Zoom Video Communications Earnings Preview: Layoffs point to a hard quarter

Zoom Video Communications (ZM), a star growth stock of the pandemic era, is scheduled to release its fourth quarter earnings after the bell on Monday. Wall Street consensus does not expect much from the once-revered stock. In fact, Wall Street expects revenue of $1.1 billion in the quarter, flat with Q3 and just 2% higher than the same quarter in 2021.

As is, analyst consensus has Zoom losing $-0.05 a share or about $12.3 million in the quarter on a GAAP basis. Despite all the negativity, Zoom stock is ahead 1.6% in Monday's premarket as NASDAQ futures have advanced 1.3%. This may simply be a reaction to last week's major sell-off. As a tech stock, Zoom stands to benefit from market optimism.

Zoom Video Earnings Preview: How will the layoffs affect guidance?

Much of the chatter surrounding this release holds that Zoom's announcement on February 7 to layoff 15% of its workforce, or 1,300 employees, was a result of the poor results from Q4. This thesis says that Zoom has had difficulty achieving sales growth over the past year, so now management has decided to give up on growth for the time being and focus on profitability. With the Federal Reserve likely to continue raising interest rates on the back of last week's hot PCE data, it is easy to understand this view. An impending recession is probably not the time to focus on sales growth. 

"We did not take a single departure lightly – our leadership carefully examined and made decisions based on critical priorities for long-term growth, and also looked for functions that have become overly complex or duplicative," CEO Eric Yuan wrote in a blog post regarding the layoffs. Yuan's executive team will forego their fiscal 2023 bonuses and take a 20% cut to base salaries. Yuan himself has cut his compensation for the year by 98%. 

Because most downsized employees are being given 16 weeks of paid salary and health coverage, the savings will not be felt until the second half of 2023. In the meantime, Barclays has reported that Zoom is raising the monthly price of its Zoom One Pro Plan by 7% to $16. This policy should be felt in the near term and likely marginally result in better full-year guidance. 

"We view this as a positive for Zoom given broad growth concerns and investors’ lower expectations for the near-term business ," wrote Barclays analyst Ryan MacWilliams.

Morgan Stanley, Bernstein and MKM Partners have all release primarily negative feedback on the upcoming earnings release over the past few weeks. Most of the criticism stems from the view that enterprise growth is tapped out for the time being, especially in Europe, and that currency headwinds will negatively affect earnings this year. MKM Partners cut its price target from $100 to $75.

Zoom Video Communications stock forecast

Zoom Video stock seems to be trading within a wedge formation. The descending topline falls somewhere around $83, and the ascending bottom trendline is currently at $71. The topline has been running since November of last year, while the bottom trendline just began after Christmas.

Both the MACD indicator and the 9 and 21-day moving averages are crossed over in a bearish tilt, so the odds are that Zoom stock sells of following the announcement. At least, that is how the market is positioned. Expect a break above the topline to lead ZM stock to make a run at $89.35. That is the range high from November 11. Likewise, a break below the bottom trendline could send shares hurtling toward the December 27 low of $64.

ZM daily chart