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Zoom Signals that Platform Transition is Underway

Zoom_AdobeStock_81817722_6721.jpeg

A cloud depicting a UC platform
Image: ra2 studio - stock.adobe.com
High-flying cloud video provider, Zoom last week announced its quarterly results and the company we have all grown accustomed to reported strong numbers across the board. I imagine that while prepping for the investor call, CEO Eric Yuan plays Queen and sings along to “Don’t Stop Me Now.” because he’s “travelling at the speed of light” and “burning through the sky.” The reason this quarter was so important to “Mr. Fahrenheit” is that it’s the first quarter where Zoom is being compared to the surge in demand created by COVID-19.
 
It’s been speculated that market demand would fall off with businesses planning to go back to work. Of all the work-from-home stocks, Zoom’s price has been the most sensitive regarding pandemic news. When the pandemic started, Zoom’s stock took off disproportionality compared to many of its peers. When news of the vaccine’s effectiveness broke, the stock fell equally disproportionality.
 
Investors have eagerly anticipated this quarter to see if Zoom is “real life” or “just fantasy.” Looking at the numbers, revenue grew a whopping 191 percent year-over-year (YoY) and 8.4% from the prior quarter to $956.2 million. This blew the Wall Street estimate of $905.7 million out of the water. Zoom's fiscal first-quarter sales soared 191% year over year (and 8.4% from the prior quarter) to $956.2 million. This result sped by the $905.7 million analysts were expecting and the company's guidance of $900 million to $905 million. Growth was driven by the addition of new customers and expansion of the services the company provides to existing customers. Earnings were strong at $1.32 per share compared to $0.99 as expected by analysts. Zoom also reported free cash flow margins of 48%, maintaining its high level of profitability, indicating it hasn’t had to go “buy” customers to maintain its growth.
 
This performance is evidence of Zoom’s strong execution in staving off churn at the low end of its base by driving new business in with existing and larger customers. During the earnings call, the company provided some interesting data points. For example, before the pandemic and even early into the cycle, the majority of the company’s growth came from companies with under 10 employees. This past quarter, the number of customers that had over 10 employees jumped 470% while those that spent north of $100,000 grew 156%—showing that the business is shifting upmarket.
 
Looking ahead, the company also guided ahead of Wall Street expectations for the second quarter of its fiscal 2022 as well as upped its full-year number. For next quarter, Zoom expects to do between $985 million and $990 million, well ahead of the expected $935 million. This equates to 48.8% YoY growth, and while its much lower than the triple-digit growth we have come to expect, the numbers are impressive given the “COVID” bump. Zoom expects to do $3.975 billion to $3.99 billion for fiscal 2022, which tops the Wall Street expectation of $3.8 billion.
 
These financial results are indicative of the long-term profitability of Zoom’s business model. While there are several pieces to the puzzle that need to fall in place, I believe Zoom will be one of the big winners in the secular tailwinds in a massive growth opportunity created by the hybrid work environment.
 
Zoom’s revenue growth is being fueled by the shift to the Zoom platform. The most immediate opportunity is to sell Zoom Phone into its massive base. The quarterly results certainly indicate that it’s “land and expand” strategy is working. On the call, management noted that the company just hit 1.5 million Zoom Phone lines at the end of April, showing there’s an acceleration to this business. It took the company about seven quarters to get to the one-million-line mark but has added the additional half a million in a little under two quarters. Look for Zoom to continue to rise upwards in calling.
 
Additionally, Zoom Apps has the potential to not be big, but huge. In February, the company launched its $100 million Zoom Apps Fund to expand its app ecosystem. I believe at last count, Zoom had somewhere in the range of 1,300 app partners and, while that might be impressive for a communications vendor, its chump change. I’ll call Zoom Apps a success when it starts to enable the long tail of developers that create apps using Zoom tools. Everyone partners with the big app vendors but it’s typically the two people in a garage that sell vertical apps that create the massive scale.
 
Given Zoom’s massive base, the company has an excellent chance of making Zoom Apps its largest source of revenue. Supporting this is the recently announced Zoom Events product that launches soon as well as Zoom Webinar that’s now doing millions of minutes per month. The combo of Meetings, Phone, Apps, Webinar, Events, and Rooms lets people enjoy the Zoom experience any way they like.
 
We can’t forget about contact center. To date, CEO Eric Yuan has been somewhat non-committal on this topic. In fact, on a recent industry analyst call, he was asked about it directly and danced around contact center as a service (CCaaS) without saying much. That’s unlike Yuan, who typically is very open and honest. When asked about it during this most recent quarter, he responded as follows:
 
“When it comes to contact center, this is part of our UC platform, and that’s the reason why I mention Zoomtopia scheduled for September 13 and 14. Stay tuned. You will see something. Hopefully, we can do something around the contact center. Again, that’s also the big market. Today, we do integrate very well with our greater partners, Five9, Twilio, inContact and others. Stay tuned at Zoomtopia.”
 
The contact center is an obvious adjacency and presents a massive needle-moving opportunity. The high-end price of a UCaaS seat is in the $30/month range where the low-end cost of a CCaaS seat is $50/month. The high-end price is over $200 and likely to grow with the infusion of artificial intelligence (AI). In a recent conversation with Umesh Sachdev, co-founder, and CEO of JC2 Ventures-backed Uniphore, he told me that CCaaS seats could potentially hit over $1000 a seat with AI. With that kind of money on the table, why wouldn’t Zoom want in?
 
Realistically, I don’t believe we’re going to see Zoom roll out a full-fledged contact center at Zoomtopia because building a product to meet the demands of this area isn’t trivial. What we could see is Zoom UC being used for certain types of customer care but not full customer service. In the short term, it can continue to leverage its partners, but I don’t believe that’s the endgame.
 
Investors, partners, and most importantly, customers, shouldn’t buy into the bear thesis on Zoom where a return to work and vaccines will kill the company. Digital collaboration is here to stay and its use is expanding. One could argue that Zoom was in the right place at the right time when the pandemic began, and there’s probably some truth to that, but now it’s about converting that opportunity into something bigger.

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