Zoom Video Communications Inc. is looking to reverse the impact of its slowing videoconferencing business by expanding into the highly competitive contact center market.

The company's new Zoom Contact Center offering launched Feb. 22 in the U.S. and Canada, about five months after the company's $14.7 billion all-stock deal to acquire contact-center software vendor Five9 Inc. fell through. The new product is aimed at helping businesses connect with customers via Zoom's video and voice conferencing services.

Zoom aims to differentiate itself from other contact-center providers by leaning on its core video product, which became a household name during the COVID-19 pandemic. The company will face an uphill battle to compete with tech behemoths such as Microsoft Corp. and Cisco Systems Inc., which are increasingly ramping up their presence in the contact-center space.

"The Five9 deal would have given Zoom a turnkey massive client base as well as access to a range of cutting-edge AI technologies," said Keith Synder, an analyst at independent research firm CFRA. "The company will now have to play catch up in the space without these advantages, which will be very difficult to pull off."

Ailing growth rates

Zoom's growth has declined on tough comparisons to a pandemic-driven surge that lasted through 2020 and early 2021. For the quarter ended October 2021, the company's revenue grew 35.2% year over year, down from the 366.5% growth reported for the same period of 2020.

Consensus estimates indicate that analysts expect the company's year-over-year revenue to decelerate to about 19.5% and 15.2% for the quarters ending January and April, respectively.

"Zoom's pandemic levels of growth will probably never be seen again, mostly because companies around the globe have adjusted to remote work by now," Snyder said. "Even if we go into another lockdown situation now, a growth spike of this magnitude will be very unlikely."

The post-pandemic slump is not the only downside that Zoom is facing. The two biggest issues obstructing the company's revenue growth are market saturation for its core Meetings video-conferencing product and intense competition from Microsoft's Teams product in particular, said UBS analyst Karl Keirstead.

"Our checks reaffirmed that Zoom is a leader in the SMB (small and midsize-business) space, but Microsoft Teams is winning more and more business on the enterprise side," Keirstead wrote in his latest analyst note to clients.

Investor sentiment on Zoom is negative due to fears that down-market customer churn will pick up, Keirstead said, reiterating his "neutral" rating and $130 price target on the company's stock.

Contact center competition

Strong demand for communication and collaboration tools made Zoom one of the biggest pandemic success stories in 2020, with its stock skyrocketing to as high as $568.34 per share in October that year. But shares started to fall as soon as quarterly growth rates declined. Zoom's stock closed at $126.97 per share on Feb. 24, 2022.

Five9 shareholders ultimately proved unsatisfied with the total price Zoom was set to pay in the all-stock deal as the company's market valuation fell.

Zoom still faces pressure to diversify its offerings and evolve from a pure-play video-conferencing provider to an all-purpose communication and collaboration platform, and it will likely pursue other deals as it looks to compete with services like Microsoft Teams, Snyder said. Teams already includes video conferencing tech with contact center integration.

"Zoom could still pursue another deal for a contact-center provider, because they do have a ton of cash and very little debt," Snyder said. "I wouldn't be surprised if they decided to try and go after Five9 again with an all-cash offer."

Meanwhile, Cisco, whose Webex video conferencing product competes with Zoom Meetings, is likely to announce its own expansion in the contact center space at the Enterprise Connect event in March.

To compete, Zoom could leverage its brand recognition and strength in video collaboration to differentiate its contact center product in the market, said Raul Castanon, a senior research analyst covering workforce collaboration and communication platforms at 451 Research.

"The big names in the contact center space handle enormous amounts of workloads, while Zoom is looking to take a very video-first approach at a smaller scale," Castanon said. "From that perspective, they are pioneering a new category of use cases for contact centers, so it could give them an advantage as a first-mover."

However, building out a niche offering in the market will take a long time and the company will not see any noticeable impact in its results for the next two to three quarters, Castanon said.

Further diversification

Zoom is also hedging its bets in other areas of the workplace communications and collaboration market. Zoom Phone, a cloud-based business phone system with enterprise-grade features, saw revenue grow in triple digits year over year in the three months through October 2021, CFO Kelly Steckelberg said in the company's last earnings conference call.

Another service poised for growth is Zoom Events, a service that allows the company's enterprise clients to create, host and manage a range of virtual events.

"The pandemic caused a lot of events to turn to virtual environments, which made many participants realize the advantages of not having to run these in person," Castanon said. "Moving forward, virtual or at least hybrid events will be very prominent, allowing Zoom Events to grow significantly."

Meanwhile, Zoom could benefit from further expanding into the hardware space, Snyder said. While the company already has a hardware-as-a-service program that bundles Zoom's services with devices from third-party hardware partners such as Poly, outright acquiring a manufacturer to better compete with companies like Cisco could prove beneficial.

"Many organizations prefer relying on Cisco's services because they can bundle both hardware and software solutions under one umbrella," Snyder said. "If Zoom really wants to establish itself as a one-stop-shop in the market, offering hardware to go along with its software will attract more clients who don't want to deal with multiple vendors to run their operations."

451 Research is part of S&P Global Market Intelligence.