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Zoom's Five9 deal sets stage for long-term growth past pandemic – analysts

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Analysts think Zoom's acquisition of Five9's customer-support platform will supplement the video conferencing company's expanding portfolio of communication offerings, setting the stage for long-term growth well past the pandemic.
Source: Zoom

Amid signs of a looming slowdown in its core videoconferencing business, Zoom Video Communications Inc. is hedging its bets on the increasingly lucrative contact center market.

The company struck a $14.7 billion all-stock deal to acquire Five9 Inc., a provider of cloud-based software for contact centers that use artificial intelligence to help companies interact with customers. The acquisition, which is Zoom's largest to date, is also the second-largest tech M&A deal this year, following Microsoft Corp.'s $19.7 billion deal to acquire speech technology firm Nuance Communications Inc., according to S&P Global Market Intelligence data.

The pandemic-driven surge in demand for communication and collaboration tools made Zoom one of the biggest COVID success stories, and the company's share-price growth is helping to fund the all-stock deal. But analysts say that to continue growing and compete on a larger playing field, Zoom must evolve from a pure-play video-conferencing provider to an all-purpose communication and collaboration platform — and the Five9 deal helps Zoom do exactly that.

"Customer behavior had already been transitioning to digital communications and the pandemic just further accelerated the need for contact centers that could provide customers support through various digital means, such as messaging channels," said Raul Castanon, a senior research analyst covering workforce collaboration and communication platforms at S&P Global Market Intelligence's 451 Research unit.

Head-to-head with Cisco

While some of the oldest service vendors scrambled to adapt to serve customers with more complex demands, Five9 was winning larger and more complicated deals with its contact-center offerings, Castanon said. The acquisition will allow Zoom to get in on the ground floor of this market, allowing the company to compete with other large technology vendors with a broad cloud communications portfolio, such as 8x8 Inc., RingCentral Inc. and Cisco Systems Inc.

"Beyond traditional contact center competitors, Cisco can be considered a key rival [to Zoom]," Castanon said. "In addition to a portfolio that includes unified communications and contact center offerings, the company is aggressively expanding its capabilities around hybrid and virtual meetings and events."

Carolina Milanesi, president and principal analyst at Creative Strategies, said the collaboration market is getting increasingly competitive while collaboration itself is changing.

"As more workflows have gone digital, contact centers have moved to play a more critical role in customer engagement," Milanesi said. "With Cisco embedding more of the contact center offering into Webex, Zoom had to look to add value to their platform, and Five9 gives them a way to be more competitive."

Both Zoom and Five9's CEOs previously held positions at Cisco. Zoom's Eric Yuan previously helped build Cisco's Webex platform, while Five9's Rowan Trollope held the position of senior vice president in charge of all of Cisco's collaboration products. Under the deal, Trollope will become a president of Zoom and remain CEO of Five9, reporting to Yuan.

Zeus Kerravala, founder and principal analyst at ZK Research, said both Yuan and Trollope are two of the best leaders in cloud communications, and bringing them together can only be viewed as a positive for both companies and their customers.

Zooming share price

Zoom is bankrolling the acquisition with its stock, which skyrocketed in 2020 amid pandemic-driven usage gains, hitting an all-time high of $568.34 on Oct. 19, 2020. The closing share price on July 16, the last trading day before the deal announcement was $361.97.

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"Financially, the deal seems to be a steal for Zoom," said Kerravala. "The purchase price seems cheap given the growth rate of Five9, and the fact that it's an all-stock transaction means Zoom doesn't have to spend any of the billions of dollars in its coffers to bring the capabilities in-house."

Zoom Phone

In a research note, Piper Sandler analyst James Fish wrote that the deal makes "complete sense over the long-term," making Zoom "an even more formidable force" in the communications software sector.

FBN Securities analyst Shebly Seyrafi believes the deal may add 14% to Zoom's overall revenue in calendar year 2022, as it is especially complimentary to the company's Zoom Phone cloud-based voice-calling solution.

UBS analyst Karl Keirstead agreed, writing that Five9 adds advanced routing technology and call recording features that could enhance Zoom Phone's functionality and give the service even more credibility as it competes with companies such as RingCentral and Microsoft.

Growing market

On a July 18 analyst call with analysts, Zoom and Five9 estimated the contact center-as-a-service (CCaaS) total addressable market is worth $24 billion, which Kerravala said the companies calculated by converting all the traditional contact center seats to the cloud.

"What's missing there is that more and more businesses are now buying CCaaS seats for non-contact-center employees," Kerravala said. "I'm also expecting the average sales price on the seats to grow with the influx of AI, as the more automated contact centers get, the more customers are willing to pay."

Given these two factors, Kerrvala estimates the total addressable market on CCaaS is closer to $50 billion. "I think this is an outstanding deal for Zoom as they are catching the CCaaS market at an inflection point," he added.