Eric Yuan, founder and CEO of Zoom Video Communications Inc., center, famous ... during the company 's initial public offering (IPO) on the Nasdaq MarketSite in New York, United States on Thursday, April 18, 2019. Zoom reported net profit of $ 7.6 million on one figure $ 331 million in business for the fiscal year ended January, and is now worth nine times the $ 1 billion it got after a second round of funding years ago. Photographer : Victor J. Blue / Bloomberg © 2019 Bloomberg Finance LP
Last year I called Zoom Video a "pegasus" because the company stands out from the unicorn dime that is Silicon Valley exits. Zoom exemplified rare financial strength from its IPO until today due to an excellent product-market fit.
The term unicorn was first used to describe a startup with a valuation of $ 1 billion or more. There have been some since the term was coined by. However, there has only been one technology company in the public market that has demonstrated Zoom Video's financial strength in both revenue and results.
Critics will say that Zoom asked Covid to generate these numbers, but a single glance at the S-1 filing immediately disproves this theory. The market overlooks Zoom's long history of premie growthr plan in its category, which is discussed in detail below.
In the analysis, I also clarify my thoughts on "exceptional product-to-market fit" and the strength of Zoom's product before covid, during covid, and what the company will do to achieve it. to double its TAM in the coming year.
Please also note from the analysis below that the I / O Fund closed its position in Bandwidth and allocated more to Zoom. I explain why bandwidth remains a solid choice, but we see more benefits in Zoom due to the company valuation in the sub-top 20.
Cloud Software is not dependent on Covid
In the September 2019 cloud sale, which saw drops of 40 % to 50% in many names ofe solid cloud, I made sure that this cloud is a secular trend isolated from geopolitical risks and economic downturns. My thesis has been proven correct by Covid because cloud software works well in extreme economic climates, reducing costs when budgets are tight and increasing productivity, which is important in times of economic expansion.
This year is very unique for cloud software, as there are many actions guiding it. We're not surprised to see lower valuations following the fourth quarter earnings reports as the market is holding its breath to see how the cloud will fare after Covid's tough performance. The first quarter reports are needed to shed light on which companies will be the leaders after the unusual year of 2020.
There is only one way forward for SMEs and businesses: adoptter the IaaS cloud, platforms and software. Traditional IT is expensive and will only prevent a business from leveraging AI and 5G. Competitively, it can be very dangerous not to move to the cloud at the moment, as I pointed out in my past reports .
My overall thesis on cloud software resiliency extends to other names, but this analysis focuses on Zoom Video because it is one of the strongest stocks in the market in terms of growth history of its revenue, strong margins, incredible free cash flow and growing profitability. I think the market is making a mistake in dropping Zoom from the top 20 cloud software ratings. Zoom in and expose them reasons below.
Zoom is more than just a web conference
The biggest market misconception about Zoom is that it 's This is a web conferencing application. The company is more than two years in the development of products and services which n its use beyond web conferencing with the launch of Zoom Phone in January 2019, but the marketplace priced Zoom for a single path (web conferencing). The company has since launched Zoom Rooms, a virtual Zoom Apps and OnZoom marketplace. The company coined the term hardware-as-a-service because Zoom expects to disrupt almost all areas of telephony.
Last August, I reported that Zoom Hardware as a Service products have enabled companies to replace legacy systems by consolidating software and hardware for a single. cohesive experience. ServiceNow hit the headlines last year by choosing Zoom Phone to replace its professional telephone lines. "Going forward, with the addition of Zoom Phone, we take a head start on an even more robust experience with Zoom— One-touch communication and collaboration features, plus conference rooms connected to Zoom.
Zoom experienced significant expansion in 2020. Partner sales bookings have increased more than 7 times over one year. More than 20%of international business bookings in the last quarter were driven by Zoom's partner ecosystem, and Zoom's principal agent business saw the fastest growth in history for Avant and Intelisys principal agents .
Notable partnerships include operators such as British Telecom, Lumen Technologies and Orange Business Services. Zoom's distribution partner program includes Carahsoft Technology Group in the United States, Nuvias Unified Communications in Europe, eLink Distribution AG at DACH, West Telco at LATAM and EMEA, SYNNEX / Westcon at LATAM, SB C&S in Japan and FVC in the Middle -East and Africa.
Senior agents AVANT Communications and Intelisys, a ScanSource company, both achieved $ 1 million in monthly recurring revenue (MRR) before the first anniversary of their partnership with Zoom. Zoom has also added six new primary agent partners: AppSmart, Bridgepointe, eLink Distribution, PlanetOne, Sandler Partners and Telecom Consulting Group (TCG).
Over the past year, Zoom has seen growth in use cases in telemedicine, virtual events, and health and fitness after redesigning its partner program for independent software developers. The company supports over 200 partners through its open API and SDK and expects further growth as new industries and markets develop besides Zoom.
Zoom also recently announced a multi-year partnership with, following a successful collaboration in 2020 on the Virtual Paddock Club, which offers VIP sports experiences. As part of the expanded partnership agreement, Zoom is working with Formula 1 to provide unified and news communications for on-site and virtual guests, including live updates from 'Legends of the Paddock' andPaddock Club business lounges in the Zoom rooms.
Forward CAGR & Product-Market Fit
Analyst estimates for Zoom are of 29.8% CAGR over the next three years to fiscal 2024. This does not make sense because the company had a net retention rate of 130% above it. This means that analysts are essentially guiding for an increase in the churn / downgrade rate and these projections assume that Zoom will not add new customers.
Analysts' estimate for Zoom is 29.8% CAGR over the next three years to FY2024. I / O Fund
As indicated, the management of Cloud-based software companies don't give much to forward guidance analysts because it's best to play it safe during this transition period. Either way, the projections don't match Zoom's incredibly solid reputation.
First, no other cloud software stock has made the leap from business to consumer. Zoom was the best app in terms of unique active clients and users over the past year. Yet it's also the preferred corporate video conferencing app and ranked among the most popular work apps overall, according to Report.
We are seeing further evidence of Zoom customer approval from both consumers and businesses alike, as security concerns over the past year have been rapid.are forgiven. management reacted quickly. In, Zoom Phone was the fastest growing product line quarter over quarter. In the most recent, Zoom announced expansions in Zoom Phone by clients of Zoom Meetings Equinox, Universal Music Group and University of Southern California. The company expects strong growth for Zoom Phone in the future with a sales strategy within the existing install base.
For product-market fit, you need the top row to grow quickly and for the bottom row to get stronger. This is not the only indication but it simplifies the many variables. Before going through recent financial data, I want to point out that Zoom was already outperforming its class compared to the S-1 filing that I have.
The graph below provided by shows how Zoom compares to other cloud software companies that had a revenue rate ofsubion of $ 100 million during their Alex Clayton of Spark Capital
Not only was Zoom the fastest growing cloud software IPO of $ 100 million plus in execution ... but also grew 108% in their last quarter year-on-year, compared to a median of 38 % in 2018 for the companies pictured above.
Not only was Zoom the fastest growing cloud software IPO starting at $ 100 million in terms of rate 'execution, but also grew 108% in their most recent quarter year-on-year compared to a median of 38% in 2018 for the companies pictured above. Zoom was also the most efficient in terms of customer acquisition cost, with a median payback period of 9 months compared to the median of 30 months.
Here's how Zoom compared to other popular cloud software stocks when it went public:
Comment Zoom stacked up'to other popular cloud software stocks when it went public I / O Fund
The Graphic pictured above presents a problem: Snowflake was only 6 years after launch while Zoom was 8 years after launch. Therefore, when we adjust the growth rates according to the age of the company, we see that Zoom is the # 1 company in terms of financial strength in cloud software:
We see Zoom as the # 1 company in terms of cloud software financial strength. fbs -accordion> I / O Fund
There is more… Zoomwas profitable at the time of the IPO when the majority of cloud software companies are unprofitable for many years after their IPO. Zoom is not only the strongest IPO in cloud history, it has also been profitable. No other business was profitable when it went public ... and only Shopify is now profitable in the list although this happens several years after Zoom if we adjust the age of the company.
I hope this helps reviewers see that Zoom has always been the best in its class - and that cloud software isn't an easy category to run with top performers like Crowdstrike, Snowflake, Shopify and Slack (very sticky product) from this category.
Founded in 2011, Zoom describes itself as a leader ins modern business video communications. The CEO says Zoom enables greater efficiency in remote human-to-human interactions with use cases that are not possible with legacy systems. Keywords here are " not possible with older systems .
Zoom's current goal will be to disrupt all legacy systems with cloud native communications - and that means all possible communication methods that are not currently done in the cloud and / or are currently in the cloud, but the process is too cumbersome due to the walled gardens.
According to, 65% of meeting solution users will benefit from SIP / VoIP based audio conferencing tools. This is an increase from 20% in 2017, while 40% of meetings will be facilitated by virtual concierges and advanced analyzes. Here we see that Gartner had previously predicted thataudio conferencing would develop considerably before Covid.
The global web conferencing market is expected to grow from $ 12.58 billion in 2020 to $ 19.02 billion by 2025, with a CAGR of 8.6%, according to Valuates, which offers market research reports.
The global Web conferencing market is expected to grow om $ 12.58B in 2020 to $ 19.02B by 2025, at a ... CAGR of 8.6%, according to Valuates, which offers market research reports. Valuates Reports
The exact size of the video communications market varies considerably depending on the source. This is because the market is very new. According to a study by Markets and Markets, the video communications market is expected to grow an average of 8% per year to reach nearly $ 20 billion by 2023, another report predicting that the industry will register a CAGR of de . However, IDC places Zoom's addressable future market much higher at $ 43 billion, as noted in a previous Zoom earnings call.
If we go for the more modest addressable market size of $ 20 billion, then Zoom Phone will double TAM , as telephony is expected to reach $ 23 billion by now 2024, according to the fourth quarter of fiscal 2021 report. While doubling TAM, Zoom Phone was the company's fastest growing product line quarter-over-quarter, according to the report , and dir themLeaders expect strong growth in fiscal 2022.
Some analysts say the domestic market is near saturation, and Zoom will need to look for more opportunities in overseas markets . This is unlikely as communications are both account and usage based, not to mention hybrid work from home is one of the executive polls with just 29% saying the office will go back to five. office days a week.
Zoom sees international expansion as a major opportunity. In the first quarter of fiscal 2020, APAC region and EMEA region revenue increased 127% year-on-year. As such, Zoom plans to add local sales support over time in other selected international markets and also use strategic partners and resellers to sell in international markets..
APAC and EMEA revenues collectively accounted for around 20% of Zoom's revenues for a quarter one da management noted that this could be the start of a considerable opportunity for development. '' bring the Zoom platform to other regions.
Why Zoom has gone viral and will be viral again…
Agnosticism Zoom over Google and Microsoft means the company has the opposite goal of big tech: rather than locking users into a walled garden, Zoom has created a flawless, viral mechanism where users can share web and audio conferencing links without needing to log in. Zoom has exploited the weakness of big technology - the walled garden - which requires connections and cumbersome user workflow.
Many critics believe the catalyst for virality was Covid,but my premium site, this mechanism was a viral feature several months before the pandemic. "Viral mechanics" means the propagation of growth among users as a mechanism built into the product. The first Zoom user in an office naturally evangelizes the product by inviting more people to a conference with a simple link. Guest users do not need to register for Zoom, and the experience is much better than other conferencing solutions that require many steps to join a conference and are not in HD.
The best growth in technology products occurs when the product multiplies exponentially among users. This is why social media has reported incredible growth: One user invites many users to the platform with a simple link. Zoom is an example of “the sum of its parts is greater than the whole”. HisIts success relies on numerous micro-improvements to videoconferencing, which is a serious advantage over its competitors.
Cisco was the main competitor that Zoom disrupted as CEO Eric Yuan was a former engineer at WebEx before it was taken over by Cisco. Zoom has a "bottom-up" viral customer base, which means junior employees evangelize service within the company. They are often the most loyal customers. For example, 55% of customers with revenues of $ 100,000 or more were started with a free trial for one employee. This is an important insight into the traction of the product.
Zoom's virality with web conferencing is important because I expect the same team (and for the same reasons) to create a viral, frictionless method to replace all forms of legacy communications.
Zoom 's Current Quarter & Forward Growth
Last quarter Q4 revenue of $ 882.5 million, up 369% year-on-year, beating expectations of $ 71.54 million of dollars. Non-GAAP EPS of $ 1.22 beaten by $ 0.43 and GAAP EPS of $ 0.87 beaten by $ 0.39.
GAAP operating profit was $ 256.1 million, up 2327% year-over-year. Non-GAAP operating profit was $ 360.9 million, up 839% year-over-year.
For the full year, total revenue was $ 2,651.4 million, up 326% year-over-year. the other. GAAP operating profit for the year was $ 659.8 million, compared to GAAP operating profit of $ 12.7 million for fiscal 2020. Operating margin GAAP was 24.9% and adjusted operating margin was 37.1%.
Please note, when you see this level of growth in results, it means that Zoom is spreading organically and does not need to pay for its growth. This is extremely rare in Silicon Valley and other hotbed of tech startups, as growth marketing is a tactic used to grow revenue at the expense of the bottom line.
The remaining performance obligation increased by 189% year on year. - year from $ 604 million to $ 1.75 billion, with the company planning to achieve 70% of that amount in the coming year. This means that even before the start of the fiscal year, the company will already have $ 1.22 billion in pending revenue out of the $ 3.7 billion forecast for the year.
The remaining performance obligation increased 189% year-over-year from $ 604 million to $ 1.75 billion with ... the company is waiting to realize 70% of this amount in the coming year. Zoom
Non-GAAP net income for the year was $ 995.7 million, after adjustment for stock-based compensation expense and related payroll taxes, expenses related to charitable donations of common stocks, expenses related to the acquisition and retained earnings attributable to equity securities. net income per non-GAAP share was $ 3.34. Non-GAAP net income was $ 101.3 million, or 0.35 ddollar per share.
Net cash from operating activities was $ 1,471.2 million for the year, compared to $ 151.9 million last year. Free cash flow, which is net cash from operating activities less purchases of property, plant and equipment, was $ 1,391.2 million, compared to $ 113.8 million per year. 'last year.
Zoom provided the following guidance for fiscal 2022:
· Total revenue for the first quarter is expected to be between $ 900.0 million and $ 905 million . $ 0 million vs. $ 835.35 million consensus
· Non-GAAP operating income is expected to be between $ 295.0 million and $ 300.0 million.
· Non-GAAP diluted EPS expected to be $ 0.96 mid-term vs. $ 0.70 consensus
For the full year, the figure of total business is expected to be $ 3.770bn versus consensus $ 3.5bn, which reprepresents approximately 30% year-over-year growth, and non-GAAP operating income is expected to be in the range of $ 1.125 billion to $ 1.145 billion.
Full year non-GAAP diluted EPS is expected to be between $ 3.59 and $ 3.65 vs. $ 2.96 according to consensus, with around 311 million shares averaging weighted non-GAAP outstanding.
In the past three months, 20 analysts have set 12-month price targets for Zoom, according to data from E * Trade. The average price target was $ 472.41, with a low of $ 360 and a high of $ 610, which is a 98% increase from the current price.
Finally, it's worth mentioning that the Zoom app is still # 1 in the App Store business charts.
At the end of the first quarter of fiscal 2020, the company had approximately 58,500 customers (with more than 10 employees), up 86% from ayear over year. Zoom has a strong partner base that includes companies such as Salesforce, and these partnerships will be instrumental in future growth. Zoom ended the last financial year with more than 467,000 customers and more than 10 employees, an increase of approx. 470% of the same quarter of the previous fiscal year, according to the report.
One of the reasons we closed our position in the band bandwidth is that we feel work-from-home should have been a bigger catalyst for bandwidth, with major clients like Zoom, Google, Microsoft Enterprise, Skype, RingCentral and Square. If there had ever been a year where a Tier 1 supplier should have experienced rapid growth with these customers, last year would have been the year. Instead, for the whole of 2020, we see the bandwidth with aTotal revenue of $ 343.1 million, up, compared to Square (for example) which reported total net income of $ 9.50 billion, up for the full year of 2020.
The bandwidth is a Communication as a service platform company (CPaaS) that offers voice, messaging and 911 APIs based on the level 1 network of the 'business. Although bandwidth competes in an area similar to Twilio and Messagebird, the company stands out for owning its network and offering competitive prices and a lean version of voice and SMS.
The company works with the largest VoIP and video conferencing / audio companies including Google, Microsoft, Skype, Zoom and Ring Central. The work from home trend has benefited Bandwidth customers. Hethere is potential for another catalyst, which is expansion in Europe. This is important as Europe in particular has proven to be a major market for VoIP due to nearby country codes.
Bandwidth is eclipsed by competitors including Twilio and Messagebird. Five9 is also located in the adjacent space of the cloud contact center (at the top of the stack as a complete solution)
It's important to understand the difference between these companies. Twilio enables communications for mobile applications, such as voice or text. When you're texting or making a call in a mobile app, you're probably using Twilio's APIs. The company works with more than 1,000 mobile operators in more than 150 countries for voice and text / SMS services. The features pre-packaged with Twilio are ideal for companies that want to reduce development time, such asas startups or pureplay applications. Examples include customer service calls on Zendesk and homeowner messaging in the AirBnB app.
However, large video conferencing and telephone companies (including business applications), which are primarily communications-focused, are unlikely to embed an expensive third party for out-of-the-box development. 'employment. As a network provider, Twilio's bandwidth cuts down on prices with cheaper outgoing and incoming calls and free incoming SMS. This option is entirely focused on voice and SMS while its customers are developing additional functionalities in-house. Twilio costs $ 1 for a dedicated number while bandwidth costs $ 0.35 per dedicated number. This is why Bandwidth is the network provider for Google, Microsoft business applications and Skype, as well as for Zoo.mr.
On the other hand, the bandwidth makes a fraction of a dime for every call or message sent over the Tier 1 network. Therefore, Bandwidth's revenue is not up to par. those of Twilio, at around $ 280 million, compared to $ 1.5 billion.
The problem may be that the bandwidth offer is more commonplace between different telephone networks and also cellular. Therefore, the best investment may be in the full product stack, like what Zoom offers.
More on Bandwidth finances…
Excluding the acquisition of Voxbone , which closed last quarter, Bandwidth's CPaaS T4 YoY revenue growth was 53%. Favorable winds include political messages and factors related to Covid-19. Political messaging and Covid-related usage contributed 19 percentanointed at the company's fourth-quarter year-over-year growth rate, according to the.
Where the behavior of dedicated and day-to-day users within enterprises around native VoIP and cloud conferencing applications may have been overtaken for many years, covid-19 has accelerated that. The addressable market growth was estimated to be around $ 1.7 billion in 2017 to $ 6.7 billion in 2022 for this market. Still, we believe that a problem with bandwidth lagging behind for this category is that there was too much competition for bandwidth to increase its market share.
The last quarter was impressive with revenue growth of 82.3%, while the previous quarters were between 30 and 40%. Despite these normal comps, the company is forecasting 58% year-over-year growth for the March quarter.
Among total income, incomeCPaaS amounted to $ 98.1 million, up 84% year on year. Other income contributed to the remaining $ 14.9 million for the quarter. Other income was $ 8.6 million in the same period last year. Total, CPaaS and other revenues include $ 17.5M, $ 16.6M and $ 0.9M respectively from Voxbone as of November 1, 2020, date of acquisition.
Adjusted gross profit was $ 55.8M, versus $ 31.1M for Q4 2019. Adjusted gross margin w at 49% versus 50% for Q4 2019.
Adjusted net income was $ 3.5 million, or $ 0.13 per share, based on 27.2 million weighted average diluted shares outstanding. This compares to a non-GAAP net loss of $ (0.5) million, or $ (0.02) per share, based on 23.5 million weighted average shares outstanding for the fourth quarter of 2019. Adjusted EBITDA was $ 8.3M, compared to $ 1.2M$ in Q4 2019.
Total revenue for 2020 amounted to $ 343.1 million, up 48% year-on-year 'other. Gross profit for the year 2020 was $ 157.9 million, compared to $ 107.6 million in 2019. Adjusted gross profit for the full year 2020 was $ 169.1 million. dollars, up from $ 114.4 million in 2019. Adjusted gross margin was 49% for the full year of 2020. and 2019.
In the past three months, five ranked analysts have set 12-month price targets for bandwidth, based on the E * Trade date. The average price target is $ 210, with a low of $ 200 and a high of $ 227 for a hike of around. 95%.
On the bullish side, Canaccord Genuity raised its price target from $ 175 to $ 225 after Bandwidth's, saying the purchase: "accelerates Bandwidth's international expansion plans and creates a stronger position onthe $ 18 billion global CPaaS market. "
JMP increased BAND from $ 180 to $ 206, favoring the deal " because it accelerates Bandwidth 's international expansion in a way that increases its gross margins non-GAAP and its non-GAAP net income. "
Inertia counts with technological growth. rapidly growing companies tend to continue to do well over the long term. Zoom was excluded from the top 20 in terms of valuation for the cloud software category and is now cheaper than before the pandemic, which led to the best earnings reports of any company in Wall Street history.Due to the low valuation and the company's intention to quickly double its TAM, among other reasons, we shut down bandwidth in favor of a more prominent position in Zoom.
Disclosure: Beth Kindig owns shares of Zoom Video. The information expressed here are opinions and not financial advice.