Wow. Today has been a day of important announcements from Zoom, and at the end of it, it feels like Zoom’s total addressable market has just got a whole lot bigger. Zoomtopia feels like a very apt name in this moment.
There has been much talk in recent times over Zoom’s valuation and how much room it has to grow. Well today not only did we get reassurance of Zoom’s penetration into its video conferencing market, we also got an insight into alternate, complementary markets: OnZoom and Zoom Phone.
First off, this morning we got a teaser from Zoom ahead of its first ZOOMTOPIA day of the week, with the following announcements of new features and innovations:
The top announcement from this release was regarding the release of OnZoom:
Today, Zoom proudly unveils the public beta for OnZoom, a one-of-a-kind online events platform and marketplace that supports – and salutes – the creativity, perseverance, and innovation that enabled so many people to adapt their in-person events to virtual or hybrid experiences.
An extension of Zoom’s unified communications platform, OnZoom is a comprehensive solution for paid Zoom users to create, host, and monetize events like fitness classes, concerts, stand-up or improv shows, and music lessons on the Zoom Meetings platform.
I’d highly recommend reading this blog about OnZoom, citing partnerships with Weight Watchers, Life Rolls On and Beautiful Destinations (with a nice complementary video):
A year ago Zoom was primarily a B2B video conferencing solution. That was its market. However due to the pandemic it has also been propelled into the consumer market. I had recently watched an interview between Eric Yuan and Matthew Prince (the Cloudfare CEO) (https://cloudflare.tv/event/1X1beCKdopiVKzGA8MBlno) where Yuan hypothesises how they might be able to monetise this opportunity.
Well today, it feels like we have a glimpse of what that is going to look like, with Zoom pivoting by offering a B2C streaming platform, hosting events, digital workshops and shows. This feels like a VERY meaningful move.
The Analyst Call
And the event that I was waiting for all day, and which I have just got off was the Zoom Analyst call. Here are some highlights I noted during the call:
Annualised Meetings Minutes Run Rate
Q121: 2.6 trillion
Q221: 2.0 trillion
Q321: 3.3 trillion (!!!)
Kelly Steckelberg (CFO): the downward fluctuation over the summer months in Q2 while annual meeting minutes increased in Q3 is due to schools reopening. This does NOT necessarily correlate to revenue (we must remember that Zoom has offered free service to 125,000 schools. Zoom should be in a good position to monetise these in due course).
Opportunity and Financials
Zoom Rooms aimed at the growing customer segment <10 employees (36% of revenue) (see later for how this segment of customers is being targeted by OnZoom, perhaps with an end goal of ‘adding value’ by creating stickiness and reducing churn).
Of the Global 2000 (biggest 2000 listed companies worldwide) there is only 12% penetration of potential customers spending over $100k (!!) (Zoom currently has half that market share). Zoom grew its Enterprise customers >$100k 112% in Q2. There is therefore significant opportunity here for Zoom.
Financial Services and Tech are the biggest industries of Zoom’s Global 2000 customers, but Kelly noted that government and learning were fastest growing segments within that.
31% of revenue was international in Q221 (+629% YoY!!) compared to just 19% in Q121. India is the fastest growing among that.
Zoom Phone (!!!) Market opportunity of $23bn by 2024 (!!!) This almost DOUBLES Zoom’s estimated UCAAS total addressable market in the same period. Now offered in 43 countries (a 44th country, South Africa, signing later this week).
High demand for large virtual events. Annualised webinar minutes up from 3bn in Q420 to 45bn+ in Q321 (this helps highlight the OnZoom opportunity for live events).
Gross Margin long term outlook updated to 80% (72% in Q2), and operating margin 25% (42% in Q2). Sales and Marketing expenses outlook of 30-35% (Q2 19%), as Zoom has benefited from brand awareness and sales efforts in Q2 but expect to pick back up in post Covid world as they host more events.
There was a lot of detail on Zoom Phone. What I picked up from it is:
GROWTH OPPORTUNITY! 22% of Phone customers are new to Zoom. This means that they’re buying the entire platform (Phone and video together), giving huge traction to upsell. The ‘Head of Zoom Phone and Rooms’ cites a huge transformation in the market.
While Phone has expanded from 18 countries in March 2020 to 43 countries today, they are only at 13% of revenue - offering significant international growth opportunity.
Education has growing significantly quarter on quarter (perhaps unsurprising with schools reopening).
Guest speaker Jill Porubovic (SVP Technical Workforce of Discovery Inc), then offered a really interesting insight into the customer side of things:
She cites moving to Zoom Phone due to cost to alternate vendors, and change of management costs and stressing that the labour cost is very important. There are labour costs of mantaining on premises platforms, the licenses for that, so Zoom offers the customer economies. She cited $1m savings from Discovery Inc of moving to Zoom Phone. She says that businesses will go with best of breed - and that is Zoom. She cites a strong desire to maintain hybrid working environment
(To me this seems fantastic, if Zoom can incentivise customer growth by offering them cost reduction, while monetising that).
Eric Yuan:‘Thank you so for much for your support. With customers like you, life is great’.
(side note: I have noticed that every conference call I have seen Yuan on, just how enthusiastic and appreciative he is for whoever he is talking to, especially customers).
Ryan Azus, Chief Revenue Officer: Phone is a huge opportunity, but has a relatively slow sales cycle. Can take a little while to get migration over the line. (Hint perhaps not to expect significant upside in Q3 from Phone).
Analyst: Is the pandemic an obstacle to deploy phones? Pent up demand from when offices reopen?
Ryan: Yes there will be some pent up demand. We have seen a lot of success with it. We are aggressively getting word out. People are changing their Zoom footprint. Customers still figuring it out, their Zoom Phone journey.
Kelly: To get full native deployment, we need international presence in all markets (43 markets today).
Yuan steps in: video and phone are CONVERGED. We are not viewing them as separate solutions. It’s just another way to launch a Zoom meeting, through a phone.
Yuan announces that he is having a fireside chat with the CEO of NVIDIA tomorrow. He is going to talk about NVIDIA’s new AI video improvements, which is what Eric wants to leverage.
(Despite the headline of the subsequent article, I don’t see NVIDIA’s new features as a threat to Zoom here, but rather an opportunity to improve its platform (as Yuan has just hinted at):
Analyst: what about the monetisation of Zoom? For the new products and compared to the past?
Kelly: 1. Portion of new products will be a revenue share model and 2. through tips customer can generate. Still very early stages, not necessarily seeing anything there yet.
Yuan: Zoom is a knowledge sharing platform primarily. Like Uber or Airbnb - huge opportunity. (insinuation being is that they can demand higher prices).
He reiterates the importance of talking with customers, understanding pain points, improving features based on feedback. All Zoom products are one team.
Ryan: The brand is not reliant on channel presence. But can leverage channel relationships, which is more important on the international scene (eg Japan).
Analyst: question on competition, specifically Mircosoft Teams. How do you protect yourself from them? Despite your integration with Teams too?
Yuan: Enterprise customers use something from Microsoft. Their culture is getting much better. We are very good partners with Microsoft. Many customers employ both Teams and Zoom. Teams is for file sharing, next gen share-points, Zoom for webinars, video compatibility. Different functionality. The Enterprise opportunity is huge. Enterprise customers need two solutions - what if there’s an outage - they need a back up. He is not considering Microsoft a competitor, but looking to optimise on the partnership & opportunity.
(Clearly Yuan thinks the market is big enough for both of them.)
Analyst: How do you compete against Cisco, are you having any sales success against them despite Cisco maintaining dominant share of Global 2000?
Ryan: we have had a lot of success there, through innovation and product, and through channels. Lot of Cisco customers are coming over to Zoom and at least adding it to their portfolio. (I interpreted this as a very bullish response).
Yuan: culture is the MOST important thing. There has been so much work. Without culture, employees would have given in. No one is complaining, every realises what an opportunity it is. But it is difficult, and working from home so long. Mental health is so important. How can we reward employees? For example with share bonuses. Employees are so passionate, we know how important to support customers through this period.
Analyst: What about your global workforce? Political pressure on where traffic goes (eg China). Where can Zoom expand R&D workforce?
Eric: core engineering team is in USA. More and more engineers in the USA, double down on that. Also opening big office in Bangalore and Singapore. Given anyone can work from home, great opportunity to hire engineers abroad. It’s a trend - for every company all over the world. Don’t need engineers just from Silicon Valley any more.
Analyst: Zoom Chat? How is that being integrated?
Eric: need to have that feature built in. We are integrating very well with Slack and Teams, need to give customers flexibility. Don’t want to build own chat to rival Slack, not Zoom’s focus (video and voice is) - but how do we integrate with those platforms.
Analyst: What is some of functionality in Zoom as a platform that is not there today?
Yuan: Zoom is people and product. Video is the people part of the platform. You could make a cooking class on Zoom, knowledge sharing aspect. On product part, you can embed API on to the platform. We can allow all other applications embed into the Zoom interface. For example Dropbox, or mental health apps. Platform is the huge opportunity.
Analyst:How do you comp this exceptional growth year in future years, incremental growth in future years?
(A key question, at this point I was interrupted (bad timing), but from what I captured:)
Yuan: Growth will be achieved through the platform and integrating applications.
Kelly: How these platforms are contributing to revenue won’t be given until Q4 guidance with a view to 21/22. This will be the first view of it.
Analyst: How is churn being affected?
Kelly: we still don’t know. Still in early stages. New consumer focus. OnZoom is now trying to bring more value, streamlining for consumer and small business. (I see this as trying to create more stickiness, for smaller customers more prone to churn).
Analyst: Long term margins? More colour on the upside long term?
Kelly: op margin so high in Q2, due to severe acceleration of revenue, too quick from a hiring perspective but this is not sustainable. Need to expand sales org and build capacity for longer term growth, or burn out employees. This is why the expansion of S&M and R&D in future, which is too low currently.
All in all, a very impressive ZOOMTOPIA.
This seems to be a company that just keeps on executing, and growing with management’s vision. For me, Zoom is still king of the castle.
(An aside: Fastly had just jumped into top place of my portfolio this week with the latest run up and I had intended to top up Zoom to reclaim top spot. With Fastly’s 30% drop after hours, at least I don’t have that problem any more. Feeling slightly Foolish, that’s the first, and last time I try and predict guidance - clearly TikTok was not baked in nor was there the usage upside as assumed, perhaps by the market too. But let’s remember the share price is back to where it was a few weeks ago, and will mostly likely recover on the next good news).