Unlike most tech companies preparing to go public, video-conferencing startup Zoom is profitable. One key driver of Zoom's profitability: a large engineering team in China, where average tech salary is relatively lower than in the U.S.
Zoom's large R&D presence in China, which is likely made easier by CEO Eric Yuan's Chinese background, is turning out to be a major cost saver for the video-conference software maker — and reflects an increasingly popular strategy among fast-growth tech companies.
Zoom disclosed in its IPO prospectus last week that most of its product development personnel are based in China. Zoom employs over 500 people across multiple R&D centers in China, which accounts for roughly 30 percent of its total workforce and 70 percent of its non-US-based employees, according to the prospectus.
"Our product development team is largely based in China, where personnel costs are less expensive than in many other jurisdictions," Zoom wrote in its filing. "If we had to relocate our product development team from China to another jurisdiction, we could experience, among other things, higher operating expenses, which would adversely impact our operating margins and harm our business."
In the fiscal year that ended Jan. 31, Zoom spent $33 million on R&D, or just 10 percent of total revenue. That's a much smaller share than other business software makers, and less than half the median R&D percentage of its peer group, according to Redpoint Ventures' Tomasz Tunguz. For example, Atlassian's development cost accounted for over 40 percent of its revenue, while smaller companies like Zendesk and Hubspot both spent over 20 percent of their revenues on R&D.
That helped Zoom record a net income of $7.6 million last year, even after spending more than half of its revenue on sales and marketing, like many young business software companies. Its revenue more than doubled to $330.5 million in the same period.
"One key driver of profitability is labor-market arbitrage," Tunguz wrote in a blog post about Zoom's financials.
Zoom's representative didn't immediately respond to a request for comment.