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Zoom Embraces Its New Consumer Customers

By Brian Withers – Jun 24, 2020 at 11:20AM

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A series of unexpected events has made Zoom a different company today.

Video calls have quickly become a new way of life. Meetings for work, classes for our kids, or catching up with friends and relatives are all now virtual events through the magic of software and the internet.

Zoom Video Communications (ZM 1.27%) has been at the center of this trend, and has seen unprecedented customer growth since December. But not all of this growth was intended. Along the way, the video platform has attracted a huge consumer following, which has changed the company for the better.

Let's look back at how this happened, the challenges along the way, and what this unplanned customer set means for this growth stock.

The platform that just works

In 2011, CEO Eric Yuan left his position leading Cisco's WebEx video conferencing engineering team because the product had so many customer issues that couldn't be fixed without a full refresh. He started Zoom to build a video conferencing tool from the ground up with the vision of making video meetings better than in-person ones. Zoom was launched two years later, and it quickly gained traction as it was known as a product that just works.

The company experienced torrid growth, and by the time it went public in March 2019, it had $330 million in annual revenue. The company built its software and growth strategy around a "land and expand" model to gain a foothold inside corporate enterprises and then grow its footprint as organizations gradually embraced video as a way to get work done. 

But then everything changed when the coronavirus pandemic hit.

The challenge and opportunity of COVID-19 

As a gesture of goodwill, in early March 2020 Yuan opened up the Zoom platform to K-12 schools to allow them to conduct remote classes online for free. At the same time, it was "landing" new consumer customers with its free limited-function product that was easy to download and worked great.

Video conference call on laptop with four work colleagues.

Image source: Zoom.

By April 1, Zoom's usage grew 20-fold from its levels just a few months earlier, over 90,000 schools had adopted its free educational service, and the product was experiencing numerous security and privacy issues. Yuan and the management team committed to a 90-day plan to reassign all its engineering resources to fix the issues facing all of its users regardless of whether they were educational, consumers on the free plan, or large corporate organizations. In an open letter explaining the plan, Yuan said "our platform was built primarily for enterprise customers – large institutions with full IT support..." He went on to explain that it now had "a broader set of users who are utilizing our product in a myriad of unexpected ways."

The company has since fixed the major security and privacy issues, and has shared how many new consumer and small business customers it has attracted along this journey.

A new consumer segment has emerged

In the past, the company hasn't split out data for consumers, but it provided insight to its customers with "less than 10 employees" on the most recent earnings call. This segment grew from 20% of revenue in the fourth quarter to 30% of revenue just one quarter later. In absolute dollars, the numbers are even more impressive, growing an amazing 162% to $98 million in first quarter 2020.

The company has a realistic expectation that some portion of these customers may drop the service as the crisis passes. But even so, this consumer/small business customer segment is still significant, which prompted a question from the last earnings call on whether the company had a consumer strategy. The CEO's answer is important for investors to understand:

I do not think we needed to have a specific consumer strategy. Our strategy is, offer one service. No matter where you are, no matter what you do, no matter which device, we just help you to stay connected.

It turns out that the features that make the product more secure and address privacy issues are universally important to all customers. The work accomplished during the 90-day plan made the service better for all its customers, no matter if the account has 1,000 users or just one.

Zoom's role is expanding

In the opening remarks of the recent earnings call, Yuan explained that he was "proud to see that our platform is serving a critical role beyond our original vision." It's important that Zoom is helping people stay connected no matter whether they are a consumer, an educator, or part of a large corporation. The company's brand image, its entire customer base, and its shareholders will benefit from this new perspective for years to come.

Brian Withers owns shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Zoom Video Communications and recommends the following options: short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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