Zoom's Rapid Growth and Budding Profits Point to a Strong IPO
Like Lyft, which is going public this week, Zoom is seeing strong revenue growth and has a large base of enthusiastic users to help bid up its stock following its IPO.
Unlike Lyft, Zoom is already profitable and has a cost structure that leaves it poised to produce considerable amounts of free cash flow (FCF) in the coming years.
Zoom, which plans to go public on the NYSE under the symbol ZM, offers a popular, subscription-based, videoconferencing and collaboration software solution (known as Zoom Meetings) that works across PCs and mobile devices. It also provides software for powering conference room systems, and recently launched a cloud-based PBX phone system for businesses.
Much like Atlassian (TEAM) or SolarWinds (SWI) , Zoom depends heavily on word-of-mouth and virality to gain footholds within enterprises. An individual or team within a company might initially adopt the free version of Zoom Meetings, which places a 40-minute limit on group meetings and lacks many of the management and support features provided by subscription plans. And in time, this initial usage could lead a team to adopt a subscription plan, as well as drive Zoom usage by other teams within a company.
The numbers shared in Zoom's S-1 filing, which was released late last week, make it clear that this strategy has begun paying off in a big way. In fiscal 2019, which ended in January, revenue rose 118% to $330.5 million, and billings managed to top $400 million. And though Zoom's GAAP sales and marketing spend more than doubled to $185.8 million as the company got more aggressive about landing big enterprise deals, it produced $7.6 million in net income and $22.9 million in FCF.
The company still appears to have a lot of headroom to grow revenue at many of its corporate accounts. Zoom notes in its S-1 that while over half of all Fortune 500 firms have at least one paid Zoom host, only 4% of Fortune 500 companies contributed more than $100,000 in revenue. It also points out that 55% of the 344 customers that did contribute over $100,000 in revenue originally "started with at least one free host prior to subscribing."
Meanwhile, as others have pointed out, Zoom's reliance on Chinese programmers has helped keep its R&D spending at relatively low levels: In fiscal 2019, Zoom's GAAP R&D spend (though more than doubling) was equal to only 10% of revenue. And while sales and marketing spend is bound to keep growing with revenue, Zoom's sales model should yield some operating leverage in this area.
Zoom is facing off against seem deep-pocketed rivals in the meeting software space: Notable names include Microsoft's (MSFT) Skype for Business (bundled with some business Office 365 plans), Cisco Systems' (CSCO) Webex, Alphabet's (GOOGL) Google Hangouts and LogMeIn's (LOGM) GoToMeeting. But as is the case for a number of other smaller, fast-growing, enterprise software firms, Zoom's focus and product quality have kept rivals from seriously slowing its momentum to date. On websites providing user reviews of meeting software solutions, such as Gartner Peer Insights and G2 Crowd, Zoom has both the largest number of reviews for meeting software solutions as well as some of the highest average user ratings.
Valuations have definitely gotten frothy for many enterprise software names, and that raises the risk that Zoom will be granted nosebleed multiples right out of the gate. But in the event that it isn't, the company's growth trajectory and business model make it a pretty intriguing software-as-a-service (SaaS) play.
Apple and Qualcomm Still Seem Far From SettlingMar 27, 2019 | 01:39 PM EDT
With Qualcomm (QCOM) and Apple (AAPL) each scoring a victory with the ITC on Tuesday, it's safe to say that this week hasn't provided much additional clarity about how the massive patent-licensing dispute will ultimately be resolved.
That said, even if Qualcomm or Apple had been the sole winner this week, it's far from certain that such a turn of events would have significantly upped the odds of a settlement -- particularly given that several important cases still haven't concluded.
On Tuesday, an ITC administrative law judge (ALJ) made an initial determination that Apple infringes a Qualcomm patent related to a processor's power management functions, and supported Qualcomm's request for an import ban on older iPhones featuring Intel (INTC) modems.
Later in the day, in a final determination, the ITC commission ruled that Apple doesn't infringe three separate Qualcomm patents. Back in September, an ALJ had ruled that Apple infringes one of the three patents, albeit while declining to recommend an import ban.
The ITC commission will still have to review the ALJ's ruling in the first case before any import ban goes into effect. And even then, there's a chance that -- just as the Obama Administration once vetoed an import ban on select Apple devices ruled to be infringing a Samsung (SSNLF) patent -- the Trump Administration could veto an ITC ban.
Moreover, since Apple used both Intel and Qualcomm as modem suppliers for the iPhone models that the ALJ recommended a ban on, Apple might (much as it recently did in Germany following a Qualcomm legal win) be able to respond to a ban by relying solely on Qualcomm modems for U.S. sales of the iPhones in question. Admittedly, this could be harder to do with the company's 2018 iPhone models, which solely rely on Intel modems, but getting those banned would require a new case to be tried.
The Tuesday rulings arrive a couple weeks after a San Diego jury ruled that a slew of 2016 and 2017 iPhone models infringe (depending on the model) either two or three Qualcomm patents. The jury awarded Qualcomm $31 million in damages (equal to $1.41 for each sold device that Qualcomm was seeking damages for). It wouldn't be surprising to see Apple appeal the verdict.
Separately, the trial for a 2017 lawsuit filed by Apple against Qualcomm will kick off in San Diego next month. Apple claims Qualcomm illegally withheld nearly $1 billion in royalty rebate payments, and also charged it excessive royalties. Ahead of the trial, the federal judge presiding over the case ruled that Qualcomm owes Apple the rebate payments; Qualcomm claims Apple, which in 2017 ordered its contract manufacturers to stop paying Qualcomm royalties on Apple hardware shipments, has already withheld the money in question.
Also still outstanding:
- A final ruling by a San Jose court presiding over the FTC's antitrust lawsuit against Qualcomm, which (if the FTC gets what it wants) could result in major changes to Qualcomm's licensing model. It wouldn't be surprising to see Qualcomm, which has already seen an adverse summary judgment issued by the San Jose court, appeal any decision in this case that goes against it.
- Qualcomm's trade secret theft suit against Apple. In that case, Qualcomm alleges that Apple "engaged in a years-long campaign of false promises, stealth and subterfuge designed to steal Qualcomm's confidential information and trade secrets," with the goal of shifting its modem business to Intel.
To sum it up: The ITC's latest rulings don't put serious pressure on either Qualcomm or Apple to settle. And with the companies' past remarks and actions making it clear that big differences remain regarding the kind of royalty payments that Apple should be making to Qualcomm on iPhone sales, there's a good chance that neither company will be eager to settle until a ruling or two that does have major consequences for its business arrives.
To see Tech Check coverage from the previous trading day, click here.
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