Free Users Pushing Down Zoom’s Profit Margins

Communication technology company Zoom Video Communications (ZM) has expressed its concerns that increasing number of free users of its services is curtailing the company’s profit margins.

The company is afraid going into next year its profit margin will continue being curtailed by the astronomical growth in number of free users courtesy of the pandemic which switched a lot of work and learning to video conferencing.

The company runs some of its data centers however, it still depends on computing services from external vendors such as Oracle Corp. (ORCL) and (AMZN) meaning that it incurs costs and expenses for free users of its video conferencing services.

These costs pushed down the company’s profit margin in the third quarter to 66.7% which is lower than the 72.1% analysts had estimated for the company. Before the pandemic, the company was registering average quarterly profit margins of 80%.

We expect gross margins to be consistent with Q3 into the next fiscal year before starting to improve towards our long-term target margin,” said Kelly Steckelberg, Zoom’s CFO.

For the fourth quarter, the company is expecting revenue of between $806 million to $811 million. This is on a higher side compared to the $730.1 million estimated by analysts for the company.

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