Executive Summary / Key Takeaways

• Zoom Communications is successfully transforming from a video-centric provider to an AI-first work platform, integrating core communications with business services like Contact Center and Employee Experience (Workvivo).
• Recent financial results for Q1 FY26 show modest revenue growth (+2.9% YoY) driven by Enterprise expansion (+5.9%), while the Online segment demonstrates stability with record-low churn (2.8%).
• AI Companion is seeing strong adoption (MAU up ~40% QoQ) and is a key differentiator, enhancing product value at no additional cost, with future monetization potential through Custom AI Companion and Business Services.
• Growth products like Zoom Phone (mid-teens revenue growth), Contact Center (65% customer growth, triple-digit million ARR), and Workvivo (106% customer growth) are gaining significant traction, contributing to Enterprise momentum and winning new logos.
• Despite macroeconomic uncertainty leading to a prudent Enterprise outlook, disciplined cost management, strong gross margins (76.3%), and robust cash flow generation ($489.3M operating cash flow in Q1) underpin financial stability and support significant share repurchases ($418M in Q1).

An AI-First Platform Takes Shape

Zoom Communications, Inc. has come a long way since its founding in 2011, evolving from a disruptor in video conferencing to an ambitious AI-first work platform. While the company's name was synonymous with video during the rapid adoption spurred by the COVID-19 pandemic, its strategic journey has increasingly focused on building a comprehensive ecosystem designed to simplify the workday and enhance human connection across various modalities. This evolution is critical for understanding Zoom's current positioning and investment thesis.

At the heart of Zoom's strategy is its proprietary technology, built on a scalable, cloud-native architecture that has historically delivered high-quality, reliable video communication even in challenging network conditions. This foundational strength in real-time media processing provides a tangible benefit over legacy systems, enabling smoother interactions and lower latency. The company has invested heavily in expanding this technological core, particularly in security and privacy features like end-to-end encryption (E2EE) and a global network of 31 co-located data centers, addressing past concerns and building trust. Crucially, Zoom has committed to not using customer content to train its AI models, a key differentiator in an era of increasing data privacy scrutiny.

The strategic pivot towards becoming an AI-first platform is the most significant recent development. Zoom AI Companion, initially offered at no additional cost to paid users, leverages a federated approach combining internal models with third-party LLMs (like OpenAI, Anthropic, Meta (META)) and SLMs. This allows Zoom to offer features like meeting summaries, chat composition, and task extraction, aiming to boost individual productivity and streamline workflows. The company is actively developing more advanced agentic AI capabilities and plans to monetize customized AI solutions through a Custom AI Companion add-on and within its Business Services portfolio. R&D efforts are focused on integrating AI across the platform and tailoring solutions for specific verticals like healthcare and frontline workers, with the stated goal of automating complex tasks and driving efficiency. While specific quantifiable targets for these new AI features are still emerging, the strategic intent is clear: to leverage AI to enhance the value proposition, differentiate from competitors, and create new revenue streams.

The competitive landscape for Zoom is intense and multifaceted. Core video conferencing and UCaaS offerings compete directly with bundled productivity suites from hyperscalers like Microsoft (MSFT) (Teams) and Google (GOOGL) (Meet), as well as established players like Cisco (CSCO) (Webex) and UCaaS specialists like RingCentral (RNG). In the Contact Center space, Zoom competes with companies like Five9 (FIVN), Genesys, and NICE inContact (NICE). Microsoft, with its vast installed base and aggressive bundling of Teams within Microsoft 365, represents a significant competitive challenge, often positioning its communication tools as "free" within the suite. However, Zoom differentiates itself through its perceived ease of use, reliability, faster pace of innovation in specific areas, and a focus on delivering a strong total cost of ownership (TCO), particularly as competitors begin to charge for advanced AI features that Zoom includes at no extra cost in its core offerings. While competitors like Microsoft and Google benefit from greater scale and deeper AI integration in some areas, Zoom's open platform approach and specialized offerings like Zoom Phone and Contact Center allow it to win competitive displacements and capture market share, often leveraging channel partnerships.

Performance Reflecting Strategic Evolution

Zoom's financial performance in the first quarter of fiscal year 2026 reflects the ongoing strategic evolution and the prevailing macroeconomic environment. Total revenue grew modestly by 2.9% year-over-year to $1.17 billion. This growth was primarily fueled by the Enterprise segment, which saw revenue increase by 5.9% year-over-year and now accounts for 60% of total revenue, up from 58.3% in the prior year. This shift towards Enterprise customers, including an 8% year-over-year increase in customers contributing over $100,000 in trailing 12 months revenue (totaling 4,192), validates the company's focus on moving upmarket and expanding within larger organizations. The trailing 12-month net dollar expansion rate for Enterprise customers held steady at 98%.

Profitability remained a key strength. Gross margin slightly improved to 76.3% from 76.1% in the prior year, benefiting from lower stock-based compensation despite increased hosting costs related to AI and infrastructure upgrades. Operating expenses decreased by 1.5% year-over-year, driven by efficiencies in sales, marketing, and general and administrative functions. This disciplined cost management, combined with revenue growth, resulted in a substantial 18.9% increase in income from operations year-over-year. Net income also saw a healthy 17.7% increase. Other income, net, contributed positively, growing 22.6% due to higher investment yields and favorable foreign currency changes.

Liquidity remains robust, with cash, cash equivalents, and marketable securities totaling $7.8 billion as of April 30, 2025. Operating cash flow for the quarter was $489.3 million, a decrease from the prior year primarily due to the timing of estimated tax payments. The company actively returned value to shareholders through its stock repurchase program, buying back 5.56 million shares for $418.0 million in Q1 FY26. A significant $1.20 billion remains authorized for repurchase, expected to be executed by the end of fiscal year 2026, underscoring management's confidence and commitment to shareholder returns.

The Online segment, while experiencing a 1.2% revenue decline year-over-year, showed encouraging signs of stabilization. The online monthly average churn rate improved significantly to 2.8% in Q1 FY26, down from 3.2% in the prior year period and representing the lowest churn rate for a first quarter. This improvement is likely a reflection of the enhanced product value delivered through the core AI Companion features included in paid plans. Momentum in growth products is increasingly contributing to the narrative. Zoom Phone revenue is growing in the mid-teens, winning deals often through integration with other productivity suites and competitive displacements. Zoom Contact Center is a triple-digit million ARR business growing in high double-digits, with customer count increasing by 65% year-over-year and strong adoption of higher-tier packages incorporating AI features. Workvivo, the employee experience platform, saw its total customer count grow by an impressive 106% year-over-year, benefiting from strategic partnerships like the one with Meta Workplace migrations. These products, often sold in conjunction with Zoom Workplace, demonstrate the effectiveness of the "better together" platform strategy.

Outlook and Future Trajectory

Looking ahead, Zoom's guidance for fiscal year 2026 reflects a balance between continued investment, expected growth drivers, and a cautious stance on the macroeconomic environment. For the full fiscal year 2026, the company expects revenue in the range of $4.8 billion to $4.81 billion, representing approximately 3% year-over-year growth at the midpoint (3.2% on a constant currency basis). This outlook incorporates a slight increase in the Online segment forecast due to a recent $1 price increase for monthly Pro SKUs, offset by a more prudent view on the Enterprise business, acknowledging potential sales elongation and increased scrutiny on deals observed in Q1.

Non-GAAP operating income is projected to be between $1.865 billion and $1.875 billion, resulting in an operating margin of 38.9% at the midpoint. This guidance implies continued operational discipline, managing expenses effectively while funding strategic priorities like AI development. Non-GAAP diluted earnings per share are expected to be $5.56 to $5.59. Free cash flow for FY26 is anticipated to be in the range of $1.68 billion to $1.72 billion, maintaining strong cash generation capabilities.

For the second quarter of fiscal year 2026, Zoom forecasts revenue between $1.195 billion and $1.2 billion (approximately 3% year-over-year growth at the midpoint). Non-GAAP operating income is guided to be $460 million to $465 million, with non-GAAP EPS of $1.36 to $1.37. These figures suggest a continuation of the trends seen in Q1, with modest top-line growth and solid profitability.

The strategic focus remains on expanding the AI-first platform, driving adoption of growth products, and leveraging channel partnerships. The Custom AI Companion add-on and vertical-specific AI solutions are expected to contribute to monetization, particularly in the latter half of FY26. Continued competitive displacements in Phone and Contact Center, along with the expansion of Workvivo, are anticipated to fuel Enterprise growth.

However, the outlook is not without risks. The uncertain macroeconomic environment could continue to pressure IT budgets and lengthen sales cycles, particularly for large Enterprise deals. Competition remains fierce, with rivals potentially intensifying bundling strategies or accelerating their own AI roadmaps. Security and privacy concerns, while addressed through ongoing investments and features like end-to-end encryption (E2EE), remain a persistent risk in the digital communication space. Regulatory changes, particularly concerning data privacy, AI governance, and international operations (including geopolitical tensions impacting R&D in China), could impose additional compliance costs or restrict business activities. Execution risk in integrating new products, managing international expansion, and successfully monetizing AI features are also factors to monitor.

Conclusion

Zoom Communications is actively executing its transformation into an AI-first work platform, moving beyond its core video conferencing roots to offer a more integrated suite of communication and business services. The recent financial results demonstrate a stable core business with encouraging momentum in the Enterprise segment and growth products like Zoom Phone, Contact Center, and Workvivo, supported by disciplined financial management and robust cash flow. While macroeconomic uncertainty and intense competition present ongoing challenges, Zoom's focus on product innovation, particularly with AI Companion, its commitment to security and privacy, and its strategic expansion into adjacent markets position it to capture new opportunities. The investment thesis hinges on the successful execution of this platform strategy, the ability to effectively monetize AI and new offerings, and the continued leverage of its operational efficiencies to drive profitable growth and shareholder returns in a dynamic market landscape.