Zoom Video Communications (NASDAQ:ZM) crushed expectations when it reported quarterly results earlier this month. Revenue jumped 85% year over year and non-GAAP net income soared from $2.1 million to $25.2 over the same timeframe. In addition, Zoom lifted its outlook for its full-year top line and profitability, further highlighting the company’s strong momentum.
For investors looking for more insight into this technology company’s growth story, consider some of these key excerpts from Zoom Video’s fiscal third-quarter earnings call.
Zoom Phone gross margin will probably improve
One of Zoom’s more nascent but fast-growing products is its Zoom Phone, or a unified app experience that seamlessly works across different devices and communications features, such as screen sharing, audio-only calls, video conferencing, and Zoom Meetings.
While Zoom Phone is seeing enough traction to make management excited about the opportunity ahead for it, it’s notably a lower margin product (about four percentage points lower) than the tech company’s flagship Zoom Meetings product, the company expects Zoom Phone’s gross margin to improve over time.
“And what we’re really focused on is continuously improving those gross margins so that by the time it does become a more material part of our results,” explained Zoom CFO Kelly Steckelberg, “that ideally we’ll have improved the gross margin, so that it’s very close to equal” to Zoom Meetings.
Zoom is upselling enterprise customers
One key catalyst for Zoom has been its outsize growth in enterprise customers. Zoom’s customers contributing over $100,000 in trailing-12-month revenue increased 97% year over year in Q3 — greater than the 67% year-over-year growth Zoom saw in its total customer base. Given this robust growth and the larger revenue opportunity from these larger customers, it’s not surprising that management is aiming to upsell them.
There’s a “huge opportunity to up-sell both video conferencing license as well as phone license,” said Zoom CEO Eric Yaun. “That’s our growth strategy for enterprise […]. We like to get a small footprint and grow business over there.”
Expect more sharp growth in sales and marketing expenses
Zoom’s sales and marketing expenses in Q3 increased 58% year over year, coming in at $82 million. That’s no small sum considering that total third-quarter revenue was $166.6 million.
Going into Q4, sales and marketing expenses will likely grow even faster, management said.
“We expect to generate a great return on investment in this area and we expect to increase hiring for international up-market growth initiatives in Q4 and into” fiscal 2021, said Steckelberg when discussing Zoom’s fast-growing sales and marketing expenses.
Of course, investors should take comfort in the fact that revenue is growing much faster than sales and marketing expenses. Furthermore, given that management credits much of its revenue and free cash flow growth to its investments in sales and marketing, investors should be on board with aggressive spending in this area.