This blog was co-authored by Brett Winton, William Summerlin, and Andrew Kim.
Given its stance against Zoom’s acquisition of Five9 at the current price, we would like to offer Institutional Shareholder Services’ (ISS) team another perspective based on the research of our four-person next-generation-internet analyst team. We would welcome thoughts, ideas, and constructive criticism in response. This blog is a condensed version of a more comprehensive paper with an open-source valuation model that we plan to release during the next few weeks.
Roughly 18 months ago, COVID-19 changed the relationship between and among technology, labor, and leisure activities. One of the most important changes involved work. Stay-at-home orders forced workers—including key decision-makers—to assess the productivity of remote and hybrid-workforce models.
According to Gartner, by the end of this year, the percent of all knowledge workers working remotely will approach 51%, nearly double the 27% in 2019. Perhaps as important, a majority of workers seems to prefer this new working world order, as shown below.
Despite this significant shift, Unified Communications (UC) for hybrid and remote-only working models seems to be in the early stages of adoption. To service decentralized knowledge workers, enterprises will have to invest in UC platforms to ensure the ubiquity of two-way communication channels. Firm-wide adoption will be critical to communication between and among individuals and teams in different departments and geographic regions in a digital-first age.
To maximize the productivity of digital communications, many firms will search for vendors guaranteeing the highest quality video conferencing and cloud-based telephone solutions. Because knowledge workers seem to prefer hybrid and remote to office-only working models, companies seeking to maximize the quality and efficiency of their human capital are likely to adopt best-in-class UC tools, pushing them toward mass adoption.
During the pandemic, Zoom transformed into a verb and enjoyed widespread consumer and enterprise adoption. In a March blogpost, TechRepublic stated that Zoom’s share of the global video conferencing market share was roughly 49%, above Google Meet’s 22% and Microsoft Team’s 15%, both formidable competitors.
While some may attribute Zoom’s success to its aggressive go-to-market strategy, Microsoft, Google, and Cisco, all of whom have Unified Communications as a Service (UCaaS) offerings, seemingly have stronger distribution channels. Discounts do not seem to be behind Zoom’s success either, as Microsoft Teams, Google Team, and Cisco Webex offer free tiers as part of broader-based services. In other words, Zoom’s leadership seems to be associated with its technological edge, which is illustrated below.
While we believe Zoom’s best-in-class audiovisual performance and reliable service guarantees offer the best technology solutions for meetings, as shown below, Zoom does not bundle as many free services as does Teams as part of Office 365. Its success seems to be a function of other variables.
In our view, and from our experience, with the best audiovisual quality, a simple interface with little friction, and robust customization settings, Zoom’s user experience is superior to all other video conferencing services. Moreover, as it continues to invest in offerings such as chat, phone, large events/webinars, and digitally connected conference rooms, Zoom’s quality- and communications-first strategy should help consolidate the enterprise communications market toward its platform, branch by enterprise branch.
According to Gartner, global cloud-based UC spending today is only $45 billion per year, which, spread across our estimate of approximately 1 billion knowledge workers, amounts to less than $4 per knowledge worker per month. Compared to the significant upfront hardware costs associated with legacy corporate communication systems, UC costs today are de minimis. Less productive on-prem phone systems average $40 per knowledge worker per month in recurring expenses on top of $1,000 in upfront hardware costs per employee. Given the superiority of cloud-based solutions that integrate video, voice, and chat, we would not be surprised to see monthly spending on UC increase at a compound annual rate of more than 40% during the next five years to roughly $25 per month.
In our view, companies are likely to fund the shift toward UC not only from their $1.4 trillion enterprise communication budgets but also from the $1.4 trillion, coincidentally, in global travel budgets.  Based on our estimates for 2026, the number of knowledge workers outside of mainland China will increase to 1.1 billion, and the average UC revenue per month will increase to $25, suggesting that the total addressable UC market could scale to $330 billion.
Zoom’s decision to acquire Five9, a leading cloud contact center provider, suggests that it aims to streamline more customer-facing interactions. When incorporated into UC platforms, call center services are likely to complement broader enterprise strategies like merging customer service and sales to accelerate the planning and analysis of customer acquisition.
In our view, Contact Center as a Service (CCaaS) vendors like Five9 are unlikely to be viable on a standalone basis over the medium term. Instead, enterprises will continue to automate, using AI to handle high-volume, low-value queries, relegating the contribution of CCaaS players to more labor-intensive high-touch interactions. Addressing a total available market five times that of CCaaS, Zoom is likely to improve Five9’s go-to-market pipeline substantially. Meanwhile, according to our estimates, Five9 will add modestly to our expected returns for Zoom under various penetration assumptions shown below.
Thanks to a technological edge that should grow as it bundles new services and scales, Zoom should be able to maintain pricing power and increase its profitability. Absent Five9, if Zoom were to increase its share from 8% of current total UC expenditures to 15% of the total available UC market by 2026, its revenue and gross profits would both compound at an annualized rate of 61% to $50 billion and $35 billion, respectively. If it were to optimize for profitability, then Zoom’s operating margins could approximate 35% and its cash conversion, 80%, delivering roughly $14 billion in free cash flow. Given a free cash flow yield of 5%, Zoom’s enterprise value would nearly quadruple from approximately $76 billion today to $280 billion by 2026.
In our view, Zoom is well-positioned to define the future of communications. The way in which companies compete is changing now that video is enabling faster innovation and execution cycles, leading to accelerating sales and business development timelines. Zoom is building the communications fabric supporting this transition, a unique and high-value add position, one that Five9 would do well to join.