Zoom Has Mastered The Art of Profitable Growth
Zoom Video Communications stands out from the pack of companies going public this spring — it’s doubling revenues profitably.
What’s more at its estimated IPO price range, it’s expected to enjoy an eight-fold leap in value from its last round of private funding.
If you were going to buy one company’s stock after its IPO, this would be a good one to consider. But it might be wiser to take a serious look at the stock six months after it goes public.
(I have no financial interest in the securities mentioned in this post).
This videoconferencing service provider — targeting a market expected to hit $43.1 billion by 2022, according to IDC — is planning to raise nearly $350 million when it goes public. This will value the company at around 8.7 times its last private market value of $1 billion. Zoom’s revenues doubled to $331 million in the year ending January 2019 during which it earned net income of $7.6 million, according to its S1.
Zoom is not without its woes. After all, its CFO Kelly Steckelberg, was the subject of a letter from an anonymous source claiming that she had an “undisclosed, consensual relationship” during her tenure at a previous employer, according to TechCrunch.
On April 7, CEO Eric Yuan published an open letter which concluded that Zoom’s board of directors had investigated this matter in full and determined that Steckelberg would remain as Zoom’s CFO.
Zoom is also the target of a patent infringement lawsuit. According to Reuters, “Dayton, Ohio-based digital advertising firm Krush Technologies LLC, which holds patents originally assigned to ooVoo, sued in San Francisco federal court alleging that Zoom’s app and other online meeting products infringe on three former ooVoo patents covering various aspects of video-conferencing technology.”
Having interviewed Zoom over the last couple of years, I have found much to admire about the company. Specifically, Yuan really cares about Zoom’s customers and the ones I’ve spoken to really appreciate it. Also, Zoom has the very rare and valuable financial profile — it’s growing at over 100% a year and it’s profitable.
Caring About Customers
Yuan was lead engineer at WebEx which was acquired by Cisco where he became a VP of Engineering. As he told me, he got so frustrated that he left to start a new company, Zoom, that would solve all the customer problems that he believed Cisco had caused — and strove to win back those customers with a better value proposition.
Yuan left Beijing in 1997 to be the founding engineer of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.
In 2011, Yuan left to start Zoom which was then growing faster than the industry. FORBES reported that Zoom grew 300% in 2016 after raising $100 million in January 2017 at a $1 billion valuation.
Yuan was not happy with the way Cisco was managing WebEx when he left in 2011. As he said, “I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?”
He could not convince Cisco management to fix the problems. As Yuan explained, “Cisco would not change its collaboration strategy. I said I had a different view and left Cisco. 35 to 40 WebEx engineers left with me. Six years later we are doing well with 750,000 customers [up 67% from 450,000 in January 2017]. We are growing thanks to our simplicity, quality, features and price and we have a very high net promoter score of 69.”
In February, I spoke with a former Cisco customer who switched to Zoom and he revealed what look to me to be Zoom’s considerable competitive advantages — Zoom understands what this customer wants and its technology and customer service satisfy them better than competitors’ do.
How so? BAYADA Home Healthcare — a 28,000 employee, 32,000 client in-home health care service provider switched to Zoom from Cisco and Skype. As BAYADA application manager Dennis Vallone explained in a February 11 interview,
[Cisco and Skype] have been relentlessly trying to win us back since we switched to Zoom five years ago. We use video and collaboration tools for remote physician check-ins. We need high quality, reliable video in all locations — not just the ones with high bandwidth. Zoom was the only one that could deliver that. Zoom was easier to use, cloud-based, did not require a hardware investment, and its pricing model — a freemium pricing model when we signed on — made it convenient to try without an investment. We reconsider our videoconferencing needs every year — but we stay with Zoom because they listen to what we ask for and unlike the others, they actually provide it. For example, we asked for digital signage and room scheduling and they delivered.
Vallone does not know why it is so difficult for other providers to respond to its needs. As he said, “Sometimes when a company gets too big it becomes too political. It is hard to push change through. Eric Yuan has a culture of really listening to customers and responding.”
Scalable Business Model
Many company going public these days — including Lyft whose shares are down 32% from their March 29 peak — go public without figuring out how to be profitable.
As I wrote in my new book, Scaling Your Startup, such companies skip the second stage of scaling — building a scalable business model. They go from the first stage — winning the first customers — to the third — sprinting to liquidity.
But Zoom did not skip building a scalable business model because it figured out how to get more efficient at key processes like selling, marketing, service, and product development as it got bigger.
This shows up in its numbers — for instance, in the year ending January 2017, operating expense to sales was 79% — the same as in January 2019. Meanwhile, Zoom’s gross margin increased from 79% to 82%.
At the same time, it has made its product more valuable to customers — yielding a net promoter score of over 70 in 2018, according to Zoom’s S1.
Zoom does not always add the features that customers want — but it does listen and execute when it sees a significant market opportunity. As Jim Mercer, Zoom’s head of customer success, explained in a February 22 interview,
Here execution for the customer is our true north. We have a consultative approach to building our service — working with our customers and our product development teams. We listen and implement features if enough customers request them. We have a customer advisory board for our up-market customers and use AI and automated tools to boost engagement with our product for down-market customers. When it comes to the onboarding process for new customers, some of our competitors merely provide video tutorials and a one page PDF.
156,171,668 shares of Zoom’s Class B shares can be sold six months after the company goes public. If you wait to buy share until after that lockup expires, you may have a chance to buy them at a lower price.
You’ll also know whether Zoom can beat expectations and raise guidance every quarter the way investors crave.