What's the Strategy Behind the Zoom Phone?

One of Zoom's (ZM -0.82%) perhaps underestimated opportunities is Zoom Phone. In this Backstage Pass video, which aired Sept. 28, 2021, Motley Fool contributors Jon Quast and Brian Withers share their thoughts.

Jon Quast: Yes, indeed. For my section here, we're talking about Zoom Phone.

I think, Dana, we're to address your question here that you put in the chat.

Basically, what we talked about to this point is Zoom's core business, what it's doing, and how it's really still very solid and things that it's doing to improve that experience. But now, we're going to transition into what they talked about regarding what is going to be the next growth driver for this company.

One of the things that they are really focusing on is Zoom Phone. Now, this is replacing a PBX system or what's also called a Private Branch Exchange. This is the internal phone system of a company. If you've ever called a company and then you get transferred somewhere else, this is what we're talking about. We're not talking about the inbound and outbound calls necessarily.

You can bring your own carrier to Zoom. We're talking about the internal workings of the system.

Yeah, in the next slide there, keep in mind that Zoom Phone only launched in January of 2019. I'm talking about calendar 2019, not fiscal 2019. This is only two years that it's even been a product.

It had a fantastic [inaudible] over the past year. It's been adding a lot of accounts. I think it's added a million since the start of this calendar year, since the beginning of 2021. On the next slide there. This is how Zoom is doing this. They are not concerned about the hardware aspect of the internal phone system. Their concern is the software. What they're doing is they're partnering with all of these other hardware providers, certifying them saying yes, Cisco's phones work for our system. Zoom certified. Yes, Oracle's hardware, [laughs] Yealink, this is Zoom certified, so you can buy those things from these different companies. Zoom's not involved in that. They are more in the software deployment of all of this.

Brian Withers: Well, that totally makes a lot of sense. I didn't completely understand this, Jon, but if a company has a bunch of Cisco phones on their desk, it's not like Zoom comes in, takes all those out, and puts a Zoom Phone down. One day, it's running on Cisco's network. The next day, Zoom is powering the infrastructure. I think that's a super cool way to do it.

Quast: Yeah. It's all about reducing the friction. Maybe you have a phone hardware that you've liked or maybe it's new and you just got it. Well, you can still change your operating system basically and it's Zoom's model. What makes this unique for Zoom is you can take the call on your phone, but then you can forward it to a cellphone device. You can pull it up on a video of you need to transfer to that, it just has a lot more flexibility than the more legacy systems. Basically, their job is to get traditional phone systems transferred over to the Cloud services that they provide.

The next slide here we see that they have already reached two million seats and so by a Zoom seat, what are we talking about? We're talking about a physical location of the phone. Not that many customers, we're not talking two million customers, we're talking one customer could have 100 seats because that's how big their employee basis that needs a phone seat from Zoom.

Next slide. This is the one that we're going to camp out on the most because I really like this slide. You see right here, it shows the growth on Zoom Phone customers with more than 10 employees. They are over 18,100 customers right now. Major growth over the past year more than a triple up 212 percent. Now, if you look at this, remember that Zoom has over 500,000 customers with over 10 employees. Right now, we are looking at 96 percent of Zoom's customers have not upgraded the phone yet. They are still potentially just with Meetings. The upsell opportunity here is still tremendous for Zoom. We don't know necessarily how many seats we're talking about with the remaining customers, and also trying to dig down into it's management. The Q&A was like, "Look, every customer is different, how many seats that they could potentially go for?"

But as we saw in the previous slide, the market is estimated at 464 million seats out there. Only at two million now. There's still a lot of room to grow this internal phone system side of the business. Also very interesting here all the way on the right side of this slide shows new versus upsell. If you look in the most recent quarter, 76 percent of Zoom Phone business came from up-sell. Three-quarters of that side of the business was existing Zoom customers. They had the Meetings product. They're upgrading now, they're going to say, "Yeah, we like Zoom so far what they've done for video conferencing, now we're going to trust them with the whole internal phone system."

Interestingly, a quarter are not Zoom customers at all coming in. Those are more opportunity to now sell them Meetings products. All of it is an upsell opportunity. An analyst said, "What penetration are you going forward with your customer base?" Zoom management is like, "Look, we think that maybe 100 percent of our customers will upgrade to phone, that's what we're going for." They said, "It's not just traditional legacy systems that we're displacing, there's also Cloud-based services like Zoom Phone out there but they don't offer video like we do." Some of their new customers already had maybe a Cloud operating system like Zoom. But they're saying, "You know what, we really want to package deal where we can do video conferencing and have our internal phone system in one place." Zoom is going to win that business as well. Very interesting.

If we can go to the next slide, geographic breakdown, we can see from the slide only about 18 percent of their business right now with Zoom Phone is coming from international markets. That's a lot lower than the overall business.

Overall Zoom revenue is about 33 percent international and long term they expect it's going to be a 50-50 split between USA and international on a whole. Expect that international business to also grow for Zoom Phone. Next, we get to Zoomtopia announcements. Just the new things that they were featuring here. Provider exchange, they said this is bring your own carrier. You've like your service provider for how the system is running. They're the operating system, but they are now handling the inbound, outbound, all that stuff. You like the system that you are on? Bring your own carrier. No problem. There actually providing this exchange where hey, you want to shop around right in Zoom? That's not the business that they're going for? They have no problem in featuring all these other partners of theirs and just collaborating in that way. I think it's a really great way to do it.

The next slide they talked about video voice mail. Just another feature. Is this a game changer? No, not necessarily, but it's a cool feature. If you're using Zoom Phone, you can leave somebody a video voice mail. Sometimes, that's really helpful.

Sometimes, you can't tell a person's intent necessarily just from listening to their voice. We like to see facial expressions read what's going on with the other person. Video voice mail, great thing.

Then this is a slide that I want to camp out on here. Here's why. In the question-and-answers, an analyst asked CEO Eric Yuan, "What is your favorite new product announcement today in Zoomtopia?" He said, "The Zoom Video Engagement Center."

He hedged a little bit because he's so much about his employee happiness. He didn't want to favor one new product over another. However, he did finally come down and say that this was his favorite new products that they're rolling out.

What is the Zoom Video Engagement Center?

I think it's best explained with a specific example that they gave in the press release. They could see this being deployed in brick-and-mortar retailers specifically. What it's designed to do is connect your customers with somebody who has the knowledge to answer the question that they have. It can be really hard sometimes like imagine a brick-and-mortar retailer. Let's say that they have multiple locations. It's going to be hard to have an expert in each store necessarily. But what if they could leverage one expert in multiple stores through a video tool like Video Engagement Center?

One thing that came to mind was, they didn't mention this by name, I don't know if Home Depot is a Zoom customer, but just throwing it out there, one of the strengths of Home Depot used to be that they had licensed contractors on the floor. You had a question about your project. You could ask a licensed contractor right there. I could see that kind of an application. What if you're in a store and you need specific knowledge on how to do it. He is in a different store, she's in a different place. Zoom Video Engagement Center you can get it done. What a great new feature, and it's being rolled out as part of the Zoom Phone.

This is incredible optionality.

Video waiting room was one last new product announcement that they made in Zoomtopia. But really the one that stood out to me was the Video Engagement Center.

That wraps up Zoom Phone and the new opportunity that Zoom has for future growth.