There has been no respite from tech layoffs and Zoom Video Communications (NYSE: ZM) has said that it would eliminate 1,300 positions which are around 15% of its global workforce.
Tech layoffs have mounted this year even as the overall US job market still looks tight. In January, the US economy added over half a million jobs while the unemployment rate fell to a new multi-decade low of 3.4%.
Things have been different for tech companies, especially the former pandemic darlings like Zoom. These companies saw a massive increase in sales during the pandemic. Talking of Zoom, its IPO came at just about the right time as it listed in 2019, a couple of quarters before the COVID-19 pandemic hit the world economy.
Zoom calls replaced almost everything from corporate travel to school during the lockdowns. However, as has been the case with other so-called stay-at-home companies, the growth rates were not sustainable.
Zoom lays off employees as growth slows down
In a blog post, Zoom CEO Eric Yuan said that as growth spiked during the pandemic, Zoom increased its workforce by 3 times in a span of 24 months and said that the company “needed to staff up rapidly to support the quick rise of users on our platform and their evolving needs.”
He added, “But we also made mistakes. We didn’t take as much time as we should have to thoroughly analyze our teams or assess if we were growing sustainably, toward the highest priorities.”
Tech layoffs have the same tone
Going through the layoff announcements from tech companies, one would find that the tone is almost similar. These companies overhired during the pandemic on the assumption that revenues would continue to grow at a fast pace.
While announcing the layoffs, Alphabet CEO Sundar Pichai said, “Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today.”
Tech companies are witnessing a growth slowdown
Things turned upside down for tech stocks in 2022. Meta Platforms posted its first revenue decline last year while Amazon’s sales growth was the lowest since it went public. Apple’s revenues also fell YoY in the December quarter and missed estimates. Netflix’s revenues also barely grew in the December quarter.
In Q4 2022, Alphabet’s revenues rose only about 1% YoY. Both Google search and YouTube revenues fell in the quarter. For YouTube, it was the second consecutive quarter of degrowth.
Zoom revenues growth hits all-time lows
Taking of Zoom, its revenues increased only 5% in the fiscal third quarter of 2023 that ended in October. Its online revenues fell 9% YoY to $487.6 million. It reported an online average monthly churn of 3.1%, which was 60 basis points lower compared to the corresponding quarter last year. During the earnings call, ZOOM CFO Kelly Steckelberg said, that the Online business was having “a dampening effect on the overall growth rate of the company.”
However, its Enterprise business did well and revenue soared 20% YoY to $614 million. It had 209,300 enterprise customers at the end of October which is higher than 204,100 customers at the end of July. Steckelberg said that the company expects Enterprise customers to be an even bigger contributor to its revenues over time.
Zoom also lowered its guidance
Zoom lowered its full-year revenue guidance to $4.38 billion. For the fiscal fourth quarter of 2023, it forecast revenues between $1.095 billion to $1.105 billion, which was below what the street was expecting. It forecast EPS between 75-78 cents, which was again lower than the 81 cents that analysts were expecting.
Steckelberg said, “This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow in the low to mid-20s, while our online business will decline approximately 8% for the year.”
Tech companies are now focusing on profitability
As growth has slowed down, tech companies are now focusing on increasing productivity and lowering costs. While announcing the layoffs, Yuan took the responsibility for the mistakes and said that he would reduce his fiscal year 2023 salary by 98% and also forego the bonus.
He added, “Members of my executive leadership team will reduce their base salaries by 20% for the coming fiscal year while also forfeiting their FY23 corporate bonuses.”
Notably, Apple’s CEO Tim Cook also requested a 40% cut in his 2023 compensation. Alphabet senior executives would also reportedly get a lower bonus this year.
Zoom also faces competition from Microsoft Teams
Former stay-at-home winners like Zoom, Chegg, and Teladoc Health are witnessing a severe growth slowdown. Taking of Zoom, the demand for the company’s services have come down as the economies have reopened. Also, there is increased competition, including from Microsoft Teams.
Zoom would release its fiscal fourth quarter 2023 earnings later this month where markets would especially watch the commentary on the revenue guidance for the next year.
Meanwhile, ZM stock soared yesterday as markets gave a thumbs up to its cost-cut initiatives. The stock has risen 25% this year amid the rally in beaten-down tech stocks.
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