Largely known for its video conferencing app, Zoom (ZM +2.19%) is in the midst of an intriguing business transition. In this segment of "The Rank" on Motley Fool Live, recorded on March 21, Fool.com contributors Matt Frankel and Jason Hall look at the tools and services the company is adding to become a highly lucrative fully integrated telecommunications platform.
Matt Frankel: This is Zoom, Jason is going to tell Connor and I why we were wrong.
Jason Hall: I have to say when I saw where you guys ranked this when compared to where I did, I ranked this, I think this was my No. 3 and I don't know I just expected that both of you guys would have this somewhere in the upper middle of the pack and you were seven and eight and I'll tell you why I ranked Zoom my No. 3 here.
I don't want to say it was a distant third behind the first two but I think it's, clearly for me, it's the one that has the third-best chance of 10x from here. What's happening with Zoom is we're seeing the business transition from what we all associate it with the verb that it's become. Which is do you want to Zoom? Which means the same thing. Whatever the platform is, it means the same thing now from just being the app that people use to do video conferencing to what's really largely the enterprise is driving or what enterprise customers are looking for and that's a fully integrated telecommunications platforms.
They don't want to have one platform that you use for teleconferencing and then you have your telecom provider for a lot of your landline things how do you manage external? Do you do one thing for your external use for customers and then you have something else that you use internally? You have all of these various and sundry pieces and companies, they want it to be as simplified as possible, they want to get a good return for the amount of money that they're spending. It needs to be very reliable and they need something that's easy to manage so a lot of that pushes toward it being a platform.
That's one thing Zoom's management talked about over the past year and a half is the transition from, you look at the second quarter of 2020, when companies were just getting the tools, however they could to support their employees working remotely. Zoom won a tremendous amount of business. Just because somebody went in, created a corporate account online, pushed out user licenses to all of their users, and then there are a hundred employees or a thousand employees or whatever had Zoom. It happened just like that.
Companies are getting back to their normal procurement processes where they internally look at their needs, maybe they engage with consultants to help them work on all of these things and to build a strategy, and then they determine, "Okay, we have a strategy now so what products and services do we need to fit?" They figure that out and then they put out RFP. They send out an RFP to all of the companies that can do those things and then those companies put in a bid. They put the platform together and then they go meet with them after the fact and they start selling whatever it is that the company has said this is what we need.
It basically looks like it did in 2019 again. I mean that's basically where we are and Zoom has pivoted very quickly to add more capabilities like Zoom Phone, for example. If you look at the number of users on Zoom Phone is more than doubled in a year, the revenue that is getting from Zoom Phone has absolutely skyrocketed.
At the same time that's happened, the company has continued to have very high operating margins, very high cash margins, and then you look at one of the most important metrics to me for Zoom is even as we've seen its growth rate slow, you look at its enterprise business which makes up a substantial amount of its business and its best-growing part of its business. Its net revenue retention rate which is like comps for the software-as-a-service business continues to be well above 120%. I think it has been over 130% every quarter for four or five years now.
It's clear, the business is sticky, its enterprise customers are wanting to use more and more. They're adding features to meet those needs and solve their enterprise users' problems and I think if you would take that, you think about the global opportunity. It's a massive business. There's a reason why Microsoft is in this business and it's a focus for Microsoft. I don't think Microsoft is going to win at all though. This is one of Gardner's, along with Microsoft, one of Gardner's top 3 companies in this space, this integrated communication space and I think from the current market cap, this is a 10x in 15 years. Easy but not easy, you know.
