Hi all,
I haven’t really jumped on the ZM bandwagon, but obviously should have. Its a small position for me and has done extremely well. Interestingly, we could have bought it a month ago for $135, and a few weeks before that for $113. Some of you did 
Zoom have lots of tough problems, like:
- Global brand awareness grew faster than expected.
- They grew into a whole bunch more countries than they were planning.
- They’ve made a whole bunch more Free Cash and aren’t really sure what to spend it all on.
The entirety of their execution difficulties can be summed up by this quote from the first analyst:
“One of, if not the greatest all time quarter in enterprise software history”.
There were a few interesting points but this quote from the CFO was interesting “around half of our sales in the quarter came from monthly subscribers”. Those are the subscribers with the highest churn, although they stated that 30% of revenue is from smaller <= 10 employee companies. That suggests that some of the larger orgs are on monthly subscriptions, which makes sense with an arbitrary cutoff like 10 employees.
The most interesting takeaway for me since I haven’t covered previous ZM conference calls was Erics emphasis on “Video + Voice” = one thing. This is why Zoom Phone exists. He’s positioning Zoom to be everywhere Voice currently is alone. For example, call centers. Enterprise phone systems. Landlines. Mobile. Talkback radio? I don’t know what the possibilities are but everywhere you here audio, ZM wants to add Video.
One of the big challenges for Enterprise Software companies is international expansion. You need to build out sales teams, and have offices and a whole bunch of expenses. ZM seem to have leaped that gap with +246% growth outside of Americas.
So, one of the best quarters in the history of enterprise software. The other impressive thing is that they really seemed to be trying to help the world during COVID. The number of analysts who thanked them for keeping comms, schools, weddings, life going was amazing.
ZM now seems to a) have cemented a place in the worlds social fabric, and b) engendered an enormous amount of goodwill.
cheers
Greg
ps. As always, copy and paste into dillinger.io for a pretty version.
Q1 2021
Other discussions
Sauls expectations of the future
Bears thoughts
Dennys new usecases
Checklist
Q: What is revenue doing yoy?
A: I know its academic.
| | Jul-19 | Oct-19 | Jan-20 | Apr-20 |
|:--------|:--------|:--------|:--------|:--------|
| Revenue | 145,826 | 166,593 | 188,251 | 328,167 |
| yoy ? | 96% | 85% | 78% | 169% |
Q: What are customers doing q-1?
A:
| | Jul-19 | Oct-19 | Jan-20 | Apr-20 |
|:-------------------------|:-------|:-------|:-------|:--------|
| Customers >10 employees | 66,300 | 74,100 | 81,900 | 265,400 |
| q-1 ? | 13% | 12% | 11% | 224% |
| Revenue/customer >10 emp | 2199 | 2248 | 2299 | 1236 |
| Customers ACV > $100k | 466 | 546 | 641 | 769 |
| q-1 ? | 15% | 17% | 17% | 20% |
Strong growth, number of big spenders increased. The revenue/customer got hammered due to the massive influx of lower spending customers.
Note also that they added >500 new customers with >$100k Annual Recurring Revenue. Some might churn, but it seems unlikely. So their traction with enterprise is likely bigger than indicated here.
Q: DBNER?
A: >130%. Thats all they say, rather than what it actually is.
Q: Revenue per customer up or down (either revenue/customers or ARR)?
A: Down, but wouldn’t read too much into it with the huge increase in customers.
Q: Expenses as percent of revenue going up or down (ie, any sign of leverage)?
A: Expenses as percent of revenue:
| | July 2019 | Oct | Jan 2020 | Apr |
|:----|:----------|:-------|:---------|:--------|
| R&D | 15,054 | 17,573 | 20,669 | 26,389 |
| | 10% | 11% | 11% | 8% |
| S&M | 79,652 | 96,048 | 100,905 | 121,556 |
| | 55% | 58% | 54% | 37% |
| G&A | 20,955 | 23,806 | 23,577 | 53,130 |
| | 14% | 14% | 13% | 16% |
Dropping like a stone, because they had such a large increases in revenue.
Q: What does forward EV/S look like?
A: EV = $60.734b
next quarter TTM revenue: $1.178b => 51
and FY guidance: $1.775b => 34
Comments
Customers >10 employees: +354% yoy
“One banking customer deployed 175k new enterprise licenses”
G2K customers: +200%
Still seeing “elevated” levels of participants {GD: not sure what elevated means}
20x increase in “annualised meeting minutes” → 2 trillion minutes annualised based on April.
AWS servers - sometimes provisioning “several thousand new servers per day” in COVID peaks.
Oracle also helped {GD: unclear what extent of help was. Sounds like AWS did heavy lifting}
Security
Zoom primarily aimed at enterprise who have enterprise security, and IT teams to set everything up.
But opened up first-time users during COVID. Those users didn’t have security protocols, IT teams => Security issues.
“Transparently and quickly addressed security and privacy issues”
- 90 day initiative on security and privacy.
- KeyBase acquisition to build an end-to-end encrypted meeting mode.
- Zoom 5.0 release - enhanced security, meeting controls. AES 256 GCM encryption.
Lots of support from fellow CEOS (Atlassian, Equinix, HubSpot, Okta, PagerDuty, Poly, SurveyMonkey…)
Anecdotes
ARM Technology - deployed 8000 Meeting Licenses, 800 Rooms, 9000 Phones.
Baker McKenzie - number 1 law firm brand.
Finances
| | | yoy | |
| ------------------------- | ----------- | ----- | ------------------------------------------------------------------------------- |
| Revenue | $328m | +169% | previous guidance $201m |
| - new customer subs | 71% | | |
| - expanded subs | 29% | | broadbased across verticals, geographies, cohorts |
| Customers > $100k TTM | 768 | +90% | +128 customers q-1. |
| **Customers > $100k ARR** | +500 | | One-time metric. |
| Customers > 10 employees | 265k | +354% | +183k in Q1. |
| Customers <= 10 employees | 30% revenue | | vs 20% q-1. Shifted billing mix as these customers pay monthly |
| DBNER | >130% | | 8th consecutive quarter |
| Americas | | +150% | |
| APAC + EMEA | | +246% | 25% of revenue {GD: **this is important**} |
| Non GAAP GM | 69.4% | 80.9% | vs 84.2% q-1. Impacted by free demand, and public cloud use. |
| R&D | $21m | +66% | Added 2 engineering centers |
| S&M | $104m | +69% | +$42m. 32% of revenue. |
| G&A | $49m | +196% | 15% of revenue. Higher accruals from telco taxes from higher billings. One time |
| | | | license payment {GD: for what?} and external prof. services {GD: security?} |
| Non GAAP OpIncome | $55m | | vs $8m |
| Non GAAP OpMargin | 16.6% | | vs 6.7% |
| Non GAAP EPS | $0.20 | | $0.10 more than guidance, vs $0.17 yoy |
| Shares | 295m | | |
| Deferred Revenue | $552m | +270% | |
| RPO | $1.1b | +184% | |
| Current RPO (12 months) | $772m | $240m | |
| Cash and equivs | $1.1b | | |
| Operating CF | $259m | $22m | |
| FCF | $252m | $15m | {GD: holy smoke!} |
“Our global brand awareness has spread more quickly and we have expanded into more countries that we had originally planned for FY21.” {GD: Terrible problem to have
}
“Expect to bring Gross Margins back to mid-70s in the next few quarters”
- Expanding hiring plans in S&M
- Increase CapExp for datacenters
- “Semi-annual cadence of net cash outflows from ESPP purchases in Q2”
Guidance
“the current environment has expanded Zoom’s market opportunities and outlook as the increase in demand propelled us to a higher growth trajectory than originally planned for this year. This requires us to recalibrate our original FY21 plan for the new scale of our business.” {GD: what a great quote}
| | Q2 | FY |
|:------------------|:---------------|:--------------------------------------|
| Revenue | $495m to $500m | $1.775b to $1.8b (+185% to +189% yoy) |
| Non-GAAP OpIncome | $130m to $135m | $355m to $380m |
| Non-GAAP EPS | $0.44 to $0.46 | $1.21 to $1.29 |
| Shares | 299m | 300m |
Guidance Assumptions
- Higher mix of smaller companies and individuals on monthly contracts which historically have higher churn.
- As governments ease shelter-in-place, expect lowered demand.
- Expecting Q3/4 to be consistent with Q2
Question and Answers
- “One of, if not the greatest all time quarter in enterprise software history”. Where does Zoom go from here? Growth drivers. “Video is the new voice”. Make sure we keep service up, good experience wherever user is. Triple down on privacy, security issues. TAM is bigger than we saw it before.
- End-to-end encryption, from acquisition - when will it deploy? Upsell? End-to-end encryption, industry standard - most vendors use AES 256bit either GCM, CBC. End-to-end encryption can’t use phone to dial in. Cloud recording not available. However, for extremely sensitive meeting, can enable this feature. Think it should be part of offering, at least to enterprise will be free. We also want to work together (FBI, local law enforcement) {GD: does this mean they can eavesdrop?}
- Guidance context - prosumers, why they will stay? Assume multiples of historical churn rates {GD: I think she means higher}. Conservative estimates. About half sales in quarter came from monthly subscribers. Percentage of monthly subscribers consistent with historical. Annual, multi-year churn a fraction of monthlies {GD: Didn’t understand this response at all.}
- Billings +350% and CRPO +220%. Why discrepancy? Billings and CRPO are not good metrics for us - because of monthly subscribers {GD: this makes sense, but… she could have provided more colour}.
- What do you spend all this extra cash on? We have Video Conference system BUT also Zoom Phone. Zoom phone is a huge opportunity. Pandemic accelerated video adoption. Also brand recognition, and prosumer, new use-cases like education, telemedicine. We’d like to double-down on that. Way we work in the future will be totally different {GD: think he means WFH becoming more normal}. Where should we build, and when to leave it to partners?
- Shelter-at-home changes, any changes? Too early, taken a conservative approach. People taking time to go back to work.
- Retention - have great customer success team. Looking for opportunities for monthly subscribers to move to annual contract.
- Zoom Phone - upsell. Full unified comms suite {GD: not sure what this means}. Video+Voice will be one platform. Q1 global pharma company -deployed 18k phone license to have a single consistent experience. Think huge opportunity. Enterprise customers still deploy on-prem and PBX. COVID accelerates from on-prem cloud-based service.
- Consumer strategy - video conference will be a mainstream service. Boundary between consumers, enterprise not clear anymore. I don’t think we need a consumer strategy. Strategy is to offer one service, no matter where you are, what you do, what device. Its like an infrastructure service now, like the internet. Don’t use different internets for different usecases.
- When replacing competitor, you give the customer free Zoom for life of their existing contract - we count them as new customer, and entire revenue gets amortised over the full period including free period {GD: so it looks like a discounted rate for life of contract}. Which goes into billings.
- New salespeople - hunters vs gatherers, channel vs overlay sales team. Doubled down on hiring late last year. Good progress in Q1, EPI, SDR, Account execs. Partner program helped us a lot.
- Thank you. What is Zoom Phone uptake, and whats next? Chat? Q1 focus was ensuring business continuity of video. Zoom Phone Q2 opportunity to sell into existing install base. Video collaboration business, bigger TAM. Adding in Phone = a huge market.
“online business used to be a small portion of total net MRR growth” {GD: not sure what he means - whats an online buyer here?}. Not going to sell data, or advertising. But there are lots of ways to monetise prosumers {GD: like what?}
“Also building a chat” but looking at it from customer perspective. If they use Slack, we have a great integration with Slack. Microsoft Teams - integrated with them too. Some customers will standardise on Zoom. But overall laser-focussed on Video and Voice.
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Churn - order of magnitude - taking a conservative approach, assuming historic norms don’t apply. Using multiples of historic churn rates.
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Next quarter will be full quarter of noise - higher levels of newer customer adds going past that? Lots of pipeline in Q1, Q2. We’re selling Zoom Phone, Rooms into existing customer base so whole new opportunity.
-
Thank you for corporate leadership! Balancing data security and privacy vs ease-of-use. Normally working with enterprise IT teams, enable features etc. COVID = lots of first time users. As CEO, I should have done a better job. We should have been IT for those first-time users. Learned a hard lesson. Wanted to leverage this opportunity to be “the most secured solution”. If there is a conflict, think privacy > usability. Ease of use is also a critical part however, committed to getting balance right.
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Cloud-based storage, file sharing, editing in Zoom. Have partnership with DropBox, MSFT Drive, Google Drive, can share files with those services. Video and voice is critical, just want to integrate with best-of-breed service providers.
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Competition - eg: Blue Jeans, RingCentral. We’re laser-focused on video and phone service. Market opportunity is bigger. RingCentral focussed on phone service. We focussed on Video. We added Cloud PBX, they added video. We will partner for now. {GD: quality wasn’t great here!
} -
New recurring revenue Q2 to be greater than Q4 last year. Yes.
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Enterprise comms fragmented market, do you see market consolidating around one to 2 competitors? Too early to tell, but yes. Best of breed will survive and thrive its not that easy. Zoom “just works”. You can build basic service easy, but 24/7, no outages, innovation… is hard. Huge market opportunity. We may not serve every customer, but with continued innovation, think we should be ok.
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Churn - education, consumer additions not sustainable. 300m users is daily participants both free and paid. That was the peak in April. Has come down in May on average. Over long-term expect it to grow beyond 300m number. NB: 300m not unique, if you join 5 meetings in a day, we’ll count 5.
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Net renewal rate >130% bounces around a bit.
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G2K - penetration rate still lots of opportunity to grow in G2K.
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Is Phone something that can get a boost from COVID? Every company has a phone system. Phone seems to be last area of IT that has been taken to Cloud. Zoom Phone is next natural step after customers end up relying on Zoom Video. Excited about that opportunity. Eric -Phone is not a separate service, part of the “Zoom Video” service. You can’t think of Phone as a separate service {GD: eg like mobile vs Facetime - Zoom is providing the Video/Voice communication service}
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Education - highest vertical re: growth on a quarter on quarter basis. Many universities and schools may host classes remotely. Expect strong demand, even with shelter-in-place lifting.
100k K12 schools - will they keep Zoom? Going to work on that. -
Had to scale up massively - previously talking about gross margins in 80%. Over time start to moderate public cloud. Scaled up 3rd party contractors, will look to scale back with employees.
“During this pandemic crisis, our top priority is to show our corporate social responsibility… do all we can to have people stay connected at no cost… This is time to help people stay connected. But down the road, after the pandemic crisis … we are going to go back to our the gross margin focus.”