Zoom Communications, Inc.

Over the past 17 years, Spruce Point has conducted deep forensic research of public companies across the world. Our mission has always been to present a variant viewpoint of companies which we feel are misunderstood by the market. Often, our work has led us to high conviction strong sell opinions. After all, we believe there is a structural bias on Wall Street towards overly rosy recommendations. However, today we present the opposite viewpoint - through our forensic research process we believe that we have identified a very attractive opportunity in a market leader trading well below intrinsic value with a roadmap for shareholder value creation. We are pleased to share with you this strong buy recommendation.

After conducting a forensic review of Zoom Communications, Inc. (Nasdaq: ZM, “Zoom” or “the Company”), we see material upside potential in the Company’s shares. Zoom is the leader in video communications and was a COVID-19 pandemic darling. However, a growth slowdown, persistent skepticism regarding its market opportunity and competitive position, and the current SaaS-pocalypse have, we believe unfairly, driven Zoom’s valuation to egregiously low levels, particularly considering the Company’s estimated $1.2 billion stake in AI leader Anthropic. Beyond failing to find credible evidence to support the bear thesis, we have identified a broad set of recommendations for Zoom’s management and Board that we believe can drive a stock re-rating and significant share upside. Based on our research, we also believe management is open to our suggestions and will carefully consider our recommendations which we have shared with the Board.

We See Clear Opportunities to Accelerate Shareholder Value Creation: We Have Nine Core Recommendations

Improve capital allocation: Zoom has nearly $7.8 billion of net cash and should generate close to $2 billion a year in free cash flow going forward. While we laud its increased focus on share repurchases, its recent activity pales in comparison to its lower-growth, highly cash-generative peers. We highlight the recent buyback transactions executed by Salesforce and Wix as prime examples of the more aggressive actions Zoom should take. We recommend a $4 billion modified Dutch auction tender as the most shareholder-friendly alternative. In addition, based on our assessment of other technology sector dividend payers, we believe Zoom should initiate a $1/share dividend (1.1% yield). Doing so would signal management’s confidence in the Company’s long-term earnings power, enforce financial discipline, and generate incremental demand for Zoom shares from long-term and income-seeking investors. Our recommended $4 billion share repurchase would be 10% accretive to non-GAAP EPS. In addition, dividend initiations have typically resulted in 3-5% one-day returns, and that excludes the longer-term benefits of incremental investor demand from a new and broader investor base.

Reallocate and reduce operating expenses: Relative to its peers, Zoom underspends on R&D relative to S&M, and the Company’s sales investments are clearly generating questionable returns. Moreover, we find that, despite reducing headcount 15% in early 2023, Zoom has failed to rationalize its headcount post-COVID-19 to the same degree as other more aggressive peers. In fact, Zoom’s revenue per average employee has declined 14% since 2020. By contrast, peer and large cap SaaS medians grew 53% and 44%, respectively. Moreover, when we calculate an estimated revenue per average employee for Zoom’s Enterprise segment, it falls consistently below peer medians. With AI already driving improved organizational efficiencies and the partner channel playing a larger role in go-to-market strategy, we see ample opportunity to pursue material headcount reduction outside R&D. Given the growth rates associated with its newer products, increasing enterprise penetration, opportunities for improved marketing, and AI monetization, we believe Zoom can achieve 130bps and 300bps revenue upside over the next two years. Combining these impacts with our recommended operating expense reductions could increase Zoom’s two-year EBITDA CAGR from 4.0% to 13.3%. Based on our analysis, this could drive an EV / EBITDA multiple re-rating from the current 9.5x to 19x. This multiple expansion coupled with $172 million of incremental EBITDA could drive 83% share upside. In addition, it is well known that recent significant workforce reductions by companies such as Block, Meta, Salesforce, and Atlassian have been met with highly positive stock price reactions.

Restructure and refocus the international business: Despite Zoom’s universal popularity and exceptional performance with international video, the Company’s international business has underperformed. Zoom’s international revenue CAGR materially trails that of US revenue on both a 3- and 5-year basis (1% vs 5% and 11% vs 14%, respectively). As a result, Zoom has generated low and declining international revenue per average employee since FY2022. Also, Zoom’s international revenue mix trails that of most SaaS peers at just 28% in FY2026. Our research suggests the “order-takers” who cleaned up during the pandemic are struggling to actually “sell”. Troublingly, Zoom’s commentary on its international business is rarely more than a recitation of unremarkable growth rates. Something is clearly broken with Zoom’s go-to-market for the vast international opportunity. We recommend an assessment of sales personnel and a revamped go-to-market strategy.

Improve marketing: Zoom could not have better name recognition, but we fear the Company is not adequately leveraging its brand equity. Unfortunately, the Zoom brand remains inextricably linked to its video conferencing application. The result has been an inability to shake a “consumer-only” perception, a failure to properly educate the market on the value delivered by (or even the existence of) its diversified enterprise platform, and suboptimal sales enablement. We believe this is a missed opportunity for the Company.

Avoid M&A mistakes: We view Zoom’s failed Five9 acquisition as a cautionary tale. The Company violated its stated M&A strategy guidance and inked a $15 billion all-stock deal, only to have Five9’s failed shareholder vote save Zoom from itself. We fear that a massive cash war chest and the current AI fervor will lead Zoom to be overly aggressive in an environment of inflated private company valuations.

Consolidate insider selling: Zoom insiders are increasingly seeking liquidity. We would like to see Yuan and others consolidate their sales rather than creating a constant flow of shares coming to market. A marketed secondary offering or a structured sale to a financial partner would reduce pressure on the stock. In addition, we believe a financial investor could be a beneficial addition to a management team needing a push on capital allocation and a Board light on strategic financial sophistication. Based on our analysis, we suspect the sale of secondary shares to a credible financial investor could result in a 10%+ share price reaction, as well as provide valuable guidance to the Zoom Board on maximizing shareholder value going forward.

Collapse dual-class share structure: Zoom’s Series B shares held by CEO Yuan are subject to a 15-year sunset provision. Given Yuan’s 57% reduction in ownership since IPO and current 7% stake (comparing unfavorably to typical 10% sunset thresholds), we believe there is a strong case for Zoom to collapse all shares into common. The most common sunset term is 7 years (which implies an April 2026 expiry), and an accelerated collapse would address some of the moral hazard issues created in the lead up to its expiry. We acknowledge the debate around the extent to which dual-class share structures drive discounted valuations. However, research suggests that collapsing a dual-class share structure can result in 4-10% one-day stock returns.

Lobby for S&P 500 inclusion: Zoom is a premier technology company with a ubiquitous global presence and a highly profitable business model. We believe it is an excellent candidate for the S&P 500 index, and the Company will be even more so if it can execute on our recommendations. We would like to see the Company proactively lobby for index inclusion. We highlight that previous technology company additions to the index have averaged 17% share price returns as a result.

Pursue a sale of the Company: While we believe Zoom has work to do near-term to drive a re-rating, we see a sale of the Company as the ultimate desired outcome. That said, we wouldn’t be surprised to see a private equity buyer act sooner to reap the benefits of some of our recommendations for themselves. We believe Zoom should pursue a sale transaction if management cannot drive shareholder value creation within a year. We view Zoom as a highly attractive acquisition target and believe there is a broad universe of potential strategic buyers with massive financial wherewithal. Our analysis of the largest software buyouts of the past five years suggests a 33% premium from private equity could set an M&A valuation floor.

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