Zoom Phone’s latest milestone demonstrates the company’s winning sales strategy and shows where Zoom Contact Center could go.
Zoom announced its quarterly results for Q1 of the fiscal year 2023 (FY 2023), and the results confirmed that its “land and expand strategy” is working. The company’s revenue rose 12.3% year over year (YoY) to $1.07 billion. It also reported two-quarters of sequential growth for its gross margin, which management attributed to optimizing usage across the public cloud and increasing the number of co-located data centers.
To those unversed in sales terminology, a “land-and-expand” strategy is where a sales rep lands a small deal with an organization, then continues to build the relationship and sell more services and products into the organization.
During the earnings call, CEO Eric Yuan provided several examples of customers that have increased their spending with Zoom. These include:
- Healthcare provider Humana has expanded beyond meetings by adding about 24,000 Zoom Phones.
- Car rental agency Avis Budget Group, a Zoom Meetings and Rooms customer added 10,000 Zoom Phones.
- Solar company Lumio, a Zoom meetings customer, added Zoom Chat to its 4,000 employees.
- Outsourced medical care solutions provider TeamHealth has been a longtime customer for Zoom Meetings, Webinars, and Rooms; they expanded their customer relationship by adding “thousands” of Zoom Phone licenses, plus Zoom Contact Center.
- Franklin Covey, a provider of leadership and business execution training, started as a Zoom Meetings and Events customer and has since added Zoom Phone and Zoom Contact Center.
Since it launched Zoom Phone, the company has been laser-focused on cross-selling this product. During the call, Yuan mentioned that Zoom passed the three million seat milestone for that product. For perspective: it had taken Zoom two years to reach the one million seat mark in January 2021, and within sixteen months, the company had tripled that seat count.
Now that Zoom Contact Center is now generally available, I expect that to be Zoom’s next area of focus. Given the size of the CCaaS market and the potential ARPU boost, I expect to see Zoom with a full-court press in this area. The CCaaS industry is filled with strong brands, so success here isn’t a fait accompli, but customers generally like Zoom, and many of the ones I have talked to are willing to give the product a look. Historically, the company has used the land-and-expand strategy to move into adjacent areas such as Zoom Rooms, and the sales force seems adept at this. Given the success it’s had in the past, I believe Zoom is well-positioned to continue this strategy.
Continuing to add channels, features, and capabilities that close the gap with the incumbents, such as Talkdesk, Avaya, and Five9 is critical to Zoom’s success. Zoom Contact Center is new, and many customers will give Zoom a pass for a short time, but given the importance of customer experience, Zoom needs to innovate quickly. Its recent acquisition of Solvvy added self-service and conversational AI into the mix. Historically, Zoom hasn’t been aggressive with acquisitions and prefers to build capabilities in-house. I expect to see more technology tuck-ins, like Solvvy to add to its current CCaaS offering. CCaaS is a highly competitive, fast-moving market and this change in strategy will enable Zoom to add differentiated features quickly, while it uses its R&D to catch up on core capabilities.
One of the concerns that came up on the earnings call was that the breadth of the Zoom portfolio adds complexity to the sales process, which could lengthen the sales cycle. CFO Kelly Steckelberg countered with, “’land and expand’ is a very tried-and-true sales strategy for Zoom from the very beginning. And working with our account teams, we have these experts in the overlay team that come in and continue to do land and expand. It isn’t adding complexity. It’s just continuing to build our relationship with our customers, which is what we’ve been doing since day one.”
Zoom has been exceptional in its ability to get its foot in the door and grow its relationship with the customers, and the more products it has, the more opportunities it creates for itself. Evidence of this was quantified on the call during Steckelberg’s prepared commentary. She noted Zoom saw 46% YoY growth in the upmarket as the company had 2,916 customers contributing more than $100,000 in trailing 12-month revenue. This group of customers now accounts for 24% of total revenue, up from 19% in Q1 FY22.
Looking into the future, Zoom provided updated guidance for FY23. The company reiterated its revenue will be in the range of $4.53 billion to $4.55 billion, which equates to about 10% growth if the midpoint is used. Given the growth in the industry, one might look at 10% as a bit low. Looking a little closer at the company growth—the most notable point is that management expects enterprise revenue to grow at greater than 20% year over year (YoY). Whereas the online, which is comprised of small businesses and consumers, will be flat. On the earnings call, management stated they expect low-end churn to level out in 2023, which should lead to accelerated growth. Zoom also upped its margin guidance. For FY23, the non-GAAP operating margin is expected to be 32.8%, better than the street’s 31.8%.
The cloud communications industry is certainly a crowded one, but Zoom seems to have established itself as a dominant player, and that’s reflected in its revenue as the company looks to cross the $5 billion mark in the fiscal year 2024. The good news for Zoom investors is that the industry is still in the early inning, so there’s lots of room for growth.
