zoom
Watch the Video “The Rise of Zoom”

Zoom was founded in 2011 by Eric Yuan.  Yuan had worked as an engineer at Cisco Webex, so he was an expert when it came to videoconferencing.  The company’s mission was, “to make video communications frictionless” and Yuan focused on creating a best-in-class experience for users.

By the end of the fiscal year on January 31, 2017, Zoom had grown to $60 million in sales.  Sales growth remained strong, so Zoom went public on April 18, 2019; the same day as another tech company, Pinterest.

But unlike Pinterest and many other tech IPOs, Zoom was actually profitable.  It posted a Net Income of $7.5 million on $330 million in sales for its most recent fiscal year.  Zoom went public at $36/share, but the stock price had increased by 72% at the end of the day.  But this was nothing compared to what would happen in 2020.

The pandemic

I wondered if Zoom’s executives knew they built a business that would thrive in a pandemic.  So I went back and read Zoom’s S-1, which is the registration form a company files with the SEC when it goes public.  Zoom’s S-1 said the company could be disrupted by a natural disaster like an earthquake, but the word “pandemic” was never mentioned.

However, Zoom did have some customer testimonials that hinted at the company’s possibilities.  Zoom’s S-1 mentioned a university that, “uses Zoom to encourage participation and inclusion for students in its night program who have family and work constraints that would otherwise prevent them from participating in class.”  It also described a technology company with 1,000 employees that had been able to grow despite having an all-remote workforce.

Few could have predicted that these situations would soon become the norm for businesses and universities.

Zoom scales up

Zoom had slightly more than 2,500 employees on 1/31/20.  But within just six months, Zoom’s workforce increased by more than a third, with 3,427 full-time employees around the globe.  These employees are responsible for managing a wide range of products.

Most of us are familiar with Zoom Meetings, but there is also:

  • Zoom Phone
  • Zoom Chat
  • Zoom Rooms
  • Zoom Conference Room Connector
  • Zoom Video Webinars
  • Zoom App Marketplace

For example, Zoom is trying to get customers to ditch their private telephone networks and sign up for Zoom Phone.  Zoom Phone is a cloud phone system that allows a company’s employees to make and receive phone calls.

Competitors

Zoom’s success has been truly incredible, given that it’s just a small company competing against some of the largest tech firms in the world.

There’s Cisco Systems with its Cisco Webex, Microsoft with its Teams app, and Google Meet.  And once the pandemic hit, Facebook got in on the action with its Messenger Rooms.  But my university and so many others will be using Zoom this fall.

So how has Zoom cornered the market on videoconferencing?

Well, unlike Google, Microsoft, and Facebook, videoconferencing is Zoom’s main product.  Thus, it’s sink or swim; Zoom can’t count on ad revenue from a search engine or social network.  And Zoom has been all-in promoting its product, even before the pandemic:  Zoom spent more than 50% of its revenue on sales and marketing the past 4 years.  They used that money not just to run digital ads, but to recruit and train a sales team.   Zoom has also spent at least 10% of its revenue on R&D the past 4 years.  This allowed the company to release over 300 new features in 2019 alone.

Business model

Zoom has infiltrated so many homes and organizations using a freemium model, which was popularized by Dropbox, LinkedIn, and so many other tech firms.  Anyone can set up an account and get some basic services for free, but to access more features, have more meeting participants, and get longer meetings you need to upgrade to a paid account.  Once Zoom gets one department at a company using Zoom, it’s a lot easier for them to convince the whole organization to start using Zoom.  Start small, and spread throughout the entire organization.  Or as Zoom calls it, “land and expand.”

Success

But has this strategy dramatically boosted Zoom’s profitability? Or did it simply lead to lots of people signing up for free accounts?  In a recent year, Dropbox had over 500 million accounts, only 12.7 million of which were paying customers.  Investors were eager to find out, and Zoom did not disappoint.

For the quarter ended 7/31/20, Zoom reported a $186 million profit.  This was an increase of 586% from the previous quarter!  Zoom’s sales revenue for that one quarter was higher than its sales for the entire previous year.  Zoom wasn’t just signing up individuals for free accounts.  It reported that 988 organizations had spent at least $100,000 on Zoom’s services in the past year.

Zoom was going after the big fish, and it was catching them.  Investors were ecstatic, and Zoom’s stock price continued to soar.

Challenges

But Zoom’s rapid growth hasn’t come without challenges.  People have raised a number of privacy concerns.  Zoom’s been criticized for not properly encrypting users’ data and using servers in China.  And some people are worried that hackers could be listening in on Zoom meetings, particularly after zoombombing became popular practically overnight.  Zoom has promised to bolster its security, but it also faces a financial challenge.

The company’s significant jump in profit was accompanied by a large decrease in gross margin.  Zoom’s gross margin had consistently been above 80% the past 4 years, but has hovered around 70% since the pandemic.  This is because all those free users take up space on servers, and those data center costs are part of Zoom’s cost of revenue.  Zoom said it hopes to return its focus to business customers after the pandemic, so perhaps the number of free accounts will decrease and Zoom’s gross margin will return to normal.

But it’s difficult to predict the future.  Will Zoom continue to be a big part of our lives, even after the pandemic is over?  Or did this small company simply benefit from a once-in-a-lifetime event? Only time will tell.

Zoom’s July 31, 2020 10-Q