Zoom (ZM)

Video communications platform Zoom (NASDAQ:ZM) beat Wall Street’s revenue expectations in Q4 CY2025, with sales up 5.3% year on year to $1.25 billion. The company expects next quarter’s revenue to be around $1.22 billion, close to analysts’ estimates. Its non-GAAP profit of $1.44 per share was 3.1% below analysts’ consensus estimates.

Company Overview

Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ:ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.

Work is becoming more distributed, both across geographies and devices. In order for businesses to keep functioning efficiently, they need to be able to communicate as well as they did when the teams were co-located, which drives the demand for integrated communication platforms.

Zoom's main competitors include Microsoft Teams (NASDAQ:MSFT), Cisco Webex (NASDAQ:CSCO), Google Meet (NASDAQ:GOOGL), and RingCentral (NYSE:RNG). In the contact center space, it competes with Five9 (NASDAQ:FIVN), Genesys, and NICE (NASDAQ:NICE).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Zoom grew its sales at a 12.9% annual rate. Though this growth is acceptable on an absolute basis, we need to see more than just topline growth for the software sector, which can display significant earnings volatility. This means our bar for the sector is particularly high, reflecting the non-essential and hit-driven nature of the products and services offered. Additionally, five-year CAGR starts around Covid, when revenue was depressed then rebounded.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Zoom’s recent performance shows its demand has slowed as its annualized revenue growth of 3.7% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

This quarter, Zoom reported year-on-year revenue growth of 5.3%, and its $1.25 billion of revenue exceeded Wall Street’s estimates by 1.1%. Company management is currently guiding for a 4.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.2% over the next 12 months, similar to its two-year rate. This projection is underwhelming and implies its newer products and services will not lead to better top-line performance yet.

This quarter, Zoom reported 4,468 enterprise customers paying more than $100,000 annually, an increase of 105 from the previous quarter. That’s quite a bit more contract wins than last quarter but also quite a bit below what we’ve observed over the previous year. This indicates the company is optimizing its go-to-market strategy to reinvigorate growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Zoom is extremely efficient at acquiring new customers, and its CAC payback period checked in at 16 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Zoom’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 98% in Q4. This means Zoom’s revenue would’ve decreased by 2% over the last 12 months if it didn’t win any new customers.

Zoom has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.

For software companies like Zoom, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Zoom’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 77% gross margin over the last year. That means for every $100 in revenue, roughly $77.02 was left to spend on selling, marketing, and R&D.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Zoom has seen gross margins improve by 0.7 percentage points over the last 2 year, which is slightly better than average for software.

This quarter, Zoom’s gross profit margin was 76.3%, in line with the same quarter last year. Zooming out, Zoom’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Zoom has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 23.1%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Zoom’s operating margin rose by 5.6 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Zoom generated an operating margin profit margin of 20%, up 1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zoom has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 39.5% over the last year.

Zoom’s free cash flow clocked in at $338.4 million in Q4, equivalent to a 27.1% margin. The company’s cash profitability regressed as it was 8 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Zoom’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 39.5% for the last 12 months will decrease to 38.7%.

We enjoyed seeing Zoom’s optimistic revenue guidance for next year. We were also glad it had many new large contract wins. On the other hand, its full-year EPS guidance missed. Overall, this quarter could have been better. The stock traded down 3.6% to $84 immediately following the results.

Updated: February 25, 2026 at 4:50 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Zoom.

We cheer for all companies solving complex business issues, but in the case of Zoom, we’ll be cheering from the sidelines. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its software has low switching costs and high turnover.

Zoom’s price-to-sales ratio based on the next 12 months is 5.2x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $97.78 on the company (compared to the current share price of $84).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.