Zoom’s margin falls with the increasing number of its free users

Due to the COVID-19 pandemic, people have to work from their homes, attend meetings, socializing and online classes have increased the demand for the Zoom App. Therefore, the number of free users of Zoom is increasing day by day. This makes the cost up and resultantly, putting severe pressure on its gross margin. Due to its increasing number of free users. Its shares have jumped up to seven times this year. According to speculation, it is very hard to main its growth by the year 2021 which is not good news.

Before this pandemic, the profit margin of Zoom was an average of 80 percent. However, it was expected that the gross margin will reach 72 percent. What worst was that it could not touch this expected percentage with a decline of 5 percent, it hardly touched 67 percent.

Universities and colleges started online sessions to facilitate millions of students during the pandemic increased the bills of Zoom. However, According to Chief Financial officer of Zoom (Kelly Steckelberg) said that they will make their gross margin consistent in the third quarter. Further, he said they plan to improve this margin in the next fiscal year. This will make their growth stable in the long run.

Zoom said that Ten employees have to deal with 433,700 customers which is a huge increase in their number of customers which is around 485 percent from the prior year. This is because they have to rely on external merchants as well such as Amazon and Oracle Corp. So, this makes their cost jump up and the number of employees is less due to the higher cost. Zoom however also deals with its own data centers up to some extent.

Due to a giant increase in their number of customers, their quality of services decline. Consequently, their sales became slower as compared to last year which is an alarming situation for Zoom because it could lose out reputable Tech titans. This was the statement of an analyst at Rosenblatt securities named Ryan Koontz.

Cisco and Microsoft are the competitors of Zoom who are dealing with oversize enterprises, while Zoom has to deal with small scale businesses. This makes a difficult job selling for Zoom as compared to them.

However, the financial officer of Zoom is still hopeful that they can make revenue from 806 million dollars to 811 million dollars in the last quarter of this year. If Zoom becomes successful in reaching this target, this will increase earnings per share up to 79 cents as compared to 66 cents which prior earning per share.

They made an anticipation of 694 million dollars in revenue before the third quarter. However, they became successful in crossing this number in the third quarter.

Image credit: Smith Collection / Gado / Getty Images

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