Going ahead, Zoom will increase the capacities of its own data centres, double down on new use cases that include education, telemedicine, and tele-health, expand hiring plans for the rest of the year, and invest in R&D to focus on security, CEO Eric Yuan and CFO Kelly Steckelberg said in Q1FY20 earnings call earlier this morning (IST).
Given the spate of security incidents related to Zoom, Yuan said that the company’s top priority is to “keep the service up, double down, triple down on the privacy, security issues”, especially as video conferencing becomes a “mainstream service”. For both “prosumers and consumers or enterprise customers”, the company has to maintain “a very consistent experience”, Yuan said. The challenge is easily letting consumers use security features that are already there for enterprise customers, he said. But, end-to-end encryption may only be available to business and enterprise users:
“So we want to give to at least the enterprise customer or business customer [end-to-end encryption]. Free users, for sure, we don’t want to give that [end-to-end encryption], right? Because we also want to work it together, see if this with FBI, with local law enforcement, in case some people they use Zoom for the better purpose, right?” — Zoom CEO Eric Yuan
Company to focus on R&D in security: In its focus on security and innovation, Zoom’s R&D expense increased 66% YoY to 421 million, but was only 6% of the total revenue, lower than Q1FY19 because of topline growth, CFO Kelly Steckelberg said. In FY21, the company will invest in R&D, focussing on security, “including leveraging the expertise and resources from top security firms”.
Problems with opening up platform to lay users were not anticipated
As traffic on Zoom skyrocketed because of shelter-in-place directions from governments across the world, Yuan said that the company had not “fully anticipate the problems with opening up the platform to first-time users”.
Pre-COVID-19, Zoom had primarily worked with enterprises: Before the pandemic struck, Zoom was primarily built for and used by large enterprises and institutions, Yuan said. When they opened the service to “unprecedented number of first-time users”, “with good intentions”, they did not consider that these users would not have full IT support or established protocols for security and privacy like the enterprise customers, he admitted. Use cases increased from just enterprises to first-time consumer users who used the platform for personal and social use, Yuan said. This resulted in negative price related to meeting disruption, security, and privacy issues.
The company took multiple steps to resolve this:
- 90-day plan on security and privacy with weekly webinars with Yuan to ask him anything
- Acquisition of Keybase to build end-to-end encryption
- Release of Zoom 5.0 cloud with support for AES 256-bit GCM encryption, and ability to report platform misuse to Zoom’s Trust and Safety Team
Zoom relied extensively on its cloud partners to deal with demand: To meet the increase in traffic and use cases, while providing “uninterrupted, reliable and high-quality services” to users was “a tremendous undertaking for our team”, Yuan admitted. Their data centres could not scale fast enough to handle the unprecedented traffic.
- Amazon Web Services: AWS is a “long-time” Zoom partner. As Zoom’s demand increased and the company had “limited visibility into the growth”, AWS provided the majority of new services the company needed, at times “adding several thousands a day for several days in a row”, Yuan said.
- Oracle: In April, Oracle also provided a number of servers in its cloud as demand for Zoom increased. Oracle is also a Zoom customer.
But this increased its operating costs: The gross margin in Q1 was 69.4% compared to 80.9% in Q1FY19 and 84.2% in Q4FY19. The increase in demand, “especially higher levels of free meeting minutes”, affected the gross margin, Steckelberg said. Using public cloud providers, though critical meet demand, had a huge impact on margins. This is why, Zoom will build “additional capacity” in its own data centres to bring gross margins back to mid-70s, and will increase capital expenditure to do that.
Expenses increased as the company had to do “record sales hiring and higher sales commissions due to strong execution”. The platform is also expanding its hiring plans for the rest of the year. While the company scaled up with third party resources, it will “backfill those with direct employees”, Steckelberg said. The platform also gave all its non-commissioned employees a one-time bonus (equivalent to two weeks’ pay) “to offset costs associated with any disruption” caused by the pandemic.
Partnership programmes to improve sales: For its primary videoconferencing services, Zoom has relied on direct sales, Yuan said. But for its Zoom Phone business, it also used a partner program and that helped it during Q1. Thus, partner deals, channel sales programs will increase.
Zoom will capitalise on new use cases such as online education, telemedicine, and tele-health. Education saw the highest QoQ growth, Steckelberg said. “[M]any universities and schools have announced that they are potentially hosting all of their classes in the fall remotely. So we expect that demands to be strong, even as we see certain easing their restrictions of shelter-in-place,” she said.
Zoom will never sell customer data, or use an ad supported model, Yuan said.
Chat as product is not a focus since Zoom already overs integration with Slack, and its platform has in-built chat. The focus is on video and voice enterprise, Yuan said. It has no plans to build its own real-time collaboration platform right now, he said.
Subscriptions main source of revenue, monthly customers increase
71% of increase in revenue came from subscriptions to new customers while the remaining 29% came from existing customers, Steckelberg said. This was seen across industry verticals, geographies and customer cohorts.
Customers with fewer than 10 employees grew 354% YoY, change billing mix of the company: In Q1, Zoom had 265,000 such customers, a 183,000 QoQ increase and a 206,000 YoY increase. These customers accounted for 30% of revenue in Q1, up from 20% in Q4FY2019. This changed the billing mix of the company as customers with fewer than 10 employees pay monthly unlike enterprise customers who pay annually, but monthly subscribers have a higher churn rate, Steckelberg said. She said it was too early to estimate if ease in shelter-in-place restrictions was leading to higher churn rates.
How to retain customers: A big concern highlighted by multiple external analysts during the call was whether the new customers will stick around and what Zoom was doing to ensure that. Steckelberg said that although there was an increase in number of monthly subscribers, the percentage of monthly subscribers was “consistent with historical”. The company will offer annual plans to the monthly customers, she said.
Other customer details:
- Customers with more than $100,000 in trailing 12 months revenue: 769, 90% increase YoY, up from 621 customers in Q4FY19
- Added more than 500 customers with more than $100,000 in annual recurring revenue in Q1
Demand for Zoom may taper as lockdowns ease but it is difficult to predict what will happen because of the pandemic, Steckelberg warned.
International expansion now focus as EMEA, APAC see 246% YoY growth
In Europe, Middle East and Africa, and Asia-Pacific, Zoom saw a 246% YoY growth and this represented about 25% of the company’s revenue. The Americas grew 150% YoY. As a result, the company will expand into more companies in FY21 than orginally planned, Steckelberg said.
Expansion of Board of Directors
Lt Gen. H.R. McMaster, who served as the National Security adviser for 14 months (February 2017 to April 2018) under US President Donald Trump, became an independent director on Zoom’s Board of Directors.
- Annualised meetings run rate increased 20x from 100 billion at the end of January 2020 to 2 trillion meeting minutes based on April 2020’s run rate.
- Customers with more than 10 employees grew 354% YoY
- Usage by Global 2000 customers grew over 200% sequentially
- Daily meeting participants peaked at 300 million in April 2020, up from 10 million in December 2019. Yuan specified that these are not unique participants, that is, if the same number joins five times a day, they are counted five times.
- Elevated levels of participants even as stay-in-place restrictions around the world are eased
- Total revenues: $328 million, grew 169% YoY from $121.9 million in Q1FY19
- Gross profit: $224.4 million, grew 129% YoY from $97.8 million in Q1FY19
Note: Zoom’s Q1 is defined from February 1 to April 30.