What really moves stock prices upwards is something good that we were not able to predict with reliability.
Mr. Market is forwards looking only and doesn’t like surpises. Having a stupendous last quarter that you didn’t predict means nothing. Predicting a great next quarter when your previous predictions have been achieved/exceeded means everything.
But, we all know WFH is here to say.
Based on what? Serious question.
First, remember, that is based on my statement: the world won’t completely return to 2019 normal ever, which is to say that adoption of WFH will end up at a much higher level than 2019 even after the pandemic is over. Sure, it won’t remain at current levels, but the effect is still large and wide reaching.
Twitter, Facebook, Barclays, Shopify, Nationwide, Coinbase, Microsoft and others have already instituted permanent or long-reaching WFH policies. This Forbes article (https://www.forbes.com/sites/jackkelly/2020/05/24/the-work-f… ) points out the benefits not just to workers avoiding commutes, but to companies reducing office space expenses, etc.
CNBC has an article More big employers are talking about permanent work-from-home positions (https://www.cnbc.com/2020/05/01/major-companies-talking-abou… )
My previous company is talking about reduced travel moving forward to cut costs, and even closing some offices in high cost of living areas to open up more remote offices in lower cost of living areas, and do more with video (WebEx, though, not Zoom).
Of course, not every company will do that. Finance companies in particular, may not: https://fortune.com/2020/05/29/wall-street-big-tech-companie…
At a time when major tech and media firms are prolonging their work-from-home policies amid the ongoing coronavirus pandemic—raising questions from some about the future viability of the commercial office model—Wall Street’s big banks seem to have a singular goal in mind: a return to business as usual.
Then again, Morgan Stanley … said the bank would need “much less real estate” in the future…“Can I see a future where part of every week, certainly part of every month, a lot of our employees will be at home? Absolutely.” (CNBC link above)
Some people are shorting commercial real estate as a result.
What has happened at many companies is that as people have been forced to WFH, they’re realized that productivity didn’t actually go down. In some cases it actually went up. And, costs have declined to boot. So while it’s a certainty that WFH will decrease as the Covid crises passes, WFH will stabilize at much higher levels than it was in 2019.
So what do you base this statement on? Have you seen some polling or scholarship that indicates businesses are planning to change fundamentally how they run their operations?
I have a personal anecdote, I’ve been working from home for 30 years with customers in the US, GB, Norway, Australia, New Zealand, and Venezuela. LOL
I saw an article that mentioned a survey where a number of firms were planning on having a small part of the workforce WFH (5 to 10%, I don’t recall). WFH saves a lot of money in office leases and time wasted in rush our traffic not to mention travel to visit customers.
I certainly don’t expect the full workforce to WFH but a high enough number and increasing in time to make Zoom a very attractive investment. People talk about a new normal which I don’t buy into but progress travels forward, not backward.
BTW, my Chicago client was very happy to be able to work from poolside in Floria during the Winter using just an iPhone! Think of all the people who WFH running a Shopify, Amazon, eBay, MercadoLibre, or uTube business. It’s the trend. The “scholarship” might be the Technology Adoption Life Cycle (TALC).
https://softwaretimes.com/pics/talc-300.jpg
The current adoption is probably between Early Adopters and Early Majority and has at least two or three decades before it peaks.
Denny Schlesinger
Companies are generally very conservative. They don’t like new ways of doing business. Again, I reference my employer. They have issued a “come back to work” order. It’s “phased”, so we don’t all show up at once. But everyone, including people who demonstrated that they don’t need physical presence to do their jobs, is expected to return. “Business” travel is expected to resume, as well. I forget the precise term used, but basically they think face-to-face with distributors and customers (as well as presenting at investment bank conferences, e.g. JP Morgan) are vitally important. Even though teleconferencing is cheaper and more efficient, and has been for probably the last 10 years.
The push is to go back to how we were doing business before because it worked.
So, do you think they’ll:
A) Toss out the efforts and expenses associated with doing WFH in 2020?
B) Or, keep them ‘setup and ready’ but on the sidelines for the next crisis?
Because to pick “B” you just increased their expenses. Seems unlikely to me, but choice “A” looks crazy, too.
A new anecdote: my brother in-law’s architecture firm has hired “Net” one architect during this spring. They actually used the WFH environment to assess people for their productivity and ditched 6 architects and replaced them with new architects that they started in the WFH environment. The new workers are being brought up to speed as remote employees.
Another anecdote: My sister’s friend interviewed and was hired by one of the Big 4 accounting firms (whether there’s actually 4 anymore, I don’t know.) They told her she’d not be coming to the office before January 2021 (but she started in early May) and she’ll likely never have her own personal space onsite. Same thing, right? She’s being brought up to speed as a remote employee. This wasn’t an entry level position, or support staff position, either.
I think this means there is at least one more choice:
C) Grow Forward with permanent remote employees, as appropriate.
Another personal anecdote that fits with this thread. A close friend of mine who works for a major corporation based in California called and told me that his company had contacted all employees that were working from home due to the virus. They have been offered the opportunity to work from home on a permanent basis provided they can submit a plan of action that the company approves. In addition, he sent me a portion of an email that the company sent to a new client. In part the email was informing the new client that video conferencing would be done using Zoom only. My buddy found it quite interesting that his company was clearly laying the ground rules for all video conferencing going forward. He was somewhat surprised that they would make a point of this in such an early communication with a new client.
While I realize this is anecdotal, given Zoom’s numbers, I have to think this scenario is playing out on a scale that is hard to wrap our minds around. I certainly hope that is the case.
Steelerfan100
From personal experience.
I work in traditional financial services in tech.
We have been asked to WFH till end of year.
I posted previously but for clarity we replaced webex with zoom.
Now zoom is the tool of choice for the future.
They are gaining market share.
As long as they take care of the security, keep delivering updates in an agile manner and don’t mess-up, there is no reason why enterprises would move back to a free solution(aka teams).
Thanks,
Praveen
Praveen,
What’s the ability of teams to start a video call with just a phone number to send a txt to?
I’m going to go out on a limb and say that many, many Zoom users create zoom sessions on the fly via txt messages and never create contacts, etc.
It’s that level of simple & fast that is helping Zoom become the Kleenex of VC.
Power users aren’t driving adoption. Executives are (lol).
Another anecdote: the school we were hired at in Japan told us their high school and possibly upper middle school will never be full time face to face again. The transition was smooth, so they are planning to do two days face to face and three days online permanently. That will free up space for their elementary which will still need to be full time so parents can work. Crazy times.
Re:
https://softwaretimes.com/pics/talc-300.jpg
The current adoption is probably between Early Adopters and Early Majority and has at least two or three decades before it peaks.
this also means they are “Crossing the Chasm” and are about to enter a new phase of ubiquity
So, do you think they’ll:
A) Toss out the efforts and expenses associated with doing WFH in 2020?
B) Or, keep them ‘setup and ready’ but on the sidelines for the next crisis?
IMO, A. Definitely. They want to put this in the rearview mirror, and go forward as before the pandemic.
I think WFH was actually cheaper, but they want to halt it anyway. There really weren’t added expenses to that. Many folks have laptops (I’m an outlier that I didn’t want one, and so have a desktop). We already had licenses for Microsoft 360 and VPN and WebEx, so no cost there.
C) Grow Forward with permanent remote employees, as appropriate.
That would make sense, IMO, but I don’t think that will actually happen. I can only venture a guess as to motivations. Maybe employers feel they need to “supervise” (i.e. monitor) employees; observe the “slackers” first-hand, etc. When in fact I have seen reports that WFH has resulted in more productivity, not less. But companies (especially established companies) don’t care. That’s not “how we do business”.
Based on my limited sample size, I think companies will be recalling all workers and strongly discouraging work from home. I think it’s the wrong decision, but they’ll do it anyway.
1poorguy
1poorguy,
First post so be kind. Been following for months and have greatly improved my returns. Many thanks to all.
I see the future completely opposite of you. My company, large defense contractor with over 100k employees, has seen the benefits of working from home and is looking to keep that up for those that don’t need to be in the office.
In addition, we are switching in June-July from Webex, Skype and AT&T teleconference numbers to Zoom for Government with thousands of licenses to be purchased. We are already using Zoom for external hiring interviews.
We don’t see going back to business/operations as usual as there have been too many pluses from the current environment. Company has been encouraging work from home for a couple of years and this just triggered the ‘we can do this’ attitude by proving that it does work.
Again a limited sample size of one, but it’s a pretty large company and we’ll be using this tool to access our customers and our suppliers so there will be a ripple effect.
Legender
Again a limited sample size of one,…
Me too. I had hoped my company would realize WFH is superior (for those who can do it). After all, I’m a shareholder also (ESPP). But they don’t seem to.
People like me who handle product and/or use labs are different. But pushing papers -an important job, in case someone thinks I’m trivializing it- can be done remotely. The lawyers should never have to show up in the office, or the planners, or the purchasing people, etc. Meetings can be done remotely. Customer and investment conferences can be done remotely.
But (sample size of one), the powers that be don’t like it.
I won’t claim that for all companies, of course. But I don’t think mine is atypical. We also presently do not use Zoom (in fact, we are forbidden to use it or even have it loaded on company hardware). But that may change since Zoom apparently has fixed their security problems (at least I would assume given the security requirements of a defense contractor that they have met whatever standard is required).
1poorguy (always tries to be kind when discussing investing!)
My wife works for a very large healthcare company in a typical office like setting. She was always told that management was reluctant to allow work from home, though they usually had one day a week before this started. About a month ago she was asked to clear out her desk and forced to work from home permanently. Just one example affecting a few dozen workers, though others we’ve talked to are at least sticking with WFH until the fall or the end of the year.
There’s obviously no way to predict the actual amount of the workforce that will work from home more, and for sure some companies are itching to get back to regular business, but I’m pretty confident in saying it won’t be less than before the pandemic.
Like all the other long threads filled with anecdotes particularly regarding Zoom, any attempt to predict what’s actually happening and how it correlates to revenue is essentially futile.
…but I’m pretty confident in saying it won’t be less than before the pandemic.
Oh, I have to agree there. Definitely not less. Likely a bit more. I only am skeptical of the avalanche of adoption of WFH that some seem to expect. I’m not sure “a bit more” can drive the type of growth people on this board expect from their companies. Doesn’t hurt, certainly. But I’m skeptical it will be more than a small positive step function. Even though WFH makes tremendous sense (IMO).
I am so happy my post sparked this great discussion! Some points
On Models and Multiples
I totally agree with Bear about multiples. This is always the case. We can only really compare to recent history. If the market turns its back on us then multiples go down. This is just how it works. All models make some assumptions and an assumption is just an educated guess. Debating the inputs to the model (scenarios) is really educational and helpful. We can iterate on it; massage the numbers, see what we feel is reasonable. We have to accept that models are only as accurate as their inputs though.
On Flat QoQ Projections…
Remember the reason for the guidance of flat QoQ growth is the unknown impact of “churn”. There are a few kinds of churn I see here.
Consumer habits. I’ve tried really hard to ignore non-enterprise customers (customers with fewer than 10 employees I think is how Zoom refers to them). Individual users have a lot more options (Facebook, WhatsApp, Hangouts, Skype) and many, if they pay, are month-to-month. We don’t know how many will keep using Zoom as we relax social gathering and travel restrictions. There is still a good value proposition though so hopefully more than I think! Personally I never paid for my own but I use Zoom every day for work. According to comments below I am going to assume this is around 20% of revenue.
Enterprise. This is the big one. I don’t know how many contracts actually expire over the next three quarters. (Perhaps someone who knows how to read the cash flows can make an educated guess. I’ll paste something below in case it is helpful) I’m making a big assumption that the larger the company the more long term the decision to switch to Zoom is. Perhaps we will see more churn in customers with 10-100 employees? I’m not sure.
Also, Churn implies incoming as well as outgoing.
All I can comment on is what I hope will happen. I hope we don’t see too many individuals leave…say it is 50% and that accounts for 10% of Zooms revenue (again, a guess. I don’t know the real numbers), well then enterprise growth only has to grow 10% to make up for it to break even. I hope they do more than make up for it…and then there is expanding within existing customers via Zoom Rooms or Zoom Phone. This will be really interesting watch.
From Kelly Steckelberg, Chief Financial Officer, in the transcript: https://www.fool.com/earnings/call-transcripts/2020/03/05/zo…
“Turning to the balance sheet. Deferred revenue at the end of the quarter was $231 million, up 83% year-over-year. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $604 million, up 94% from $312 million last year. We expect to recognize approximately 62% or $375 million of the total RPO as revenue over the next 12 months as compared to 67% or $208 million in Q4 last year. This is a result of a mix shift between our current RPO, which grew 81% year-over-year, while non-current”
…and in the Q&A:
">>> Zane Chrane – Sanford C. Bernstein & Co., LLCq – Analyst
Hello. Good afternoon. Congrats on the great quarter. So I wanted to dig into the non-business customers a little bit. I know that’s only about 20% of your revenue at the time of IPO, but it’s important group in some ways just because it had a much higher annualized churn rate than I think your business customers typically do. Can you give us a sense of what portion of the revenue non-business customers comprise now and what that should look like over the next couple of years?
>>> Kelly Steckelberg – Chief Financial Officer
Yes. It’s actually been really steady at that same 20% of revenue for FY’20.
…
I mean – I think over time as we continue to focus more and more on the up-market, we’ll see that overall percentage decrease, but it’s been pretty steady and consistent over the last year.
>>> Zane Chrane – Sanford C. Bernstein & Co., LLCq – Analyst
And just to follow-up to that, have the renewal rates, the contract renewal rates either on a customer or dollar basis changed over the last year? I know you’ve talked about the net expansion rate, but before including upsell and seat expansion, how should we think about the trend for just contract renewals?
>>> Kelly Steckelberg – Chief Financial Officer
Yes. We haven’t seen any trade changes. It’s been pretty consistent. It’s holding pretty steady."
On the Numbers in My Original Post…
I didn’t put too much effort in to the revenue inputs in Scenario 2. I pretty much just assumed
That last point is the big one. If they grow at 15% QoQ then you can just about double the growth I modeled in.
On the Losing of Shirts…
To reply to the comment up-thread, I don’t think we lose any shirts here. I mean, this is just another guess at the future really, but as Saul pointed out, YoY, this all still looks a bit ridiculous to the upside. This is why I was looking at QoQ growth instead of YoY. I guess when we get out 5 or 6 quarters the YoY numbers will revert a bit, but by then I’ll have whole new sets of guesses at the future, and so will the market. I’m not capable of playing that game.
On Fearing the End of Work-From-Home…
I think Zoom may be indifferent to this. Going back to offices means more Zoom Rooms and Zoom Phone bundles…more integration. I know I, and my team, have grown to like the way Zoom meetings go over what we did before. I have to believe others feel the same. Then there are the customers who will have a portion of their employees work remotely regardless…work-from-anywhere, not just from home. There WILL be lasting change. I’ve seen company culture regarding remote work completely flip and everyone likes it. How much this is true in the borader world is just something we will have to watch and see.
More on On Fearing the End of Work-From-Home…
For Enterprises, it’s looking increasingly like it won’t be an “End”. It will be a decrease somewhere between mild and moderate, and it won’t really start until at least late July, and it will be gradual.
In our instance, we’re relying on Zoom newly for company-wide checkins (@350EEs) because we haven’t been successful at scaling Microsoft’s products to that level. Teams has not cut it, nor has the 2021-retiring Skype, but it could be an artifact of our lack of engineering expertise with configuration - giving MS the benefit of the doubt.
Many large employers are newly educated about the happiness of their “associates” not having to commute, the increased productivity (on average), and about the possible decreases in rent and utilities costs with an expanded WFH program.
Rafe,
Why the heck are you are estimating and quoting from Q4 back in March??? Zoom is a completely different ballgame this prior Q (reported June 4) and beyond. See my Zoom Q121 recap for links (hey… way easy to find that post now on the new DataHelper search page… wooooo!!): https://discussion.fool.com/zoom-q121-recap-34529119.aspx
This is the transcript you want to focus on: https://www.fool.com/earnings/call-transcripts/2020/06/03/zo…
In particular, that “consumers = steady 20%” mantra you just quoted multiple times from Q4 is no longer the norm.
CFO from CC: Year-over-year, we added over 206,000 new customers, growing 354%. … While this is remarkable growth, our customer segment with 10 or fewer employees also expanded during the quarter as individuals adopted Zoom for many personal and social uses. As a result, we have experienced a mix shift of customer cohorts, where customers with 10 or fewer employees represented 30% of revenue in Q1, up significantly from 20% in Q4. In addition, the increase in customers with 10 or fewer employees also shifted our billing mix as these customers generally pay monthly, rather than annually like most enterprise customers.
Consumers are absolutely part of the wave of recent success, going +1000bps as a percentage of total revenue as part of total customers skyrocketing. Considering that it was really steady at 20% in prior quarters as you highlighted, I think we need to consider that extra 10% of revenue ($33M of the $98M consumer part of revenue) as highly prone to churn, especially as pandemic and stay-at-home wanes.
-muji
long ZM
“Why the heck are you are estimating and quoting from Q4 back in March???”
To temper some of the crazy results they just had by mushing in some of the past and hopefully get a feel for 6 months down the road.
The point I was trying to make is that to get some rational numbers I looked to the past, the present, and guidance, and tried to come up with something like a reversion towards the past, but biased by the new Zoom. In other words, I’m making a guess at what the churn might look like. Since Zoom is a commonly known brand now, it is, as you say, playing a completely different ballgame…BUT…things will churn after this insane in-rush of business and then finally settle on some sort of new norm.
I don’t think it would be all that bad if customers representing 10 or fewer employees reverted entirely back to 20% of revenue if we get the enterprise growth I’m hoping for…those juicy longer term contracts with expansion optionality. This could happen through a combination of 10-or-more-employee-customers growing while paying individual users decrease.
Anyway. I’ll put a prediction in interweb-stone here: 1) They will do awesome and we will all be happy. 2) churn will hit customers with fewer employees, including individuals, more than the more valuable bigger customers. 3) #1 + #2 = beating that 1.8B guidance by a decent amount, bringing us back to #1 again…
This is all very hand-wavy, but I did say some of my “model” inputs were “educated guesses”!
Considering that it was really steady at 20% in prior quarters as you highlighted, I think we need to consider that extra 10% of revenue ($33M of the $98M consumer part of revenue) as highly prone to churn, especially as pandemic and stay-at-home wanes.
Yes, and it may be even worse than that. Half of all sales last quarter were from monthly customers. From the CFO in the call:
I want to make sure you understand that while we did see an increased growth of monthlies, as about half of our sales in the quarter came from monthly subscribers, when you look at the signals from our direct sales organization, the percentage of monthly subscribers was consistent with historical. So we didn’t see an increase in monthly subscribers in the up-market. We saw the same percentage as we have historically. And those typically – the churn in that segment, when they are annual or multi-year, is a fraction of what the monthly subscribers are.
My interpretation is that the large number of monthly customers - much larger than the 10 & fewer customers - is from companies trying Zoom out. And if they like/need the service longer, they may switch to annual contracts, which are cheaper in the long run. As the pandemic isn’t going away any time soon, the churn Zoom worries about may be reduced compared to expectations.
