The big knock against Zoom Video Communications' (ZM 1.46%) stock in recent months is that the video communications giant has likely plateaued since its business became a global sensation during earlier phases of the pandemic. Sure, annual sales are now well above $4 billion compared to $600 million in 2019. Yet investors are more concerned about how Zoom can keep growing as social distancing restrictions end.
That path forward is looking clearer today. The company recently reported a solid sales increase thanks to a growing customer base and increased contract sizes for its existing clients.
These factors suggest that Zoom is becoming a more valuable, sticky platform for its users.
Let's take a closer look.
Image source: Getty Images.
Zoom is attracting bigger clients
Zoom has likely lost many small accounts since early 2021, when nearly all meetings and gatherings were occurring online. But it made up for that decline by signing up big enterprises.
This segment of the business grew 24% year over year. Zoom's biggest client base, those who pay over $100,000 a year for their services, grew 46%. Each of these growth rates was lower than the prior quarter's, but the expansion in Zoom's enterprise business was still strong enough to keep overall sales rising.
Zoom's sales were also pushed higher by a trend toward increased contract values. A solid renewal rate combined with increased uptake of services like Zoom phones and Zoom rooms pushed net retention up 123%.
That figure was down slightly from 2021, but executives said in a conference call with analysts that this result was right within their expectations. The enterprise business "saw a steady increase in customers as well as improved renewal rates," CFO Kelly Steckelberg said.
Zoom is offering more services
CEO Eric Yuan put the spotlight on several large companies, including Avis Budget Group, that chose to significantly expand their annual commitment. "Companies are getting more and more out of our platform," Yuan explained, thanks to its growing portfolio of services, including new collaboration tools like the whiteboard function.
Zoom is doubling down on that approach through its Solvvy acquisition, which gives it customer support services it can market as part of its services platform. It has already found some success in this area with its Zoom-branded chat product.
Looking ahead
The company is still planning to boost research & development spending significantly, and sales and marketing expenses are elevated. But these factors don't appear to threaten overall profitability or cash flow. In fact, operating cash margin was a healthy 49% of sales this quarter.
The payoff from these R&D investments isn't guaranteed, and that's a big reason the stock has been pummeled since late 2021. Yet Zoom is already showing that it can extend its sales footprint compared to pandemic highs a year ago. And the best news is that it is achieving those wins while remaining solidly profitable.
