On the forum, I stated that Zoom had 90 degrees of the cloud-native communications market with web conferencing and moved to 180 degrees with Zoom Phone. This “half-circle” represents employee communications. When the sales department has a meeting with the marketing department, they’ve been using Zoom for up to 10 years. Prior to this, these departments used Cisco Webex, where Eric Yuan cut his teeth. Ten years ago, when Zoom came on the market, employee communications software and apps were too cumbersome to deliver the speed required for communications. Mobile was especially an issue for legacy products. The beauty of Zoom’s product is it reduced friction entirely from where it used to take minutes to join a call to mere seconds.

Five9 is on the opposite 180-degree side of the enterprise communications circle, which is customer communications. Customer communications is when you go to call your credit card company 1-800 number or health insurance company as a customer. These contact centers are very good in siloed situations yet there is a lot of friction when it comes to aggregating omnichannel touchpoints. Have you ever called your credit card company and discussed an issue for 5-10 minutes only to be transferred to another department where you must repeat the exact same issue for 5-10 minutes? Or, have you ever engaged with a chatbot or live chat and 10 minutes later ended up calling in for help because it was ineffective?

Many of these customer contact centers are quite advanced yet they are not able to connect the pieces in the customer journey to be effective. Wait times have improved yet getting the customer what they need to increase loyalty has not improved.

Here is how Zoom depicts the 360-degree circle:

Here is how Gartner shows the circle – which is actually two circles overlapping:

More on Five9 …

I’ve published volumes on Zoom Video so it makes sense to focus on Five9 for this analysis.

Five9 was not a hypergrowth story like Twilio or Zoom during Covid. In fact, the stock price being up 187% is pretty generous of the market as the company has remained range bound in the 28-40% revenue growth range even during the ideal conditions for a contact center company, which was the work-from-home environment we saw last year.

By my estimation, Five9 has a “bells and whistles” issue and lacks focus. There are too many features and the company tries to do too much. That’s an opinion of mine, although if you visit the website, you’ll probably see what I mean as it’s a bit overwhelming. Essentially, Five9 doesn’t have its cornerstone selling point.

To contrast here is how streamlined Zoom and Twilio are:

Zoom delivers web conferencing and audio for employees. It’s also now a consumer favorite
Twilio simplifies SMS for developers. It’s also becoming an omnichannel marketing solution using first-party data

Despite the fact Five9 lost its way by trying to do too much (evidenced by its lackluster sub-40% growth for many years including during the hypergrowth window of 2020), the product has some chops and ranks competitively across cloud contact centers in the North American region. The company is third for high-volume customer use cases, second for customer engagement use cases, and first place for agile contact center use cases. Agile means it’s quick to deploy for specific use cases (like health care, for instance, needs a customized deployment) and can scale quickly if needed.

The ongoing argument in terms of the shift towards cloud communications is that omnichannel approaches have not resulted in a unified customer experience. The pain point –for both the consumer and the SMB/enterprise – is the sheer number of touchpoints we have today. This includes chat, phone, email, SMS and social media.

Here’s a visual of what Zoom and Five9 will set out to accomplish with multiexperience between employee communications and customer communications. Cisco is one company that has combined Webex with a contact center. As you already know, this is an easy competitor for Zoom to take on. Otherwise, Zoom is primarily taking on competitors in either UCaaS or CCaaS but not both.

Source: Gartner

In a previous Forbes article, I had stated “Zoom’s ongoing goal will be to disrupt all legacy systems with cloud-native communications – and this means every possible method of communication that is not currently done on the cloud and/or is currently on the cloud but is too cumbersome of a process due to walled gardens.”

Vendor lock-in usually means Microsoft or Google. There is serious vendor lock-in across enterprise companies with 115 million users on Microsoft Teams due to the cross-sell from Office. Google’s walled garden likely destroyed its potential for doing more in communications, as well.

Quick note: I’ve seen some questions about the difference between UCaaS and CCaaS. We can simplify this by calling UCaaS “employee communications” and CCaaS “customer communications.” We know these are cloud-native and we know employee communications is unified. While I’m on the topic, it’s important to note that Zoom made the UCaaS Gartner quadrant for the first-time last year with the addition of Zoom and was immediately named a leader.

Artificial Intelligence

The reason that combining employee communications with customer communications is important is for data integration. One of the most advanced areas for AI is speech and voice recognition. This lends itself well to customer contact centers who speak with customers all day, every day. The AI for enterprise communications will become more effective when CX and EX is combined.

In November of 2019, Google released its Contact Cloud Center AI (CCAI) solution and Five9 was an integration partner for the release. The integration allows Five9’s contact center to send the voice conversation and contextual data to Google’s Cloud CCAI via APIs for real-time transcription and the triggering of knowledge base responses. Salesforce was also a launch partner for the use of CRM to help with custom integrations across a customer base and customer service agents.

The stack in this case (moving forward) would be Zoom for voice/audio/chat for customer contact centers, Salesforce for millions of agent desktops, and Google’s AI voice recognition for accuracy. This is also a great illustration as to why a walled garden like Microsoft isn’t a good reason to discount Zoom. In many ways, you can do more outside of walled gardens and reduce vendor lock-in (or dependency). This is why best-of-breed is becoming popular (reference my Snowflake analysis). In this case, Google likely has the better AI for voice recognition and a company with high customer service volume isn’t stuck with Microsoft for a contact center just because it uses Microsoft for other software products.

If I were to guess the motivating factor behind Zoom’s choice in Five9, it is probably because the company has been working on AI for customer communications. This will save Zoom not only the build for a contact center, but can immediately center Zoom in the trend of AI voice recognition where it’s being rapidly adopted and needed for communications.

Key Points from Investors Call and Investors Presentation:

You can access the investors call here and the presentation here.

Five9 stockholders will receive 0.5533 shares of Class A common stock of Zoom Video Communications. This represents a 13% premium at the time of announcement to Five9 for a stock price of $200.28. The transaction value is $14.7 billion and is an all-stock deal. The transaction is expected to close in the first half of 2022. This equates to a 25.3 price-to-sales, which the Five9 CEO pointed out, is the highest M&A P/S paid in the cloud category. On a side note, even though this was stated, I’m not sure this is correct as I believe Slack was bought at a 29 price-to-sales.

According to the Investors Presentation, Zoom will increase the addressable market from $62 billion to $86 billion, for an increase of $24 billion by adding the customer communications. The company points to the cross-sell opportunity, which means not only will Zoom increase its TAM but should capture a higher percentage of the TAM.

Last twelve months revenue for Zoom Video was $3.3 billion compared to Five9’s $478 million. The growth from Zoom was nearly 10X higher at 296% compared to Five9’s 37%. If we look to growth rates prior to Covid, Zoom was growing at higher growth rates of about 3X compared to Five9. My main concern with this acquisition is if we will see slower rates of growth for Zoom. I’ll look to management to make sure the cross-selling re-accelerates the customer communications portion for the growth opportunity that was emphasized in the call.

Management teams have to balance giving away their entire strategy to competitors while also keeping investors happy with enough transparency. According to Zoom’s CEO, they chose Five9 because the two companies had synergy and have landed significant deals in education and retail. He also said that building the solution would take many years and that customers don’t want to wait. As stated, I think it’s because Five9 has been working on the AI-driven automation. At one point, when pressed to state why Five9 specifically, the answer was “look at our video assets and look at their AI.”

According to the Investors Call, Zoom will partner with Five9 competitors, and vice versa, with Five9 continuing to partner with Cisco and Microsoft, for example.

Key Points from Previous Zoom Analysis:

In the August 2020 and April 2021 analysis, I emphasized that the story for Zoom Video was changing and the company was doubling TAM with Zoom Phone. Although I’ve discussed Zoom Phone many times – here is one example:

Last August, I pointed out that Zoom’s hardware-as-a-service products allowed companies to replace legacy systems by consolidating software and hardware for one consistent experience. ServiceNow made headlines last year when they chose Zoom Phone to replace their business phone lines by stating, “Going forward, with the addition of Zoom Phone, we're getting a head start on an even more robust experience with Zoom— one-touch communication and collaboration features, plus Zoom-connected conference rooms.”ServiceNow made headlines last year when they chose Zoom Phone to replace their business phone lines by stating, “Going forward, with the addition of Zoom Phone, we're getting a head start on an even more robust experience with Zoom— one-touch communication and collaboration features, plus Zoom-connected conference rooms.”

This is key because as the CEO of Five9 pointed out, Zoom has the very best technology available today with Zoom Phone. The CEO of Five9 also pointed out that “the opportunity here is the millions, tens of millions, even hundreds of millions of phones, that have to be replaced. When you replace the phone system, you replace the contact center.”

Another key point from our ongoing analysis with entries into Zoom from $62 onward is the international opportunity. The United States is a large land mass with very few telephone providers (we call it a duopoly between AT&T and Verizon). There’s Charter, etcetera, but you get the idea. Many other countries don’t have the reliability that the United States has and/or many countries have close borders and require new country codes when they dial a number 1,000 miles or even 500 miles away. Zoom is all about global and that’s key for investors to understand. This isn’t about the United States.

A Note on Twilio:

There will be customers who overlap between Twilio/Flex and Zoom/Five9 and will evaluate both to ultimately choose one. However, Segment is the main pivot we are interested in for Twilio and the post-IDFA world. It’s the omnichannel marketing path that is most interesting for Twilio as it can eat into advertising budgets rather than IT budgets for a call center (like Five9).

I covered our thesis on Twilio here in a 1-hour LTBH webinar and also here in a Q1 post-earnings write-up.