Insights

Zoom to IPO at USD $8 Billion Valuation

Zoom Video Communications, Inc. is a startup company that provides online video communication systems for individuals and enterprises. The company plans to list on Nasdaq under the ticker symbol “ZM” in April 2019. The company set IPO price at between $28 and $32 per share, which would be worth over $8 billion valuation.

(IPO Registration Statement; S1, S1/A)

Highlights

  • Number of enterprise customers is over 50,000 at the end of FY2019. Large volume of customers increased 2.4 times compared to the previous year.
  • Revenue from outside of the United States is 18%. 
  • Cash flow from operating activities is $51 million (+164% year-over-year).
  • Video conference market is predicted to reach $41 billion in 2022.

Eric Yuan, Founder & Chief Executive Officer

Mr. Yuan was one of the founding engineers and vice president of engineering department at Webex between 1997 and 2011. During this time, Cisco acquired Webex in 2007 for $3.2 billion. At Cisco, Mr. Yuan was corporate vice president of engineering. However he decided to start his own company to address some of the issues he was hearing from customers, and this led him founding Zoom in 2011.

More than 40 engineers were driven by Mr. Yuan’s vision, and joined Zoom to start new online video conference systems in 2012. Zoom raised over $100 million fund from Sequoia Capital and became a startup unicorn. Currently more than 750,000 companies worldwide are using Zoom’s services.

Financial situation

Zoom achieved $330 million in revenue and $6 million in operating income for the recent FY2019. While many of the tech companies that went public recently were still struggling with operating losses during the IPO phase, Zoom has already achieved profitability.

Zoom’s Online Video Services Packages

Basic plan is free for 1 on 1 meetings without time limit, or group meetings up to 40 minutes. Zoom also offers user-friendly apps and functions such as chat or screen sharing given them a competitive edge.

Zoom provides App Marketplace where users can cooperate other applications with Zoom services. For example, users can set conference schedules from Google calendar or launch Zoom directly from Slack.

Many educational or medical institutes as well as rapid growing companies such as Uber or Zendesk have been using Zoom as their main communication tool.

Number of corporate customers with more than 10 employees exceeded 50,000 in 2019. Revenue from those customers accounted for 78% ($257 million) of total revenue in FY2019. Average revenue per customer would be $5,075 annually ($423/ month).

Number of customer that contributed more than $100,000 of revenue increased to 344 in FY2019 from 149 in FY2018. Revenue from those customers accounted for 30% of total revenue ($288 million per customer).The growth ratio of subscription revenue (net dollar expansion rate), which is driven by increase of user adoption within customers, was 140% in FY2019.

 (Integration Partners)

Zoom provides four types of partner programs (Technology Partners, Refer-a-Friend, Reseller/ Referral Partners and Integration Partners) that helps organizations to connect Zoom seamlessly with third-party applications that their employees already use. Zoom has partners outside of the United States as well.

Looking into revenue segment by regions, EMEA made $32 million (+163% year-over-year). The growth rate of EMEA is larger than that of America. Zoom established a physical sales presence in Australia and the United Kingdom in 2018. 18.3% of revenue was generated from customers in APAC and EMEA in FY2019.


Cost of revenue decreased to 18.5% in FY2019 from 20.3% in the previous year, which primary comes out of server cost. Research and development cost was 10.0% and general administration cost was 13.5%. Zoom spent $185 million in sales and marketing cost (56.2%) in FY2019. As the company earned 25,000 of new customers with more than 10 employees in a year, it spent $7,432 to earn one customer by simple calculation. Considering that average revenue per customer is $5,075, Zoom can get the return on its expense if the customer kept on using Zoom services approximately 1 and 1/2 years. Zoom reported that 74% of annual recurring revenue was from multi­year subscriptions.

Since after Zoom raised $100 million from Sequoia Capital, Zoom has not had to raise any further large sums of capital. The company’s balance sheet has been expanded due to the increase of deferred revenue, which is associated with the long-term contracts from customers.

Cash flow from operating activities, which has been continuously positive, was $51 million in FY2019.

Total asset at the end of FY2019 was $354 million. Cash and cash equivalent accounted for 49.7% of total asset.

Video conferencing market is expanding rapidly. It is expected to increase to $41 billion in 2022 from $16 billion in 2017.

Zoom started providing “Zoom Phone” which is a cloud based phone system that will allow customers to replace their existing PBX (private branch exchange).

By introducing Zoom Phone, Zoom has entered UCaas (Unified Communication as a Services) market where competitor such as RingCentral leads. The market is expected to reach $79.3 billion in 2024. It is noteworthy that how Zoom would perform in UCaas market.

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