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Making Markets EP29: Zoom Continues to Grow and Delight Despite Market Gyrations – With CFO Kelly Steckelberg
by Daniel Newman | March 11, 2022

In this episode of Making Markets, Zoom CFO Kelly Steckelberg joins the show during the week of International Women’s Day as the first female guest and first CFO on Making Markets. A big show that pulled no punches digging into Zoom’s significant retracement after exploding amidst the Covid-19 pandemic. Steckelberg dives into the company’s most recent earnings, the challenges for growth companies and the path Zoom is on to become much more than just a video meeting solution. All this, and more, on this week’s Making Markets.

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Transcript:

Daniel Newman: Tech has a long way to go when it comes to diversity. A show that focuses on tech CEOs is unsurprisingly male dominant, so it’s great to have Zoom CFO, Kelly Steckelberg, join us during the week of International Women’s Day to talk earnings growth, market challenges, and how Zoom is building a platform to accelerate growth in the future. We hold nothing back as we take an in-depth look at Zoom, it’s run up, it’s slide back down, and the opportunities that lie ahead. Here we go. We’re back with another must tune in episode of Making Markets.

Announcer: This is the Making Markets Podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the company’s featured on the show. The Making Markets Podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Kelly Steckelberg, CFO at Zoom. Welcome to Making Markets.

Kelly Steckelberg: Thank you so much for having me today.

Daniel Newman: I am really excited to have you here. Your team probably hasn’t told you just how many times I actually asked to get you on the show, and it’s a couple of firsts for Making Markets. We’re in the 29th episode, and I’m a little bit ashamed to say first female and a first CFO. I think this is probably a little bit of an example of some of the challenges tech is still facing to meet diversity, and I’m really glad to see efforts being put into place. But also I’ll be totally candid. I had started the show as a CEO focused show, but I’ve watched you on CNBC each and every quarter, when you come on and talk about your earnings. And I said, “You know what? She would be great to have on the show.” So a little confession there, but super glad you’re here joining me today.

Kelly Steckelberg: Well, thank you. I’m thrilled to be the first female and hopefully not the last of your female guests, and also your first CFO.

Daniel Newman: Well, super appropriate given that we are in the week of International Women’s Day. And I was really glad, having so many tech clients and relationships, to just see all the companies putting forward, all the great work that’s been done over the past few years to push. We have so far to go, Kelly, but it is good to see this happening and watching your leadership over at Zoom has been very impressive.

I’m going to start there. Well, I’m going to start with Zoom’s latest results, but we’re going to get into some of that leadership stuff. You’re coming off, what about a week and a half ago, you posted earnings? Another, what I thought was a good quarter, especially as I look at how you’re growing over pandemic numbers. Run me through the highlights.

Kelly Steckelberg: Sure. We ended, obviously, not just the quarter, but our FY22. And we announced 55% year-over-year growth getting to 4.1 billion for the company. So we were really thrilled with that result. We also, over the last couple of years, have had very strong profitability and cashflow. We are really excited about the future ahead, and I’d love to take some more time to talk about the platform, what’s coming, all the product innovation. We’re just really excited about the future of Zoom, and the growth that’s yet to come.

Daniel Newman: Well, I promise you, you’re going to get that chance, and congratulations on the quarter. Zoom, so as someone has followed it, opined about it, talked to a lot of media about it, the company’s had really great growth. I think everybody’s well aware the pandemic pulled forward a whole lot of technology investment, including collaboration and communications technologies. Zoom was a huge beneficiary. The pandemic surge had you guys growing at 300 plus percent in a number of quarters, just remarkable.

But candidly, there’s also been a somewhat palpable pullback from the highs, and this isn’t just Zoom, but of course, Zoom is one of the companies. This is a tougher question, Kelly, but how do you create that long-term confidence for your investors, the broader stakeholders, given the fact that even though what I consider and you seem to consider good results have been met with a lot of selling?

Kelly Steckelberg: Yeah. I think there’s a lot. Investors are trying to understand exactly as you pointed out, what’s the sustainable growth for Zoom. And this is absolutely a year of transition. We are going from being this killer meeting app to being a unified communications platform. We are really excited about our full breadth of products, which includes not only Zoom meetings, which everybody knows and loves today, but also Zoom Phone, which is our cloud PBX solution. And just to highlight in Q4, we sold over 550,000 seats of Zoom Phone. That’s not only a record for Zoom, but a record ever in the industry. So really seeing a lot of momentum with that product and excited about that.

We have Zoom Rooms, which is our conference room solution, which is really important for the future of hybrid work and making sure that the environments are inclusive to everyone who’s inside or outside that room.

We have Zoom Events, which is our events platform, which will also support hybrid events in the future. And then just a few weeks ago, we announced the general availability of Zoom Contact Center, which is our contact center solution. And when you really look at the breadth of those products and having them natively built on this very efficient, usable, reliable platform, nobody else out there has it. And so we are thrilled about the opportunity. I think investors are waiting to see that we’re going to execute to this plan, and we gave guidance on the call, which we could talk about as well, but they’re excited about the opportunity and now they want to make sure that we’re going to execute to it.

Daniel Newman: Yeah, there’s something I heard. We’ve gone through what I would say bit of a tech wreck across growth. And again, it’s only a retracement because the growth was so explosive. So it kind of depends on the world and the way you viewed it. Did multiples grow too fast? Did the revenue expansion get pulled forward? Did an economic shift, like we’re about to face with inflation and such, will that create some compression of growth and such? I think the answer is yes, but at the same time, something along the lines of, in this market, what happened was a number of features turned into companies.

And I think there was a period of time with Zoom, where I think it was always more than feature, but you were sort of one killer app. It was the one killer app. And by the way, as a user, I can tell you, it really was just a tremendous technology. Whether it was my wife and my children, they weren’t regular users. They were going to school every day. Zoom was the platform that literally connected everybody back to the world, and its growth was explosive. Having said that, I almost feel, and a little follow up to my last question, Kelly, was I almost feel like there is no growth that you could show right now that will be appreciated. It’s all about your execution. It’s all going to be about what they see in the future.

I remember looking at one your quarters. And it was like, “Oh they grew 37% over 367%.” I mean those are rough numbers, but it was like a 37% growth over a year before, where you’d had multi-triple digit growth. And I’m like, “And they’re still selling.” And I’m like, “I wonder if Zoom, because it’s more than a growth stock.” You guys are profitable. You’re making a ton of money on bottom line performance. You’re making smart acquisitions. You’re building out new products. Your net revenue expansion numbers are very strong. I guess I’m just curious from your inside-out viewpoint, how much of the Zoom, the pullback, the retracement is tied to the investor sentiment about Zoom versus the overall sort of just change in view and sentiment towards growth?

Kelly Steckelberg: Well, there’s absolutely, a whole change in the market that’s happening. And at Zoom we always talk about, “We can’t control the stock price. All we can control is our execution.” And we certainly can’t what’s happening with the markets in general. And there’s a lot. There’s a lot of uncertainty in the world today. But what we are trying to do is not only focus on the opportunity, but also make sure that investors understand. And if, if I may, I’d like to talk about another thing that we talked about a lot on our call, which was, what happened partly during the growth period over the last two years is there was really a shift as well is in the channel and where our customers were coming from.

So you looked before the pandemic, 75% of our revenue was touched by our direct business, our channel business, or ISP partners. And there was a small part of our revenue that was coming from the online channel. Over the last two years, at one point, revenue in the online channel peaked all the way at 56%. And in Q4 it was approximately 50% of our revenue. And one of the things that we started disclosing to investors on the Q4 call was the split in terms of customer count, or the number of customers that are in this enterprise, we’re calling it, which is touched by direct, and the split of the revenue between these two right now, halves of our business.

When you look forward, the growth, the sustainable growth that’s coming for Zoom, is coming out of this enterprise portion of our business. We gave guidance for the full year of approximately 11%, but this enterprise segment of our business is growing approximately 20%, which is amazing and super exciting. And it’s this online segment of our business, which is really important, because they’re highly profitable because no salesperson is touching them, and they contribute about $2 billion of revenue right now on a run rate.

But that portion of our business is about flattish. And so, I mean, what we really strive to do is, of course, be transparent with our investors and help them understand how we’re thinking about the business. And when you understand there’s this portion of our business that’s growing at 20%, that feels really great at a company our size. And I think that resonated well with investors and just helps them understand what they can think about and how they should look forward to the future.

Daniel Newman: Yeah. Well, and while this is not a show to recommend any stocks, I want to be very clear about that. We’re not giving financial advice of any type. You do have to definitely say that some of these pullbacks on growth companies like Zoom, it made them very attractive. It made these companies very attractive. I always say, “People end up doing very well when they take risks, when things look the darkest.” You know what I’m saying? Those numbers are really what investors have to hang onto, because your point, Kelly, about just doing the business is the thing that CEOs and CFOs and your teams and your leaders can control. And I say that all the time.

You see all these companies that have pulled back 50, 70, 80, and you go, “Gosh, I wonder what their executives, can they sleep at night?” But I think in the end, you’re running a growth business. It’s profitable. It’s creating satisfied customers. I mean, I think these are the things you have to say, “We keep doing this, eventually the market will kind of sort itself out.” You can’t control inflation. You can’t control going to war. You can’t control interest rate hikes. But what you can control is building a product, making it secure, delivering great experiences, making the platform more extensible. And I think that’s a lot of what I’m noticing.

Of course, the Five9 deal was something that created a lot of excitement. Personally, I thought it was a great deal. I thought it was going to be a great deal. But again, you can’t control what happens, that vote and the decision and what the market forces were. But you guys said, “We’re going to plow ahead. We’re going to build a contact center solution.” That’s something I wanted to ask you about.

You started to tease this in the beginning. I use the word extensibility and platform. You went from sort of a killer app to now a platform. And over the last year, Eric and you and the team have been expanding this. Events seems like it’s got a lot of promise. The contact center’s got promise. The phone business has. Talk about this, because I think some of the market is a little uncertain. Can you compete with Microsoft? Can you compete with Cisco? A billion a quarter is a big number in terms of revenue, but they’re touting 270 million users now. That extensibility has got to be a big part of your future. Tell me more about that.

Kelly Steckelberg: Yeah. First of all, I think if you look across any market, generally there emerge two leaders. And we see the leaders in this space being Zoom and Microsoft. We partner really well with Microsoft because our customers often tell us they want to use part of the Zoom platform, and there might be part of Teams that they want to use as well. So we do have an integration within the Microsoft user interface, which allows you to one-click launch a Zoom Phone Call or launch a Zoom Meeting.

And that’s really important because one of the things that we always focus on at Zoom is delivering happiness to our customers. And that means letting them choose, in certain situations, and making sure that those products they want to work together, do so seamlessly. We do not take them for granted as a competitor though, and every day are focused on listening to our customers, understanding what problems they’re trying to solve, making sure that we are innovating as quickly as we can, and continuing to drive forward, because people want choice. They want to choose the product that works best for them.

And when we have the opportunity to go in with a proof of concept or for users, the end users, to actually experience our meetings, our phone, we win. We win because of the user interface, the ease of use, the you’ve heard it, “It just works,” the reliability, the extensibility. When you start to bring these products together, the change management is so easy, because it’s just one more icon on your client. All of that, users love. They love, love, love Zoom. And we are focused on that, and we just keep going and delivering and focusing on what we can do for our customers every single day.

Daniel Newman: I really appreciate you taking the time here. I try to keep these interviews punchy, keep them short so that people can learn and get on. And the execs, like yourself, can get on with their day. But one of the things I always like to ask the guests is, oftentimes I felt the market misunderstands companies. I think the reason stocks go up, the reason stocks go down, isn’t always in alignment with what companies are doing or performance. Sometimes they are. There’s certainly a lot of smart quants and people out there building really great algorithms. But there’s always one or two things I find that are misunderstood. And so within that community of investors, institutions, retail, you talk to them, you do yours. What do you think is most misunderstood or not fully appreciated right now about Zoom’s business?

Kelly Steckelberg: I think people don’t quite envision what the future of work looks like yet. They knew how we all worked together at one point. They know how we all worked remotely at one point. But the future of work is some version of flexible hybrid because employees really want that choice. And if you’re going to be an employer that gives your employees choice and wants to support them being productive, they need Zoom. They need Zoom because if they’re working outside the office, even one day a week, they need a Zoom license. If they are going to be in the office and they want to connect in an inclusive way with their colleagues who are outside of the office, you need a Zoom Room, and it just goes on from there.

And I think that what people haven’t quite adjusted to yet is what does that look like in the future? I get this question all the time. Are people rationalizing their Zoom licenses? Are they turning it off because they’re going back to the office? And the answer is no. In fact, they’re recognizing that standardization of these tools is paramount now, because having people in a conference room that doesn’t work with a meeting solution, it starts to get really complicated and inefficient and frustrating.

And that’s what I think we’re going to start to see is continued standardization across these products. What I think is coming in the future is, we all are excited to see our colleagues and see our friends in person, but we want to pick and choose which events or which meetings we want to attend in person and which we’re thrilled to do from the comfort of our home. And that sort of a hybrid approach means you need a great tool like Zoom.

Daniel Newman: Yeah. I like that. I just got back from Barcelona. I was out at Mobile World Congress. And it was really interesting, Kelly, because it was probably the first event that almost felt like they did prior to the pandemic. 60,000 people, which is only about 60% of the attendance, but still at a single event. I was at CES and NRF and they were like ghost towns. I mean, you were literally walking halls alone. This felt like we were making that pivot.

But one of the things, Kelly, that I really don’t think the market is appreciating is human social behavior. And what I mean by this, and by the way, I think it’s a good thing for the overall collaboration in video space. But I think the migration away from everything being done individual in your home and in your office, it’s going to be more meetings and coffee shops. It’s going to be meetings in offices. You’re going to see the rooms business, the collaborate tips systems business pick up. I mean, of course asynchronous will grow. Hybrid customer experience should drive your contact center business because people will not just be online or in store. They’re going to be doing everything in hybrid manners. I just think we underestimate the human condition a little bit, that we are largely social creatures.

I’m introverted, so I could literally never travel. And I would be totally okay with that. But most people I know, want to get back out. They want to be out. That doesn’t mean they don’t want to, like you said, still do a lot of their meetings on a quick pop on video and do a Zoom Meeting, but they want to go see people. They want to go out to dinner. They want to go to a show, a sporting event, a game. They want to have class in class.

And so I think we kind of are still in this area of not quite pulling the onion back of what the future of work looks like. So I could see to your point, why a lot of companies and investors are like, “Well, how big is this?” But what I think they misunderstand, maybe if I could add one thing, is it doesn’t really matter the mix. There’s a role for Zoom to play, no matter where that mix lands.

Kelly Steckelberg: Yeah. I completely agree with you. I think what I appreciate so much about this is the ability to, I was in San Francisco a few days ago for conferences. Now I’m in Southern California, and I continue to be completely productive no matter where I am. And that, to me, is the most valuable thing, that you can start to mesh your… I agree with you, like the need for personal connection. I’m here, I’m with my sister and her husband and my nieces, which I love, but I’m also working in a very efficient and effective way. And that’s what I mean when I think people are going to want to pick and choose how they meld their in-person experiences with their Zoom experiences, to the best, the most convenient way in their life or the most productive value for their lives.

Daniel Newman: Absolutely. I don’t think I could say it better myself. Kelly Steckelberg, CFO at Zoom. I want to thank you very much for making the time to join me here on Making Markets.

Kelly Steckelberg: Oh, it was great to be here. Thanks so much.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio