Zoom (ZM)

Video communications platform Zoom (NASDAQ:ZM) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 4.4% year on year to $1.23 billion. The company expects next quarter’s revenue to be around $1.23 billion, close to analysts’ estimates. Its non-GAAP profit of $1.52 per share was 5.8% above 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 experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Zoom’s sales grew at a decent 19.7% compounded annual growth rate over the last five years. Its growth was slightly above the average software company and shows its offerings resonate with customers.

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 3.4% over the last two years was below its five-year trend.

This quarter, Zoom reported modest year-on-year revenue growth of 4.4% but beat Wall Street’s estimates by 1.3%. 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% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not lead to better top-line performance yet.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Zoom’s ARR came in at $4.92 billion in Q3, and over the last four quarters, its growth was underwhelming as it averaged 3.8% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

This quarter, Zoom reported 4,363 enterprise customers paying more than $100,000 annually, an increase of 89 from the previous quarter. That’s in line with the number of contract wins in the last quarter but quite a bit below what we’ve observed over the previous year, suggesting that the slowdown we observed in the last quarter could continue. It also implies that Zoom will likely need to upsell its existing large customers or move down market to accelerate its top-line 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.

It’s relatively expensive for Zoom to acquire new customers as its CAC payback period checked in at 50.6 months this quarter. The company’s drawn-out sales cycles partly stem from its focus on enterprise clients who require some degree of customization, resulting in long onboarding periods that delay delay returns and limit customer growth.

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 Q3. 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 76.9% gross margin over the last year. Said differently, Zoom paid its providers $23.11 for every $100 in revenue.

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 1.1 percentage points over the last 2 year, which is slightly better than average for software.

Zoom produced a 77.9% gross profit margin in Q3, marking a 2 percentage point increase from 75.9% in the same quarter last year. Zoom’s full-year margin has also been trending up over the past 12 months, increasing by 1.1 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 22.9%. 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 6.5 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 25.2%, up 9.7 percentage points year on year. The increase was solid, 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.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Zoom has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 41.7% over the last year.

Zoom’s free cash flow clocked in at $614.3 million in Q3, equivalent to a 50% margin. This result was good as its margin was 11.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Zoom’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 41.7% for the last 12 months will decrease to 35.9%.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Zoom is a profitable, well-capitalized company with $7.94 billion of cash and $28.07 million of debt on its balance sheet. This $7.92 billion net cash position is 30.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see Zoom’s EPS guidance for next quarter top analysts’ expectations. We were also glad its full-year EPS guidance slightly exceeded Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 1.8% to $80.12 immediately after reporting.

Updated: December 3, 2025 at 9:15 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 see the value of companies addressing major business pain points, but in the case of Zoom, we’re out. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. And while the company’s bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is 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 it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $94.58 on the company (compared to the current share price of $85.60).