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Can Zoom Sustain Its High Growth As The World Opens Up
An article by • Published Feb 8, 2021

Can Zoom Sustain Its High Growth in a Post-Vaccine World?

Zoom's (ticker: $ZM) stock is down almost 40% from the all time highs it set in October. In addition to the extreme valuation (trading at >60 times FY21 revenues at its peak), one of the catalysts driving the stock lower has been expectations of the economy opening up in the coming quarters as vaccinations ramp up across the globe.
Zoom has yet to announce guidance for its next fiscal year which ends in January 2022, but
consensus estimates
are calling for >35% revenue growth YoY.
So what will drive the future growth opportunities for Zoom?
In this article, we take a look at how Zoom's KPIs have evolved over the course of the pandemic, and what are the likely avenues for sustained revenue growth in the coming quarters.

KPIs

Zoom has seen exponential revenue and customer growth in the past three quarters.

The acceleration in revenue growth has been sharper in the customer segment with less than 10 employees — revenue share from this segment has increased from 20% in 4Q20 to 38% in the most recent quarter.

Zoom's 1-10 employee segment generally has lower LTV characteristics as compared to customers with >10 employees. According to management,
50% of customers
from this segment are on monthly contracts. Management has previously disclosed that the monthly churn for this
segment of customers is 4%
, whereas the churn in the upmarket segment on annual or multiyear contracts is
a fraction
of this number. These customers are also less likely to purchase additional high-value Zoom products such as Zoom Phone and Zoom Rooms as compared to upmarket customers.
Pre-pandemic, Zoom had a relatively simple land and expand business model where a significant portion of revenue growth came from existing customers. Since the start of the pandemic, Zoom has seen an increasing share of revenue growth coming from new customers.
With an increasing share of revenue coming from customers with 1-10 employees that are more likely to churn, and an increasing proportion of revenue growth coming from new customers, some investors are rightly anxious about about a "return to normal" in the back half of 2021 and beyond when the tailwind from Covid-19 may turn into a headwind as monthly customers churn off and customer growth slows down into tough comps.
Next, we look at three areas of opportunity for Zoom that can help drive strong growth in the coming quarters.

Adoption of Zoom Phone

A key component of Zoom's bull thesis pre-pandemic revolved around its ability to get its existing customers to adopt Zoom Phone to replace legacy PBX solutions. Zoom Phone will be under the spotlight again in the coming quarters as the company now has a much larger customer base to cross sell into, and Zoom Phone has the potential to be an important source of additional revenue as the economy opens up.
On a recent investor conference, management said that customer conversations were moving from business continuity in the first two quarters towards strategic planning for workplace changes in a post-pandemic world where remote work is expected to continue to play an important role. Zoom Phone is an important part of this conversation, they noted.
In Q1 and Q2, a lot of the customer demand was driven by reaction, reaction to the pandemic, customers doing business continuity planning. And what's exciting, that we see that in Q3 and as we're moving into Q4 is people are now thinking more strategically about what is their work from anywhere strategy and what they need to get their employees in terms of their toolkit and that's where Zoom Phone comes in nicely. As they're sitting, they're looking at all these desk phones they have sitting in an empty office and they think about how simple it is to add Zoom Phone to that existing client, it just -- it really makes a lot of sense. And so that's what I think partly is driving the momentum that we saw in Q3 and into Q4.
A couple of recent data-points point to continued momentum around Zoom Phone:
Zoom

just
announced
yesterday that it had
sold 1 million Zoom Phone seats
shortly before the product's general availability.
Data from alternate data platform Revealera suggests that Zoom continues to ramp up hiring for Zoom Phone.
Management continues to have high hopes for the product — they expect Zoom Phone to eventually account for
25-50%


of the company's revenue in the future.
Zoom Phone is a
breeze to set up


for existing clients, helps IT teams
consolidate vendors


, and is
competitively priced


, so investors have high hopes that increased adoption of Zoom Phone among the company's existing customers will help sustain revenue growth in the coming quarters despite headwinds from the economy opening up.

Significant Expansion Opportunity Remains in G2K

On its analyst day event in October, management reported that while the majority of the Global 2000 companies are Zoom customers, the penetration rate by recurring revenue remains low, suggesting that there remains a long runway ahead for growth within these enterprise customers.
When looking at our Global 2000 customer cohort, we see significant opportunity to expand and continue to add new logos. Year-over-year, the penetration rate by revenue -- by recurring revenue doubled across all cohorts. We have a 54% penetration rate for customers spending more than $1,000 of ARR. But at $100,000 ARR threshold, the penetration rate is only 12%, signifying that there is still a lot of opportunity ahead.
This is somewhat counterintuitive as you might think - how could anybody still be buying Zoom if they have a need for a video communications solution? Shouldn't they have bought it months ago?
Zoom management tried to clarify the reasons behind the low G2K penetration at an investor conference. They said that part of it was just due to potential customers' tie in with competitors.
In some cases, it's just timing. Those customers or those prospects might be under a long-term contract with a competitor. And so we're waiting for when that window opens up that we can engage with them or they're ready to talk about potentially transitioning.
They added that sales capacity constraints had also hindered growth, and penetration within the G2K should increase as they add to the sales headcount.
Part of it is capacity in our own system. And so sales and adding sales headcount is certainly an area of investment that we are focused on through the rest of this year and well into next year also.
It looks like while there's clearly awareness of Zoom in G2K companies, there aren't as many large scale deployments as one would expect. The opportunity to continue to grow within G2K could potentially help Zoom sustain its revenue growth in 2022 and beyond.

International Expansion

Zoom has long talked about international expansion as a key driver of future growth. In FY20 before the pandemic, the international segment (APAC + EMEA combined) accounted for ~20% of Zoom's total revenue, and international revenue growth rate was slightly above that of Americas.
Since the start of the pandemic, the acceleration in international revenue growth has been much sharper than Americas, taking the international share of Zoom's revenue
from 20%
at the end of last year to
31% in 3Q21
.
Zoom expects this growth to continue — they expect international to eventually account for
40%
of Zoom's total revenue. Management said that the significant brand awareness they have achieved over the past few months has been especially beneficial for their international prospects.
...the accelerated brand awareness that Zoom has achieved during the last 6 months has been especially helpful from an international perspective because the way that we have historically gone into new markets is by seeding that market with marketing dollars, first by brand awareness, maybe digital advertising, so that when we put salespeople in there, they're going into a warm environment. And now because of the brand awareness, it's allowed us to really accelerate and put salespeople anywhere that we see demand. So we're going into markets like Latin America, for example, that probably wouldn't have been on our road map for expansion for another couple of years.
As Zoom invests in additional international sales capacity to capitalize on increased brand awareness, investors hope that Zoom would be able to sustain higher than pre-pandemic growth rates in APAC and EMEA in the coming quarters.

Looking Forward

It is difficult to take a strong view on Zoom in the short term. While churn, especially from the prosumer customer segment, is definitely a concern going into the next fiscal year, so far this year, churn has been much better than the management's conservative expectations. In fact, retention rate for this segment of customers actually
improved
during 3Q21.
Zoom has been working to
covert monthly customers to annual
subscriptions. The company recently launched OnZoom which allows paid users to create, monetize, and host events on the platform, and unlocks a large TAM for consumer/B2C use cases popularized during the pandemic. The product is
directed towards
attracting and better retaining the 1-10 customer segment, which should help with churn in the coming months.
While news around the rollout of vaccinations across the globe may continue to drive volatility, better retention among the smaller customers and continued execution on the upmarket opportunity may help beat consensus estimates.
And beating street estimates of >35% YoY growth in FY22 may not be that difficult going by the likely 4Q21 exit rate.
Zoom trades at ~30 times FY22 revenue. While not cheap by any means, the consensus estimates do not look unbeatable, and any beats in the coming quarters will likely lead to a quick shift in sentiment around the stock.

Zoom Valuation