This Thursday Zoom Video (NYSE: $ZM) will debut into a red-hot market for enterprise SaaS companies. The most recent, PagerDuty (NYSE: $PD) filed at $19-21, priced at $24 and is now trading close to $40/share. That’s about 25x trailing sales of $118M. That one is hard to buy at these prices.

And if Zoom wasn’t already a hot enough deal, Salesforce Ventures will be buying $100M in stock via a private placement at the IPO price.

At the mid-point that’s 26x trailing sales of $330M. Now Zoom grew over 100% YoY, has 81% gross margins and is profitable. Investors who follow momentum, love these numbers.

Members note we did a transcript of the roadshow which you can access on our Current IPOs page.

The Product & Competition

Zoom has built a better mousetrap for doing video-based collaboration. Some have asked how well they can compete against larger rivals like Cisco (WebEx), LogMeIn (GoToMeeting &, Microsoft and Google.

WebEx was built in the 1990s and came public in July of 2000. They had built a better product too – theirs was focused on voice. At the time Microsoft had a competing product of their own and investors were worried. That’s until they found out that Microsoft was a huge customer of WebEx for all their own usage – turns out their product wasn’t even close when it came to performance. WebEx had built something special and turned into a massive business  – ultimately to be acquired by Cisco in 2007 for $3B. Today many business users think of “WebEx” as the default for online corporate meetings.

The WebEx platform today feels pretty clunky, especially for live video and real-time desktop sharing. Video is hard to do well – high quality, delay and distortion free – even if users might be on a cell phone and riding in a car.

This is the use case Zoom has gone after with their “video first” architecture. In order to do that Zoom has had to do a few special things that might be hard to copy.

  1. Owning the network. If you want high end-to-end quality around the world you need to address the wildly varying standards of performance and types of technology. It’s easier to do this now because one can “piggyback” on the infrastructure-as-a-service industry but you still need to build your own on top of this which is what Zoom as done.
  2. Design the system to deliver “instant success” for first and experienced users. Anyone who has had to deal with video conferencing systems tends to describe them as “a bear to use.” When experiencing Zoom for the first time many users have an experience that’s more like “wow, this works great!” A strong desire to do more video collaboration ensues.
  3. Open architecture that works with other systems. There’s a large installed base of video collaboration systems. Having an API and software development kits allows Zoom to work with other software vendors and create “connectors” to existing systems companies have installed in their conference rooms. Other vendors tend to focus on their own platform rather than playing well with others.

The Zoom “moat” is comprised of 1) better software and performance, 2) ability to integrate with other systems and 3) support of outside applications and a “marketplace” for other software vendors to build Zoom in to their own products and services. 

Considering the current competitive landscape, Cisco and Microsoft are fairly safe in the higher end of the enterprise market. However, LogMeIn is almost certainly losing share. This review on the Gartner peer-to-peer service is fairly typical:

“We switched to Zoom from GoToMeeting (LogMeIn). The switch was sparked by some poor performance issues that we had experienced with GTM. The implementation and training process with Zoom was top-notch. We were able to switch all of our sales team out in 2 days and only had one person with any trouble getting meetings switched and started. We love the user interface and the ease of use for our customers. As the administrator of this technology at our company, I haven’t received any complaints regarding functionality or connectivity using Zoom. Those complaints were a regular occurrence during our time with GTM. I couldn’t be happier with the switch. Lower cost and better functionality is a win/win for everyone involved.”

Zoom isn’t going to take major business away from Cisco or Microsoft but they will be taking market share in and growing much faster than the two large players.

Management, Market Opportunity & Valuation

The CEO, Eric Yuan, is an engineer who helped build WebEx from 1997 to 2007 and then stayed with Cisco post-acquisition until 2011. He certainly knows the space, products, technology, and competition.

The CFO and CMO each have over a decade of experience at WebEx/Cisco. The board of directors some solid members – Jonathan Chadwick was the CFO, COO of VMware and before that spent time at Microsoft and Skype. Other experienced board members include Peter Gassner (Veeva & and Carl Eschenbach who is at Sequoia now but spent 14 years at VMware before that.

Weeding through the various vendor reports a fair estimate of the current size of the online meeting market is about $3B annually – growing about 10% per year. Zoom cites a much broader market definition from IDC that includes all “Unified Communications, Collaborative Applications and IP Telephony.” According to IDC that’s a $43B market. Zoom does have their new “Zoom Phone” offering which puts them in the IP telephony game and we may see them expand their product line further to tap into these other market segments.

Collaboration is already a large available market that’s going to grow consistently for decades to come. Rich collaboration is inescapable for many multi-person projects. Relying on physical meetings is not only expensive it is highly inefficient in both time and energy.

Video is also creating new markets for collaboration that were not there a few years ago. Healthcare is probably the largest current example – patients, especially sick or old ones, are hard to move. Doctors and related healthcare providers are scarce. Video collaboration is being actively deployed in this market.

We’ve already indicated that valuation for Zoom is off-the-charts but that’s the market we are in right now. Looking at the Comps Table we in the PagerDuty note the multiple of forward revenues is about 11x. Atlassian (TEAM) is a bit of an outlier trading at 21x. If Zoom does $600M this year the P/S multiple using the $34 mid-point is 14.6x.

Our quick PFV supports the stock at the filing range and perhaps a little higher based on your discount rate. We can get to $40. We may do a full model on Zoom post-IPO if we decide to put it in the model portfolio.


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