“So we have assumed multiples of what the historical churn rates have been. And also, we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment.”
Is it that last sentence that makes you think things will actually be rosier, or was there additional color I missed? Because that doesn’t exactly inspire confidence to me. How much is Zoom management sandbagging? What do you expect for the next few quarters from them?
Hi Smorg, Those are good questions. I’ll try to answer them. Please follow me along here.
In describing about my expectations for the quarter I wrote the following:
This April quarter was divided into two equal parts. The first month and a half was the Old Zoom, and the second month and a half was the New Zoom. Thus for the first half of the quarter Zoom probably grew roughly 80% (maybe a couple of percent less. For the second half of the quarter, even if… revenue grew a huge 250% in the second half of the quarter, 250 and 80 average to up “just” 165% for the quarter. That’s certainly the absolute maximum you can imagine.
On the other hand, the July quarter (May, June, July), will be all the New Zoom, and revenue up 250% will mean up 250% for the whole quarter.
Then, after the results were came out I wrote :
So let’s see what actually happened. They grew revenue for the quarter by 169% yoy. I’ll assume that in the first half of the quarter they grew at 78% (unchanged sequentially, but still a very large rate of growth). To average 169% they would have grown 260% in the second half of the month (260+78=238 and 238/2 = 169.
And the year-ago revenue of $122 million plus 260% growth means they would have had $439 million if they had had that growth for the entire quarter. Are you with me so far?
But let’s look at that second half of the quarter. They were not growing at 260% the whole time. Think back to March 16. That’s when work from home just started and they started exploding their growth, and it was by the end of March that they had 200 million daily participants, and mid April when they had 300 million. Obviously they ended those six weeks with a higher revenue growth than they had at the start of the six weeks. Are you still with me?
So if they averaged 260% growth for the entire six weeks, lets say they exited the quarter at a rate of 310% growth (which seems a reasonably conservative estimate). If they had had that exiting 310% growth for the entire quarter they would have had $500 million for the quarter. That was their exiting run rate!
Which explains their 2nd quarter guidance of $500 million, as a low ball estimate and something that they expect to beat. They gave that estimate in June, after all, and they had all of May to look at. They knew they would beat $500 million when they gave it. Do you really think that they had no new sign ups in all of May? And no new increases of service? Of course they will have more than $500 million revenue this quarter.
As far as churn, the amount of churn is not going to be anywhere near what you are imagining, or anywhere near Zoom’s worst case scenario that they are basing their guidance on. I think that you are forgetting that the people who have paid subscriptions are a different population entirely than all those millions of free subscribers.
For example, I wrote: Do you know many people with the $12.50 per month subscriptions? Well I’m one and I know maybe a dozen more. It would never cross my mind to cancel my sub, and I don’t know any of the others who would think of it either. Remember we are not talking about the people who are using free because they can’t afford to pay for a sub. We are talking about the people who have already sprung for the sub. That’s a DIFFERENT POPULATION! Those people are not going to cancel to save $12. Not going to happen, when they can now talk with a half dozen, or a dozen, of their friends all over the country and the world once a month for a couple of hours if they want to. Or think of a doctor’s office, or a yoga studio, or whatever. One client a month well more than pays for their subscription.
Then tObis wrote:
“Zoom has really helped us maintain sales of our scientific instruments across the US for the last few months. We’ve been able to stay in contact with customers via regular product webinars, training sessions and one-on-one demos. Although we miss the personal contact, the webinars actually work better than face-to-face in many cases. Much easier to reach higher-level decison makers, for example. There’s a virtuous circle as we’ve learned what works best in a webinar, receive feedback, our invitation list has expanded, become better targeted and attendance has just exceeded 100 for the first time. This meant we just had to upgrade from the $50/month to $140/month, which is still nothing compared to the cost (and time) of shipping equipment and visiting a single customer. No way we’d want to lose this new aspect to our sales efforts.”
And dpmohr wrote:
“Prior to Covid, my work involved extensive international travel to deliver workshops. I am a small business owner of a company with only two employees (three if you include my cat). I was in Australia in mid-March when I had to cancel the remainder of my workshops and return to Canada before flights were shut down. I had two to three stressful weeks where I grappled with how to pivot as my former business had simply disappeared. I spent some $2000 buying equipment to turn my office into a video studio to allow me to deliver the trainings virtually. I then began to advertise these sessions to not just the regional areas that I did before, but to whole countries as the cost of travel for my participants had been eliminated with the sessions being delivered virtually. Prior to the pandemic, I spent over $40,000 a year just on travel. With virtual trainings, I have no travel costs and my audience has increased exponentially, because of Zoom. What I am experiencing must be happening for 100,000s of other small businesses. For example, the individual I take music lessons from is no longer constrained by geography and has quickly pivoted to virtual lessons.
I understand the importance of enterprise customers to Zoom, but I would suggest that the number of small business owners (like me) who can profit from using Zoom is many, many times larger and the cost of a monthly or yearly subscription is completely trivial to us. I believe as an investing community we have focused on personal use of Zoom, which we all know has exploded, but that growth has obscured the number of small business users who have pivoted just like I have. I do not expect much churn for small business users as the value proposition is just so compelling.”
Smorg, I hope that this helps explain why so many of us are so positive.
Best
Saul