As it tries to live up to its lofty post-IPO valuation, Zoom Video Communications (ZM is making it clear that it plans to be aggressive about going after its large enterprise and international opportunities.
Zoom, a fast-growing provider of videoconferencing and online meeting software, had an IPO day to remember. After pricing its IPO at $36 — above a raised price range of $33 to $35 — Zoom opened at $65.00 on Thursday morning and closed at $62.36.
The first-day jump left Zoom valued at about $18.1 billion after accounting for outstanding stock options. That’s equal to a whopping 55 times the company’s revenue for fiscal 2019 (it ended in January), and about 45 times its fiscal 2019 billings.
Shortly after Zoom began trading, I had a chance to talk with CFO Kelly Steckelberg about Zoom’s long-term strategy and post-IPO plans. Steckelberg joined Zoom in late 2017, after having previously served as the CEO of online dating firm Zoosk and as the CFO of Cisco Systems’ (CSCO – Get Report) rival Webex conferencing software business.
Here’s a run-down of Steckelberg’s comments on several subjects of interest.
Driving Viral Growth
Zoom relies on a “freemium” business model for its core Zoom Meeting product. The company provides a free Basic plan that has a relatively limited feature set (for example, there’s a 40-minute limit on group meetings), along with Pro, Business and Enterprise plans that can provide a number of additional features (i.e., 24-hour meeting lengths, management and reporting tools, phone support, cloud video recording).
Zoom charges a monthly subscription fee for each employee licensed to be a meeting host under a Pro, Business or Enterprise plan, but doesn’t charge users to simply be participants of meetings hosted by these employees. Steckelberg notes this pricing strategy allows Zoom’s offerings to see viral growth in two ways: Basic plan hosts can be converted into paid subscribers, and meeting participants could (whether a meeting host is using a free or paid plan) eventually sign up to become hosts themselves.
Zoom CFO Kelly Steckelberg.
“[We] value and love even our free hosts because they provide such a potential opportunity,” Steckelberg said. She added that in addition to potentially becoming paid hosts, free hosts help expose Zoom to more people and provide the company with usage data that its sales teams can leverage to pursue new deals.
In its IPO filing, Zoom mentioned that while over half of all Fortune 500 firms have at least one paid host, only 4% of them produced more than $100,000 in revenue in fiscal 2019, leaving it with a lot of headroom to grow its paid footprint at such businesses.
Zoom Phone
In addition to Zoom Meeting, Zoom sells subscription-based offerings for powering conference rooms and hosting video webinars. And in January, the company rolled out Zoom Phone (formerly known as Zoom Voice), a cloud-based PBX phone system for businesses that’s integrated with Zoom Meeting.
Steckelberg declined to say how many customers there currently are for Zoom Phone, noting the product is still in its early days, but did claim there’s “strong interest” in the offering and said more details will be shared as milestones are hit. She also noted Zoom’s sales strategy for Phone revolves around selling it to its existing base.
“Our go-to-market strategy is offering this and selling this to our existing customers,” Steckelberg said. “We really see video as the future of communication, and audio is a part of that.”
New AI-Related Features
When asked about Zoom’s current efforts to address feature requests from customers, Steckelberg noted that 20% of the time spent by Zoom in each product development cycle is set aside for customer requests, and that Zoom Phone was an outgrowth of such work. She also mentioned Zoom is investing in using AI/machine learning to enhance its offerings.
Examples given included using AI to automatically create a meeting summary from a recording for people who were unable to attend a meeting, as well as to automatically schedule follow-up meetings. “That’s what we’re thinking about — how do you leverage this technology to make yourself even more efficient than [in a] face-to-face meeting,” Steckelberg said.
Zoom’s Biggest Competitors
When asked about which competitors Zoom runs into most often, Steckelberg said Cisco’s Webex was the rival it most frequently encountered at large enterprises. At smaller businesses, by comparison, Zoom is more likely to be up against free services or LogMeIn’s (LOGM – Get Report) offerings.
Though many corporate workers have access to Microsoft’s (MSFT – Get Report) rival Skype for Business software, thanks to its inclusion within many business Office 365 plans, Steckelberg insists this hasn’t been a major headwind, thanks to the quality of Zoom’s offerings. “Office people…are happy to pay for Zoom even when they have Skype in their shop,” she said.
International Growth
Only about 20% of Zoom’s revenue currently comes from outside the U.S.. However, Steckelberg indicated ramping international sales is a major company priority, and noted that the company recently hired an international sales chief.
“In the short-term, [international will] be 30% of our business. And in the longer term, I see no reason why it shouldn’t be at least 50% of our business,” she said.
Sales and Marketing Investments
Like many high-growth enterprise software firms, Zoom has been investing heavily in building out its salesforce. While the company’s revenue rose 118% to $330.5 million in fiscal 2019, its GAAP sales and marketing spend grew even faster, rising 125% to $185.8 million (56% of revenue).
Not surprisingly, Steckelberg forecast Zoom’s sales and marketing spend will continue growing as it tries to keep up its enterprise momentum. However, she added that as a percentage of revenue, it will stay “right within the range that it’s in today” — potentially rising by a few percentage points, but not dramatically.
Thanks in part to relatively low R&D spending — made possibly by Zoom’s reliance on Chinese developer teams — Zoom’s sales and marketing spend hasn’t prevented the company from turning profitable. The company had GAAP net income of $7.6 million in fiscal 2019, as well as free cash flow of $22.9 million.
Potential M&A
After backing out the sale of shares from existing stockholders, Zoom probably raised over $450 million through its IPO. When asked about how the company plans to use its IPO proceeds, Steckelberg said Zoom plans to keep investing in key initiatives such as moving upmarket, growing international sales and growing Zoom Phone sales. Interestingly, she also said Zoom is open to making acquisitions that “might be a great addition to the Zoom family from a technology or a product perspective.”
She added that the recently-launched Zoom Marketplace, which features dozens of third-party business apps that integrate with Zoom’s products, could help it find M&A targets.
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