SaaStr Podcast 437: 5 Interesting Learnings on Zoom at $4B with SaaStr CEO Jason Lemkin

Let’s talk about Zoom. Look, we’ve all been talking a lot about Zoom since COVID. We are in Zoom all day long. We know it, we love it, we can find its quirks, we know our favorite features, we know the ones that maybe we wished worked a little bit differently, but we really run our companies on Zoom today, and that’s fabulous.

But in the last year, Zoom has gone from a stunning one billion in ARR, just before COVID to four billion. It quadrupled. It went from one billion to four billion in one year, and that is unprecedented in SaaS, at least in public SaaS companies. We may find later that some others did the same. It looks like Discord, for example… Which is a sort of a Slack for gamers and others, has grown just as quickly. There’ll be a few others, but in our group of public companies, no one benefited as much as Zoom. Not even Slack, not even other applications that we needed to immediately work from home, but Zoom grew the most.

So maybe superficially, we can’t learn much from Zoom, because it’s such an outlier, but it turns out if we step back and take a look, we can find five interesting things about Zoom that I think we can all learn from, and then we’ll add four bonus points.

Full transcript of this podcast episode follows the embed.

#1 The Importance of Secondary Products

So number one point… And when we’ve talked about so many times on our five interesting learning series, is actually that phone is super important to Zoom. Now, you know Zoom. It is the video service, but it turns out almost every SaaS company, as it approaches a billion in revenue, needs a second product to scale, right? At some point, there are only so many businesses on planet earth. They can only buy so much from one product, so everyone ends up having a second product. Twilio has multiple products. We see so many other leaders adding them as they scale, and we track this, and the ones that actually have slowed down after a billion, are the ones that didn’t.

Dropbox slowed down because it really didn’t expand much beyond its iconic product. Slack hasn’t slowed down, but perhaps the reason it’s become part of Salesforce is that it has one product, and Box may end up growing faster than Dropbox in the end, because it has multiple products. And what we see with almost any vendors, if you have multiple products, you buy more from them. Folks that buy multiple products from Box, have higher NRR and last longer. Folks that buy more from Procore, which is about to go public at 500 million revenue… Folks that buy three or more products stay longer and buy more. We see this again and again. And so as great as Zoom is, it’s added a second product, which is phone.

And in two years, they’ve added 10,000 phone customers and one million paying seats, and Zoom phone is very elegant product to a problem that’s been around a long time, how to run phone in the browser and otherwise, but they’ve added a million additional paying seats they would not have without a second product. So it’s a reminder. It’s not always easy. We had a long chat with both the co-founders of HubSpot on second product. HubSpot has expanded its footprint substantially into sales and others, and it’s worked, but there wasn’t always a natural upsell process to all the customers, but Zoom seems to have hit it at least with the segment of its product. So Zoom phone is actually… It’s a big deal. It is a big deal, the company, which is entering its material.

#2 + 3 Going More (And Less) Enterprise 

The second interesting learning it’s really two, our second and third, which is Zoom has gone both more enterprise since COVID and less.

How could it do both? Let’s break it down for a minute. Its enterprise business, which they define as 100K up in customers. So these are not mammoth customers, but they’re large. They added 100,000 plus customers in the last 12 months. 1000 new customers paying 100,000 or more a year. That’s incredible, and that is 158% growth, stunning growth. Growth that for any other SaaS company would be off the charts and would drag them very enterprise. Any other company that grew a segment, 188%, well that would be your primary segment, but interestingly… And this is point three, is even though enterprise exploded in Zoom during COVID, SMBs exploded even more. It’s crazy. Their SMB customers quintupled, right? So overall Zoom quadrupled last year, its enterprise business grew 1.5 X, or rather I guess 2.5 X, but its small businesses grew 470%. That’s crazy. And so what happened was, even though they added a thousand customers paying $100,000 or more a year, actually the revenue count skewed more SMB, because they grew even faster.

So before COVID about 20% of Zoom customers had fewer than 10 employees. Now it’s almost 40, almost 40% of Zoom customers have 10 or fewer employees. So it’s very interesting as you scale. Many of us that have been doing SaaS for a while, find that our enterprise customers outgrow our SMBs, not just because the accounts are bigger, but because of the magic of NRR, right? If your enterprise customers grow organically 140% in NRR and your SMB struggle to hit a hundred over time, your enterprises will outgrow your existing SMB customers. So we haven’t always seen it. We haven’t seen that with Zendesk, we haven’t seen it with Asana. Now we haven’t seen it with Zoom.

Zoom has grown so electrically with SMBs that they have grown even faster than enterprises, which have also adopted them.

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#4 Net Recurring Revenue

Point four, NRR, which we just talked about, Net Recurring Revenue. How much does Zoom keep? Zoom’s 130%, which is pretty impressive for a company that is 40% tiny businesses, right? It’s tough to even get 100% from tiny businesses. Shopify and HubSpot have 100%. Zoom overall has 130, which is very impressive, but more interesting is that it’s consistent. Zoom has had 130% net revenue retention for 11 quarters in a row. It had it when it was growing quickly, and then when it exploded from one to four billion in one year, it still had 130% NRR. So a lot of lessons to learn there, but first of all, you don’t have to put up with low NRR from small businesses, Zoom proves otherwise.

And maybe the most important meta thing is don’t let yourself off the hook. Don’t let yourself off the hook for NRR declining because accounts are fully penetrated. Don’t let yourself off the hook for NRR going down because you’re bigger. Zoom proves you can have that same 130% magical NRR all the way up to four billion in NRR, and most importantly, no matter how fast your growth is, you can still have that 130%.

#5 Finding Traction Outside Your Home Market

Zoom actually was slow to go international, slow to go to there. Some of us go very early because look, the web works everywhere and you will often find even in your first year that you start getting customers outside of your home market if your product works well in a browser.

But Zoom was slow, and even just before, COVID only 20% of its revenue came out of North America. That’s not much for a company at a billion in revenue of ARR, but in one year it went to 33%, right? Zoom embraced it. And I’m not sure why it was relatively low for Zoom, but a lot of folks with the communications element… RingCentral was low. Zoom was low. It may simply be because of communication networks, but in any event, Zoom was slow to go international. And the meta-learning is that with very, very, very few exceptions, your customers are everywhere on the web today. Your customers are in Europe and they are in APAC, and they’re in Australia, and they are in South America, and maybe there’s even some in Africa and other environments, and they can be in India, and China’s tough because they have their own internet.

But if you see a pocket, if you start to get five, eight, 10% of your customers from a geo, especially from Europe, but sometimes from Asia, lean in. Lean in because you didn’t do marketing there, you didn’t even try. You tried in your home market, and if you find early traction outside of your home market, don’t run from it, embrace it, localize your app, do more, have a local team, open even a small office, as we open offices again, but be close to those customers because if you get pulled into international early, it can be a gift. It can help you grow even faster than you otherwise would, because it means people everywhere want your product. Even with no marketing there. It’s a magical thing.

4 More Interesting Learnings on Zoom:

Number six. This one is super interesting. 50% of its customers pay monthly, 50%. It was 40% before COVID, now it’s 50, and that makes sense because they have so many more, very small businesses, right? With almost 40% of their small businesses, 40% of their customers, one to 10 employees, they don’t want to pay through your contracts. It makes sense they’ll want to pay monthly. But the meta point is, half of Zoom pays monthly. So, just challenge yourself. Do you need annual contracts? Look, there’s different ways to approach this. We did a deep dive on Qualtrics, which is worth almost 30 billion. It had an epic IPO, 100% of its customers are on annual contracts. That’s one example, but Zoom wants to take the friction out of everything, and so they’ve taken the position that for the most part, accepting their very large contracts, pay it how you want.

You want to pay monthly, pay monthly. You want to discount to pay annually, pay annually. You want a further discount for a multi-year deal, great. And that’s not all of us. Some of us have much more complicated deployments, need more services, et cetera, but think about that. If Zoom can afford to have half its customers pay monthly, are you sure you want to take that option away from your customers just to make your numbers look better. And it also reminds us, Zoom has 130% NRR with monthly customers. Think about that for a minute, because your NRR and your renewal rates… Especially your renewal rates, can be flattered by longer-term contracts, because the churn can take a while. Get folks to sign a three-year contract. Mathematically, your turn’s not going to show up for 37 months. Zoom is doing it the hard way. They have 130% NRR from small businesses and they let them sign monthly contracts. It can be done folks, be more customer centric. And ultimately you will have more customers. Zoom sort of proves it.

Seven. Just a quick note, Zoom’s at four billion in revenue, it’s generating two billion in free cash. Half of that four billion is flowing to the bottom line, and Zoom is almost always been almost breakeven since the early days. In fact, Eric Yuan going from IBM, made it a rule to just break even for two years straight, just break even, spend what’s left in marketing. And that’s why you saw airport ads and buses wrapped in Zoom because they were doing so well, they have almost an extra marketing budget, but Eric made sure they didn’t lose anything. But now they’re generating a stunning two billion a year. Half of their ARR is coming out as free cash flow. So we can’t all do that, but it’s good to remind us that software does not have to hemorrhage cash forever.

That software ultimately should be profitable. Even with a sales team. Zoom does have a sales team. It doesn’t need it for a lot of their smaller accounts. Even with marketing, even with billboards and buses, Zoom is generating 50% of its revenue and free cash flow. We can’t all do 50, but at some point software should scale because everyone can use the same code base.

Point eight, and this is super interesting. Zoom quadrupled during COVID from one billion to four billion again in one year, incredible, but the gains are not even. This is super interesting. Zoom won more than the others. WebEx grew, even Citrix GoToMeeting, which we think of as a… I don’t even see it much in the wild anymore. It grew RingCentral has a competitive product, RingCentral and Zoom used to be partners, now they’re more competitors between phone and screen-sharing. RingCentral grew, 8×8 grew.

Some others… Even Skype grew, but Zoom grew more. Zoom grew much faster on both a relative and absolute basis, and its competitors did. So it’s interesting that the COVID benefits were not evenly distributed, and interestingly Slack grew very nicely during COVID, but again, Discord, which is sort of more of the consumer version of it, it quadrupled, and Slack grew nicely, but it did not quadruple the way Zoom did. So the COVID benefits are not evenly distributed. And I don’t know why for sure, Zoom group more than the others, but it’s a reminder that brands matter. It’s a reminder that we don’t have time. Most of us don’t have time to test UberConference and Skype and RingCentral and bake-off 11 vendors. Most of us just trust brands. Very few of us even have time to do a bake-off between two vendors. So brands matter and brands matter even more than ever as you scale because they’re proxies for trust, and Zoom benefited far more than its competitors set from COVID.

And the last point nine, and this is a shame for us for the future. Zoom is predicting 42% growth next year or the coming year, the coming year after COVID, and 42% at four billion in ARR is still basically unprecedented okay? Almost no one grows 42% at four billion ARR. So Zoom is an epic company, a generational company, but it is interesting that they’re predicting 42% after a year in which they grew 400%. So what is Zoom saying? Zoom is saying the COVID boost is real. We’re still… And we’re going to come out of this and we’re still going to grow like a rocket ship. Adding 42% on top of four billion in ARR. Let that sink in a minute.

That means Zoom still says, look, we’re going to add $1.6 billion in new bookings in the next 12 months. They’re adding 1.6 billion of new ARR in the next 12 months. It’s really jaw-dropping, especially since it’s organic, right? So many folks like Salesforce have grown inorganically, but it’s also saying that the massive boost is of course behind us, as we know, right? So Zoom is saying growth will be huge next year, but at 42%, it’s coming back to normalcy. We’re coming back to normal types of growth rates for SaaS and enterprise software, which is what you expect, and 42% is crazy, but it’s not the 400%. Sometimes you can get the math confused. 300 or 400%. It’s not the quadrupling of last year. It’s growing an epic, but normal-ish, normal-ish 42% next year. Incredible. Anyhow, Zoom is someone to learn from.

And sometimes we think it’s too big, but actually, break this down, go monthly, follow your customers internationally, where they are, let your customers by how they want to. Zoom is a reminder, we can go both enterprise and small business at the same time, right? And Zoom is a reminder that the winners in the market sometimes benefit even more than the rest of the pack. So, do one of them. Leverage your brand, leverage your customer happiness, get that incredible 130% net revenue retention that Zoom has from small businesses over 11 quarters in a row. Be the product folks love, lean into that, and maybe you’ll see some of the same magic as Zoom.

Published on March 22, 2021

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