Zoom Video Communications, Inc. (NASDAQ:ZM) Bank of America 2023 Global Technology Conference June 7, 2023 4:20 PM ET
Company Participants
Sanjay Rao – Head of Corporate Development, M&A Strategy and Zoom Ventures
Charles Eveslage – Manager Investor Relations
Conference Call Participants
Michael Funk – Bank of America
Michael Funk
Okay. We’ll get started here in a minute. Once again, Michael Funk, SMidCap software analyst, Bank of America. Really happy to have Zoom here with us again this year. New speaker actually this year. Sanjay, the Head of Corporate Development at Zoom, been there about two years now, I believe. And then we have Charles, Investor Relations Manager, I believe, is the credit title. Is that right to get there?
Sanjay Rao
You get that right.
Question-and-Answer Session
Q – Michael Funk
Yes. So thank you all again for being here, going to get started. 30-minute session, once they can all trial in a few minutes at the end for any Q&A from the audience, if you have it. But wanted to kick off by — I think probably a role-specific or appropriate question for you, given your previous background, investment banking at JPMorgan and now in your current role and bringing all of that experience from the investment banking side. And one thing that’s been topical is M&A, for investors, right? I mean clearly, large cash position, something still close to $5 billion cash position. Management has talked publicly about growth organically and inorganically, targeted acquisitions we’ve talked about. And I think you’ve announced a number of deals, Workvivo most recent. So the question is really twofold. First, I’d like to hear about the Workvivo and how that fits into the product portfolio, integration plans there? And then the second piece to give it to you now is putting that banker hat back on, kind of what are the top factors that you think about and care about when evaluating targets? And do you have a litmus test where there is one factor or maybe multiple factors that just takes an acquisition off the table?
Sanjay Rao
Great. Well first and foremost, thank you for having us here. I’ll try to remember both.
Michael Funk
I know it’s a multi-part question.
Sanjay Rao
Definitely. Appreciate it, and it’s nice to see everyone. So thanks for coming. So on the first piece, so do you want me to start with Workvivo?
Michael Funk
Maybe Workvivo first, integration and the opportunity there.
Sanjay Rao
So driving the corporate development and venture part of our business, we have the unique benefit of seeing a lot of adjacencies to Zoom and things that are core to Zoom in trafficking in these markets and companies every single day. Workvivo was one that we had our eye on for quite some time. And we were very fortunate to be able to put something together earlier this year with it. And just kind of stepping back, so Zoom’s platform has evolved pretty meaningfully from what most people know us for, which is our Meetings product, which is our core video solution to a much broader communications collaboration platform. One of those elements that most people don’t know about is our Team Chat product, which is a Slack alternative that we’ve had great penetration with. It’s an exceptionally good product. We use it internally every day as to a lot of customers. And what happens is companies spend a lot of time updating their employee bases on what’s going on, new customer wins, what events are going on in a company, all on Team Chat. And then you get a plethora of these messages. So it’s very hard to really track what’s going on day to day in a lot of companies. And Workvivo had developed a very nice corporate intranet, corporate Facebook type solution where you could post pictures of what you’re doing have a central calendar, do things like polls for customers — or employees poll surveys, reviews, things like that. And we have been tracking the company for quite some time and in this market, they have been contemplating potentially raising money, and we were able to really get in and make them an attractive offer and have the team join us. It’s based in Cork, Ireland. It’s about 50% North America, 50% outside of North America and something that complements our asynchronous Team Chat product really well, where we can eventually bring this into the Zoom platform and have a really nice home landing page for customers to go to over time.
From an integration strategy point, so one thing that we have to be delicate with a lot of acquisitions is companies like Workvivo were doing tremendously well on their own. Think of it as like a hyper-growth company, small company in Ireland that was winning against big entrenched competitors day-in, day out, 90%, 95% win rate, exceptionally strong value proposition. As we bring those into Zoom, we need to be very delicate that we don’t disrupt that existing momentum the company has. And so with us, as we think about our integration strategy, about 50% of Workvivo was upmarket. So enterprise strategic accounts, your typical bread-and-butter enterprise strategic account you would think of and about 50% was lower market. We can see tremendous value potential with that business of leveraging our installed base and accelerating that upmarket part of the business especially and we’ll look to do that. And the integration is still pretty early of it, but the initial feedback from the customer ecosystem has been super positive on that transaction for what it’s worth. Sorry, Mike, I forgot your other question.
Michael Funk
No, no. Let’s write it down.
Sanjay Rao
I forgot my notepad. So you should also give me feedback after this.
Michael Funk
I asked if you have kind of top 3 factors that you have look or a meaningful as you go through the checklist of M&A. And then if you have a litmus test where if a company feels one factor, it’s just off the table.
Sanjay Rao
Yes, for us, so every core part of our platform as well as things that are adjacent to us, we’ve mapped in terms of a build partner and partner, invest, buy framework. And one thing that’s unique about Zoom is Eric, our Founder is a hyper engineering-focused founder and product-focused founder. And Eric can build any product, I think, faster than anyone I’ve ever seen and the quality is just exceptionally good. So oftentimes, I find myself competing with him to see if I can buy something faster than he can build it. And he continues to outperform relative to my expectations. But I think for us, first and foremost, it’s — when we look at our road map and how quickly we can develop things, can an acquisition accelerate our time to market in those fields or not? And Zoom is great because so many of our customers tell us what they want us to buy. For example, another acquisition we did about a year ago was a company called Solvvy, which does conversational AI which sits in front of our cloud contact center solution we’ve gone to market with. And we started really investing in this time based on feedback from customers.
And when we went through the build, invest, partner, buy framework, it was clear to us that it would be faster to actually acquire Solvvy, turn it into Zoom Virtual Agent, which we’re in market with now versus really building it from the ground up. And one of the benefits you get with some of these is the teams that you can bring in through acquiring these companies who’ve spent a bunch of time they come all from the Carnegie Mellons of the world where they have these big AI think tanks, and they can really accelerate our road map. I think for us, it’s mostly like does it fill a keyhole and accelerate our road map more than anything? If it’s at the early end of the spectrum, we look for companies that are really in this hyper growth phase where there’s definitely product market fit. The team cultural fits good. It fills a key hole, and I think most importantly, the acceleration they have, we believe we can meaningfully move that just given our installed base and leveraging that to the benefit of the company that we’re bringing in. So that’s I’d say the first thing.
I’d say where things — acquisitions we look at, they don’t get done. It’s as we dig in, Zoom, we have the benefit of a tremendous base of engineering go-to-market product development talent. And with any acquisition, as you dig in, it’s really just making sure that you uncover everything you possibly can during these diligence phases to find where the skeletons in the closet might be buried. And sometimes we dig and we find things, and we realize that if we were to proceed with them, just the value proposition of doing it, it’s just going to not be as high and the risk-adjusted value proposition is not strong enough for our investor base and really moving the company forward and reaccelerating our enterprise business. So that’s usually where we see things…
Michael Funk
Is that more often on the technology integration side where you see potential issues? Or is it it…?
Sanjay Rao
It can be for a variety of things. I mean, technology, architecture, customer feedback. Oftentimes, like a lot of the companies that we monitor from our side, our customers are also monitoring. We talk to our customer advisory counsels, we understand what they like, what they don’t like. And it can be for any variety of reasons, but we want to have strong confidence that when we buy something, we can accelerate that business from where it is that it’s a good cultural fit and that it accelerates our road map and delivers a better value proposition to our customers and shareholders.
Michael Funk
Makes a ton of sense. A related topic would be Contact Center right? You just mentioned Solvvy is one acquisition that was additive to that product. It’s something you started to build out organically a year or so ago. And if I have heard you correctly the last few quarters, I think made tremendous progress, right? Just in terms of moving from primarily internal contact center to now more external contact capabilities, some of the larger deals that you highlighted, I think last quarter, so winning larger upmarket deals. So is Contact Center an area now let’s think about more being organically built given the positioning, capabilities or other areas in context and we’re like, you know what, here is a must-have to take that next step, and we can do it best through acquisition versus the sitting down and coding yourselves?
Sanjay Rao
Yes. So the core guts of the CCaaS we’ve built, you’re right, over the past about 1.5 years, we’ve been in market since last February in GA with our Contact Center. We compete with the other CCaaS vendors. On its base, it’s a super attractive market because we have a lot of that market that’s still on-prem. And there’s a lot of that base to go after as well as leveraging our own installed base. Sitting around the Contact Center, there’s 80 to 100 companies that you either have to partner with or find a way to maybe invest in or potentially could be acquisition targets. Solvvy was an example of that in terms of conversational AI.
Another category that we’ve recently announced something is on the workforce management, quality management side, where that’s a space where there’s a set number of companies that we partner with. You could easily acquire them. Sometimes it’s actually faster and easier for us to build those ourselves. So in that case, we went with the buy part of the — or the build part of the framework in terms of building our own workforce management solution, which with contact centers and live agents, one of the complexities is how do you schedule people to be there at the right time. If you’re around a holiday and you have a bunch of people having customer support issues or needing to return things, you need to have your contact center appropriately staffed. And then once they’re actually in the contact center responding to customer support, inquiries you need to make sure that you can monitor how they’re performing. So we have our quality management solution that we’ve come to market with.
We have Zoom IQ, which leverages a bunch of AI capabilities where you can monitor how agents were actually doing in a call. And then if they’re doing things, if there are other — if there are things they can do to perform better and resolve the customer support inquiries faster, we can provide those suggestions to those agents in real time. And so there’s a lot of these innovations where we’ve built the core guts of it, we acquired Solvvy versus partnering and just solely partnering with companies. We’ll still partner with other companies on conversational AI side as well as the workforce management side. But there’s definitely a combination that you could see play out of internally developed things and doing more things like a Solvvy to really accelerate our road map on that side. Because I think the — in the Contact Center, you need to partner with everyone and customers like best-of-breed, different components. And as we get deeper in market, it might validate more things than we should be buying there based on customer feedback to accelerate our efforts there. So we’re very excited about that product too.
Michael Funk
That makes a lot of sense. Charles, do you want to add something?
Charles Eveslage
Yes. I was just going to add on the Contact Center. Two things that we found really interesting that we weren’t really anticipating when we first launched the product. Number one is that in a macro market that’s kind of — there’s a lot of uncertainty, we’ve seen a lot of customers kind of lock this product as a way to save costs because we’re very price disruptive in this market. And number two, we usually use our Meetings product is like a beachhead to get in with other products. But with Contact Center, we’ve seen a lot of these greenfield deals where we’ve actually been able to start with contact center and then expand into Meetings, Zoom One, Zoom IQ for sales and Zoom Virtual Agents. So that’s been a pleasant surprise for us.
Michael Funk
It’s a great point. Actually, you mentioned being price disruptive in context that you see the same strategy. And Phone is something I always wonder about because you could argue that Zoom the brand as a premium product in video, right? Easiest to use, most reliable, I mean, really viewed as probably the premier product in video. But then you can on Phone and deeply discounted relative to peers to gain market share. Come out again with Contact Center, you’re pricing, I believe, about 1/3 of where some of the higher-end companies are positioned. So how do you think about it internally with positioning the company with pricing and within that kind of premium relative to discount product and is the pricing strategy today in Phone and Contact Center subject to gain a beachhead. And is there opportunity to normalize pricing then over time?
Sanjay Rao
So our Meetings is product, we think is the best, as do we, for our Phone and our Contact Center product, too, just Eric’s fundamental philosophy in the company is to develop the best product and be most price disruptive that we can be for everything. I think a founding philosophy of the company. I do think with us it gives us a tremendous advantage in a market like this because contact centers can be very tricky in a complicated macroeconomic backdrop. And we’ve been able to take down 1,000-seat, 2,000-seat contact center deployments, which normally would have taken a lot longer than a lot of us had expected.
But that being said, the price disruption element is part of it, but also like customers won’t deploy it unless there’s like real technological advantage for our Contact Center stack versus what they already have deployed in a lot of cases. So I think with us, our fundamental philosophy will continue to deliver the best product at the most competitive price and do what’s right by our customer versus like trying to get there and then try to drive up pricing over time with some of these solutions.
We also like Contact Centers, so we have different ways to monetize it too. So we have the pure CCaaS part where we charge $1 per seat per month, where we’re hyper competitive. As we mentioned, we have ZVA Virtual Agent, which is more of like a consumption-based pricing model in terms of usage of the Virtual Agent. And so there’s different ways of marketing Zoom IQ, we charge on a per seat per month basis and at a pretty attractive price there. But the value that we’re getting is how I think will drive the expansion and growth of the company versus trying to double the price of our Contact Center solution, which I don’t think we usually yield. So…
Michael Funk
And how do you envision TAM growth and progression over time that in context, and you just mentioned the seat component in usage based and it all ties back into AI once again.
Sanjay Rao
Yes.
Michael Funk
So in your view, does the TAM grow? Do you see it shrink as the usage-based component turn to something akin to wireless plans today, where it’s just great big buckets and carriers to keep giving more and more minutes or data usage for the same price, how does that evolve? And how does the TAM move over time?
Sanjay Rao
So I think the great thing with having both the CCaaS and then ZVA is it’s — if you have some seat count contraction, ZVA is probably picking up that slack. And oftentimes, we think we can actually get good monetization of the ZVA product in terms of offloading some of that seat-based license onto the Virtual Agent. And so I think the TAM — so conversational AI TAM, I think, has been a little bit understated historically, especially with a lot of the AI innovation that’s going on. Now I do think the market will take a little more time to form, but we think there’s a lot of interesting things we can do from a growth perspective with coupling those two together as well as with our Zoom IQ product and optimizing the performance of agents that are actually using that seat-based license and making them more productive.
Michael Funk
Okay. Makes sense. I mean where do you think we have to go in AI being able to kind of address a remedy context there when you see seat counts decline. I think the stats I’ve heard is that, look, I mean, 80%, 90% of most calls actually going to a human agent to get solved, right?
Sanjay Rao
Yes. So I think in different — there’s a variety of AI solutions. I’ve had the misfortune of using two Contact Center solutions over the past week because I had my own customer support issues and AI wasn’t able to resolve either of them. Fortunately, neither of them was our product but a good opportunity for sales. But I think with us, so if you take ZVA, we’re using it right now on our website at Zoom. So our online business, which is about 43% of revenue is self-serve. So customer support issues come right to our website and they use ZVA to remediate those. We’re seeing about 90-plus percent of the customer issues being resolved just through ZVA. So that’s pretty high, I think, relative to where the broad conversational AI bucket is right now in terms of remediation and containment of issues.
But I would hope with most of that market, it probably gets like 60%, 70%, 75% remediation through like an AI chatbot. But that doesn’t necessarily mean that you’re losing all of that seat count too because those — that remaining 30%, 25% of things that need a human agent to resolve are usually highly complicated, multifaceted issues where you need multiple specialists in a lot of cases to help resolve those. So I do think it will take time to get there. Conversational AI has been around for a while, and you’ve still seen a lot of like the existing customer support requests struggle to like get them resolved without having that interaction. So there’s great potential, but I think it will take time for this to really catch up and see significant dislocation in that seat count so.
Michael Funk
Yes, it’s step function overvalued where you get to the point and…
Sanjay Rao
Yes, I’m still looking for the day where I can have a customer support my own personal ones resolved by an AI chatbot, but we’ll get there one day, I guess. ZVA gets deeper in market.
Michael Funk
Hopefully so. I asked about pricing a little bit earlier, but slightly different angle. I think you actually increased some of your pricing for online earlier this year. I want to say it was March, Charles?
Charles Eveslage
Yes. It was the beginning of February. March is when it went in effect. We announced it…
Michael Funk
Went into effect in March.
Charles Eveslage
In March, yes.
Michael Funk
Okay. Is there capacity opportunity to increase more and not just across online cohort? Or have you already done everything you believe is prudent to the short term?
Sanjay Rao
We look at it every day. And for right now, our stated MO is deliver the best product at a very price disruptive point. And that formula has worked really well for Zoom historically. If you look at Meetings, Phone, what we’re seeing in Contact Centers, Zoom IQ different parts of our portfolio, so we’ll continue to hold that for the time being. But we look at it very closely to see if there’s a different pricing packaging that we can offer customers. So the online part on the monthly contract may increase by $1 per month if you’re on a monthly contract, if you’re on a full year contract, the price is effectively the same.
Another thing we’ve done is like localization of pricing for our online business in foreign markets where you couldn’t necessarily take the U.S. dollar and translate into a local currency and I think that was right strategically. So we’ve actually localized pricing in different currencies to make it easier for international customers to access our platform. But I’d say outside of that, broadly across the platform, we routinely look at it and where the market collectively is as a whole. But really feel that our approach of delivering the best quality, best value product and most competitive price is the right strategy for the time being.
Charles Eveslage
Yes. I would just add that a lot of the reason why we increased that price is because we also increase the value that we’ve delivered to customers since we originally launched at that lower price point. Now they have Zoom essential apps, all available within the online platform, and they have cloud storage and they have Whiteboard. And so the strategy is not just to raise prices because we can. The strategy is to raise prices because we’re delivering more value.
Michael Funk
It makes sense. The question was really kind of more often more aimed at how much elasticity demand the really is in your core online segment. And there has been some fluctuation in churn. I think probably largely just due to the pandemic and the effects of that, maybe not natural users churning off. So I think the more direct way to ask it is, can you quantify the price sensitivity or you lost to see demand amongst your online cohort, did you see any material uptick in churn after increasing pricing?
Sanjay Rao
Interestingly, the churn has come down in that business. So we suspected it would be pretty retentive through the price increase when we went through that process and the churn actually came down. We’ve seen more conversion actually to the annual contract from the monthly, which was one of the goals of getting that business a little bit longer term duration in nature. But it’s actually been pretty retentive through the price increase. It was only $1 increase per month. So — but if you were to switch to the annual plan, it would have been the exact same economic proposition. So we saw a lot of customers do that. So…
Michael Funk
Okay. We’ve got about 8 minutes left. I open up the audience in there for 3 or 4. I do want to get to a little bit longer-term focusing questions and just the growth trajectory. Your guidance implies some deceleration in growth. I think you had renewal kind of peaking or higher levels and peaking higher in 1Q, some of the same online pressure, but you’ve talked about accelerating top line growth exiting 2023. I believe that’s how you talked about it. So what are the factors that have to line up to hit that objective? And so what kind of levers are you able to pull?
Sanjay Rao
Yes. So I’d say a couple of things. So one is having the product platform able to be sold. So we’ve evolved our platform exceptionally meaningfully over the past couple of years. And for example, we have 1,500 feature innovations over the past year we put in our platform. We’ve expanded from very few products to multiple products where we can touch multiple buying centers of a customer.
The second thing that comes along with that is the go-to-market side, where we’ve gone through some changes on our go-to-market team, and we’ve recently appointed Graeme Geddes as our Chief Sales Officer. Graeme was previously in charge of platform acceleration for Zoom. So think of like newer products like Phone, Graeme — that was one of his babies that became one of — 10% of revenue in our last quarter. And so we’re trying to replicate that success across other parts of Zoom platform as a whole. So we have the product platform.
Now the go-to-market side, we’ve done some restructuring that you’ve probably heard about over the past quarter. We had a RIF in the company, we had 15% of the company reduced as part of a program we put in place in February. But on the back of that, now we have Graeme, we have a new leader in APAC, a new leader in EMEA on the go-to-market side. And in the layers below Graeme, we have the right people in the seats there to really drive the enterprise acceleration of this company going forward. Whereas I think before trying to find that right person with the right DNA and who can really get the go-to-market or to really get excited behind them, sometimes it takes a little bit time to find the right person, but we’re very fortunate to actually have Graeme in that seat right now, and he’s super charged to get the enterprise business reaccelerated. And that’s from Eric’s side, Eric’s top 3 priority, I always joke are, accelerated enterprise growth, accelerated enterprise growth, accelerated enterprise growth. So…
Michael Funk
And another one of the pressure points last quarter was also EMEA, I think, in part related to the RIFs, their local laws, they create some delay and notification in obviously to moralize people. Have you seen improving trends, though, since then in productivity? And…
Sanjay Rao
Yes. Part of the challenge is different regions have different regulatory frameworks when you do a restructuring. So in EMEA, for example, you have to go to a population base and say there’s going to be a restructuring, but we can’t tell you were impacted. So on the back of that, you cause some turbulence with people that don’t know if they’re going to be part of that or not. And the good thing is it’s behind us now. And actually, we’ve seen pretty good momentum with parts of our business like mid-market, which is a shorter sales cycle than the big enterprise part of our business, now that it’s behind us. So, yes, I think going forward, we have all the pain has been taken and the investment is taken in Q1 and going forward, it looks a lot more stable and productive going forward.
Michael Funk
Great. And can we get the microphone now is there any questions in the audience? Just raise your hand. I have one more while we wait here. I just wanted to circle back for my last one. Going back once again to your prior job and thinking about M&A and valuation specifically. I’ve heard a lot from management teams the last two years about that we’d love to do deals, but private market valuations aren’t reflecting reality and haven’t come in. So from your seat, are you seeing those valuations come in? And I guess if they have or treated they have, what do you think makes them correct even further, meaning come lower?
Sanjay Rao
Yes, especially in the private market, we’ve seen much more openness to evaluation exploration than six, nine, 12 months ago. We — just to give you a context, we probably get inbounded by 300 to 400 companies a quarter. And a lot of these start off with, oh, there’s a stocking horse bid, you’re very fast processed. And then three months later, it never gets done and then three months later, it’s like an acqui-hire discussion then three months later it’s like, can you just take our team.
So I think we’re getting closer to the bottom of those because a lot of the private companies that we’ve trafficked in, they’ve done inside rounds, they’ve done extensions of prior around. They’ve done venture debt, multiple of these things. And a lot of that gas in the tank has been exhausted. And we’re waiting Mike for you to take all these companies public. So given you’re not taking public it just makes them more attractive from a valuation perspective for us. But it depends on if the IPO market comes back, so there’s different views on when that might come back if it’s later this year that, that might open an avenue for some of these companies. But the hyper-inflated ARR, multiples of ARR we’ve seen come in pretty meaningfully. I think for us, it’s really on the M&A side, can we build it faster and build something better? And is the short-term, long-term dynamic of those acquisitions better for us as a company and our shareholders versus just building it ourselves? We’re just not doing anything in some cases, too, like maybe it’s an adjacency that we don’t need to get into.
Most of our M&A like we’ve actually sourced internally. So filtering through a lot of the inbound traffic. I think the best ideas we get from our customers, from internal product teams and sales teams when they realize there’s like different parts of our portfolio where we can accelerate meaningfully by having something that we might be missing in an RFP or something like that. So…
Michael Funk
Yes. And then real last one for me is how to think about firepower for M&A. I mean, I’m sure you talked to Kelly and the Board and everyone, they probably tell you here’s what your firepower is, whether it’s an allocation that $5 billion cash forecast, using equity is okay or even debt. How much firepower do you have? And where are they looking to allocate capital elsewhere outside of M&A that might be taking some of that capacity away from you?
Sanjay Rao
Yes. With us, I mean, we have a $5.6 billion of cash on our balance sheet…
Michael Funk
I apologize for changing it.
Sanjay Rao
No. So we have ample firepower to use that cash balance for M&A. But I think you also have to be very disciplined at just spending that cash balance for the sake of doing M&A versus doing something that’s going to really drive long-term value creation in the company. So it provides us a ton of flexibility in this market that we’re in. So our priority is accelerating the enterprise growth, both organically, and we can supplement from M&A. We’ve looked at things very, very small, all the way up to very, very large transformational things, but it’s finding those things that really help to enhance the long-term value creation of this company versus there’s a lot where short term, you get an optimization than long term. You’ll get bogged down on restructuring your competitors will come in and take your market share, which no one wants to happen here. So we’re very thoughtful around it.
And as we get deeper into these new markets, too, we validate a lot of categories that we’re tracking for my team in terms of does it make sense to do this? Or is this something that might not make sense? And let’s focus on some other categories. So we’re really excited about having that flexibility, especially in this market. It’s more of a function of like when do we find the bottom in this market. And I feel like a lot of the other corporate development teams are doing the same thing. But where is it at the bottom or close enough where you can make some of the returns work where you want them to and really get the enterprise part of our business accelerated faster than we’re going to do organically ourselves.
Michael Funk
And is equity occurrence you want to use in the current valuation?
Sanjay Rao
Yes. I think we’re open to it. I mean, obviously, we have to do what’s in the best interest of our company and shareholders, and we pay attention to things like dilution and so on and so forth. And we don’t like where our stock price is. We like your price target much better than where our stock is trading today. But we do pay attention to all those vehicles and trying to figure out what the right consideration mix is for something that we do.
Michael Funk
It makes a ton of sense. Thank you, guys, again for coming out today, and thank you all for coming to the meeting.
Sanjay Rao
Yes. Thank you, guys.
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