While Zoom Enterprise is growing at a healthy clip, churn is over 3% a month for its SMB customers
As a result, it’s now predicting 1% growth next year
— Jason ✨Be Kind✨ Lemkin (@jasonlk) February 27, 2023
So Zoom has just been the craziest story of all time in SaaS. It was already a rocketship before Covid. At $450m in ARR, it was growing a stunning 110% already, as fast as anything we’d ever seen. Good Times, indeed.
Then lockdown came, and in the end, it wasn’t a boom for Zoom. Revenue rocketed from $1B ARR to $4B ARR … in just 12 months. Truly insane. But also, something that could never possibly be sustained. It was too much, pulled forward too quickly.
Fast forward to today, and to no fault of its own, we can see what happens when 5+ years of growth was compressed into 12 months: a reversion.
At $4.4B in ARR, Zoom’s enterprise business is robust, if not a true rocketship, growing an impressive if mature 24% a year. But the 110%+ NRR Zoom had from SMBs through 2021 didn’t last. It probably couldn’t last.
It’s SMB and self-serve customers are now churning at 3%+ a month, which is high but not all that uncommon for “grab and go” SMB products. Not everyone lives in Zoom all day long like we did at the peak in 2020:
Enterprise is the engine of growth today, with 115% NRR:
Blended together, Zoom is seeing about 6% growth today and is now predicting a tough transition year in 2024 of … 1% growth. A really tough transition year to an even more enterprise-focused model.
Put differently, that +24% growth from the enterprise is being almost fully offset by -35% to -40% annual contraction in its smallest customers. Blended together, 6% growth now and a projected 1% in 2024.
Zoom should come out of this strong, but a much more mature and slower growing company than before. SMB churn likely will decrease a bit, but may never get back to the 100%+ of pre-Covid, let alone 130%. But if it comes up to 80%-90% NRR, and enterprise keeps growing, Zoom can easily return to 20%+ growth at $5B in ARR.
Not too shabby, but a painful path getting there. One that almost certainly would have been far smoother had that crazy Covid Boost never happened.
In the end, the Covid Boost in SaaS was really the Covid Bust — for almost all of us. And we’ll all still be digging out of it for the rest of 2023, with public SaaS multiples still 20%-30% lower than in 2019. Let alone the crazy peak of Nov 2021.
And a reminder of the critical importance of getting NRR up to 100% or more from SMBs. Zoom had it for quite a while, and down the road, it may see it again. But it’s really painful at scale when your SMBs don’t have 100% NRR. It’s worth doing almost anything possible to get there, and stay there.
More on that here: