During its fiscal 2023 (which ended in January), Zoom Video Communications (ZM -1.59%) generated record revenue of about $4.4 billion. Profitability, however, was down. And for this reason, investors would like the company to lower expenses to help bring profits back up.
Zoom's largest operating expense is sales and marketing, which makes it the biggest opportunity for cost-cutting. And there's a simple reason to believe that the company might be able to achieve savings on that score in its fiscal 2024.
Zoom: tools for big businesses
At this point, Zoom is primarily an enterprise-software company. In the fourth quarter of its fiscal 2023, 57% of the company's revenue came from enterprise clients, up from 50% in the prior-year period. And declines in the consumer-level side of the business masked enterprise revenue growth of 18% in the quarter.
For this reason, the company's newer offerings are enterprise products. Indeed, it offers far more than video-conferencing for meetings. It also offers phone infrastructure and conference room modernization tools. And it also launched a contact center business last year.
During its Q4 earnings call, Zoom's management excitedly shared that it landed its largest contact-center customer since launch. And the company beat out the competition by being easier to use than rival options, according to management.
Being easy to use is a core part of Zoom's mission, and that philosophy guides its decisions. As it says on many of Zoom's filings, "Our mission is to make communications frictionless and secure." And that mission may help it lower its sales-and-marketing expenses.
Focused on its frictionless mission
After the COVID-19 pandemic began, Zoom's revenue and gross profit grew far faster than its sales-and-marketing expenses -- its core product sold itself when in-person interactions were limited by the necessities of social distancing. However, as the company has moved further beyond its coronavirus-fueled growth, sales-and-marketing expenses are catching back up. They accounted for almost 52% of its gross profit in fiscal 2023.
ZM Gross Profit (TTM) data by YCharts.
To be clear, spending on sales and marketing is still necessary for Zoom because its growth opportunity remains sky-high. Back in November, management shared that only 10% of its enterprise customers were using three or more Zoom products. However, these few customers accounted for about 50% of its annual recurring revenue.
If Zoom can induce more of its 213,000 enterprise customers to adopt more than one Zoom product, the company's revenue growth could reaccelerate faster than anyone expects.
There are two options for enterprises coming to Zoom for service. They can work with a sales representative. Or they can self-serve online. And historically, Zoom has encouraged businesses with 10 or fewer employees to use the DIY option.
According to CFO Kelly Steckelberg, that's changing. Speaking at the JMP Securities Technology Conference earlier this month, Steckelberg said Zoom is now encouraging businesses with up to 50 employees to use the self-serve option.
If the user interface for those business interactions is clunky, then this could actually be a bad move for Zoom. After all, you don't want to frustrate potential customers by sending them to a website that they can't easily navigate. But Steckelberg also said: "The platform has really improved. It's gotten much easier for them to self-serve."
These improvements are driving the sales-strategy shift. And to me, the simplification of the self-serve process aligns with Zoom's mission of being frictionless.
Why I'm still a Zoom shareholder
Looking at Zoom stock today, I believe it's reasonably valued for what it has accomplished so far. The company is well-capitalized, with around $5.4 billion in cash and marketable securities on the balance sheet -- over one-quarter of its market capitalization. And its price-to-sales valuation is below 5, which seems reasonable for a company with a gross profit margin of 75%.
Yes, Zoom is forecasting just about 1% revenue growth in fiscal 2024. But I believe its long-term opportunity is still quite large as its customers expand their use of its products. It may not happen overnight. But Zoom is truly striving to make its products frictionless, and I believe its relentless focus on that will eventually win it more business.
And in this case, being frictionless could even help it improve its cost structure, as fewer sales representatives will be needed to facilitate growth.
That's why I believe that Zoom stock can be a market-beater from here, and why the stock remains in my personal portfolio.
