Zoom Video Communications (NASDAQ:ZM) saw its shares tumble 5.8% in premarket trading on Wednesday after the company issued third-quarter earnings guidance that fell short of Wall Street expectations. The stock was quoted at $95.06 ahead of the market open, down from Tuesday's closing price of $100.92. The decline erased approximately $1.76 billion from the company's implied market capitalization, compounding a 3.7% drop in the prior regular session.
The company projected adjusted earnings per share (EPS) for the third quarter in the range of $1.46 to $1.48, with a midpoint of $1.47—three cents below the consensus estimate of $1.50. Revenue guidance of $1.275 billion to $1.280 billion was largely in line with market expectations. The weaker profit outlook overshadowed a second-quarter performance that exceeded forecasts on both the top and bottom lines.
Q2 Results Beat, But Cash Flow Slows
For the second quarter, Zoom reported revenue of $1.277 billion, a 4.9% increase year-over-year, beating the analyst estimate of $1.270 billion. Adjusted earnings came in at $1.55 per share, surpassing the $1.48 forecast. Despite these beats, the market focused on the softer profit guidance and a noticeable slowdown in cash generation.
Free cash flow fell 7.0% to $472.4 million, while operating cash flow declined 4.1% to $494.8 million. The company ended July with $7.2 billion in cash and marketable securities. During the quarter, Zoom repurchased 3.7 million shares, leaving $1.3 billion under its buyback authorization—roughly 4.6% of its premarket equity value.
Enterprise Growth Accelerates, Online Stalls
Breaking down revenue, enterprise sales climbed 7.8% to $787.5 million, marking the fastest pace in three years. Online revenue, however, inched up just 0.6% to $489.7 million. Enterprise now accounts for 61.7% of total revenue. The number of customers generating over $100,000 in annual revenue rose 8.2% to 4,625, while net dollar expansion improved by one percentage point to 99%—still indicating slight contraction within the existing customer base.
Chief Executive Eric Yuan highlighted the enterprise growth as the strongest in three years. Notably, customer counts for Zoom Virtual Agent, an AI-driven support solution, jumped 256%, reinforcing the company's narrative around AI adoption. However, Zoom did not disclose specific revenue figures for this product line.
Full-Year Outlook Maintained
Zoom reaffirmed its full-year revenue forecast of $5.085 billion to $5.095 billion, with adjusted EPS projected between $6.08 and $6.12. The company also guided free cash flow to $1.78 billion to $1.82 billion for the year.
The competitive landscape remains intense. Microsoft Teams (NASDAQ:MSFT) and Google Meet (NASDAQ:GOOGL) integrate collaboration tools within broader productivity suites, pressuring Zoom to leverage AI for faster growth while maintaining margins.
Analyst Sentiment and Risks
Prior to the earnings release, analysts held a generally positive view. Of 28 firms surveyed, 16 rated the stock a Buy and 12 a Hold, with an average price target of $111.64—well above the premarket price of $95.06.
Risks remain, including potential premarket volatility due to lighter trading volumes. Share buybacks can boost per-share metrics but do not guarantee sustainable growth. Additionally, gains from strategic investments may reduce the comparability of GAAP profit with core business performance.
Investors will now watch whether Zoom can convert its enterprise momentum and AI initiatives into renewed cash-flow growth, especially given the softer profit outlook for the current quarter.
