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Zoom is on fire

September 1, 2020, 1:35 PM UTC

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Four months and a business lifetime ago, critics were poking holes in the newfound success of videoconferencing upstart Zoom Video Communications. Its safety wasn’t up to snuff, its product was engineered in China, and too many of its newest customers weren’t paying.

This latter group was of particular concern. Virtual bar mitzvah celebrations, surprisingly delightful Zoomtails with distant friends, and rapid adoption by schools catapulted Zoom into the zeitgeist. But non-business uses sucked up Zoom’s server capacity without generating much revenue. As Michal Lev-Ram wrote in Fortune in April: “Zoom may have become a beloved household name even as it faces unexpected scrutiny for its less-than-perfect security. But its success when the world returns to normal is anything but assured.”

The good news for Zoom is that the world hasn’t returned to normal. Its gross margins indeed have been walloped by all the spending to support a rapidly growing business. Adjusted gross margins dropped 10 percentage points from the year before, according to the company’s quarterly earnings released Monday. Yet because Zoom is growing its base of revenue-paying customers too, and making so much money in the process, the hit to margins feels practically meaningless.

Zoom says the percentage of revenue attributed to customers with 10 or fewer employees jumped to 36%, from 30%. Quarterly revenue hit $664 million, a fivefold jump from the year before. It generated $373 million in free cash flow. The year-ago figure was just $17 million.

Zoom already was a modestly hot company when the year began, the result of a product popular with businesses and a successful IPO. With the pandemic, it is on fire, and whatever its challenges are, they seem minor. In pre-market trading this morning, its stock is now well above 10 times the $36 IPO price from April last year. And if any company can claim that even in a post-pandemic world its product will remain relevant, Zoom is it.

Adam Lashinsky

@adamlashinsky

adam.lashinsky@fortune.com

This edition of Data Sheet was curated by Aaron Pressman.

NEWSWORTHY

You can't handle the truth. With Australia planning a law to force Internet companies to pay publishers when their users share news articles, Facebook says it may have to prohibit news sharing. Under the proposal, publishers could set any price they wanted, Facebook says. “This is a decision we’re making reluctantly,” Campbell Brown, Facebook’s vice president of global news partnerships, explains. And I don't know if it's depressing or exciting that this is the most popular story on Fortune.com this morning, but Tesla's stock rise pushed Elon Musk past Mark Zuckerberg to become the third-richest human on Earth (I'm sure Musk would want us to include in the solar system).

Eyes without a face. After years of offering free trial subscriptions, Netflix has a new gambit: free shows. Numerous Netflix originals including Stranger Things, Love Is Blind, and the Academy Award–nominated The Two Popes can be watched at netflix.com/watch-free, no sign-up required. It's full movies but only one episode of each TV series. While you're binging, ponder whether Walmart needs to add video streaming to its Amazon Prime competitor, Walmart+. The $98-a-year service, launching Sept. 15, includes free shipping for many items and a gasoline discount. Speaking of shipping stuff, TikTok is adding a commerce feature to let its top creators sell merch.

Bank account bingo. The leaky supply chain at Apple says the company is planning a busy fall schedule with new 5G iPhones, an iPad with a bezel-less display, two new Apple Watches, over-the-ear headphones without the Beats brand, a smaller smart speaker, and a partridge in a pear tree. The iPhone will come in four sizes, from 5.4 inches to 6.7 inches, Bloomberg reports.

Like a bridge over troubled water. For reasons I'm not quite certain on, Microsoft's amazing new Flight Simulator 2020 offers an incredibly realistic and detailed view of the world, except for certain famous buildings and structures (try flying over Australia's Sydney Harbor Bridge). So an enterprising group has sprung up on Reddit to hack the game by pasting in better images from Google Maps. Hopefully, they won't need to hack any maps at Amazon to get their drone fleet off the ground. The company just got the FAA's coveted Part 135 "air carrier" designation for its delivery drones, following in the footsteps of UPS and Alphabet's Wing.

Acquisitions and mergers looking a little stodgy. On Wall Street, in a reshuffling of the private equity world, KKR sold Texas software firm Epicor to Clayton Dubilier & Rice for $4.7 billion. KKR bought Epicor four years ago for $3.3 billion from private equity firm Apax, which took the software company private in 2011 for $2 billion. Also, online used item seller Wish has filed confidentially to go public. The 10-year-old company was valued at $11 billion in its last private fundraising.

FOOD FOR THOUGHT

Amazon founder and CEO Jeff Bezos is only 56 and, by all accounts, happy to stay working for a while longer. Geekwire publisher John Cook, based in Seattle, is still into playing the guessing game of who might be next in line now that Jeff Wilke, long considered the heir apparent, is leaving.

Succession is more than the name of an HBO drama. It’s one of the hardest things for a company to get right. And there is added complexity with a company of Amazon’s size, reach and — shall we say — uniqueness. (Or peculiarity, as people at the company would say.) And, of course, there is also the challenge of replacing a charismatic founder in Jeff Bezos.

In that regard, companies often look for successors who can help define a new age. Tim Cook brought complementary skills to Apple, just as Satya Nadella added a different style to Microsoft from the Steve Ballmer era. Amazon may look for that complementary person for its next leader, someone who is different from Bezos.

That’s often the better strategy for companies looking at succession.

ON THE MOVE

Google named 14-year veteran Halimah DeLaine Prado as its new general counsel. DeLaine Prado previously ran Google's product legal team... venture capitalist Marc Andreessen and DoorDash exec Gokul Rajaram joined the board of crypto startup Coinbase while former AOL chair Barry Schuler and VC Chris Dixon step off...after 21 years as the boss, Zappos CEO Tony Hsieh is leaving and COO Kedar Deshpande becomes CEO of the Amazon unit...Nutanix founder and CEO Dheeraj Pandey is retiring and a search is underway for his replacement...former Expedia Group CEO Mark Okerstrom is joining Seattle shipping startup Convoy as president and chief operating officer.

IN CASE YOU MISSED IT

‘Colonialism’ and crypto claims: Why the .io domain name extension faces an uncertain future By David Meyer

Investors riding high on Apple and Tesla stock splits could get clipped, data shows By Robert Hackett

Slack’s new product is a think tank By Michal Lev-Ram

Neurologists aren’t so sure about Elon Musk’s Neuralink brain implant startup By David Z. Morris

Michelangelo vs. MacGyver: Who will design the offices of our post-COVID future? By Clay Chandler and Eamon Barrett

Institutional investors must take action on diversity in venture capital By Emma Hinchliffe

‘The Dream Architects’: Inside the making of gaming’s biggest franchises By David Polfeldt

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

BEFORE YOU GO

Back when my kids were little, we often spent bedtime reading about the adventures of Frog and Toad. If we were still in that mode, it would be Frog and Toad Tentatively Go Outside After Months in Self-Quarantine, a brilliant spoof by Jennie Egerdie:

“I have so much work to do,” sighed Toad.
He set his Zoom background to a picture of his room when it was tidy.
“There,” said Toad. “Now I am professional.”

Now go be professionals!

Aaron Pressman

@ampressman

aaron.pressman@fortune.com