Enterprise

The pandemic made Zoom a household name. Finding long-term enterprise success will be harder.

To succeed as an enterprise platform, Zoom will need to land more enterprise customers, expand internationally and execute on its non-video products. That task will be much harder now that its pandemic-fueled growth is slowing down.

A crystal ball with the Zoom logo.

Zoom now has the chance to make a change from the reactionary posture it had to adopt to keep up with soaring pandemic demand.

Illustration: Christopher T. Fong/Protocol

After an explosive IPO and increased demand for video tools spurred by the onset of COVID-19, Zoom enjoyed a rocketship trajectory leading into early 2022. But two years after the worst of the pandemic seems to have subsided, Zoom’s future isn’t as certain.

While CEO Eric Yuan laid out plans to turn Zoom into a true platform player, a falling stock price, failed acquisition and unmet investor expectations have threatened those ambitions. Now investors are questioning whether Zoom can succeed without the pandemic’s windfall.

“We’ve executed through the pandemic well, and I think that our employees did phenomenally, but it was reactionary,” said CFO Kelly Steckelberg. “Now we're in a place where we get to shift, and we are shifting, to being proactive, and setting the stage for what we want the company to look like a year from now, two years from now, five years from now, 10 years from now,” she said.

The question facing Zoom now is, what’s next? Acquisition options that were once available thanks to its high-flying stock price are gone, and powerful enterprise platforms like Microsoft and Salesforce are taking direct aim at its core video service.

In response, Zoom has been doubling down on its platform vision by launching an array of products and new features. From enterprise phone system Zoom Phone to Zoom Contact Center and hybrid event platform Zoom Events, the company is aiming to become a one-stop destination for all things communications and collaboration.

Pandemic darling

Zoom’s 2019 IPO, in which the company raised more than $350 million and saw its market value soar to $16 billion, was a blockbuster. But the real growth was still yet to come. When the pandemic hit in early 2020, suddenly consumers and enterprises everywhere were faced with the challenges of communicating with friends, customers and investors remotely.

Out of crisis came opportunity. The technical edge Zoom had in its video technology, its cloud-native architecture and a savvy marketing strategy enabled the company to accelerate past its competitors, according to company followers who spoke with Protocol. Between the fourth quarter of fiscal year 2020 and 2021, Zoom’s customer base grew a blistering 470% to more than 460,000 customers, while revenue grew at a staggering 369% year-over-year to $882 million for the quarter.

Bolstered by sky-high growth during the pandemic, CEO Eric Yuan set out to turn Zoom into a major platform player by expanding beyond its core video product.

“We’re not only a video conferencing company anymore,” Yuan told investors during an earnings call in March of 2021. At that point Zoom already had its fast-growing Phone product, and in July of that year would go on to launch Apps and Events. Later that year it also announced plans for its Contact Center (called Video Engagement Center at the time) and Whiteboard products, amongst others.

But the party was drawing to a close. As the pandemic began to ease and workers returned to the office, Zoom’s growth began to slow more than expected by investors who maybe should have known better, and the stock price began to reflect that.

From the fourth quarter of fiscal year 2021 to 2022, revenue growth slowed to 21% year-over-year. While still healthy compared to Zoom’s enterprise-tech peers, it was a far cry from the heyday of the pandemic. And last quarter, year-over-year revenue was up only 12%.

That sort of late-pandemic shock was expected to some extent, but not in such a drastic manner. “I think what is a surprise to investors, and this is reflected in the stock price, is how quickly things slowed down and how dramatically. I think people were expecting growth to be 30%, not mid-teens,” said Rishi Jaluria, managing director at RBC Capital Markets.

In many ways Zoom’s explosive growth during the pandemic may have been its Achilles’ heel. While the number of customers more than quadrupled, the company also seemed to have captured its entire target market — a concern investors have held for a while. “It's renewing questions of No. 1, did they just pull forward all of their [total addressable market], and No. 2, if that's the case, how do they grow from here?” asked Jaluria.

The natural approach would be by expanding into new markets and products, which explains Zoom’s vision for becoming a platform player. But Zoom has had a number of setbacks along the way.

Not long after the company announced its plan to expand into the contact center space, its acquisition of cloud-based contact center company Five9 fell through. Zoom announced its all-stock offer for Five9 in July of 2021, but by the time the deal was supposed to close, Zoom’s stock price had plummeted almost 30%. Five9 shareholders felt the purchase price was undervaluing the company and subsequently rejected the $14.7 billion deal, forcing Zoom back to the drawing board.

To many, the failed Five9 acquisition was a major miss. “Five9 is on a roll right now and that would have enabled Zoom to strengthen its portfolio and provide more of a platform approach to their clients,” said Steven Dickens, a senior analyst at Futurum Research.

Zoom’s platform vision is also under serious threat from competitors who can offer video capabilities alongside broader and more robust collaboration products.

“You can argue whether there is parity or not, but it is coming up,'' said Nagraj Kashyap, who was head of Qualcomm Ventures when the firm invested in Zoom and is now a managing partner at SoftBank’s Vision Fund.

In Zoom’s core video space, companies from Google to Microsoft and Cisco, have all improved their video conferencing technology. “At some point in time, the difference is not that much for somebody to choose one or the other,” he said.

The fact that Zoom’s competitors, such as Microsoft, Cisco and Salesforce (thanks to Slack), also have an entire array of collaboration products at their disposal, makes it even more imperative that Zoom get it right when expanding outside of its core product.

“We have seen the likes of Microsoft and Cisco invest in their offerings, and they have broad and deep relationships with their clients so they have the ability to upsell and cross-sell their collaboration solutions,” said Futurum’s Dickens.

It’s not over yet

Although Zoom has grown from the core Meetings video service to also include Phone, Events and Contact Center among its other products, the question remains whether that will be enough to turn the company into a true platform threat.

If Zoom can succeed, the rewards are high. “I think if they can execute on both sides of the equation, I can see them getting back to 20% growth,” said Jaluria.

Zoom’s most mature non-core product, Zoom Phone, which was launched in 2019, will be key to that growth. From the last quarter of fiscal year 2020 to a year later, Zoom Phone tripled its customers from nearly 3,000 to more than 10,000. And as of last quarter, the company sold more than 3 million seats.

Part of the reason for that growth is the fact that Zoom Phone is built on the same infrastructure as Zoom Meetings, and it doesn’t take much to add it into the mix. If a customer already has Zoom Meetings installed on their desktop or phone, it’s as simple as adding another icon, said CFO Kelly Steckelberg.

The other factor is that communications infrastructure has been surprisingly slow to move to the cloud, a parallel Zoom Phone shares with Zoom Contact Center, which the company launched earlier this year. “When I've talked to CIOs about their phone systems, it seems to be sort of one of the last areas. It's kind of phone and contact center, which are the last areas that they have taken on in terms of moving from on prem to the cloud,” said Steckelberg.

Despite some setbacks, Zoom still has opportunities in the contact center space. But don’t expect Zoom to make another run at acquiring an entire contact center company. “What I think you should expect to see is acquisitions that continue to support and accelerate the build out of [existing] functionality,” said Steckelberg, pointing to the company’s acquisition of AI startup Solvvy as an example, “not necessarily bringing in a whole [new] contact center,” she said.

I think that's unfortunately not great news for Zoom because it is very hard to build a contact center software solution from scratch, because you cannot get away with good enough when it comes to contact center.

Still, it won’t be easy to compete with the likes of large dedicated contact center players such as Genesys, NICE inContact and, yes, even Five9. “I think that's unfortunately not great news for Zoom because it is very hard to build a contact center software solution from scratch, because you cannot get away with good enough when it comes to contact center,” said Jaluria.

While Zoom Contact Center likely won’t be a huge growth driver in the short term, there could be a longer-term play. “It's very early stages but I expect that product will follow a similar trajectory as Zoom Phone and really continue to grow and develop over time,” said Steckelberg.

Both products will likely play a role in the traditional “land-and-expand” enterprise sales strategy Zoom has been employing with customers. So far that strategy has been successful. Last quarter, enterprise revenue grew more than 30% to $560 million, with nearly 200,000 customers on board.

Zoom is also trying to make it easier for enterprise customers to buy more services with its Zoom One bundle, an attempt to help enterprises consolidate vendors.

Another growth area for Zoom, and one where it may be able to best its competitors, is in international markets. In fact, Santi Subotovsky, a partner at Emergence Capital, first discovered Zoom when he was searching for a reliable way to video chat with his aunt in Argentina. Noticing Zoom performed better than other software, Subotovsky went on to lead the firm’s investment in Zoom.

Even today, Subotovsky doesn't think other video tools can compete with Zoom internationally. “When you take them to markets where the hardware is not the latest and connectivity is not the greatest, it’s a hard experience. It's almost like creating that second- or third-class experience,” he said.

The opportunity isn’t lost on Zoom.

“There are many markets around the globe that are still in earlier stages than the U.S. is in terms of just video adoption in general,” said Steckelberg. That’s why Zoom is investing in its global sales capacity, expanding payment types to include local currencies and assessing pricing and packaging for international markets, she said.

So far, Zoom’s international business has performed well. Although growth stalled in EMEA last quarter, likely due to the war in Ukraine, APAC grew 20% year-over-year, and together Zoom’s international markets make up more than a third of its revenue.

Despite a number of setbacks and lowered market sentiment, the numbers show Zoom is still a growing SaaS company with an expanding product line and healthy revenue. In addition to solid revenue growth, Zoom is also profitable, and had billions in cash on hand last quarter.

Overall, investors and analysts agree that Zoom is a sound business. “The market is just recognizing that: Nothing is wrong with Zoom as a company; it's a fundamentally good company,” said Kashyap.

However, it’s not hard to see Zoom’s pandemic experience as a missed opportunity. It now has the chance to take more of a long-term view, a change from the reactionary posture it had to adopt to keep up with soaring pandemic demand.

That has spurred the company to heavily invest in research and development, hiring for more engineering and product roles and increasing sales capacity both locally and globally, said Steckelberg. “We're taking the long view here,” she said. “We're building for a $10 billion software company and beyond, that's the focus that we have here.”

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