Chit Chat Stocks - Zoom Video Is More Than Just Virtual Meetings, With Sean Emory (Ticker: ZM)

Episode Date: November 17, 2022

Zoom Video Communications is most well known for its video conferencing product that became popular during the pandemic. The company offers more than just a video service though. Zoom offers HD video, voice, chat, and content sharing with various different products. Listen as Brett and Ryan ask Sean questions about the company, its business model, and valuation. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Sean's work? Check out his Twitter here: https://twitter.com/_SeanDavid?s=20&t=SyDUYWKbAX7BSikYbhVNYA Contact us: [e-mail] Timestamps Zoom | (3:50) B2B | (14:30) Valuation | (34:13) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive show where we interview an analyst on a single stock. And today we're talking with Sean Emery. He is the CIO and founder of Avery & Co. Really actually a fascinating investment firm that we follow fairly closely. And it's always fun to keep track of their holdings. I believe their 13F is available. And they got stuff on their website, lots of... You can check out their holdings. And he's probably one of the investors we kind of, i think model ourselves after feel like we have a very similar philosophy or strategy and today we're talking about zoom which is a business i am sure a lot of people are familiar with

um because we conducted this interview on zoom and i feel like people work on zoom every day now so i guess we don't need to go any further did you have any highlights from the interview yeah just going beyond the actual zoom meeting product which everyone is aware of into what everyone most people are not aware of is all the other products that they're launching for for enterprises, phone, call center, calendar, lots of other stuff. We talk about that in detail and why that helps Zoom. Well, let's not be certain here why. Sean thinks it gives them great potential going forward to expand their business. Yeah, agreed. But before we get to the interview, do we want to talk about our exclusive sponsor for the show, 7investing?

That is correct. Yes. 7investing. Use code money, M-O-N-E-Y. The link will be in the show notes and get $100 off your annual subscription for life when using that code at checkout. That is a 25% discount every year on the life of your subscription. Seven Investing offers seven stock research reports every month. And this ranges from a variety of industries. They have analysts that cover healthcare. They have analysts that cover software. They have analysts that cover payments, innovative companies, the space economy, even. They actually have very, very good stuff on that as well. And part of the program that they do there, Simon, the founder we've had on the show, he buys a six pack of beer for any advisor who makes a recommendation that their stock and their

stock increases by 100% after the time of the recommendation. Dana Abramovitz, the healthcare analyst, her August 2020 recommendation is now officially up 100%. If you want to check out what recommendation was and why it was so successful, along with all the other recommendations and research reports out there, 200 plus in their library. Use code money, get $100 off your annual subscription. We don't think you'll be upset by trying them out at least. And I think they're also doing some trials and they're doing, they have some free content. Explore the website, check them out. If you're an individual investor, we think it could be really, really great. All right. Without further ado, here's our interview with Sean Emery.

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay, today we are joined by Sean Emery.

He is the, I believe CIO is the official title, I think, at Avery & Co. He's been a recurring guest on the show before, I believe last time we spoke about Duolingo, I think. Is that the most recent one? Si. That is true. They've done, honestly, check out that episode and check out their results. They've been doing phenomenally lately.

All right. But today we are talking about Zoom on Zoom. So kind of a Zoom inception here. So let's just kind of start with your history with the investment. When, obviously, I think a lot of people first heard about it throughout COVID. When did you first get interested in Zoom more as an investment? Yeah. Zoom went public in 2019. It was a name that had a combination of growth profits. Before that, though, actually, we used to track Eric Yuan at the SaaSter events, which is the big

software conference that is annually. He spoke there quite a bit. He was brought there a couple times. He was always very impressive. He spoke a lot about the product, his vision, things like that. So this is kind of pre-2019 when we first started to really kind of get to know him as an entrepreneur slash executive. I actually remember in 2017-18, they hit their first $100 million of ARR, annual reoccurring revenue. And I think at the time they had raised roughly $30 million. They were looking to raise like another $100 million, or they had just raised another $100 million. And throughout that journey, they've never spent any of it. So here you had a product that we knew about. It's a pretty easy product to understand. And you could see that he was

executing well in terms of things like reliability, kind of what we talked about before. than the people, you know, Eric Guan and what he was doing there, able to raise so much capital, but yet show prudence in terms of not spending it. And again, so these are like the early days of getting to know the business. And so that was it. It's really just hearing the company at these SaaS events and they went public. So that was kind of the origin of understanding the company then at some point and we can talk about that is when we really started to focus on the investment side of you know uh actually investing in it uh so um we could go there yeah was that sort of like pre or at the peak of covid when when did you get more interested

in the investment or on the financial side and all that stuff yeah so again when we wanted to be part of you know this company at some point you know we were pretty impressed again with product execution, and their conservative nature of, you know, running this business. So I think all of that combined, you know, is a pretty good start in terms of getting interested on the investment side. Then they were, you know, they're going public. And, you know, there's this was right around the big hype of, you know, IPOs, really early days of the hype, you know, 2020, I think was peak, absurd, kind of, you know, anything could go out 2019, there were still some of that or a lot of that, but a lot of the, quote unquote, better companies were going out then.

So they were going out, I think, at a $10 billion valuation. I think it was 30, 35 times sales. We were still talking about sales then, even though they were generating profits. And the hype around it really stemmed from, at the time, they were doing something like $400 million of ARR. They were generating cash flow. That growth of revenue was growing 100 plus percent. They had a payback period of less than a year. So this was one of the most efficient, fastest growing, profitable businesses that came out. Pristine balance sheet at the time. And I think when they IPO'd, it went up 100 plus percent on day one. So you're talking about already 60 times multiple of sales. um and again at the time they were a one-trick pony where it was meetings only and we weren't

really necessarily speaking about many of the other solutions that hopefully we can speak about today and and again we were interested at that point in time but we had to know or there was that covid period that you're you're referencing where you know it came out uh expensive early on um so you know in those moments you you hopefully that you get a chance down the line of of being patient enough to invest in this thing, that day may never come. And you had the COVID bump. And around those moments, we were getting the question of, why aren't you in it? Why aren't we in it? This thing was up, I don't know, 6x overnight, it felt like, from a starting point that seemed very expensive at the time, or at least on the higher end of comfort.

And they saw massive revenue growth, massive margin expansion during those moments. And we asked ourselves, or we kind of laid out the plan, which is arguably, this happens on a lot of companies, right? We needed to see valuations come down pretty dramatically at that point. And then traction on new products. So, you know, specifically things like Zoom Phone, which we'll probably talk about today, but Zoom Phone was being launched then. And, you know, they launched that around, you know, mid to end 2019. Phone systems, you know, they're very sticky. cloud-based phone systems are a growth market. And there was a clear kind of attach rate for the kind of platform from meetings to phone. Both of those, again, we're going in the right

direction. Valuation, product adoption for Zoom Phone. It's at 4 million seats today, but within the last year, which was when we started to get involved, you're already crossing 3 million phone seats, adding 500,000 new phone seats a quarter. One of the fastest growing telephony platforms out there. So that was really it. We needed to see that valuation come down dramatically. Product adoption, we didn't want a one-trick pony. You kind of started to get that over the last 12 months when it was down 60, 70. It kept going, but it definitely, we believe, again, not advice, but we believe opens the door for opportunity. And you mentioned Zoom Phone there. I think most people are obviously familiar with the core Zoom product, but there are other offerings beyond meeting. So can you talk about what all they have in sort of that product suite? And then which do you think has the most potential?

Yeah, there's a lot. Anyone out there, go to the website, click products, and just see the products. I think you'd be quite surprised. Every now and then, you follow a company, you get excited about it. It gets a lot of companies out there, right? And, you know, the market takes it down, call it, you know, from COVID peak to within the last year. And that actually prevents you from looking back at it, that type of behavior. And you go back over there now, I think what you'll see is, you know, a pretty big product suite. So you have Zoom meeting, which is, you know, a collaboration communication kind of video communication tool.

Within that, you have kind of other products inside of Zoom meeting, like whiteboards and and other solutions there. You have Zoom Phone, which is the second most important product today. It's a cloud-based phone system, PBX, which traditional phone systems run with physical networks. Generally speaking, phone systems are stuck in a single location. So it makes sense, just like the rest of cloud and other areas of software have been virtualized. Zoom phone is just that, more and more hybrid today, meaning more and more people working in less places where you know exactly where they're going to be working that day. The cloud-based phone system is interesting, and again, 4 million Zoom phone seats there.

It's literally your work phone, right? But it's on your device, so it's bring your own device, or even they'll provide physical phones inside offices that are connected to the network on a cloud-based phone system with partner hardware manufacturers. You have Zoom Contact Center. This is something that they're seeing strong early traction. And they launched it this year. And so they tried to buy 5.9 within the last 12, 18 months.

That didn't go through. The deal was blocked by shareholders on the 5.9 side. and you know they've built their contact center product internally and now they're competing you know with some of the top players and there's like uh rumors out there that they've signed a hundred million or a hundred thousand dollar arr deal here um and you know contact center is a you know support agents customer agents customer support agents they use a contact center uh where you know in a single place they can see uh the contact externally meaning with customers and and potential customers where, you know, you message them on Twitter through their direct

message for support, and it goes to a single place like a contact center or they call in, i.e. where Zoom phone kind of, you know, all this stuff starts to mesh together. Then you have the internal, which again, I think they're seeing a lot of traction. They've called that out, which is contact center for internal use cases. So like if you're reaching out to HR, having a single portal for all of this communication internal to your company, they have Zoom Team Chat. So this one's interesting. It's a Slack-like product.

We've used it. We will use it. And it's been there forever, but it's never been something that they've focused wholeheartedly on. It was kind of a side product, it felt like. They rebranded it within the last several months to Zoom Team Chat. And really, over the last two quarters, they've invested pretty aggressively in the ecosystem. They announced integrations with things like Atlassian's Jira, ServiceNow, Salesforce.

So I think there's a lot there. So I'd watch out because typically, when they lean in on a product, they do pretty well. And then lastly, there's a couple other ones that I think are important, which are Zoom video webinars for events, Zoom events, Zoom rooms, which is for the physical environments for like conference rooms and things like that, zoom for developers. And then they, they launched a whole new or announced a whole new set of products here at Zoomtopia last week or the weeks within the last month.

How about that for the purpose of this recording? And, you know, they've, they announced plenty of products that I think are fascinating, but I'll stop there. Yeah. I think the, I was going to ask for any sort of details on zoom phone, but you hit a lot of that there. So add anything, if there's anything, cause I know that's a very important product, but I also want to hit enterprise sales. Um,

why have they been so successful competing with Microsoft and enterprise sales and what is the opportunity in enterprise? Yeah. So this is a big part of their business, a big emphasis of their business. Um, I think, you know, there's a bunch of reasons why. So one, if you think about it, you know, when a lot of people think about zoom, number one, they think about teams. And Microsoft is a competitor to many. And so is Google, right? And I think what gets lost in the shuffle is not every company wants to have all of their

productivity tools and communication tools sitting inside of some of the largest companies out there that are not independent to the rest of their organization and or a competitive threat in their organization as well. So you have a company like Intuit, which has completely rolled out Zoom for Zoom Phone, Zoom Meeting, and likely probably many of the other products we're talking about. And I think you're seeing a lot of enterprises look at a couple of different factors, which is ease of use, productivity. There's change management that happens as well, specifically the larger you get. If you have 10,000 employees, changing to another solution is not as easy as 10 employees and doing that. So reliability, change management, I think are important.

You know, I think they've also proven their ability to innovate. We talked about some of those, the products that I just talked about, you know, Zoomtopia, they announced like email, calendar, and we can talk about more about that and the potential of many of those things and chatbot and virtual agents that they announced. But I think, again, the success in the enterprise is definitely the success of, you know, landing with Zoom meeting, spreading it across thousands of customers or users in that organization. And then now they're starting to begin that upsell strategy where, you know, as of today, they're 12% penetrated into their enterprise with Zoom phone and likely going to go higher from all kind of evidence that, you know, whether they say or some of the surveys that we can read out there. um so i think that's the the importance of that is you know enterprises are looking for a strategic

partner that's independent and best in breed um and zoom i think fits that bill and and they're doing that very very successfully yeah let's say let's say calendar and email before we launch into more of the financial stuff uh what do you think the potential is there can they compete with g suite because g suite does have quite the lock on a lot of users out there for sure yeah so they were pretty clear that that that wasn't the goal i don't know if that's a you know competitive talk versus reality um i think you know this was one of the more important announcements we've said for a long time is either go out and acquire you know a an email client um or you know go out and acquire, even though Calendly is expensive now in terms of private valuations, go out and acquire

this and or build those functionality. And sure enough, they did that. So this is an email client. You can aggregate your emails with Gmail and Microsoft in one place. So it's literally a client where you log in just like you would with Outlook and Exchange. And so it allows you to much more seamlessly integrate your entire zoom experience so like if you downloaded the brand new one this is new and it's it's the beta version but you know at the top you have you know meetings calendar mail uh team chat whiteboard all in one all in one area um so you can see what's next on your calendar truly a competitive i think um position versus like a teams which is what people like in all in one place they highlighted a couple stats at the event which was really around

uh, clicking how, how many clicks, uh, uh, users in kind of the enterprise world take to, you know, get between applications and they, they, they narrowed it down to four hours a week. People lose to, you know, switching back and forth between apps. So the strategy here is again, to increase productivity, increase the, I think, start your day. I think that's the most important thing where like Slack wins and some other companies win, start your day in an app. And so starting with Zoom meeting and Zmail and Calendar, they also have Zmail. That's good to highlight as well as where yourname.atgmail.com, they have the same thing at zmail.com.

That's really trying to hit the small business to just start up and get started and have an email client. With Zmail, you can obviously pay and have your domain attached to that just like you would in anything else. it's a much more seamless experience with your meetings app. So if you're sending a meeting invite to somebody, I think what you see there is it's just much more integrated and seamless. The recordings, if you had a recording on a session for sales or something, that sticks to the meeting automatically. So it's a much more intuitive product. If you are a Zoom believer and

power user i think that's really um where that comes in calendar is is is what you would expect from a calendar it's a calendar with all your different calendar stuff and and eventually able to set uh send out uh your availability similar to uh what we're thinking similar to like a calendar or something like that and um and i think it's a big deal all of that uh on top of what they've already have and announced all right well we hit the products pretty well there i think that was a great overview in the updates on how they're more than just the zoom meetings that people to talk about. However, the narrative on the company, both generally and in the financial world, is that we hit peak Zoom during COVID. I think that narrative is still on the stock,

even though the company has shown that through the revenue growth rates that this is really not the case. Why do you think that's not the case, I guess? And what do the next, say, 18 months look like for this business? I know that's a hard question to answer, But I think that's the big concern with the stock right now and why the valuation might look, you know, optically cheap and why people are concerned about the company. Right. You know, at current prices. Yeah. So I think we like I think one thing is clear is we've definitely reached peak Zoom meeting usage. I think that's like the most important takeaway. And, you know, that happened, you know, when I say that I'm talking about COVID where they had 365 or 50 million people using it concurrently at like a given time.

I think they threw out that number at one point. And so to think we would ever go back to those numbers would assume some sort of lockdown. But I think we're far from peak penetration. And I think Zoom meeting is what everyone thinks about today. And yes, it's still critical to that story. But it's also clear that 4 million Zoom phone seats are there. They've had some big wins on the Zoom contact center with other products, again, like calendar, email, team chat.

I think the future is bright in terms of where they expand to. So I think they're very much in that expand phase, which is what you're seeing in the enterprise business. Today, they have 200,000 customers paying $100,000 or more. At Zoomtopia, again, their event, they announced 10% of the enterprise customers are using three or four products and generate 50% of ARR, annual reoccurring revenue. And then a good stat they also threw out, I believe, was ARR of customers using three or four products grew 45% year over year. So I think, again, we're peak Zoom meeting,

but I think we're at the very early days of expansion into the organizations that are out there, which is why you're seeing such strength in the enterprise. The next 18 months, if I had to categorize or characterize it, I think we hope to see continued maturity of the products that they just announced. So, you know, it's starting from the newest, you know, mail calendar, and then going up to, you know, phone and contact center. Continued, I think, adoption of Zoom phone, which is, you know, 4 million seats today, but only 12% penetrated, like I said before, within the enterprise. Zoom contact center, I think just, it just launched and we want to see more deals announced. Again, there's the rumor of 100,000 ARR and we want to see more announcements

there. They announced literally within the first quarter, two pretty big enterprise logos. That was last quarter. Zoom meetings, I think, we want to see continued stability in their online business. I think that's been the crux of the negativity, which these are customers that don't have account reps attached to them. So generally viewed as smaller customers, they saw some churn there as COVID, the use cases around COVID started to fall off. You had the macro issues really start to formulate in Europe. So those were some of the issues that they were talking about early on. And again, expecting to see some of that talk continue this quarter, next quarter, and probably over the next two, three quarters. But they did share at Zoomtopia their monthly

churn data, which is essentially the online businesses' monthly churn data is back to pre-COVID levels. And I think, again, that's a really important signal to understand that the online business, which makes up right around 50%, the enterprise business makes up right around 50%. Enterprise is growing strongly. We plan to see more attach rates on products and then the online business to see, again, stability. They talked about that this week, last week, and the week before as well. But you're probably going to see a lot of that still here early on, in the next quarter to potentially elongation of cycles. Some of the same stuff, same script, I think we've seen over the last quarter from other companies, but that doesn't, I think,

change the overall narrative or story around they landed meetings and they're expanding pretty dramatically with some of their other products. Do you think that in terms of future revenue growth for them, majority of that comes from product expansion, or do you think it'll be kind of a blend with price increases as well, and maybe customer growth, I guess, in there also. Yeah. So you've seen customer growth, right? They're plus 204,000 enterprise customers, which is kind of the big core they really talk about. So you're seeing smaller customer growth, but still customer growth. It's really expansion. I think it's the expand. Some of these could be native, right? So one important thing about all this is that they're selling to the same buyer.

You know, the person that's buying, you know, Zoom phone is likely the same decision maker that's buying Zoom meeting and likely the same decision maker that's buying contact center. I heard Avaya's, you know, CEO literally talk about this exact thing. And that's why, you know, they're in such a good place. Them talking about themselves, whether I believe that or not is different, but it's something about these adjacent products selling to the same buyer. I think just, again, is probably why they've been able to expand Zoom Phone and Contact Center so fast after product launch. So the future, I think, is more of a function of expansion as opposed to new logo wins as

it relates to meetings, for example. Okay. one other question i guess we we kind of talked about this before we hit record but a lot of i feel like a lot of investors and i it's it's easy to kind of fall into this trap think it's a commodity that the video offerings is largely a commodity um given just how many other uh competitors there are in space do you think zoom has any like true moat or lasting competitive advantages yeah so again i think we both talked about it right and what you're referring to is you know before we were talking about how we we both use zoom and the reason why we use zoom is

is given its reliability we know we're going to get on here and you know the stability and clarity and stuff is going to work um and that's super important because you know it's all about trust and brand and ensuring that you know we're doing a podcast but you know if you're doing a sales pitch to a upper level executive, I mean, you might have 30 minutes to get the shot. And do you really want to, you know, so I think there's some aspects to brand trust and having that reliability, you know, is that a moat all that in itself? I don't think so again, because I think eventually, you know, reliability kinds of span across, you know, players. But four years ago, I would have said, you know, they do not like that, that they don't have a moat

that they would have to create a platform. And again, it goes back to the very origins of what I was kind of from the start of understanding who they were at the time to what would make it investable, valuation plus clear expansion. I think there's clear evidence now that there's a platform forming. The question is, how much of their user base do they penetrate? How many more products do they successfully attach to those? But ultimately, what you see is more products, the more they attach, the higher the switching costs, the more competitive they become. And as they do that, I think what forms here is the

potential of a third or fourth or fifth SaaS platform, cloud-based platform, call it the Google's, the Salesforce, the ServiceNow's of the world. So again, I think meeting by itself, they still win in reliability. They still win in that brand loyalty, ease of use. There's the hintest of a network effect here where I send you a Zoom meeting and you already know how to use it, as opposed to fumbling through Cisco's WebEx and downloading a client onto your computer. So that, I think, still exists, and that has helped bridge them to today to then upsell these new products. But once you attach, it's the reason why Avaya still exists is because you roll out 10,000 Zoom phones across an organization, and then their service and support team is using Contact Center, and their HR team is using Contact Center, and we're all using meeting and team chat. I mean, that is very sticky for sure. Right.

Do you think that leads to pricing power? And do you think they are underpricing versus the value they're providing? Because personally, we look at, again, we're power users with the podcast. We use it multiple times per week, but we have one account. I think they charge about $150 to $200 a year. And the value they're providing us is much, much higher than that. And we're really just the Zoom meeting users at this moment. What do you think about the pricing power?

Because you would think that the competitive advantage would lead to that. And I guess, do you see them flexing that in the short run or maybe more of an out years thing? Yeah. So they've always tried to be kind of the, uh, the, the platform that anyone can jump on at the very least, right. Where they have like the 40 minute threshold. And then if you're using it more, um, then you become a, a, a buyer. Um, and so I, I do think, you know, they could in theory flex on pricing power. They've actually always tried to price aggressive, you know, and, and try to serve more people. I think, again, that's why they expanded so quickly. And even with that kind of, call it aggressive pricing or slightly aggressive pricing, we talked about it before,

they still supported 20%, 40% cash flow margins on that. And again, they fluctuate. But Microsoft, I think what's important here is over the last, recently, this year, Microsoft increased their pricing on their e-licenses multiple times. And, you know, that is a stepping stone, right? It's essentially allowing, you know, it's like when, you know, Apple in the app store increases the price of going from 99 cents to whatever it was, $1.50 or two bucks at the minimum, it literally pushes the whole space up in terms of being able to price. So Microsoft leading with price increases, I think, allow some flow through to the rest of the ecosystem. But again, I think it comes down to product attach rates become mission critical

inside of an organization, and then you can start asking for price increases. Down the line, I think that's the thesis, right? Which is more attaches, keep prices relatively attractive today. And then once you can't attach anymore, and you're at peak kind of attach penetration, I think that's ultimately when you start to flex pricing thereafter. So I don't think we see that for some time. It could be, obviously, as an inflationary-ish environment, or it was. But that's how I view pricing. Okay, let's talk through financials a bit.

And I'm going to try to summarize it the best I can. And you can kind of tell me if I'm getting it wrong or right. But throughout COVID, cash flow margins ballooned because it seemed like their sales team was pretty much just customer service reps at sort of the peak there. And since then, margins have kind of come back down as they invested back into the business. What do you think of the valuation today? And what kind of margins do you think this, what kind of normalized margins do you think Zoom can have? Is it ever going to be sort of that peak level that they saw during COVID? Well, I don't think it'll be peak level, right?

Which was like 50. I think that at some point they were probably touching, you know, even if it was interquarter, like peak 50% flow through. They talked about it. They, even during those moments, they couldn't invest fast enough. That makes a lot of sense. Conceptually, you know, you have within a month, you know, if you recall, right. I mean, what was that?

March, April, May. I mean, within that timeframe, they had concurrent 350 million plus people using the platform. People were naturally coming to the platform. They didn't have to spend as much on sales and marketing. R&D, they were always under investing in R&D during that time. And they always talked about bringing that up to the 10%, 12% threshold. They're kind of there today. So they're within the ballpark of what they've outlined.

At Zoomtopia, they announced 30-ish percent operating margins. a lot of their operating margins flowed through to cashflow. And so you can kind of suggest that that's where they think this business is going. Again, pre-COVID, post-COVID, they've kind of been in that ballpark. The peak COVID, again, I don't think that's the margin structure you should have been looking at. We weren't at all thinking that in many of the stuff we were doing. we were taking margins down 15% at the free cash flow. Now, obviously the market doesn't like that in the short term, but the reality is it's more about that revenue on that 30%.

So yeah, so margins for us, again, we think that 30% kind of threshold makes a lot of sense. And they outlined that again within the last couple of weeks. All right. Can we just get some context for the listeners on valuation? I know we're in a market cap at about $25 billion right now. cash pile is pretty high. I think it's five or $6 billion. Um, just what are they earning? Like just, yeah, just some reference on that. Yeah. So 25 or so billion dollar business today on a

market cap basis, enterprise values probably around, you know, depending on the day it's, you know, 17 to $20 billion, uh, in terms of enterprise, um, essentially no debt, you know, so this is a, you know, 20% of their market cap is sitting in, in cash. Um, pretty interesting. right so they laid out and i'll kind of walk you through our framework slightly here is you know there's multiple markets they play in uh they're all pretty big you know so zoom's laid out a i'll call it a soft goal they've talked about it anecdotally um of 10 billion dollars in revenue today you know that number is closer to inching towards five right um and they to get there right to get to that soft number it'll take we think it's very doable right but it's also it'll take

execution across product offerings. Probably, with that cash position, you'll probably see some acquisitions. They've talked about acquisitions a lot here. They haven't necessarily done any. You could argue that's been very prudent to do as valuations across the landscape have come down, so they should be in a pretty good position to do something. But we don't know the size. They've talked about tuck-ins, and they've also talked about where it fits in, in terms of a product software engineers culture types i think they're pretty rigid in terms of uh acquisitions to capture these markets we do think again it it does require like successful product launches and telephony 37 billion are kind of market according to them you see similar figures that have been

shared around other cloud players talking about similar market sizes whether it's like 25 or 40 and you know you get somewhere in the ballpark of you know 35 40 billion dollars we know the revenue of some players like avaya cisco others and how much they generate so you can kind of get in that ballpark for telephony uh the collaboration market they laid out somewhere around you know 45 billion that's kind of always been kind of the number and again you can go out and look at some of the other players out there and aggregate all that revenue and kind of figure out where that goes um contact center uh smaller market than the first two but it's like 20 billion dollars you know there's the ring centrals and five nines and and some others that sit out there if i as

well um where you can see again a lot of this just remember is is going from on-premise to cloud right so zoom being the cloud players it's re-platforming to the cloud so uh some of that spend just simply goes from on-prem to cloud not necessarily having to create like new markets um some other like some other areas so webinars and events i think that's four billion net net you get around like a hundred billion dollar kind of call it space uh of tangible you know not not future looking kind of mythical uh addressable markets they have a strong offering in all those categories uh so again like we talked about before is the upsell opportunities uh of attaching and then they have up sales inside of that so they have sales iq which is a pretty cool thing for like

you're recording a meeting, but that's like $15 a user per month, which is almost double the price of an original one. Really good for sales teams. They have their conversation intelligence product and some of the products announced at Zoomtopia, we think don't even exist in the numbers we're talking about. So again, we think $10 billion is in the cards from what they have announced on the product side, what they have achieved to date. I think, again, taking those two things together to try to judge the potential here. They laid out that 30% operating margin at the midpoint, so a little bit higher, a little bit lower. Again, a lot of that flows through to free cash flow. We're trying to value it on free cash flow. If you take those numbers, you net out around $3

billion in terms of this kind of free cash flow opportunity. And again, not in the too distant future in our opinion, again, with acquisitions and execution on the product side. And you apply somewhere around a 10, 15 multiple on that, you get a $30, $40 billion company on a $17 to $20 billion enterprise. Again, that $5.6 billion of cash. We just think you put that all together, that's not only a framework to use, it provides a margin of safety, we think, with the 10, 15 multiple. Because if, again, you're talking about a business doing $10 billion in reoccurring revenue with strong attach rates, becomes a central platform, like we talked about the Salesforce Service Nows, they're not getting 10 to 15x multiples. So that is the opportunity.

We think the margin of safety is in the multiple relative to that $10 billion. Eric Yuan said, we're going more than that. He's kind of taking the Benioff approach where at first it was it was a billion, then it was 5 billion, 10 billion. And then, you know, now they're shooting for 50 billion, I think, or something like that at Salesforce. I think you could see similar type of activity at Zoom. Not the 50 billions and such, but I'm just saying how this platform matures. And again, it won't be a straight line. You know, there'll be comments around Zoom meeting and some turnaround online business, but I think that's the best way to think about it. And we think that's a couple of years out. It's definitely in the medium term to

the end of near term of opportunity. You mentioned the huge cash pile. What do you think they'll do with that? If I'm not mistaken, didn't they authorize a repurchase program in there too? Yeah. Share count's going down a little bit. Yeah. So they had a billion dollar share buyback program. So acquisitions, They've talked about acquisitions. They've talked about the acquisitions. We spoke about them a moment ago in terms of what they're kind of looking for. The size of those, they tried to take a big chunk out of 5.9 before. So they've shown their ability to try to go big. And I think at some point you'll see a big enough acquisition. I don't know what it'll be. They've talked a lot

about acquisitions. So we'll see there. I think that's really that. And then on the share buyback side, assuming, you know, the shares are reasonably priced in their view, I think they'll do a lot of that as well. So, you know, they're sitting on a lot of cash. There's no kind of questions about that. The question is what they do with it. You know, what's cool though, is, you know, they easily could have acquired a bunch of stuff over the last year with that cash pile, like some others have done. And at Zoomtopia, they had like a breakout session. And one of those breakout sessions, they talked about all the products that they announced, Zoom mail, products, virtual chat, the chatbot, all the other stuff in team chat. And he gave a roadmap of when they first got

feedback on that and when they had a product in market. And the gentleman speaking basically said they had feedback to product launch in beta to a fully kind of general available was 12 months. So not only is this company, you know, have pretty good products, but they're doing, they're rapidly building these things out. So, you know, as a somebody that says product and execution and an expansion of platform has to happen, that's again, just like other signals of that where, you know, maybe they can be even more razor focused on more purposeful with that $5.6 billion of cash than somebody that can't necessarily launch products. and innovate as fast as they have. So it's refreshing to say the least. All right. Last question. I think pre-mortem, how could an investment in Zoom go poorly? Yeah. It's probably everything I just talked about, which is the product and execution around that product. Could be go to market. It could be the actual product. Because you could argue team chat, right? It's been there for four years or something or even

longer um yet you know they're starting to emphasize it um and really seeing it as an opportunity um to to get people to start their days and in their slack like product again literally with a zoom meeting you could have zoom and team chat for the same price and you could totally remove slack um just throwing that out there everybody but the um yeah and then again teams is doing a good job i think uh teams uh is call it a is a threat but it's a threat to a point because unless you're assuming you know they they take the entire market which again like i was referencing before which is there's a lot of companies that don't want to that don't use microsoft at all right um and they use you know google's ecosystem

um or apple's ecosystem uh for many of their tools and they don't use excel not everyone's a financial firm and the uh and that's the reality so you know i think they can coexist but Teams is one. Google's always one. I mean, we talked about it before. Google just, you know, for some reason doesn't nail some of the software, even though they're so big in this space. And that's really kind of it. You know, financially, there's no financial burden. You know, they could make some sort of a freakish acquisition, but they haven't shown anything to support that kind of belief. So they're not sitting on a lot of debt. They're sitting on a of cash so even if they lost you know some big logos at some point they would financially be

be sound um product problems i think one thing we didn't talk about is that they they run their own data centers um right so everyone talks about you know the cloud the public cloud public cloud public cloud you know zoom actually does it so they pre-covered they had essentially they ran everything internally. They have 26 zones that they run internally at co-located facilities where they own the hardware and hold them at co-location facilities. The importance of that is it gives them control. They own the data. AWS doesn't. Microsoft Azure doesn't. Google Cloud doesn't, which is also important for their end customers who don't want AWS holding their data. um and you know there could be something that goes wrong there just because you know they don't have

the same scale as aws but i mean they're pretty darn reliable so they're doing a good job uh they have some public cloud spend that happened during covid because of uh because of um the burst in in usage so they needed to you know supplement a lot of that and and that actually led to a degradation in gross margin and that's come back so it's actually been cheaper and they've talked about that their gross margin's gone up as they continue to push off the cloud same we saw with Dropbox and some others. So that's super important. It's another thing as well. So if anything goes wrong with their own facilities, mind you, they have 26 zones, 27 zones. So they have a lot of redundancies as well. So I think that's important. Lastly, you know what's important

about that? And I'm just kind of going on here, but I think it's important for the thesis is They announced Zoom Mesh, which is their ECDN, their Enterprise Content Delivery Network for webinars and events. A lot of that stuff is ran through Microsoft and call it some of the other players out there in CDN. Because they own their own infrastructure, they're actually now able to provide infrastructure as a service services that somebody that's just using the public cloud can't necessarily do. um, as a function. So that is actually a solution there. And all that does is doesn't allow, doesn't have, uh, uh, allow buffering during like a webcast or, uh, an event, right. Cause it's running through their network. Um, and there's probably like a gap and delay and it allows it to stream fluidly, um, to the rest of everybody. So that's important as well. All of this, you know,

going back to go, what could go wrong is, you know, some of those things, you know, there's, there's competitive threats are always will be product execution. Um, and you know, if anything goes wrong, uh, the flip side of that is contract lanes are like, you know, 15 months, 70% of customers are on annual contracts now. Um, so for every potential negative, there's kind of a, uh, a flushing point, but you know, anything could go wrong, but I think again, reoccurring revenue is why it's such a love space. If you were a shareholder at the time of the 5-9 bid, would you have been upset if the deal went through? If you were a shareholder of Zoom? I don't know if you were. I wasn't. I wasn't. Or we weren't. But it's hard to say, right? Because

it's hindsight now, right? Because now they have a product that's in market and they're getting traction. So it's showing that they didn't necessarily need the deal. It would have fast tracked product, enterprise grade products, and it would have obviously brought over customers. They're the only ones that know the level of the synergies there. So in hindsight, I think it depends on that. It depends on that question on the synergies, whether right now they would have you know uh instead of having you know a couple logos that they're talking about they could have you know 50 100 a thousand logos but then now they're quickly upselling phone and quickly upselling uh some of their other stuff we don't know any of that data they didn't that's

not out there because the deal didn't necessarily go through and i think uh um it's tough it's tough i think at the time i would have been a little upset because again if you go back to recall of the thesis is going from meetings to phone to contact center. This was a clear step into an adjacent kind of product with a clear user base. That's enterprise grade with a product that is best in class. I mean, that just like definitely put, you know, the fork in the ground saying this isn't just meetings anymore. Um, they've done that on their own now here, here over the last, uh, like, you know, three quarters. Um, but yeah, I mean, it's tough to say at the end of the day. I remember the announcement and thinking through it, but at the time they didn't

have contact center launch. So now they do. And that's kind of my views on it. Right. All right. Well, I think that's all the questions we have. Thank you, Sean, for your time. We want to remind listeners that Brett and I are not financial advisors. So anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thanks again, Sean, for coming on the show and we will see you all next time. Hey, Simon, we wanted to ask you a few questions about 7investing so listeners could get an idea

of what they're getting. What inspired you to start the company and what exactly is 7investing? Well, hey, Ryan, thanks again for having me. You know, from years of working in the investing industry, it was inspired by conversations with people that would just always have kind of the same negative perception of the stock market, right? It's too hard, or I don't have time for this, for this to stack against me. And those conversations kind of led me to say, hey, we need to create a site that actually does inspire people to say, you can take control of your financial future.

You can invest in stocks. You can find good stocks to buy and hold for long periods of time. At the end of the day, too, we know that everybody is different. We don't believe that there is one stock that fits for everyone, right? Maybe you're a dividend loving, you know, paycheck cashing income investor, they might want an option that's going to be a lower risk dividend paying stock, especially right now with the economy being what it is. And then other people might say, hey, you know, I'm ready to hold on for 20 or 30 years, I want to take some swings for the fences. Let's go after those high growth opportunities. And so I said, you know, this would be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background and a diverse perspective of the stock market so we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles and a whole bunch

of different industries. And so seven investing is kind of the genesis of all of those that we started in March of 2020. And we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis. And let's present our seven favorite actionable ideas every month for investors to choose from. And let's start the conversation about which of these stocks is right for you and which one might be the right fit for your portfolio. Knowing that investing is a very personal thing. All right. If you are a subscriber of Seven Investing, what do you get? Can you give an overview of what subscribers get? On the very first of every month, Brett, we release our seven

new recommendations so we are uh coming up on october 1st here at least in the recording of this and you know on october 1st we'll release seven recommendation reports some of them will be low risk some of them will be high risk some of them will be biotech some of them will be financial services we run the full gamut and as a member you get immediate access to all of the new reports but you also get access to all of our old recommendations as well we track all of them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going. And sometimes we even see red flags that we think people should be aware of.

There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to kind of understand the risk and reward relationship. And then the last part of it is in addition to issuing new recommendations and providing updates on them is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades to accomplish whatever we want to get to as the end goal. And so we always, every month, make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other

investors. I think that's one of the key differentiators for 7investing is that we know this is a long-term journey. We know it's a very personal thing. We know they're going to have questions along the way. We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey. And you mentioned, so seven recommendations each month. Sometimes those might be repeats, But obviously, there's a lot of companies now in the 7investing universe. So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they have a way of knowing whether advisors like certain ones more?

That's the most common question we've gotten actually since we started is what's your favorite ideas right now? You know, we've done the diligence on almost 200 unique companies now and put them on the scorecard and people would say, hey, this is too much to keep up with. How do I even know where to start? And so we've kind of evolved as a company. One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another advisor's previous recommendations and put the flag on it that says this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the scorecard.

So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive bullish flag that we can mark things with. And you can filter through all of those to really quickly see here's some of our favorite opportunities. And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio where every quarter now we've gone ahead and self-selected as a team through a pretty methodical process our 20 favorite ideas, our 20 highest scoring companies that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter, also available as an added benefit for no extra charge for seven investing members. All right. Last question here. What does it cost to become a 7investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code money to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard

for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a discount on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use money, the Chit Chat Money promo code, it's down to $300. So you're basically getting the subscription for half price if you sign up for the annual offer with that promo code. That does not expire after the first year. As long as you remain an active subscriber, you get to lock in that a hundred dollars off a year benefit. All right. Well, as he mentioned, use that code money. Thanks for joining us, Simon. Thanks very much for having me.