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Does Zoom Need to Expand Its Services to Maintain Its Growth?

Zoom Video Communications (NASDAQ: ZM) said during its second-quarter earnings report it expects sequential growth to grind to a halt -- even as year-over-year sales continue to go up at a double-digit percentage pace. To reignite expansion, Zoom may need to start adding other services to its core video software suite. In this Motley Fool Live segment from "The 5" recorded Sept. 15, Motley Fool contributors Jason Hall, Toby Bordelon, and Nicholas Rossolillo discuss why and how the company is adding new products into the mix.

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Jason Hall: All right, guys, let's move on to our second topic here. Zoomtopia. Just wrapped up. It was yesterday and the day before, this is Zoom's big two-day conference. Big deal, a lot, a ton happening there. Company's making some serious in-roads not just with its existing services, but also expanding its offerings in some kind of interesting ways. What I would like us to answer, Nick, I'm going to ask you to go first here. How well can Zoom grow by focusing on that core business versus expanding its offerings?

Nicholas Rossolillo: Yeah, it's a good question. I think they have to expand at this point. As they revealed in their last earnings, the individual users, paying users, and the small businesses that Zoom defines as 10 or fewer employees, that business is stalled out a little bit on a year-over-year basis as the pandemic progresses, the effects have eased. That's going to be a headwind for them going forward. But on the enterprise side, businesses with more than 10 employees, and especially those that spend at least 100,000 a year with Zoom, that business is still booming. That's a huge market right now because so many large businesses are still struggling to figure out how to operate in this new business climate and with cloud computing. Zoom adding on other ancillary services to video, I think is an absolute necessity to help them continue their pace of growth, I think it's one of the primary reasons they got aggressive and went out and bought, or intends to acquire, Five9 (NASDAQ: FIVN).

Toby Bordelon: Yeah. I have to agree with you on that, Nick. I think they have to expand. I think I could see this core business, I'm talking about video conferencing here, I think that probably, I don't want to say probably, I think that potentially declines over time as we move out of the pandemic, but more importantly, competition is increasing and there are other options available for people. Now, you don't see individuals and businesses in panic mode like you did in the beginning pandemic thing. I had to have something. Zoom works, I'm going with that. There are other alternatives out there and they can now take a time and say, "Does this work better for me in my circumstance?" I think in that environment, it's going to be tough for Zoom to continue to grow or even maintain on some of the customers they have. Though they absolutely should take advantage of the momentum they have right now, push out more services to their customers, make their service and their products stickier because similar to CrowdStrike (NASDAQ: CRWD), the more I'm using, the less likely I am to leave. By pushing out more services, they can make the overall package stickier and that will be good for them. But I think they got to take advantage of what they have now and make that happen.

Hall: I agree with both of you. The caveat I want to put in is it's the obvious one. They do need to expand. The company needs to expand. The CEO Eric Yuan, they talked about it on the last earnings call that they're seeing customer shift in normal buying patterns. They're putting out RFPs. They're not just, "OK. Yeah, what do you have? Yeah, I will take two." They're not doing that anymore. They're going through their normal months-long processes to determine what's the right fit, and that means there's going to be more competition. That's the reality. The need to expand is important. But I really want to make sure that they stay disciplined and focused. I'm not concerned about them getting di-worsification, to use the Peter Lynch term. I don't think that's a real likelihood because they are so laser-focused on telecommunications, but they've got some things coming I think are really interesting.

Zoom VEC, which stands for, what is it, video engagement center. I think it's a really cool tool that can be leveraged in a lot of like hybrid situations that you don't necessarily think about Zoom as being a player in. You go into a retail store, you're a customer and you have a problem or you need specialized support for something. The company has 10, or 20, or 30 locations and they can't afford the technical expertise in every single retail location. They have specialists in a center. Using VEC to have a hybrid approach where you physically have somebody in your brick-and-mortar location, but now you're engaging internal resources and leveraging them more effectively using Zoom VEC I think is a really interesting thing. Nick, you mentioned it in our pre-show planning that the Zoom Phone management probably doesn't really talk about it as much and it gets panned. But since the beginning of the year, they've doubled Zoom paid phone seats from 1 million to 2 million. That says a lot about where the enterprise views this business. The other stat you threw out there, too, is the size of the telecom industry. This is like a trillion-and-a-half in annual, yearly spend. It's a ton of money and all they have to do is stay focused on telecommunications. This can be a huge winner from here, without even it being what we're using right now, the three of us, as our backend platform to send something to live stream for our members. I mean, I think that's what we need to see is just that focus.

Rossolillo: Absolutely. There's a lot of room for them to stay focused within telecommunications but still staying true to their video conferencing routes where they started. It's just a huge opportunity. If they can add ancillary services to that around it and build out that ecosystem, I don't really see their overall growth trajectory slowing anytime soon.

Hall: Yeah. I think when you're adding $500 million a quarter in cash to your balance sheets, even in a more competitive environment, the incremental revenues they get will be very, very profitable. I think even that profit story is still in pretty good shape, even with competition.

Jason Hall owns shares of Zoom Video Communications. Nicholas Rossolillo and his clients own shares of CrowdStrike Holdings, Inc. and Zoom Video Communications. Toby Bordelon has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Five9, and Zoom Video Communications. The Motley Fool has a disclosure policy.


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