Soft Q3 Outlook Weighs on Zoom as Enterprise and AI Momentum Build

Zoom’s Enterprise Transformation Is Gaining Ground, but Near-Term Guidance Disappoints

Zoom Communications (ZM) fell after its fiscal second-quarter results as investors focused on a third-quarter outlook that came in below Wall Street expectations. Revenue rose 4.9% year over year to $1.28 billion, above the $1.27 billion consensus, while adjusted earnings of $1.55 per share topped expectations of $1.48.

The quarter also showed accelerating Enterprise growth and expanding adoption of Zoom's AI products. But Online revenue remained nearly flat, margins declined, and third-quarter guidance pointed to slower near-term growth. That combination overshadowed Zoom's higher fiscal 2027 revenue, earnings and free-cash-flow forecasts.

Key Points

• Zoom's second-quarter revenue increased 4.9% to $1.28 billion, while adjusted EPS of $1.55 exceeded the $1.48 consensus.
• Enterprise revenue grew 7.8%, its fastest pace in three years, while Workplace AI monthly active users increased 125% and Zoom CX ARR grew at a high-double-digit rate.
• Third-quarter revenue and EPS guidance fell slightly below expectations, overshadowing increases to Zoom's full-year revenue, earnings and free-cash-flow forecasts.

Enterprise Growth Leads Zoom’s Second-Quarter Beat

Zoom's second-quarter results showed a widening gap between its Enterprise business and its slower-growing Online segment.

Enterprise revenue increased 7.8% year over year to $787.5 million, its strongest growth rate in three years and about 62% of total revenue. By comparison, total company revenue increased 4.9%.

The number of Enterprise customers generating more than $100,000 in trailing 12-month revenue increased 8.2% to 4,625. Those larger customers accounted for 33% of total revenue.

Remaining performance obligations, or contracted revenue that has not yet been recognized, increased 14% to approximately $4.5 billion. Non-current RPO grew 25%, while deferred revenue increased 6%, above Zoom's previous expectation for 2% to 3% growth.

The weaker part of the quarter remained Zoom's Online business. Revenue from customers subscribing directly through Zoom's website increased just 0.6% to $489.7 million.

Enterprise net dollar expansion improved to 99% from 98% a year earlier. However, a rate below 100% means revenue from the existing Enterprise customer base remained slightly lower after accounting for expansion and contraction.

Management also reduced its fiscal 2027 assumption for Online revenue from slight growth to flat following weaker top-of-funnel activity.

Why Did Zoom Stock Fall Despite Better Earnings?

The immediate pressure on ZM stock came from third-quarter guidance.

Zoom expects third-quarter adjusted earnings of $1.46 to $1.48 per share, below the $1.50 Wall Street estimate. Revenue is expected between $1.275 billion and $1.280 billion, slightly below the $1.282 billion consensus.

The outlook overshadowed a quarter in which both revenue and adjusted earnings exceeded expectations and management increased its full-year forecasts.

Margins also moved lower as Zoom continued investing in AI. Non-GAAP gross margin declined to 79.1% from 79.8% a year earlier, while non-GAAP operating margin fell to 40.0% from 41.3%.

Increased AI usage and investment are adding compute costs before emerging products generate enough revenue to offset those expenses at the same scale.

Free cash flow also declined to $472.4 million from $508.0 million in the year-earlier quarter, although Zoom raised its full-year free-cash-flow forecast.

The market reaction therefore reflected a tension between improving longer-term operating indicators and a softer immediate outlook. Zoom's Enterprise business accelerated, but the third-quarter forecast indicated that stronger Enterprise performance had not yet translated into faster consolidated growth.

AI Adoption and Raised Guidance Shape What Comes Next

Zoom's AI strategy showed measurable adoption during the quarter.

Licensed monthly active users of Workplace AI features increased 125% year over year. Zoom Virtual Agent customers grew more than 250%, while paid customers for Revenue Accelerator increased 41%.

Zoom CX annual recurring revenue continued growing at a high-double-digit rate, with paid AI included in nine of the company's 10 largest Zoom CX deals. Workvivo also surpassed $100 million in annual recurring revenue.

Those metrics provide evidence that Zoom's AI expansion is moving beyond product development and into paid customer relationships.

At the same time, increased AI adoption is contributing to higher compute expenses, creating a profitability trade-off as Zoom works to expand those newer products.

Management raised fiscal 2027 adjusted EPS guidance to $6.08 to $6.12 from $5.96 to $6.00. Revenue is now expected between $5.085 billion and $5.095 billion, slightly above the previous $5.08 billion to $5.09 billion range.

Free-cash-flow guidance increased to $1.78 billion to $1.82 billion, supported by first-half performance and lower planned capital spending.

Zoom also maintains a sizable financial position. The company ended the quarter with $7.2 billion in cash, cash equivalents and marketable securities and very little debt. It repurchased 3.7 million shares for $352 million during the quarter and has repurchased 44.2 million shares for $3.4 billion under its $4.7 billion buyback plan.

What It Means for Investors

Zoom's latest earnings report highlights the company's continuing transition toward a broader Enterprise and AI-powered software platform.

The Enterprise business is providing the clearest evidence of progress. Its 7.8% growth rate was the strongest in three years, larger customers increased, RPO expanded 14%, and several newer products posted strong adoption metrics.

AI is also becoming part of paid customer relationships. Workplace AI usage rose sharply, Zoom CX maintained high-double-digit ARR growth, and paid AI appeared in nine of Zoom's 10 largest CX deals.

The challenge is that these gains have not yet produced comparable acceleration across the entire company. Total revenue increased 4.9%, Online revenue grew only 0.6%, and Enterprise net dollar expansion remained below 100%.

Profitability adds another consideration. Zoom continues to generate substantial operating and free cash flow, but gross and operating margins declined as AI usage and investment increased costs.

The third-quarter outlook puts those competing trends into focus. Investors now have several measurable indicators to follow: whether Enterprise growth remains elevated, net dollar expansion moves above 100%, Online customer acquisition stabilizes, and AI-related revenue grows sufficiently to offset higher compute costs.

Zoom's growing RPO provides another benchmark, with the question becoming how effectively contracted business converts into sustained revenue growth.

Conclusion

Zoom's second-quarter report delivered a better-than-expected quarter but a more complicated signal about the pace of its transformation.

Revenue and adjusted earnings exceeded Wall Street expectations, Enterprise revenue recorded its fastest growth in three years, AI adoption expanded sharply, and management raised its fiscal 2027 revenue, earnings and free-cash-flow forecasts.

But the company's third-quarter guidance fell slightly short of expectations. Online growth remains nearly flat, Enterprise net dollar expansion is still below 100%, and increased AI investment is weighing on margins.

That explains why the earnings reaction focused less on the second-quarter beat and more on what comes next. Zoom is showing tangible progress in Enterprise and AI, but the key question remains how quickly that momentum can translate into stronger companywide growth without further pressure on profitability.

FAQs

Why did Zoom stock fall after its second-quarter earnings?

Zoom stock fell after the company issued third-quarter guidance below Wall Street expectations. Adjusted EPS guidance of $1.46 to $1.48 was below the $1.50 consensus, while revenue guidance of $1.275 billion to $1.280 billion was slightly below the $1.282 billion estimate.

How fast is Zoom’s Enterprise business growing?

Zoom's Enterprise revenue increased 7.8% year over year to $787.5 million, its strongest growth rate in three years. Customers generating more than $100,000 in trailing 12-month revenue increased 8.2% to 4,625.

How is AI adoption progressing at Zoom?

Licensed monthly active users of Zoom's Workplace AI features increased 125% year over year. Zoom Virtual Agent customers grew more than 250%, Zoom CX ARR grew at a high-double-digit rate, and paid AI was included in nine of the company's 10 largest Zoom CX deals.

What is Zoom’s fiscal 2027 guidance?

Zoom expects fiscal 2027 revenue of $5.085 billion to $5.095 billion and adjusted earnings of $6.08 to $6.12 per share. The company also raised its free-cash-flow forecast to $1.78 billion to $1.82 billion.

How much cash does Zoom have?

Zoom ended the second quarter with $7.2 billion in cash, cash equivalents and marketable securities. The company also repurchased 3.7 million shares for $352 million during the quarter.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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