Zoom: Prosumer vs Enterprise

Investment Analysis Clubs Saul’s Investing Discussions
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Pat Walravens of JMP pointed out these Zoom numbers, which I am unable to confirm:

For FY 2020 (ends at end of Jan 2020):
Prosumer Market (1-10 people): $150M/year revenue
Business Market (11+ people): $600M/year revenue

In Q1 2021 (Feb-Apr 2020), Zoom added:
Prosumer: $250M/year revenue
Business: $300M/year revenue

Thus, the Prosumer market went from $250M to $400M in Q1 (up 60%), while the Business market went from $600M to $900M (up 50%).

The worry is that a higher percentage of the Prosumer adds (which primarily have monthly contracts) will go away as lockdowns ease. As CFO Kelly Steckelberg said in the conference call:

Let me help provide a bit more context on the assumptions behind our guidance. As I discussed earlier, we have a far higher portion of revenue attributable to new customers with 10 or fewer employees, who opted for monthly contracts. Historically, monthly subscribers have a higher churn rate compared to annual or multi-year subscribers. In addition, as governments start to ease shelter-in-place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2.
https://www.fool.com/earnings/call-transcripts/2020/06/03/zo…

I would speculate that this is the concern and why the stock price initially dropped and now is up only 5% or so from before the call. A flat revenue in the second half of the 2021 year (Q3/Q4) after the growth they’ve seen in Q1 and early Q2.

Of course, they could be sandbagging, and they did say they might have to revise guidance. Props to them for not taking the easy way out, like Roku did, and not give any guidance.

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I fat-fingered the calculations, let me try again:

Thus, the Prosumer market went from $250M to $400M in Q1 (up 60%), while the Business market went from $600M to $900M (up 50%).

Should have been:

Thus, the Prosumer market went from $150M to $400M per year (up 167%), while the Business market went from $600M to $900M (up 50%).

Which better puts into perspective Mr. Market’s concern about future churn in the Prosumer market.

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Thus, the Prosumer market went from $150M to $400M per year (up 167%), while the Business market went from $600M to $900M (up 50%). Which better puts into perspective Mr. Market’s concern about future churn in the Prosumer market.

Smorg, do you mean that all those free users who will never pay for their subscriptions, signed up for $250 million dollars worth?

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 a doctor’s office, or a yoga studio, or whatever. One client a month well more than pays for their subscription.
Best,
Saul

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Smorg, do you mean that all those free users who will never pay for their subscriptions, signed up for $250 million dollars worth?

Thanks for the ribbing, but obviously there have been both free user sign-ups and pay by the month user sign-ups, and annual plan sign-ups.

If we take that $12.50/month, or $150/year, and assume Walravens’ $250M/year add during the quarter is correct, that comes to 1.67M new paying customer sign-ups during Q1. On top of the previous 1M monthly paying customers, that’s 2.7M monthly paying customers.

So first, 1M to 2.7M in a quarter is humongous growth! Zoom doesn’t disclose the number of paying users, so we have to reverse engineer the numbers. This CNBC article in Feb (https://www.cnbc.com/2020/02/26/zoom-has-added-more-users-so… ) cites Bernstein’s reverse engineering to these numbers:

Zoom had 12.92 million monthly active users, up 21% since the end of 2019, Chrane and Isaacs wrote, citing data from privately held Apptopia. “Zoom has added 3.5x more MAUs YTD [year to date] than the same period of 2019 (2.22 vs. 0.64 million), so even with half the normal paid user conversion rate, this would still yield 74% y/y growth in paid user adds YTD,” they wrote.

If we look at the 300M participant peak compared to a now 18M (? - I don’t know this number) paid users, that gives us a 15:1 ratio of participants to paid users. What’s the average number of meetings per day for paid and for free users? Maybe someone smarter than me can figure out the ratio of daily meeting participants to paid users to help us map out the future.

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 a doctor’s office, or a yoga studio, or whatever. One client a month well more than pays for their subscription.

Well, Zoom management thinks otherwise:

Historically, monthly subscribers have a higher churn rate compared to annual or multi-year subscribers. In addition, as governments start to ease shelter-in-place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2.
https://www.fool.com/earnings/call-transcripts/2020/06/03/zo…

And that last part is probably what prevented the stock price from taking off. Mr. Market is near-term future-oriented, and Zoom management is saying that revenue the second half of 2021 will be flat compared to the first half. Also, note that as a percentage of revenue, expenses declined, but that trend is going to go the other way, as they said in the call:

In FY '21, we plan to continue investing in R&D to drive innovation and security functionality, including leveraging the expertise and resources from top security firms. Also, we recently announced the addition of two Engineering Centers of Excellence where we expect to add up to 500 software engineers in the next few years. The new R&D centers in Greater Phoenix, Arizona and Pittsburgh, Pennsylvania will both be located near top engineering universities.

Like I said, they could be sandbagging, or maybe they really just don’t know, or some combination of the two. You have no argument from me that Zoom is the go-to video conferencing product for consumers and small businesses. I still think they have a battle in front of them against Cisco and Microsoft, but luckily for Zoom those companies seem to rely more on package deals than having a best-of-breed product. But, of course, we all remember that Beta was better than VHS, in terms of product quality.

One last note on the latest end to end encryption kerfuffle. I think Zoom took the wrong approach for explaining to whom they were going to roll it out. Instead of talking about big brother and government invading privacy, they should have simply said that e2e encryption is an advanced feature for which we need to charge, especially since it’s costing us so much to develop. No-one else gives away e2e encryption video conferencing.

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Thus, the Prosumer market went from $150M to $400M per year (up 167%), while the Business market went from $600M to $900M (up 50%).

Smorg,

150 + 600 = 750 million…I guess that’s about what the run rate was after Q4.

400 + 900 = 1.3 million. That’s not even close to what the run rate is. They guided for 500m in revenue next quarter. So the run rate is 2 b+.

I think this is completely wrong:

In Q1 2021 (Feb-Apr 2020), Zoom added:
Prosumer: $250M/year revenue
Business: $300M/year revenue

…you mentioned a name but didn’t provide a link. Do you have one?

Bear

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I know we don’t want to get into a list of Zoom anecdotes, but just briefly to mention our experience as a very small business…
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.

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Hi Saul:

I’m one of those use cases. 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. The individual I take music lessons with, for example, 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 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.

Finally, I do believe that Zoom needs to capitalize on these new use cases by allowing the quick configuration of settings for specific use cases. For example, there are several audio settings that need to tweaked for Zoom to be used successfully for music, just as there are for providing training sessions. I suspect that once Zoom has completed its security overhaul it will begin to provide a set of customized settings for these various use cases and further cement its ease of use for small businesses.

Take care, Doug

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One of the interesting things I got from the Zoom call was Eric’s vision to make Zoom/Video the new voice. He is envisioning that customers don’t call businesses on the phone, you Zoom them.

That market is enormous and if your infrastructure is already paid for (datacenters) to support your enterprise clients…?

cheers
Greg

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But who’s waiting to answer…? You meet ‘in the middle’ with Zoom, right? It takes two to tango, and all that?

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Smorg, do you mean that all those free users who will never pay for their subscriptions, signed up for $250 million dollars worth?

Thanks for the ribbing, but obviously there have been both free user sign-ups and pay by the month user sign-ups, and annual plan sign-ups.

Of course I was ribbing you, but gently. You maintained all the way through that there would be almost no revenue benefit from all those 300 million new participants. I truly wasn’t able to see how you could convince yourself of that.

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 a doctor’s office, or a yoga studio, or whatever. One client a month well more than pays for their subscription.

Well, Zoom management thinks otherwise:

Historically, monthly subscribers have a higher churn rate compared to annual or multi-year subscribers. In addition, as governments start to ease shelter-in-place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2…And that last part is probably what prevented the stock price from taking off. Mr. Market is near-term future-oriented,

Smorg, You seem to try so hard to find the negative. Are you truly unaware that they forecast $500 million in revenue for the 2nd quarter (next quarter), and that means that they are predicting that revenue will be up 242%. And obviously they plan to beat that in spite of all their cautiousness. Let’s say they beat it by 7%. That’s a reasonable beat. That means they will actually grow revenue by 260%.

And then, out of an excess of caution, they say that the 3rd and 4th quarters will be “only” equal to the second quarter, to allow them to raise estimates each quarter. And you think that this is bad news, and Mr Market doesn’t like it. I guess that Mr Market is really unhappy with Zoom! That must be why Zoom stock is only at 309% of the price that it started the year with. And that’s in just a little over 5 months! Can you imagine where it would be if Mr Market was “happy” with them?

And don’t bother telling me that I don’t want to hear the negative. I’m responding with facts, not pumps.

Saul

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150 + 600 = 750 million…I guess that’s about what the run rate was after Q4.

OK.

400 + 900 = 1.3 million. That’s not even close to what the run rate is. They guided for 500m in revenue next quarter. So the run rate is 2 b+.

Actually, 400M + 900M = $1.3 billion
And they expect to have growth from Q1’s 328M to a Q2 of $495M-$500M.
They also guided for the whole of 2021 to have revenue of $1.775 B to 1.8B.
Finally, they also said Q3 & Q4 would be “relatively consistent with Q2.”

The numbers all add up:

Q1: $328M as reported
Q2: $495M as guided ($500M high end)
Q3: 495M (consistent with Q2)
Q4: 495M (consistent with Q2)
2021: 328+495+495+495 = $1.81B

Nothing wrong at all. They guided for no revenue growth after this current quarter. And that’s why the stock hasn’t moved much.

No-one’s asking this, so I’ll stick my neck out: with no revenue growth past Q2 why are we staying in ZM? Do we think management is sandbagging? Do we think it’s a long term play and that 2022 will see even more growth? Some combination of the two?

…you mentioned a name but didn’t provide a link. Do you have one?

It’s the video in this link: https://finance.yahoo.com/news/zoom-valuation-has-entered-un… which is different than the text of the story.

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Of course I was ribbing you, but gently.

Like I said, I appreciated it. A good ribbing is a sign of camaraderie.

You maintained all the way through that there would be almost no revenue benefit from all those 300 million new participants.

Did I? That’s not the kind of statement I think I would make. I did a search and here’s what I did say:
It’ll be interesting see how the 300M daily meeting participants number translates into actual paying users.
https://discussion.fool.com/they-never-said-they-had-300m-users-…

and

I think it still remains to be seen how many new paying users Zoom can attract. And as I’ve said previously, it may just be that Yuan is now being forced into radically changing his company’s culture and focus in ways that may just expand its business more than if they had stayed on the same “ease of use” tract.
https://discussion.fool.com/after-reading-your-last-5-or-6-messa…

Smorg, You seem to try so hard to find the negative.

Indeed, a company has to earn my investment. Don’t we want to utilize critical thinking?

Are you truly unaware that they forecast $500 million in revenue for the 2nd quarter (next quarter), and that means that they are predicting that revenue will be up 242%.

As I’ve posted, I’m completely aware that the revenue forecast is for $495M to $500M in Q2. With Q1’s revenue being $328M, however, that’s a sequential quarterly growth of about 52%. You must be measuring quarterly growth YoY, which to me right now is less interesting considering what the stock price has done since 6 months ago.

Note that Q1’s growth over 2020Q4 came in at about 74%. So, the “Covid Effect” is stabilizing, as expected.

What concerns me now is that Zoom actually forecasts revenue to be flat from Q2 to Q3 and from Q3 to Q4. Do you view this as sandbagging? If revenue does indeed stay flat from Q2-Q4, then with expenses going up (hiring hundreds of software engineers, etc.), what’s the near-term rationale for staying in ZM at this time? Couldn’t we find a company with actual growth these next 9 months and then come back?

And don’t bother telling me that I don’t want to hear the negative.

Saul, I don’t believe I’ve ever said anything like that to you before. If I have, I’m truly sorry.

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And don’t bother telling me that I don’t want to hear the negative.

Saul, I don’t believe I’ve ever said anything like that to you before. If I have, I’m truly sorry.

No Smorg, you didn’t. I guess I was just overly sensitive because some people have accused me and the board of being overly positive on any stock which we were following, and of avoiding looking at the negatives — which seemed odd to me as I was also questioned for getting out of companies where I did see the negatives (like Elastic, Twilio, Square, Roku, Zscaler, Nutanix, etc, etc).

I do apologize for falsely accusing you of that.

Best,

Saul

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Hopefully, this remains productive. I didn’t respond to this part but I think it’s worth a discussion:
And then, out of an excess of caution, they say that the 3rd and 4th quarters will be “only” equal to the second quarter, to allow them to raise estimates each quarter.

OK, so you made me look again at what CFO Kelly Steckelberg said in the call:
[prosumer]churn will be escalated in terms of historicals. 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?

And you think that this is bad news, and Mr Market doesn’t like it. I guess that Mr Market is really unhappy with Zoom! That must be why Zoom stock is only at 309% of the price that it started the year with. And that’s in just a little over 5 months!

Well, remember that ZM tripled before the earnings announcement. I am very happy with that outcome, but Mr. Market is a forward-looking beast (near-term forward anyway). I think it’s obvious that a big portion of the revenue increase was already priced into the stock (aka expected), so the forecast that growth will be flat for the second half of the year is indeed chilling on the stock price. What saved the day there was that there will be another 52% growth in Q2.

While the revenue numbers were extremely good, I think they were just a bit over what was expected. I believe what really blew most of us away was the increase in numbers of paying customers. There was growth across the board, from the 10 & under “prosumers” up to the big $100K per year whales. And I think the stock would have popped if they hadn’t talked so convincingly about predicted increased churn of the monthly customers.

I think an investment, or continued investment, in ZM today has to be predicated on the company’s revenue increasing and the customer churn to be less than the company predicts. Is that what you expect, or something else?

Can you imagine where it would be if Mr Market was “happy” with them?

Frankly, I was trying to imagine that. I usually don’t disclose my trades for a variety of reasons, but I did sell my ZM at $208 for almost a triple overall just before earnings were announced, and went into a speculative Straddle options play to catch either a pop or a big disappointment. That was clearly not a smart move, but I can get back into the stock for only a 2% penalty right now.

And I’m happy to do if there’s a bull case from here that I can get behind.

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Zoom guiding $1.8 B likely means they will do a lot more and even if Q3/Q4 appears to be flat from their guidance, it will most likely be a lot more.

In Q2 they guided 155 M / 590 M (Q3 / Year End), in Q3 they did 167 M (beat by 12 M) and then forecasted 176 M / 611 and in Q4 they did 188 M (beat by 12 M again) and finished at 623 M (5.5% beat from Q2 guidance). They guided 201 M / 915 M for Q1, clearly they destroyed that.

Based on the momentum they have given COVID and the huge number of 100k customers they’re bringing on, Zoom will probably do $2 B+ this year.

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A neighbor who had been using the free and limited minutes plan, said last night that she opted for the $15/month plan. The website calls it “pro” and it’s 14.99/month.

That’s pretty cheap for the many, separate groups to closely stay in touch with.

HP

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Any of the prepaid plans (Annual) would have to be spread out onto future quarters,right? Did they say anything specific about how many annual prosumers they signed up?

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Did they say anything specific about how many annual prosumers they signed up?

See this post: https://discussion.fool.com/vetting-the-265400-number-further-fr… for the numbers I pulled from the earnings call.

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what if Zm just decided to cancel the free plan and charge everybody $5/mo.
They can raise it a buck every year or two like NFLX.
Is this not a possibility?

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Hello Smorgasbord1,

I’m not sure that you should pay any attention to this for I am one that has seriously reviewed ZM several times and always passed because of “valuation issues”.

Today, I established a 12% beginning position based on yesterday’s report.

I understand your issue with the prosumer churn, but to me it is a non-issue. The entire prosumer segment of revenues was 30% of total revenues. The other 70% are comprised of larger,mostly enterprise customers. This number grew in the quarter by 184,500 (several years of historic growth here). I don’t believe this number has stopped growing. I don’t believe that many of these are not prospective for Zoom Phone and any other products that Eric and his pals devise.

As to the churn, I think there is a prospect that the expected churn will be much lower given to the number of annual contracts put in place and the number of existing “free users” that will sign up for the small monthly fee.

I am not sure here that sandbagging is the correct characterization rather than taking advantage of facts and circumstances to make an ultra-conservative projection. Nonetheless, I am betting that Q2 revenues will be closer to $600 mil. and that the FY will be above $2.2 bil.

Please know that it was a big stretch for me to pay 25+ times enterprise value for CRWD in Dec. and I never dreamed that I would pay the multiple of revenue that I did today for Zoom. Perhaps the most surprising thing about it for me was that I have done it with such confidence.

Best regards,

Mike

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