The Six Five Team discusses the latest earnings release from Zoom for Q2 2024.
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Daniel Newman: Pat, a couple of weeks ago, had an interesting conversation about what was going on at Zoom. They launched some generative capabilities, they talked about how they might use some data to improve their product and people went off the rail. I think you and I finally communicated to the world that this was one of the biggest nothing-burgers in a long time. I ate 12 or 13 nothing-burgers, and then I went back and got back to work.
But Zoom has been one of these weird stories because in the pandemic period of time, the stock run, I’m talking about the NVIDIA run. The stock ran to $500 at its peak or somewhere right around $500. It’s trading now at like $60 to $70. So, it literally went up like 10x and then went all the way back down. And the question mark has been, does the company have the scale in a non-pandemic world where people actually do go to work and in remote ecosystems to grow the business? I think what’s come out of it is a healthy, consistently growing steady business, Pat, that will very likely never see its valuation return to what it achieved during the pandemic, but it is still growing.
And so, the fact is, and this is one of those really interesting things is it’s bigger than it was at the peak of the pandemic. So, meaning this idea that remote work was what drove all the Zoom, but Zoom continues to grow. It’s bigger than it was at the peak of the pandemic. They beat this quarter on top, they beat this quarter on bottom, their growth is, it’s steady. It’s not massive, but their income looks good. But what I liked the most about their numbers, Pat, was they’re consistently growing enterprise, even if it’s a small number. They’re consistently growing their large customers, which is important.
A lot of people with the advent of teams have kind of said, “Oh, Zoom is the small business.” People Zoom does the mid Zoom gets the leftover, everything else goes to teams, but they’re winning big enterprises. And so, they’re doing almost $4.5 billion a year in revenue and they’re winning large customers. Here’s the thing though and I’ll keep this short on this one Pat, that we all have to keep an eye on though. Can Zoom become a platform? Does anybody care about Zoom beyond Zoom calling and Zoom videos? And that’s the big challenge that the company really has to overcome is the market needs to believe that Zoom is an ecosystem for meeting collaboration, integration.
Right now, to do the Teams thing, Zoom needs productivity, Zoom needs some sort of developer platform like a power platform, Zoom needs Dynamics or ERP. And the truth is Zoom’s never going to build all those things. So, is there a market for best of class? Is there a market for a company that’s going to say, “Look, we’ll use infrastructure from one company, we’ll use Salesforce for the other thing. We’ll use Google for productivity and we’ll use Zoom for collaboration.” Is there enough there, Pat? Or does Zoom ambitiously try to enter into those spaces?
We’ve seen what Salesforce has done there hasn’t worked out particularly well for the company. Salesforce has a great ecosystem, so I want to be very clear what I’m saying. But even with Slack and Salesforce, it’s still been a hard run for them to fully find a way to sell people on that ecosystem. Salesforce tried to do this with Quip. Quip has really I think been a buried product. I don’t think they’re even really trying to focus on it. For Zoom, it’s going to be even harder. So, I think they really need to think about partnership, they need to think about the ecosystem, they need to think best of class. And they need to really lean into making their world-class user experience stay meaningfully better than the competition, which will be hard.
Patrick Moorhead: I’m really impressed with senior management. If you think about what they had to go through the last five years, I don’t know how a team like that even does this. I’ve been on rollercoaster rides before, I saw my stock go from $90 to $1.50, $1.45 to 45¢. It is torrential, you’re bringing on a ton of resources, you’re laying off people, you’re dealing with just so much stuff. And you look at what Zoom did during, I’m not going to say the full word during the P, by the way we will get de-ranked and we’ll have some link at the bottom of our video. It drives me crazy but it’s impressive. And then during the beginning of the P, there was the security scare and Zoom made a ton of mistakes on the way it communicated and how it dealt with it.
Now, when you’re on monster growth, you’re more prone to make mistakes. And then you look where you are, look where they are now, they’re putting up some double-digit numbers when their closest competitor is going in reverse, hasn’t had an increase in I think six quarters. And then you map that against, let’s say Microsoft, where they’re essentially giving teams away for free with the big enterprise licenses, they’re bundling that in. David Sacks on the All-In podcast loves to talk about where are the regulators when it comes to bundling all this stuff by these giant companies?
And let’s go to the other challenge, Zoom’s core value proposition is its simplicity. If you remember three years ago, why do you like Zoom? Why do you use Zoom? Oh, it’s just simple, it just works compared to everything else. When you start adding features to it, the risk you run as a product leader is that it gets more difficult. I do like the pace that it is adding these features. They could add these capabilities and put them in our face, but I think it could backfire. You have to slowly pull these folks in who brought you to the show, who bought you for simplicity. I do think generative AI is an opportunity for them.
If you look at all of the value that you can get from a meeting where it’s essentially your note taker, it’s your action item provider, it’s your big moments. It determines what decisions were made. This is going to be gigantic and I think that people are just underestimating the value of that. And yes, the generative AI, nothingburger came and went just like you and I said. It was essentially red meat for the press who needed something to write about. The funny part is a lot of other companies changed their talks and it didn’t get nearly the headlines as-
Daniel Newman: It was like someone discovered this Pat and decided that this was the one time they were going to give a crap about-
Patrick Moorhead: The talk was updated in March and everything came out six months later.
Daniel Newman: It’s like now go read the rest of them. Go read all the rest of the terms of services, let’s just make that a beat for somebody.
Patrick Moorhead: Yeah. Everybody’s quietly changing their talks, I guess toss terms of service terms and conditions, but no, it’s good. So, I like the way that you characterize the company as consistent moving forward. I’ll end with, I really like the double-digit growth with the large customers because that’s where it’s at. And think about how hard that is when you’re probably a Microsoft shop and Microsoft’s giving teams away for you to go in and do that. So, I didn’t go to the analyst event that you did because I had a prior commitment. But I did talk to the company’s chief operating officer and the chief product officer to try to figure out what was going on with the terms of service.