Zoom Video Communications Inc warned that its gross margins would remain under pressure from 2021 as the growing number of its video conferencing service’s free users makes it difficult to offset a cost increase to sustain its rise.
The company’s shares, which increased approximately sevenfold this year due to the meteoric rise in demand for video conferencing for work, school, or socialization due to the COVID-19 pandemic, dropped 5% after the bell, amid positive estimates for the fourth quarter.
Zoom operates some of its own data centers, but it also relies on cloud computing services from outside vendors such as Amazon.com and Oracle Corp, meaning it must bear costs for free users.
“We expect gross margins to be consistent with Q3 into the next fiscal year before starting to improve towards our long-term target margin,” Chief Financial Officer Kelly Steckelberg said.
Zoom said it had 433,700 customers with over 10 employees, an increase of 485 percent from the year before, but just a 17 percent increase from the second quarter of the fiscal year, compared to the 40 percent growth rate between the first and second quarters of the company. According to Ryan Koontz, an analyst at Rosenblatt Securities, slower sales to corporate clients could mean Zoom is losing out to existing tech giants.
“Cisco and Microsoft are very entrenched 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,” he said.
