A Zoom happy hour. Jump on a Zoom call, and just in general
let's have a Zoom date. These are things that are things that we never thought
would be part of our vernacular, even a year ago.
But when Zoom IPO'd last year, I was pretty interested in it, and I put in a
tender offer for it. And one of my points of interest was the
type of business model that Zoom is in. Not
this kind of general functionality of Zoom or anything else related to it.
I'm super glad that I did. It's of course proven to be something that I would have
never anticipated with the Coronavirus in terms of the growth. But it hasn't
changed the business model overall, just the evaluation acceleration
happened. What we're going to talk about today
about Zoom is what business it's in overall,
when it got started, and why it is the business that it is.
Then we're going to talk a little bit about the financials and the strategy
simplified framework, whether it's a variable cost or a fixed cost business.
After that, we're going to talk about whether it's doing well as the business
that it's in, and finally we're going to talk
at the end about what will make Zoom successful over time.
So let's jump in. First of all, what kind of business
is Zoom in, and what's the history of Zoom? Almost everybody in the world now has
heard of Zoom, or maybe even has an account on Zoom.
But Zoom was founded nine years ago. It feels like a new phenomenon, but it's
actually been around and building for a really long time. And
you wouldn't have thought probably nine years ago that there was a
need for more of this kind of software and service.
There was Any Meeting, and Go To Meet, and Webex,
and Google Meet, and all different kinds of meeting platforms.
Skype, and and just in general it didn't seem like
something that was a problem that probably needed to be solved.
But, of course, we've seen that it's accelerated for a lot of different
user friendliness reasons. It operates outside of a web browser,
it operates with more stability, more clarity, and more intuitive
functionality than other innovations have. And that's just a message for all
of you that are thinking about innovating on something. You don't
necessarily have to do something brand new
to make a big splash in the marketplace, you just have to do something better
than what's currently out there. And Zoom has arguably done a really
great job of that. In 2017, Zoom had very aggressive revenue
growth, which resulted in its classification as
a unicorn when it achieved at its fundraising
round a one billion dollar valuation. The company IPO'd in 2019 as
well. Now what makes Zoom Zoom is, of course,
the product itself, and the functionality, the
ease of use, and a lot of the function of Zoom. But
what makes Zoom a business model that's of interest
to us is something totally different. So in order to talk about that, we need
to bifurcate whether it is a fixed cost business or a variable cost
business. And if you think about it, every
incremental user that uses zoom, does Zoom have an
incremental cost? Well, a little bit, okay. And of course, in every business
there is a variable cost to it, and there is fixed cost.
Zoom has to acquire its users and it has to process
credit cards for every user on a monthly basis. So there is
cost, of course, that goes into acquiring new users and growing their platform, but
is it big enough to determine this as a
variable cost business? My argument is that it's not.
This is a fixed cost business. Once you build it,
they may all come. And when they do, that's a great thing because you've
built fixed capacity, and then you can sell it
over and over and over again. And, of course, when you see software as a
service or software as a product business is the ability to do that
is what drives their success. In this situation,
Zoom is arguably a great success and we can go over to their financials to take
a look at that.When we look at Zoom's information for
the year ended January 31, 2020, we have $620
million in revenue. So still a pretty small company.
So their cost of revenue, their variable cost, is only $115 million of that.
In contrast, when you look at their operating expenses, you have $495
million of that. And so you'll see that, again they turned a profit
barely for the first time. But they have this huge amount of expense
that goes into research and development, developing the actual product,
sales and marketing is a giant expense, and then general administrative.
So Zoom has basically been spending almost all
of what it's made building its platform. Why does that make sense
for a business like this? Well, in a fixed cost business,
you want, for the same capacity, to have the maximum number of users.
And Zoom has a software subscription model
where they are on a monthly basis collecting fees from users that are
using it at their premium level. So they need
people to get on at the free level. They need people to
move up inside the premium levels in order to be successful as a company.
And, as you can see, their variable cost being such a small
part of their cost, the more that they can do that and leverage the fixed cost
of your business, the more that they can drive
success going forward. What do i think the future holds for Zoom?
Well, Zoom is for a time probably going to be the leader in this
kind of video and teleconferencing platform,
and we can expect that because of the disruption from COVID 19. We'll see
maybe more flexible and work from home models, more
use of Zoom over time in the next couple of years. But
Zoom is susceptible in the same way that its competitors when it started nine
years ago was susceptible. The next and newest platform that can
get adequate users onto it could always be
knocking at Zoom's door. So Zoom has a big community that it can build and
leverage off of. It just needs to make sure that its
product over time keeps up, and that the conversion opportunities for revenue
generation inside the product remain compelling for a lot of people. So there
are more metrics that we would take a look at at Zoom over time. For example, we
look at their churn rate, the number of people that are leaving,
we look at the percentage of people that are purchasing out of their total user
base, and also the revenue per customer that
are purchasing. So with Zoom, there's a big opportunity.
Let's see where it goes in the future, and if I made the right call when I
bought the stock at the IPO. We hope that you enjoyed this and feel
equipped to take a look at a business really quickly, like Zoom, and figure out
whether it's in the variable cost or fixed cost
business, and also whether it's likely to be successful in
that space. We hope that you enjoyed it, and if you did,
come along with us on our podcast Strategy Simplified, or
on our YouTube channel. Thanks so much for joining.