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Zoom Owns the Moment in Q2

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Someone analyzing financial reports
Image: nateejindakum - stock.adobe.com
Zoom this week announced its financial results for the second-quarter fiscal year 2021, ended July 31, and the company crushed it. The “beat at raise” was what I would consider epic proportions and not something I’ve seen since the dot-com boom. For the quarter, Zoom posted revenues of $663.5 million, a whopping $161.1 million above the streets expected number of $500.4 million. Even more eye-popping was the Non-GAAP EPS of $.92, which was more than twice the expected $0.45. In my years of covering publicly traded companies, I don’t remember a “beat” of this magnitude.
 
To put a cherry on top of the Zoom sundae, CEO Eric Yuan raised its full-year guidance to $2.37 - $2.39 billion, a year-over-year increase of 281% to 284% — well above consensus estimates of $1.81 billion. The company sees its EPS coming in at $2.40 - $2.47, again solidly ahead of the Street’s $1.29 estimate. The result of this is that the stock has shot up. At the time of writing, ZM is up $134/share, which equates to a share price of about $460, up 41% on the day. This is already on top of the growth it has seen since the quarter started.
 
After its Q2 results, Bank of America reiterated its buy rating and upped its price target from $260 to $475, which it’s almost at now. The Bank of America note was titled “Unprecedented times continued to lead to unprecedented results.”
 
One of the questions people have asked me is why is Zoom benefitting disproportionally more than other collaboration vendors? Almost all vendors have video meetings now, and many are comparable to Zoom on features and usability. I believe there were a couple of notable items that have led to Zoom getting on top and then staying up there:
 
  • Perceived easiest to use — Zoom caught the industry napping and built a product that was dead easy to use — one click, and you’re in. Since then, most of the vendors have caught up with “ease of use.” RingCentral Video, Vonage Meetings, and Avaya Spaces all take one or two clicks, and you’re in. In fact, USA Today recently published an article where the author stated, “Webex is just as easy to connect to as Zoom is, and it gets a brownie point for cleaner, less cluttered menu.” Perception is reality, and until another vendor creates a solution that is a step easier than Zoom, they’ll retain the “easiest to use” crown.
  • Capitalizing on COVID-19 — I’m certainly not implying that Zoom set out to monetize the pandemic, but it was the first vendor to loudly state its product was free to people WFH. I’ve talked to Yuan about this, and he told me he had no idea it would have this kind of impact. Zoom has a strong culture of doing good. Zoom made its product free because it was the right thing to do, and often when you do the right thing for businesses or the world, it pays you back, and that’s what happened here. It’s worth noting that almost every other vendor made its product free as well, but Zoom got a head start and has been looking at everyone else in its rear-view mirror since.
  • Apologizing for mistakes — Zoom’s rise hasn’t been without bumps. The term “Zoom bombing” is as well-known as the phrase “let’s meet on Zoom.” This led to a black eye in the area of security. It also has had a couple of outages that greatly inconvenienced people and companies. These didn’t derail Zoom. More they created a couple of speed bumps from which the company recovered quickly. I believe one of the reasons is that Yuan spoke publicly about making mistakes and even apologized for them. During the most recent episode of The Heard, co-host Dave Michels couldn’t think of a service provider like Zoom apologizing for making a mistake. For those that have never met Yuan, he is as genuine and humble as he appears on his videos that gets him a pass on mistakes, given they don’t keep happening.
 
Where does Zoom go from here? At over $2 billion in revenue, the law of large numbers will catch up to it and growth will slow down. If Zoom is going to keep growing, maybe not in triple digits but in the high double digits, there are a few keys to doing this. Most notably:
 
  • AI features — This is the next big battleground for collaboration and is something Zoom’s archrival Cisco and others are focused on. The challenge for the entire industry is making video meetings better than in-person ones that are done through AI. Zoom disrupted the market with ease of use but could be disrupted with AI. No vendor is really ahead here, but the clear winner is the customer as the increase in competition will ensure more features, faster.
  • Zoom Phones — Zoom came to market with video, and largely leads with that, but people still use phones. However, Zoom Phones' feature set is relatively immature compared to solutions by RingCentral and Cisco. While video meetings have replaced calling in many scenarios, calling is still important. As businesses rationalize the number of vendors they have (most vendors have messaging, video meetings, and calling), Zoom Phones could be an Achilles’ heel. Zoom Phones are serviceable, but Zoom needs to continue to drive new features into the product and close the feature gap. Alternatively, Zoom could use some of its war chest to acquire one of the many struggling, calling-first UCaaS providers.
  • Contact center — UCaaS and CCaaS are coming together. Zoom currently partners with Five9 when a customer wants both from a single vendor, but partnerships are hard to make work long term. Both Yuan and Five9 CEO, Rowan Trollope, are laser-focused on customer experience, so the partnership has a good chance of working, but Zoom would be better off with its own platform. I’d like to see it go out and buy one of the many smaller vendors, such as UJet or Uniphore, that are trying to disrupt the CCaaS industry with strong mobile and AI offerings.
  • Endpoints — Zoom recently announced its DTEN ME home unit as well as partnerships with Neat.io, Poly, Logitech, and other companies. Zoom’s success has been in software and cloud, and being successful with hardware is a whole different game. As people return to the office, extending Zoom into huddle rooms and conference rooms will be important, and that requires continued investments in hardware. Can Zoom be successful? Sure, but it’s a different skillset, and only time will tell if Zoom can make this a meaningful part of the business.
 
Zoom skyrocketed from relative obscurity to be a $2 billion household name almost overnight. Well done to Yuan and the entire Zoom team. Now the work begins as reaching $4 billion and beyond is a much harder task.