In a lost year, Zoom is a winner. Now what?

The Big Story

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Very few public company CEOs get to preside over an earnings call like the one Zoom CEO Eric Yuan hosted on Monday. More impressively, it was his second victory lap of the year already.

Zoom reported incredible growth with revenue of $655.5 million, up an incredible 355% in its fiscal second quarter compared to the same period in 2019. Even with six months of hard data and anecdotal evidence that Zoom is the driving force behind the work-from-home and remote education strategies of the pandemic, analysts still expected the company to post just $500 million in revenue.

• Zoom customers spending more than $100,000 a year on the platform increased 112%. Customers with more than 10 employees grew 458%. The company attributed 81% of Zoom's growth during the second fiscal quarter to new subscriptions, and adoption grew more than twice as fast outside the Americas as in them.
• Zoom practically became a generic term for "video conferencing" in the first half of 2020. And while no company can keep this type of growth up for very long, as the school year began in the U.S. with reports of large-scale COVID-19 outbreaks at major universities, it became clear that demand for Zoom's services is here to stay for a while.

So how's the company planning to meet continued demand? During its earnings call, company executives dropped a few hints about its plans for the future.

• Zoom is investing in its own data center infrastructure to handle the increased demand for its services: Gross margins increased slightly from Q1 to Q2 as Zoom implemented "our strategy to increase our co-located data center capacity while leveraging the public cloud as needed," said CFO Kelly Steckelberg during the analyst call.
• "For the second-half of the fiscal year, we expect to increase capital expenditures for additional data center infrastructure," Steckelberg also said while discussing overall profit expectations.
• That's not great news for desperate public cloud operations such as Oracle, which made a big deal about Zoom's decision to use its cloud in the early days of the pandemic, as well as older Zoom cloud providers such as AWS.
• It sounds like Zoom is using the public cloud for spikes in demand among free users, which makes sense given the unpredictability of those customers. But it would appear Zoom wants to run its big-dollar customer workloads on its own hardware.

Zoom's also looking to widen its purview, and is increasingly looking at big-dollar customers who want to replace their old legacy phone-network communications systems with Zoom Phone, Yuan said.

• A surprisingly large number of big companies still use old-fashioned PBX phone systems to communicate internally across a private, protected network.
• But if you're a regular reader of this newsletter, you might have heard that lots of those companies are looking at "digital transformation," the process of ripping out gear designed during the first decade of the 21st century and replacing it with modern tools.
• We mostly talk about this transformation with respect to IT infrastructure like servers and storage, but internal telephone systems were a huge part of the pre-pandemic workflow at lots of enterprise companies.
• This is a huge opportunity for Zoom, and it is business that will remain after the effects of the pandemic have faded — so capitalizing on it right now makes a lot of sense

And its plan for holding onto customers that saw it as a lifeline in a time of great stress? New features that put Zoom in closer competition with workplace hub software like Slack, Microsoft Teams or G Suite.

• The company is looking to add machine-learning technology into the product to deliver features such as transcription and face-recognition, which could allow companies to make Zoom a more central part of their meeting infrastructure.
• Yuan also hinted that the company would unveil new features geared around event planners and marketing professionals, helping those people use Zoom as part of their pre-event planning and post-event data analysis, rather than just during the event itself.
• Zoom's making a bet here: SaaS companies like it have benefitted from demand for so-called "best of breed" applications, tools that focus on doing one thing as well as it can possibly be done.
• If the economy continues to sputter and companies look for ways to cut costs, customers may tolerate "good enough" services that address some of their other needs from vendors that they rely on for mission-critical applications (like Zoom for communications), if for no other reason to save some money.

Zoom expects sequential growth to moderate over the second half of the year, but those numbers will still look incredible compared to 2019. 2020 will always be remembered as a special year, and Zoom's endurance as a tech vendor will really be tested as the world begins to return to normal in 2021.

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Around the Cloud

• Zoom isn't the only cloud company reporting strong earnings: Box beat expectations amid solid — if less spectacular than Zoom — revenue growth, as it also continues to benefit from the work-from-home economy.
• VMware is also doing well. Its transition into a cloud-centric SaaS company was also to thank for second-quarter revenue that topped expectations, although the company's data center customers pulled back on their investments during the quarter.
• Things aren't so impressive at Splunk, the application monitoring company, where revenue from older customers on software licenses fell faster than revenue from newer customers on cloud subscriptions grew.
• Helping to explain Splunk's problem is the fact that customers looking for cloud monitoring software are now turning to companies like Signal Sciences, which Fastly just acquired for $775 million.
• CenturyLink had a bad weekend, after suffering a massive outage on Sunday that managed to take out 3.5% of all internet traffic worldwide before it was fixed.
• Sudhish Kasaba Ramesh probably had a worse weekend: Last week the former Cisco employee pleaded guilty to logging into Cisco's AWS account and deleting virtual machines associated with its WebEx video conferencing software after he had left the company.
• Okta announced its new WFH plans, and will let almost all of its employees work from home on a permanent basis. It's the latest in a series of companies to bet on remote work after giving it a try over the last six months.
• Rumors are circulating that Apple wants to build a search engine, which would certainly get Google's attention and might also explain why the company has been hiring some of the best and brightest cloud talent on the market this year.
• Is the pandemic cloud computing's "iPhone moment"? One venture capitalist thinks so, although it didn't take a slow-motion disaster to make people realize that smartphones were handy.