP gross margin was slightly down, “mainly due to our investments in AI innovation. In Q2, we will incur one-time investments to upgrade our data centre backbone and expect gross margins to dip to 78%.”

Moreover, AI-related capex, along with seasonality of tax payments, meant that “We expect free cash flow in Q2 to decrease by approximately 50% to 60% quarter over quarter before normalizing in Q3 and Q4

While the company has clearly splurged big on AI, it wasn’t ever going to deliver overnight.

So what do enterprise customers want? And what are they likely to pay for? Steckelberg said that Zoom AI Companion “grown significantly in just eight months with over 700,000 customer accounts enabled as of today.”

CEO Eric Yuan, said AI was a big part of company’s transition from “Meet Happy” to “Work Happy”, and “at no additional cost.” At least from the customer point of view.

At the same time, he said AI was a key differentiatior and would enable additional services such as Ask AIC.

“I think the AI, for the existing collaboration customers, adds more value for new services, he said.

“And also, you know, we can charge a premium price, plus also can leverage AI Companion to build new services, given the edge-AI is coming, and there's a lot of new opportunities.”

Zoom is, of course, not the only company to have spotted the AI opportunity.

But Yuan said, that it had “Overall, I think only one competitor - they bonded a solution together - which is Microsoft, right? “

“However,” he said. “When customers, they deep dive, they look at a total cost of ownership in terms of support cost and AI cost. Guess what? I think we're in a much better position now.”

He also suggested that because customers already trusted Zoom, it made it easier for them to trust the company when it came to newer features on the roadmap, including AI features – and the pricing. Implying that customers might not be so trusting of other vendors.

This was all enough for Yuan and Steckelberg to raise their forecasts for the full year – from $4,6bn to between $4.62 and $4.62bn. Earnings are now slated to be between $4.99 and $5.02 per share, compared to earlier forecasts of $4.85 to $4.88.

Which is definitely up, but not a lot. As of today, its shares were in the low $60 range.