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Zoom: What Now?
An article by • Published Dec 4, 2020

Zoom Video Communications, Inc. ($ZM) announced 3Q earnings on Nov. 30th


We ended the quarter with an annualized run rate of 3.5 trillion meeting minutes, approximately 75% growth quarter-over-quarter.


Zoom had amazing 3Q numbers, but who cares. Going into the print at 55x this year's sales leaves little room for error (there was really none) or concern. Growth in a post-COVID world is what the investing world is increasingly concerned about. The stock fell 15% the following day shaving 9-turns off this year's sales multiple, despite numerous positives data points due to investor focus on:
Churn, especially in the less-than-10 customers base
Margin hits resulting from free customer usage
Growth and adoption rates of newer products such as Phone, Rooms, Webinars, OnZoom, App Marketplace and SDKs and APIs for white label development
Ability to compete with Microsoft Teams
Revenue: Total revenue for the third quarter was $777.2 million, up 367% year-over-year.
Approximately 433,700 customers with more than 10 employees, up approximately 485% from the same quarter last fiscal year. 1,289 customers contributing more than $100,000 in trailing 12 months revenue, up approximately 136% from the same quarter last fiscal year. A trailing 12-month net dollar expansion rate in customers with more than 10 employees above 130% for the 10th consecutive quarter.
Full Fiscal Year 2021: Total revenue is expected to be between $2.575 billion and $2.580 billion. Non-GAAP income from operations is expected to be between $865.0 million and $870.0 million. Non-GAAP diluted EPS is expected to be between $2.85 and $2.87 with approximately 300 million non-GAAP weighted average shares outstanding.

Earnings Call Highlights

Continued upmarket expansion, with customers > $100K +30% sequentially versus +17% for all customers.
Would do M&A to expand talent or technology
Zoom Phone was the fastest growing product in 3Q and they landed the biggest phone deal ever
ZM expects many customers to embrace hybrid work models post-pandemic
And then in terms of Zoom Phone, what's great about this, we have seen consistent performance across all segments of the business all the way from small business up to enterprise. In fact, as we continue to see strong performance in Zoom Phone, we once again had our highest deal to date in Q3. So very excited about continuing to see progress there.
And then in terms of call center strategy, we agree with you. The call center, contact center is a really important part of the strategy around Zoom Phone. And the way we're approaching that today is through partnerships with many of the great contact center providers that are out there today. And we think that works really well as we have strong integrations with them. And it gives our customers the opportunity to work with the contact center provider of their choice but to do it with Zoom Phone in a very seamless way.
In terms of OnZoom, yes, it is still in beta at this point. And we have not yet announced what our monetization strategy is around that platform. We've certainly been working on it internally, but we're more focused on ensuring that the platform is ready and is meeting the needs of not only the host but also the customers and making that a really seamless transition or transaction for them.
And then in terms of cash balance and M&A, we certainly continuously watch for opportunities to do something with that cash that would be additive. I think we've talked about it in the past, we would look for opportunities in M&A that could either extend our technology or our talent. And those are the 2 areas that we're continuously watching for the right opportunity.
Kelly Steckelberg•Zoom Video Communications, Inc. CFO: We haven't seen a significant change in our overall deal size. If you remember, land and expand is still a very important part of our sales strategy. And we see customers doing that. We also see customers that are starting with, for example, Zoom Meetings and then add on -- 2 of the customers we talked about today, Peloton and Rakuten, that added on Zoom Phone later. So not really a significant change in the overall deal size, especially at the start.
Kelly Steckelberg•Zoom Video Communications, Inc. CFO: No. It's -- the churn correlates somewhat to the overall pandemic. And so as we continue to see uncertainty in terms of markets, locations with shutdown or shelter-in-place orders, we see variance. We see the most volatility, of course, in the segment of customers with 10 or fewer employees. But even that was at an improved level than what we were originally forecasting. As I talked about before, that's due in part to these actions where we're having success in converting customers from monthly to annual contracts.
Kelly Steckelberg•Zoom Video Communications, Inc. CFO: Yes. So I think if you look across some of our areas of functional spend, we want to continue to invest in R&D. That is an area we are absolutely focused on prioritizing hiring at 3% of revenue. We would really like that to be closer to our long-term target margin of 8% to 10%. And then, of course, in sales as well, focusing on adding sales capacity and also spending a little bit more around marketing as we think about promoting Zoom Phone and some of the other new products and platforms like OnZoom. So those are the areas that we're thinking about investing in, and that's -- as we said, over the long term, why you should expect to see that margin continue to decrease.
First of all, the remote working trends that started pre-pandemic have certainly accelerated during this period of time. And while we all hope for a vaccine as soon as possible, I think that remote work trends are here to stay. And we're excited about some of the features and functionality that we announced at Zoomtopia, for example, to enable this and to support customers and employees that are thinking about eventually going back to work likely in some sort of a hybrid work environment. So these are things like Smart Gallery, which are really meant to enable better communications when people -- some of the employees are working remotely and some of them are in the office.

What Now?
Look for Zoom FCF margins to come back to earth. Cost structure implied FCF margins suggest ZM is 'over-earnings' on its FCF margin to the tune of about 20% - because of the deferred revenue benefits from its hyper-growth. Gross margin pickup with lower free usage could help offset some of the degradation. Zoom discussed disclosing the cost of free users, but the margin hit is unknown today.

Expect Zoom to spend its cash on R&D and M&A to broaden its product depth, reach and stickiness. Microsoft Teams and Slack (working on video product with Amazon) combined with Salesforce present significant competition for Zoom, with fully-integrated chat and workforce collaboration tools, and Office 365 integration in the case of $MSFT. Zoom needs to offset churn, especially at the low-end. UCaaS platform buyers who integrate ZM video, voice and chat are at lower risk of churn, but > $100K customers only represent 18% of revenue. Zoom has significant headroom to increase R&D to its long-term target after being unable to keep pace with top-line growth.
Potential public equity targets. Mostly spaghetti on the wall suggestions, but why not $API for talent and technology. $FIVN, $EGHT, $BAND or $RNG for call center or voice momentum. Perhaps a merger with $DOCU to own the business meeting and documentation segment. Or perhaps ZM can leverage its inroads into the education markets with horizontal acquisitions of online learnings or telehealth vendors such as $TWOU or $TDOC competitors.
Has Zoom created a brand moat? Zoom is more than a brand. It's made itself a verb in society - "let's Zoom." Young children and teens are using Zoom for online school. Teens use to connect with friends, meet with coaches, and even practice. Adults are taking workout classes, or having drinks with friends virtually. Zoom is synonymous with video chat, but can it last with SDKs and APIs from Zoom and others allowing the disaggregation of Zoom into more customized, niche products, such as this live event platform powered by Agora (
Zoom Phone must deliver. Zoom isn't known for voice offerings, but its phone offering was the highest growth business in 3Q. At its Analyst Day in October, Zoom had sold >500K phone seats and had 5,800 paying customers with 10+ employees. Zoom lands with video and seeks to expand with phone for fully-integrated communications.

Zoom Rooms will seeks to gain market share as employers fully move back to office settings. Hardware seems more challenging for margins and meaningful revenue growth with software eating the world, but products for full meeting integration and device management combined with online/work-from-home makes sense to offer a full end-to-end suite.

New Experiences. Few people know Zoom offers up to 1-to-10,000 webinar services, nor realize Zoom has launched OnZoom, creating a virtual marketplace for live streamed events. Near-term growth or adoption of these offering is questionable but Zoom is creating potentially large longer-term optionality with its newer offerings.
Valuation. If you assume ZM hits the FY21 Street revenue estimate of $3.2 billion, which project 24% growth, but further assume FCF margin backs up to 30-35% from its current 53%, FCF can eek out a modest gain of +/- 10% next year. At 37x next year's sales, stock volatility should be expected as the story converts from one of hyper-growth with customers finding Zoom, to a more mature business which will force new sources for top-of-funnel leads and sales execution. Zoom was growing at >100% before COVID hit, but clearly significant demand has been pulled forward. Positively, ZM has shown its network and technology can handle significant traffic spikes. Further, from this writers perspective, the experience is better than Microsoft Teams, but given Teams is free, many will find that offering 'good enough.' Significant cash generation and cash resources further bolster upside optionality, but expect Zoom to be a battleground stock due to the current positive and negative cross currents.