By Aaron Tilley

Zoom Video Communications Inc. posted another quarter of record sales and again lifted its outlook as remote working and distance schooling drags on during the pandemic, but the growth has come with higher costs that disappointed investors.

Zoom has been providing some of its services free to users, including to now more than 125,000 K-12 schools that began the new academic year largely teaching remotely. That weighed on its profitability, Zoom said Monday. Gross margin for the quarter fell to 67%, down from 71% in the prior three-month period, as the company spent heavily on cloud-computing service to facilitate all its users.

The company reported sales of $777.2 million in the latest quarter, up from $166.6 million a year earlier, as it posted a profit of $198.4 million. Analysts surveyed by FactSet had expected sales of $694 million and net income of $149 million for the three months ended October 31.

"We remain focused on the communication needs of our customers and communities as they navigate the current environment and adapt to a new world of work from anywhere using Zoom," Chief Executive Eric Yuan said. "We expect to strengthen our market position as we finish the fiscal year," he added.

The videoconferencing company, which went public last year, raised its full-year outlook for a third time during the pandemic, cementing its position as one of the biggest corporate winners from the shift to working from home and remote schooling.

Zoom said it now expects sales in the current financial year ending in January to reach around $2.58 billion, up from the previous quarter's guidance of sales reaching as much as $2.39 billion.

Its shares have surged amid the Covid-19 outbreak and are up about sevenfold this year. But shares were down around 4% in after-hours trading.

Zoom's global boost in popularity has put it at the center of a rivalry among tech companies pushing their services for managing daily life during the pandemic, pitting it against far larger rivals such as Microsoft Corp. and Facebook Inc.

The rise of Zoom, founded nine years ago, hasn't been without setbacks. The Federal Trade Commission this month said it had settled a case with the company over how the videoconferencing platform handles user privacy. Zoom also reacted to pressure to more actively police content on its platform.

Its free service also is expected to continue weighing on profitability, Zoom said. "With the uncertainty of the longevity of the pandemic, it is unclear how long gross margins will be impacted as we remain committed to supporting the global community," Chief Financial Officer Kelly Steckelberg said, adding that margins would eventually improve.

Zoom, however, has seen a large increase in its paying subscriber numbers. It said it now has 433,700 customers with more than 10 employees, up almost six times from the previous year's figure. The number of its most lucrative customers, those paying more than $100,000 a year, has more than doubled from the year before.

Zoom said it plans to capitalize more broadly on its massive surge in popularity but is still assessing how best to target smaller consumers, Chief Operating Officer Aparna Bawa said at last month's WSJ Tech Live conference.

The company said it expects sales in the current quarter of $806 million to $811 million and adjusted per-share earnings of 77 cents to 79 cents. Wall Street is forecasting adjusted earnings per share of 62 cents for the quarter on sales of $728 million.

Write to Aaron Tilley at aaron.tilley@wsj.com

(END) Dow Jones Newswires

11-30-20 1748ET