Zoom: Prosumer vs Enterprise

The thing to me about “prosumers” is these are the customers that create a network effect. Each enterprise customer operates in a closed system. The employees talk to one another in an easily replaceable videoconferencing system. A company could switch to zoom or off zoom overnight. But prosumers start using zoom because that’s what everyone else uses. So it caused momentum in growth. It will all be very interesting to see how this works out.

1 Like

“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

41 Likes

Hi,

Think about the Zoom sign in page. Look at all of the real estate surrounding the log in area that they can monetize. Sell more Zoom products. Sell an add relevant to a conference. Sell an ad for solar panels. Targeted advertising,coupons,sponsor meetings such as music lessons by advertising a sale on violins. I think that maybe they will start with the free users and present tasteful relevant targeted advertising. Even if it is just 3 seconds. Follow this up at the end of the conference when the user logs off. Maybe this will happen when the solidify their position as the Kleenex of on-line meetings. Trying to think outside of the box and hoping to contribute more here.

Jodi

5 Likes

Targeted advertising,coupons,sponsor meetings such as music lessons by advertising a sale on violins. I think that maybe they will start with the free users and present tasteful relevant targeted advertising.

The CEO stated that Zoom would not sell user information. Advertisers would have no way to target users otherwise so ads won’t be a part of their revenue stream going forward. They need the user experience to be the best and that is where they are rightfully focusing efforts.

Selling user info walks a fine line on security aspects and Yuan is not going to compromise on security now.

AJ

2 Likes

Hi AJ,

Maybe I didn’t articulate it or think it through enough. Potentially a “Meet Up” Book group for instance meet once a month perhaps a book seller could post a top seller or a Zoom meeting perhaps targeting build your own soap box car might be sponsored by an rubber wheel maker.

I am thinking way down the road about other revenue possibilities.

I wonder with the possible advent of 5G would the quality be enhanced to much that the look could rival broadcast quality? Will they come out with a way to really build out the platform so you can build the look or a TV news show?

It’s fun watching them innovate by watching them roll out new features.

Jodi

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.

As far as churn, the amount of churn is not going to be anywhere near … Zoom’s worst case scenario that they are basing their guidance on.

OK, so you do believe they’re sandbagging, or at least playing it safe. I would have thought that, being a month into the quarter already, they would have some insight into churn rates.

So, I went back to the call transcript, and while the CFO does say a couple times that they expect “multiples” of the historical churn rate, which is much higher for monthlies than annual subscribers, the CFO also did say a few times (3 actually) things along the lines of we are taking a very conservative approach and assuming that the historic norms don’t yet applied to this new cohorts, both from the magnitude as well as the potential around economic uncertainty.

So, I’m almost there (and could buy back in at 4% less than I sold before earnings) - does Zoom management have a history of being conservative in their guidance?

Zoom gang…

lot of great discussions here… I saw someone just took a 12% position after latest report… thats a big confidence boost.

after a lot of churn in my head (and also some loss making trading efforts) on Zoom in last two months, I did buy few calls going into earnings call based on confidence in this community (specially Bear… who is more sensitive to valuation as far as I know)… and I am glad I did that.

After going through earnings transcript - one thing that stuck to my head is that Eric is now going after enterprise phone opportunity… to each and any question on future growth they just came back with - we see upsell opportunity for voice / phone in enterprise… remember specifically UPSELL… not looking for new phone only customers… just add phone bundle to video conferencing and make it easy to use both.

Now, this may be counter intuitive but I suspect that $TAM for phone / pbx is larger (probably multiple fold) in enterprise market than video conferencing… so even with $TAM growing for video and $TAM reducing for phones, this is still a big opportunity and almost gurantee to more than double their $ from each enterprise customer… this to me is big big potential…
And yes, I will convert my call options into buying those stocks at ~$190 as I now see a path for Zoom to double or triple from here.

Thanks again to Saul, Bear and others who consistently kept educating on Zoom.

3 Likes

So, I’m almost there (and could buy back in at 4% less than I sold before earnings) - does Zoom management have a history of being conservative in their guidance?

They’ve only been public for a year. The following guidance is based on high end, and actual revenue rounded down.

2020Q2 guided to $130, came in at $145
2020Q3 guided to $156, came in at $166
2020Q4 guided to $176, came in at $188
2021Q1 guided to $201, came in at $328
20201Q2 guided to $500, TBD

I think it’s safe to say they are going to be conservative. Given that the quarter is about a third of the way over when they provide guidance and the majority of their revenue is subscription (maybe even already in the bank), they have very good visibility into the upcoming quarter.

I do think the 3rd and 4th quarters will show less QoQ growth than Q2 since many of the businesses that will need to sign up due to COVID will have already done so and perhaps a lot of business was pulled in from the following years. Instead of 12-14% quarterly growth maybe it’s only 8% (wild guess) because very small businesses and individuals are likely to provide little or no revenue expansion, or even revenue contraction. But that’s part of the promising thing about the 500+ customers added with an annualized spending above $100k. Those will more likely show the 130+% DBNER.

Based on the earnings call I suspect Zoom recognizes that they’ve pulled in a lot of “lands” so they’ve shifted focus more toward “expand” and new uses. Yes they can still displace Cisco and Microsoft but maybe it’s not as worthwhile.

I’d love to see them try to displace customer service. Instead of phone calls, offer a way to allow companies to offer a Zoom session. This could be initiated via chat, text, or phone call as the customer waits in line.

9 Likes

I’ll throw on an extra testimonial from a dog trainer we know. She has been training for years, and had been offering Zoom training for ~a year when “Stay At Home” hit.

• She was able to keep most of her clients, via Zoom.
• She finds the training is more effective (because her actual presence is more distracting to dogs than a laptop is)
• She is definitely looking to continue Zoom training as a significant portion of her business. (Because it is more effective, because she can do more in a day, etc.)

She was asking us to give a testimonial statement for her to put on her website about the Zoom training experience, because she’s already thought about the whether/how to get/keep clients via Zoom sessions.

Interestingly, she also uses Google Classroom for distributing training content, so Google “Meet” should have been an option?