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Profit, “viral involvement” and other reasons why the “unicorn” Zoom returns hope for technological IPOs

Successful, stable and profitable service is a rarity for modern startups.

Since 2013, more than 70% of technology start-ups that enter an IPO are unprofitable. Lyft, Dropbox, Pinterest and other companies that filed applications with the US Securities and Exchange Commission directly indicate that they will not be able to make a profit or keep it in the near future.

The percentage of IPO with a negative assessment of profit Quartz

On their background , the cloud videoconferencing service Zoom stands out , which for three years in a row doubles its revenue, in January 2019 ended the fiscal year with a profit of $ 7.58 million with a revenue of $ 330.5 million.

On April 18, 2019, Zoom started trading on the Nasdaq Stock Exchange: the company valued the value of ZM shares above the originally announced interval – $ 36 instead of $ 28-32. Immediately after the start of trading, the stock price rose by 73% to $ 62.

The company plans to raise $ 356.8 million with a total valuation of $ 9.2 billion after an IPO. This is ten times more than in the last round of investment in 2017.

The success of Zoom is based on the ease of use of video calling technology compared to competing products – Microsoft, Cisco and Citrix. Zoom began to be used in startups and small teams, and as new users were spread and attracted, large corporations became interested in the company’s products. Zoom claims that over 50% of Fortune 500 companies use its services.

Appearance zoom

Zoom Video Communications was founded in 2011 by the founding engineer of WebEx online conferencing service Eric Yuan. In 2007, Cisco bought WebEx for $ 3.2 billion, appointing Yuan as vice president of development, but by 2011 he was disappointed in how Cisco ran the company.

Eric Yuan CNBC

The company focused on selling expensive and sophisticated teleconferencing equipment, did not develop meeting software, and did not optimize it for smartphones, whose role in the workplace was becoming ever higher. Yuan saw dissatisfaction on the part of WebEx customers and left Cisco to launch his own project.

The Zoom platform combines cloud video conferencing, online meetings, a conference room, and group messaging. It works on the freemium model : in the basic version, you can communicate in group conferences for 40 minutes, and paid packages start at $ 14.99 and offer additional functions, such as meeting identifiers, video recording applications and technical support.

Why Zoom Became Popular

The basis of the Zoom business plan is customer satisfaction. In 2018, the Consumer Loyalty Index (Net Promoter Score) Zoom exceeded 70 points, which is higher than the average score for the entire technology industry.

Gartner called Zoom one of the leaders in meeting products, along with Cisco and Microsoft, and also highly rated Zoom on the aggregators of customer and employee ratings – Gartner Peer Insights, TrustRadius, Glassdoor, and others.

The Magic Quadrant of Gartner, an analytical company, demonstrating the leaders and laggards in theGartner conferencing market 

According to Zoom, the company became successful due to two reasons – its own technological approach to video calling and the “viral involvement” of new customers.

One of the features of the platform is fast and stable video call operation on any devices and platforms: Windows, Mac, Linux, iOS, Android with direct integration into other business tools – Slack, Atlassian, Dropbox, LinkedIn, Salesforce. Zoom uses its own data center infrastructure, as well as Amazon Web Services and Microsoft Azure clouds.

The company’s approach to video calling is significantly different from the approach of other companies in the market. Instead of adding video to an existing platform or chat, Zoom initially developed tools for processing the video stream in the cloud and patented its own router, which separates the processing of content from its transmission. Thus, video calls are more stable and of higher quality than those of competitors, Zoom states.

Zoom SEC structure 

Zoom not only offers its own solutions for video communications, but also allows third-party developers to create applications and extensions to increase the capabilities of services. In January 2019, the company launched the marketplace , which already has applications for integrating Zoom with Microsoft Teams, Jira, Slack, Gitlab, Google Drive, Asana, and other services.

Zoom

The second reason for the success of Zoom calls “viral involvement.” For example, a small group of developers within the company starts using Zoom at a free rate and gradually involves people from other departments. As a result, the company gradually moves to a paid subscription with advanced features, and then Zoom selects the optimal rate for full deployment.

According to the company, the sales model allows you to turn one “free” user into a full subscription for the entire company: for the fiscal year ended January 31, 2019, 55% of 344 customers started with a free subscription for one employee, and now everyone brings more than $ 100 Thousands of revenue.

Transfer development to China to reduce costs

One of the key profitability factors of Zoom is “a large team of engineers and developers located in China, where staff costs are lower than in many other countries,” indicates Zoom in documents for the US Securities and Exchange Commission.

If we had to relocate our development team from China to another jurisdiction, we could, among other things, face higher operating expenses that would have a negative impact on our operating profit and would damage our business.ZoomExplanatory note by the US Securities and Exchange Commission

For the 2018 fiscal year, the company spent $ 33 million on research and development – this is 10% of the total revenue. Zoom costs are significantly lower than other business software developers: Atlassian development costs accounted for more than 40% of revenue, while smaller Zendesk and Hubspot spent more than 20 percent of their revenue on research and development, the CNBC publication estimated .

According to statistics from the Glassdoor service, an entry-level Chinese software engineer earns about $ 34,350 a year, while in the United States in San Jose an employee earns about $ 110,000 in a similar position.

Business Insider Japan

CEO of Chinese descent helps in recruitment, Zoom believes. The company claims that Yuan has a “critical” role in operational management in China, since he spent his youth there, and received bachelor’s and master’s degrees.

However, Zoom understands that the deployment of engineers in China can provoke increased attention to security and leakage of confidential data due to working with large business clients, which is openly indicated in the application for an IPO.

How does Zoom earn

The company’s revenue is generated by subscriptions to the video calling platform and additional services and products, Zoom gets about 75% of the profit from a subscription for a year or more. Zoom divides all revenues into business customers whose services are used by more than 10 employees and “non-business customers”. Both divisions for the 2018 fiscal year grew by more than 90%, and the total number of business clients grew by 97%, Forbes calculated .

In total, according to the financial edition of Money Fools, Zoom has more than 50,000 customers, and the company’s business is maximally scattered between them: none of the customers bring more than 5% of revenue.

Over the past three financial years, the company’s revenue grew by more than 100%: $ 60.8 million in January 2017, $ 151.5 million for 2018 and $ 330.5 million for the fiscal year ending in January 2019. This is one of the best indicators in the industry in the SaaS market, says Money Fool.

According to analysts, the percentage of revenue from existing customers is one of the key indicators of company growth. If the total annual revenue growth exceeds 100%, this means that Zoom not only does not lose existing customers, but also makes them spend more each year: strengthens ties and releases more and more products that customers are interested in.

Another reason for the steady growth of Zoom Money Fool analysts called the trend for remote and decentralized work of companies. If an enterprise has several offices in different cities and countries, it is interested in tools for optimizing business processes and high-quality staff interaction, including video calls.

According to Zoom, companies, after the introduction of their video platform, very quickly pay for it and have a very high ROI (return on investment) when they sign up. The entire video market in 2020 Zoom estimates at $ 43 billion – the company is going to constantly expand and develop new products to capture most of this market.

Zoom will be one of the first large-scale technological IPOs in 2019, access to the stock exchange will occur simultaneously with the photo hosting site-social network Pinterest with a loss of $ 63 million. After that, investors expect the IPO of Uber and the Slack service, which will be used for listing on the stock exchange. not an ipo.

The first technological IPO in 2019 was the Lyft online taxi service, whose shares fell 2.5% in prices for 2.5 weeks after being placed, which is why some investors sued for the service . The profitability of Zoom contrasts sharply with Lyft, which lost $ 911 million for 2018.

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