Zoom Video Communications Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 22, 2023

There are 17 speakers on the call.

Operator

Well, hello everyone and welcome to Zoom's Q1 FY24 earnings release webinar. As a reminder, today's webinar is being recorded. And now I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.

Speaker 1

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of fiscal year 2024. I'm joined today by Zoom's Founder and CEO, Eric Yuan and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors. Zoom dot us.

Speaker 1

Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that along with our earnings press release include a reconciliation of GAAP to non GAAP financial results. During this call, we will make forward looking statements, including statements regarding our financial outlook for the first for Q2 and full fiscal year 2024. Our expectations regarding financial and business trends, impacts from the macroeconomic environment, Our market position, opportunities, go to market initiatives, growth strategies and business aspirations and These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. Zoom assumes no obligation to update any forward looking statements that we may make on today's webinar.

Speaker 1

And with that, let me turn the discussion over to Eric.

Speaker 2

Thank you, Tom. Thank you, everyone, for joining us today. As we continue to execute on the strategic focuses, which I shared with you all last quarter. We are very grateful for the support, feedback and trust that we have received from our customers And investors, last month, we closed our acquisition of WorkWeibo, which we are super excited about. Workvivo is a modern employee communication and engagement platform.

Speaker 2

Their solution combines a social intranet and employee app into 1 central hub, forming the heart of a company's digital ecosystem. Incorporating Workvivo's feature rich technology into our all in one collaboration solution will allow us to offer Zoom customers A unified platform that keeps knowledge workers and the frontline employees informed, engaged, and connected throughout the workday, regardless of in person, remote or hybrid work style. According to Enterprise Apps Today, cumulative employers Have mobile workers who are 5 times more productive and feel 3 times less run out. The WorkWeavo team is working very hard to capitalize on this opportunity and is 100% aligned with our culture of delivering happiness to customers and employees. We are so excited to join forces with WorkWeaver and help our customers raise the bar for employee communication and engagement.

Speaker 2

Last quarter, we reiterated our strong positioning in AI and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made a considerable progress towards that vision. We outlined our approach to AI It's to drive forward solutions that are federated, empowering, and responsible. Federated means flexible and customizable to businesses' unique scenarios and nomenclature. Powering refers to building solutions that improve individual and team productivity as well as enhance the customer's experience And responsible means customer control of their data with an emphasis on privacy, security, trust and safety.

Speaker 2

At Enterprise Connect, we unveiled Zoom IQ's new set of embedded features, leveraging generative AI to support chat and email composed and a meeting summary. We are also building new features to summarize long chat threads, Catch up 30 meeting participants on what they missed and the brainstorming environment. Last week, we announced our strategic investment in Anthropic, an AI safety and a research company working to build reliable, Interpretable and steerable AI systems. Our partnership with Anthropic further bolsters our federated approach to AI By allowing Anthropic's AI assistant, Cloud, to be integrated across Zoom's entire platform. We plan to begin by layering cloud into our contact center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in beta, Zoom Workforce Engagement Management.

Speaker 2

With Cloud guiding agents towards Fastworthy resolutions and empowering self-service for end users, companies will be able to take customer relationships to the next level. Now moving on to some of our customers' wins, I would like to thank Major League Baseball. MLB has long used the power of the broader Zoom platform to strengthen its connection to fans And Teams. And this quarter, we expanded our relationship by launching a first of its kind of partnership that leverages Zoom's content center to enhance real time replay reviews and deliver increased transparency to baseball fans. By introducing Zoom Technologies into operations on and off the field, MLB I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom Phoneces as well as Zoom contact center to their Zoom meetings deployment.

Speaker 2

We brought responsiveness, Reliability and regulatory compliance to this large expansion and Virginia Tech leverages Zoom's unified communication platform to build a next gen solution integrated across meetings, phone, and a contact center to serve the entire university community. I would also like to thank Venture Employer Services, which has grown its workforce significantly the past few years through hiring and M and A. In Q1, Venture expanded their existing footprint with us by adding approximately 10,000 Zoom Phone Sets and 800 Zoom contact center seats, as well as our AI powered Zoom Virtual Agent and Zoom IQ for sales. It's so exciting to see customers leverage our natively integrated phone plus contact center solutions and invest in our next generation AI enabled products across their businesses. Finally, I want to thank MyPlan Manager, Australia's leading services provider for the National Disability Insurance Program.

Speaker 2

NPM chose Zoom contact center for its attractive total cost of ownership, a deep integration with Salesforce, and the vision and the future roadmap for customer experience. And our journey Did not end with contact center. Appreciating the value of the platform, they also decided to standardize on Zoom 1. We're so happy to partner with NPM to help them deliver a world class customer and employee experience to their clients and disability service providers. Again, thank you so much, MRB, Virginia Tech, Venture Services, NPM and all of our customers worldwide.

Speaker 2

And with that, I'll pass it over to Kelly. Thank you.

Speaker 3

Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q1. Here are a few milestones. First, our non GAAP gross margin of 80.5% exceeded our long term target. 2nd, after adjusting for the 3 fewer days in the quarter, our online revenue was slightly up sequentially.

Speaker 3

And last, the moment you've all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter. In Q1, total revenue came in at $1,105,000,000 Up 3% year over year and 5% in constant currency. This result was approximately $20,000,000 above the high end of our guidance. Our enterprise business grew 13% year over year and represented 57% of total revenue, up from 52% a year ago. As I mentioned in the quarterly milestones, our online business improved meaningfully in the quarter as it benefited from many initiatives, including the price increase and buy flow optimization.

Speaker 3

In addition, we saw online average monthly churn decrease to 3.1% from 3.6% in Q1 of FY2023 and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected. The number of enterprise customers grew 9% year over year to approximately 215,900. Our trailing 12 month net dollar expansion rate for enterprise customers in Q1 came in at 112%. We saw 23% year over year growth in the upmarket as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue.

Speaker 3

These customers represent 29% of revenue, up from 24% in Q1 of FY2023 And span diverse industries such as healthcare, education, government, and more. As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our Americas revenue grew 8% year over year, While EMEA and APAC declined by 8% 5%, respectively. The decline in EMEA was primarily attributable to the outsized impact The headcount reduction due to local regulations prolonging the process, the Russia Ukraine war, and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar.

Speaker 3

Moving on to our non GAAP results, which exclude Stock based compensation expense and associated payroll taxes, acquisition related expenses, Net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities, Restructuring expenses and all associated tax effects. Non GAAP gross margin in Q1 was 80.5%, An improvement from 78.6 percent in Q1 of last year and 79.8% last quarter. We are pleased that we have achieved our long term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co located data centers. For FY 'twenty four, we still expect non GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies. Research and development expense grew by 25% year over year to approximately $106,000,000 As a percentage of total revenue, R and D expense increased to 9.6% from 7.9% in Q1 of last year, reflecting our investments in expanding our product portfolio, including Zoom contact center, AI and more.

Speaker 3

Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing Grew by 4% year over year to $278,000,000 This represented approximately 25.2 percent of total revenue, up from 24.9 percent in Q1 of last year. G and A expense declined by 10% to $84,000,000 or approximately 7.6 percent of total revenue, down from 8.6% in Q1 of last year, as we focused on achieving greater back office efficiencies and savings. Non GAAP operating income This translates to a 38.2 percent non GAAP operating margin, an improvement from 37.2% in Q1 of last year. Non GAAP diluted earnings per share in Q1 was $1.16 on approximately 304,000,000 non GAAP diluted weighted average shares outstanding.

Speaker 3

This result was $0.18 above the high end of our guidance and 13% higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1,400,000,000 Up 3% year over year from $1,300,000,000 This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3,500,000,000 up 16% year over year from $3,000,000,000 We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 63% in Q1 of FY2023 and 56% in Q4 of FY2023. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent enterprise deals Arising from uncertainty in the macro environment.

Speaker 3

We expect Q2 deferred revenue to be down 2% to 4% year over year, Which takes into account the recent trend of shorter durations on enterprise deals and our renewal seasonality, which peaks in Q1 and declines throughout the year. We ended the quarter with approximately $5,600,000,000 in cash, We had operating cash flow in the quarter of $418,000,000 as compared to $526,000,000 in Q1 of last year. Free cash flow was 39 $7,000,000 as compared to $501,000,000 in Q1 of last year. Our operating cash flow and free cash flow margins were 37 7.9% and 35.9%, respectively. Due to a net legal settlement expected to occur later this We are revising our cash flow outlook for FY24.

Speaker 3

We now expect free cash flow to be in the range of 1.14 to $1,190,000,000 In FY24 and going forward, we expect our smallest cash tax payments to occur in Q1 and the largest to occur in Q2. Now, turning to guidance. For Q2, we expect revenue to be in the range of $1,110,000,000 to $1,115,000,000 which at the midpoint would represent approximately 1% year over year growth or 2% in constant currency. We expect non GAAP operating income to be in the range of $405,000,000 to $410,000,000 Our outlook for non GAAP earnings per share is $1.04 to $1.06 based on approximately 307,000,000 shares outstanding. As our online business is stabilizing, we wanted to give you all some additional one time color on how we see it playing out in the coming quarters.

Speaker 3

We expect our online revenues to be approximately $480,000,000 in Q2 and be relatively flat thereafter in FY24. We are pleased to raise our top line and profitability outlook for the full year of FY24. We now expect revenue to be in the range of $4,465,000,000 to $4,485,000,000 which at the mid represents approximately 2% year over year growth or 3% in constant currency. We expect our non GAAP operating income to be in the range of $1,630,000,000 to $1,650,000,000 representing a non GAAP Operating margin of approximately 37%. Our tax rate is expected to approximate the U.

Speaker 3

S, federal and state blended rate. Our outlook for non GAAP earnings per share is $4.25 to $4.31 based on approximately 308,000,000 shares Outstanding. As we look to reignite growth and maintain profitability, we are committed to doing so in the right way. We are pleased to have recently issued our 2nd ESG report, which includes additional data regarding our greenhouse gas emissions inventory And recommit Zoom to achieving 100 percent renewable energy for our direct operations by 2,030. Our core value of care is as important as ever.

Speaker 3

It is embedded in how our product fosters emissions reductions while supporting Inclusiveness. It's also evident in our corporate and employee giving. You heard it from Eric. We are innovating extremely quickly to bring our customers the immense benefits of generative AI And empower modern collaboration. We are trusted and loved by our amazing and diverse set of customers.

Speaker 3

And we are fortunate to be one of the most recognized brands in the world. In Q1, we made some very tough decisions related to team size, structure and incentives that have understandably caused distraction in the short term, but at the same time exemplify our commitment to long term growth and profitability. With a focus on the future, we have refreshed Our mission and vision, one platform delivering limitless human connection. Thank you to the entire Zoom team, our customers, our community and our investors. With that, Kelsey, please queue up our first question.

Operator

Thank you so much, Kelly. And as Kelly mentioned, we will now move into the Q and A session. So, when I call your name, please turn on your video and unmute. And as a reminder, in an effort to hear from everyone, please limit yourself to one question. And our first question will come from Goldman Sachs' Kash Rangan.

Operator

Cash, go ahead and, come on video for us and unmute if you would, please. Alright. Well, hearing no response, we'll go ahead and move on to Meta Marshall with Morgan Stanley.

Speaker 4

All right. I think I got mine to work. Perfect. Appreciate it. I noted that you were taking down kind of or not taking down, but giving back some of Gross margin upside that you saw in the quarter, and noted that that was for some of your AI investments.

Speaker 4

Eric, I guess I'm just wondering how you were judging Kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development that's going on versus investments that you want to make? Thanks.

Speaker 2

Yes, good question. I think it looks like everyone seem to have just Welcome to AI. Actually, we have been busy on AI front for a few years and look at the past several, 2 of the largest acquisitions, right, Solvay and Katz, right, all of them are AI based. Internally, we also have AI team as well Because we understand the importance of AI, you know, in particular during recently by the generative AI momentum. I think first of all, we do have our own AI team.

Speaker 2

We have our own internally developer AI models as well. We also will take a very You know, essentially, we announced our, you know, and the federated approach to AI. You know, we announced the collaboration with OpenAI at Enterprise Connect. We also doubled on our partnership with Anthropic recently as well. And down the road, Maybe some open source AI models available.

Speaker 2

We are also going to embrace that. Again, you know, we look at everything from the end user perspective, right? First of all, you know, we have a really dedicated AI. And also when we sit down with the customers, sometimes customers say, yes, really like anthropic model. Yes.

Speaker 2

Why not? We doubled on that Honestly, we can leverage their API as well. Right? So we are taking a federated approach, which is to put a customer centric. Right.

Speaker 2

That's why we are very, very excited about this AI momentum, can truly improve our product experience.

Speaker 4

Great. Thanks.

Speaker 2

Thank you.

Operator

And moving on to Michael Funk with Bank of America.

Speaker 5

Yes. Hi. Thank you, guys. Another question for you, Eric, if Mike, just some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement Or as a separate SKU.

Speaker 5

And then how do you monetize AI within your platform?

Speaker 2

Story question. I would say the answer is about both. You know, you take our Zoom IQ for sales, for example, right, is extremely important, right, When you send all the salespeople back at home or working remotely, how to help them to improve their productivity? That's the reason why we announced Zoom IQ 4 Series and even way before, you know, the generative AI momentum. Right?

Speaker 2

And internally, developer, you know, Large language models really helped us, right? We can monetize that AI empowered Zoom IQ for SUSE product. At the same time, you look at our feature rich collaboration portfolio, like a meeting summary, the email and compose a chat message and a Zoom electronic center virtual agent. And also, you know, And recently, you know, in beta, right, workforce management solution as well, all of them will be empowered, you know, you know, based on the AI, you know, the the the the platform. Right?

Speaker 2

So on the one hand, we leverage AI to look at almost every features we have, Right. To empower those features, you know, and also elevate the customer, you know, the product experience. At the same time, a lot of monetization Zoom IQ 4C is just one example, right? As we have more opportunity for us. Again, we think AI does bring tremendous opportunity for us because, you know, we focus on communication.

Speaker 2

I think work with Weibo, for example, right, we just acquired them in the employee Communication and engagement platform, you know, how to leverage AI to improve that product experience. That's another example. Again, full of opportunities here at Zoom with AI.

Speaker 5

Great. Thank you, Eric.

Speaker 2

Thank you.

Operator

All right. So, let's go to Kash again with Goldman Sachs. I think you're out there driving, so he's going to stay off video.

Speaker 6

Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human. I just will turn on that video very quickly on.

Speaker 6

So, Eric, I'm curious to get your take. So I want you to, if you don't mind, drill a little bit deeper into generative AI. And while a lot of software companies are announcing partnerships with LLMs Based on the content and data that they uniquely possess. We're also at a point where many companies are identifying very unique Workflows and productivity scenarios that differentiate them going forward, right? So in that regard, just so There's a scenario everybody in UCaaS will ultimately have a generative AI strategy.

Speaker 6

So when you start to have these LLMs work with your Core products and given the vast user base and behaviors that you have contained in your knowledge base, how do you think, Zoom is uniquely qualified to get Productivity scenarios that are very unique to Zoom, sorry using the same word again, that Could be more enduring as a source of competitive advantage because the first chapter of UCaaS was all about providing the core capability of the technology, which you did An amazing job, but I'm curious the next leg of productivity growth and how you can take this company forward. Thanks so much.

Speaker 2

Yes. It's a great question. You know, we have a greater integration with the Tesla cars, right? If you use drive a Tesla, it's just one click, you can join the call. You know, even if So Webroot AI question.

Speaker 2

I think, first of all, you know, if you look at the generated AI, you know, 2 things are very important, right? So first of all, if you do not start a few years back, just given what's going on in the AI industry, AI world is, oh my god, a lot of things. However, we already started investing AI a few years back. We we should understand that. The reason why, you know, our Zoom IT for sales Was a developer based on our own, you know, internally developed a large language model.

Speaker 2

Having said that, 2 things really important. 1 is just the model, right? So, you know, OpenAI has a model, Anthropic and Facebook as well, Google and those companies. But most important thing is How to leverage these modules to fine tune based on your proprietary data. Right?

Speaker 2

That is extremely important. We need to come through, you know, collaboration communication. Right? You know, take a Zoom employee, for example. For example, we have so many meetings.

Speaker 2

Right? And talk about, You know, and everyday, like, our sales team, you know, use the Zoom call to work with the customers. We accumulated a lot of, you know, let's say, internal meeting data. How to fine tune, you know, the model with those data is very important, right? Not only just for the AI model itself, because it will evolve for sure, you know, And also we're also going to embrace at the same time how to leverage our proprietary data to fine tune this AI models towards our industry.

Speaker 2

That's very important. You know, look at, you know, meeting take a meeting, for example. Right? I think that, you know, this is, you know, probably, you know, we have way more data than Anybody else, right, given the, you know, all the past many years experience, how to fine tune data model with, you know, those data. And I think this is our unique will help us to deliver unique experience to customers.

Speaker 2

If any other company, you may have, let's say, you have a greater AI model. However, How to fine tune it? It's it's a lot of effort. Right? That's the reason why we think that's, you know, something unique for us to truly empower AI to, you know, Deliver our differentiated experience to our customers.

Speaker 6

Very persuasive. Thank you so much, Eric.

Speaker 2

Thank you. Appreciate

Operator

and we will now hear oh, so sorry. Please continue. Okay. We'll move on to Tom Blakely with KeyBank.

Speaker 7

Hi, everyone. Thank you for taking my question, Kelly and Eric. Good to see you guys. There was some Large competitor of yours has been in the news lately with Microsoft possibly needing to create a separate SKU for their Teams Teams product in terms of debundling that product. I know how important the collaboration component is to Zoom's Vision of becoming the communications operating system for large enterprises.

Speaker 7

And just noting with Kelly's updated color in terms of online, With the online business stabilizing, which is great, the implied guide for the enterprise businesses is for In pretty good detail into the second half. So just wondering how Zoom is thinking about, if at all, the potential impact or opportunity there, Just to get an understanding of the importance of the collaboration component to your product. Thank you.

Speaker 3

Well, as we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is related to competition and more due to, as we expected, some distraction internally due to the reorganization, but we feel great about The structure of our sales organization now with Graham, especially as our chief sales officer and Wendy leading the online team And that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. And, you know, we're just looking forward to seeing that come to light over the next couple of quarters.

Speaker 5

Okay. Thank you.

Operator

And the next question will come from Parker Lane with Stifel.

Speaker 8

Yeah, guys. Thanks for taking the question. I was hoping you could give us a better understanding of just how to what degree contract durations actually compressed during the quarter, How much that will be an impact as we progress through the year. And, is that more of a factor in any particular product set or was it pretty much across the board?

Speaker 3

Yeah. It was pretty uniformly across our direct segment of the business, especially. And to be thoughtful about every decision, which is Every buying decision, I should say, which is not new. It's just taking, giving themselves, you know, time to make sure that they are getting the product Lloyd and we expect it to be, you know, not long term in nature, but in order to Like that, we've updated our guidance based on, as we talked about, deferred revenue as well for the coming quarter.

Speaker 8

Got it. Appreciate the color. Thank you.

Operator

We will now hear from Peter Levine with Evercore.

Speaker 3

Hi, Peter.

Speaker 6

Thank you for taking my question. Maybe, Eric, one for you is, you know, when you think about the use case of AI and you think across like phone, you know, video contact center, you know, where do you envision seeing the most, Your kind of uplift in terms of client adoption of AI. Just curious to know where you're seeing that today?

Speaker 2

I think on many fronts, right, you know, like a take an anthropic investment, for example, right? For sure, we are getting into leverage that, You know, not for the entire, you know, portfolio, but we are going to start from a contact center, you know, the virtual agent and, you know, the contact center related features. But also look at it, you know, our call meeting platform. Right? A meeting summary is extremely important.

Speaker 2

Right? And it's also we have, you know, the our team chat solution And also how to leverage that to compose a chat. Remember last year, we also have an email candidate as well. How Autoing your leverage to generative AI to understand the context. Right?

Speaker 2

And then, you know, kind of bring all the informations, you know, relative to you And it's in helping you auto generate the the message, right, when you send an email, you know, back to our customers or prospect, right, either chat a message Or or or email. Right? You can leverage general AI as well. Right? I think a lot of areas, you know, even like I say, like I say, maybe you might be late to the meeting.

Speaker 2

Right? You know, 10 minutes later, you join the meeting. You really don't understand what had happened. Right? Can you get a quick summary Over the positive minutes.

Speaker 2

Yeah. You just also have to generate AI as well. You also can get that as well. It's kind of almost a lot of key use cases. I I think, you know, we'll be empowered, you know, by those AI, you know, the capabilities.

Speaker 2

That's why we we are looking at almost every area, right? How to leverage gender AI To improve in that experience. You know, take OpenAI, for example, this is a great company, and also a lot of companies are leveraging their AI. You know, not only bigger companies, small companies, We also announced the collaboration with them at Enterprise Connect. Right?

Speaker 2

So that's why, you know, as I said earlier, you know, three things. Right? You understand that, you know, the large language model, How to fine tune that with your own data and also revisit almost every feature you have. Are there any ways to empower those features? Are there any ways to monetize?

Speaker 2

That's why we take a holistic approach. And also we like our federated approach to AI. By the way, internally, we do have an AI team. It should

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

And moving on to Rishi Jaluria with RBC.

Speaker 5

Alright. Wonderful. Thank you so much for taking my questions. Eric, I want to stay on the AI train for a little bit. You've obviously You talked about some great use cases and feels like there's a big opportunity.

Speaker 5

I want to ask about maybe the potential to start to verticalize some of the AI solutions because It feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real time signals, for example. And I'm sure that's one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize and is that something that can make maybe direct monetization a little bit Easy because the value prop is very straight out of the box. Thank you.

Speaker 2

Yes. It's a great question. By the way, I downloaded OpenEye mobile iOS app. I should ask OpenTable GPT You know, to to answer to that question. But anyway, you are so right on.

Speaker 2

It comes vertical in this, you know, vertical, I would say the the opportunity. Two things. 1 is departmental level. Another one is vertical industry. Right?

Speaker 2

You look at our Zoom IQ for sales, specifically targeted sales use case or sales department. Right? Contact center is for support department. You're so right, down the road HR department, right, even marketing, almost every department. They all use Zoom, right?

Speaker 2

How to leverage AI to build a differentiated, you know, the solution. Right? That's the opportunity. That's when, you know, you know, Opportunity. Another opportunity, read about the vertical industry.

Speaker 2

Like, take health care, for example. Zoom, by far, is number 1 on telematics, Right. You know, how to leverage that. Right? And with, you know, those proprietary data.

Speaker 2

Right? And also working together with the customers. Right? And fine tune this AI model. Right?

Speaker 2

This is one example. Another example is a lot of law firms are also using Zoom as well. Right? And, you know, how to leverage AI to truly empower those use cases is also another opportunity. I think, as I said earlier, AI truly bring tremendous opportunity to us.

Speaker 2

So, you know, we got to deliver that. The good news, we already heavily invested in this area for a few years.

Speaker 6

Awesome. Thank you so much.

Speaker 2

Thank you.

Operator

And our next question comes from Catherine Trebnick with Rosenblatt Securities.

Speaker 9

I got it. Thank you. All right. In the last 2 years, a lot of changes has happened. 1st, everybody worked from home and now people are going back to the office.

Speaker 9

So has that changed any of your opportunities when you're looking at marketing your products. I was thinking in terms of Zoom room And then some of the areas where you want everybody to be equal in your Zoom room viewing. So has that changed anything? Have you seen anything different from that.

Speaker 2

Yeah. Exclude the question. It's good news. This question is not about AI anymore. So so you are still right.

Speaker 2

I think during the COVID, right, there's a lot of consumer use cases. Right? Almost every family, they have a a video conferencing account like a Zoom account. Right? You know, after the COVID, I think that, you know, you look at the usage, right, you know, consumer, you know, central usage, I think less and less.

Speaker 2

But however, to support a hybrid work, Enterprise customers, you know, they are going to leverage video conferencing more and more, not only just to support remote work. You know, when you And when you try to support hybrid work, how to reserve a desk, all those are basic features, right? How to make sure when you Join a meeting from the comp room, right? Remote people, they can see you, right? Not only just 1 big Square, right?

Speaker 2

So everyone, you know, who are sitting in the conference room, you know, equally, we have a Square as well, the Zoom Square, right? So those kind of experience, extremely important. Right? A lot of features are built upon enabling hybrid work. Right?

Speaker 2

That's, you know, even work with Weibo is not an example. Right? During the hybrid work, right? You know, quite often use a chat, Zoom and team chat, use the email or use the phone call meetings, but sometimes also want to You know, announced a very exciting news, a recorded video, how to distribute those to employees and sometimes even to customers. That's the reason why we're quite a work with people as well.

Speaker 2

I think the hybrid work is going to stay. That's the reason why a lot of the new use cases, right, How to double down on that? Take a conference room for example. We have the smart gallery view feature, right? Customers like that.

Speaker 2

However, in some cases, Customers are still down to work. I have a huge conference room. How to spot that? That's the reason why we are working on supporting 3 cameras. Right?

Speaker 2

That's another way to embrace hybrid hybrid work. I think hybrid work does bring another, you know, kinds of, you know, huge opportunity to us. You know, especially, you know, it's hard to convince everyone back to office 5 days a week, even for us. Even if, I talk with many CEOs, everyone wanted, right? Sometimes you wanted to see employees more.

Speaker 2

But however, this is kind of To let employee work anywhere, it's sort of become a fashion. It's hard to force employee back at home. That's why you have to embrace That's the reason why Zoom can play a much bigger role to support hybrid work.

Speaker 9

Alright. Thank you.

Operator

Thank you. And William Blair's Matt Stottler has the next question.

Speaker 10

Yes. Hey, there. Thank you for taking the question. Maybe just one on the contact center side. So, you obviously can continue to innovate on the product front for contact center.

Speaker 10

But last time we got a deep update, there was still some honing that was needed in the go to market front. We'll just get an update on what you're seeing on that front, overall adoption in the contact center product suite, and then what you think are the keys to driving further adoption going forward?

Speaker 2

Betty, you want to take it?

Speaker 3

Yeah. So our contact center leader is Scott Brown. He is a great addition to our team, and we are focusing from a go to market perspective now in the same way that we took Zoom phone. We are Hiring. We have some on board already, but we were hiring additional contact center specialists who will act as an overlay team And be there to support the account executives to go in as it's more of a technical sale and give them the opportunity to eventually over time all become versed In how to sell contact center.

Speaker 3

So we're in the process of that today. And as I said, we've approved more reps. So we're excited about making the investment there.

Speaker 10

Got it. Thank you.

Speaker 3

Yep.

Operator

Moving on to William Power with Baird.

Speaker 11

Great. Thanks. Yeah, I want to ask a question on online. It's great to see that segment finally stabilizing. Maybe kind of 2 parts tied to that.

Speaker 11

Any early color with respect to the price increases and what you've seen out of that? And as you look forward, for the guidance for online, maybe just some broader framework for how you're thinking about both churn and top of funnel. What gives you the confidence on both those fronts that this really is going to stabilize It's on both those fronts that this really is going to stabilize here.

Speaker 3

Yeah. So we've seen a very positive reaction to the price increase. The when we came into the year and we were modeling it, we've actually seen better than expected retention rates in response to that. So that's been really great. As well as Wendy's done a lot of work around the online buy flow, which has also seen a very positive response.

Speaker 3

And then We've talked about this in the past, but there's a whole road map of other initiatives that are being worked on and continue to be added, including things like Additional payment currencies, additional payment types, and additional offerings. So those are all the top of the funnel items you're referring to. And then They've also done a lot of work to the flow when people the cancellation flow when people come through, which is also contributing to the improved retention rates. And we feel Great about them. Now they've been, you know, it was 3.1 in Q3, 3.4 in Q4, and now 3.1 again, or maybe 3 yeah.

Speaker 3

3.4 and now back 3.1 again in Q1. And as we said, we expect Q2 and Q4 to be seasonally higher quarters due to The holidays in those periods and the flexibility we give our customers to come and go as they need the product. So the Churn, we're very pleased with, and we've seen the behavior expect exactly as we expected it coming back down in Q1. So that gives us confidence that it's going to be within At range for the foreseeable future.

Speaker 2

Thank you. Yeah. By the way, just quickly to add on water cut aside, right? So as we add more and more new services, Also can help us more upsell opportunities even for online segment. You take, you know, the Zoom schedule, for example, we announced that a new service.

Speaker 2

Right? You know, and some customers already paid for other services like a candidate. Right? You know, customers, yeah, I'd like you to go with Zoom, you know, deploy something similar. Right?

Speaker 2

This is a part of the package. Right? I think a lot of upsell opportunity for us to target online segment as well.

Operator

Thanks, William. And moving on to C. T. Panagrahia with Mizuho.

Speaker 12

Thanks for taking my question. Eric, when you I just want to dig into this Workiva acquisition. Do you see that a More of a long term opportunity or do you see that something that we can think of, this is some sort of technology that you can cross sell into the base in near term. And what sort of is there some particular vertical or segment where you can see more tracks on there? Could you give some little bit, you know, elaborate in terms of revenue opportunity from that?

Speaker 2

Yes. It's a great question. So first of all, you look at Our collaboration platform, right, we really want to offer a unified communication and collaboration platform. You know, customers can live within the Zoom platform, right? I think today is one of the problems we are facing.

Speaker 2

Customer also mentioned for us as well. Right? You know, quite often, you know, they they they send All kind of message, either through email is really hard to find, you know, not scalable, or you send a message through chat, you know, buried in all those Public channels, right? You know, customer also wanted to essentially, like, say, I want a video message, right? I want to share to the entire Employee base and or maybe a department news.

Speaker 2

Right? All those kind of, you know, the the content. Right? Are there any other better ways To share and engage with employee. Right?

Speaker 2

I think that's the reason why we think a worker, you know, we will, you know, complete a bigger role, right, to focus on Those kind of use cases, right? It's not only for for the short term, you know, missing key missing element of our entire product to follow, but also follow In the long run, also, it's will help us a lot. Because of the AI, right, because how do you make sure you have more data, right, And really, you know, collaboration communication related to data, right, is Workiva for sure. You know, every day we use, you know, Engage with employees, you know, we are the what we will platform, you will generate lots of data. Right?

Speaker 2

All those are very, I would say, is relevant and meaningful. Right? How to leverage AI, right? That's why, you know, in the long run, that certainly can help us more. So.

Speaker 2

Great.

Speaker 13

Thank you.

Speaker 2

Thank you.

Operator

Next question will come from George Iwanyc with Oppenheimer.

Speaker 5

Thank you for taking my question. Kelly, maybe building on the stabilization you've seen on the online side, can you give us a sense of What your expectations are from an expansion rate on the enterprise side, you know, as you look out over the next couple of quarters?

Speaker 3

Yeah. We don't guide specifically around the expansion rate, but as a reminder, it is a trailing 12 month metric. So given that it's at 112% and, you know, you can look at where the enterprise growth rate is, That possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect, You know, both online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that. Thank you. Yeah.

Operator

And Wolfe Research, it is Alex Zukin. We'll have the next question.

Speaker 14

Hey, guys. Can you hear me okay?

Speaker 3

Hi, Alex.

Speaker 14

So I guess I'll try the It's kind of a 2 parter. One is just a simple, how do you plan to monitor monetize generative AI functionality in the product rather than making it making it a part of the overall experience. And the second is from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-20s last year in the first half to just over 5% in the second quarter guide implied. That's a much larger rate of decel than I think we all contemplated or thought. So how do we like is it upsell?

Speaker 14

Is it cross sell? Is it new products that are launching? Is it later revenue recognition? Like what is it that's driven that rate of decel and how do Reaccelerate obviously, but how do you get back to a double digit growth rate in that regard? Because it seems like that's where a lot of the The evaluation is coming from the stock.

Speaker 2

Okay, I'll address the first one. You take it a second one. I think in terms of how to monetize generative AI, I think, you know, first of all, You take a Zoom IQ for service, for example. That's a new service to target the service department. That AI technology is based on generative AI, Right?

Speaker 2

So we can monetize. And also seeing some features, you know, take a you know, even before the generated AI popularity, we have a live translation feature. Right. And also that's another free feature. It is a paid feature, right, behind the paywall.

Speaker 2

Right? And also a lot of cool features. Right? Take us the Zoom meeting summary, for example, for enterprise and the customers. If you deploy Zoom 1, deploy Zoom 1, they will have those features, Right.

Speaker 2

For TASER customers, you'll see they are free. All those SMB customers, they did not deploy Zoom. Why? They may not gather those feature. Right.

Speaker 2

That's the reason why another reason for us to monetize. I think there's multiple ways to to to monetize.

Speaker 3

And then in terms of the enterprise outlook, as I mentioned earlier, we expected the distraction in Q1 as there was impact to the sales or not only from the reduction, but also reorganization. And we feel really good about the structure of the sales organization now. And we have also, as I mentioned, we are Prioritizing where we want to continue to invest and just recently committed to adding more reps In the contact center team, for example. We hired a leader in Europe, which we haven't had before. So really excited to have Frederick join us.

Speaker 3

And all of these, I think, put us to bring us to be very well positioned to execute for the rest of the year. And and now we're looking to the sales team to do exactly that. And they, We talked about we have an amazing platform that's there for them to sell and we're all rallying behind them to support them to see them execute.

Speaker 14

Perfect. Thank you, guys.

Speaker 2

Thank you.

Operator

And moving on to Michael Turrin with Wells Fargo.

Speaker 13

Hey there, thanks. Good to see everyone. Kelly, on the billings deferred revenue side, You came in a little bit ahead of what you were guiding for, a few percentage points from last quarter despite some duration impacts. So I'm wondering if there's any way you can help us quantify the duration impacts either on Q1 or the Q2 guide and anything else that you can provide just Help us think through seasonality as you've now passed the heavier renewal period, but mentioned maybe some sales transition impacts still out there. Just Help us think through just what's contemplated in the guide from a few different levels.

Speaker 13

Thank you.

Speaker 3

Yeah. So I think on the Billing duration impact. As I said earlier, we don't expect this to be a long term impact. We think it's just indicative Of some of the uncertainty that's in the macro environment today and just watching and being thoughtful about the that it's having on deferred and then you also heard it in terms of RPO. But, you know, we've seen this impact before and we've also seen customers come back then.

Speaker 3

And I think especially as we continue moving towards more bundles, Zoom 1, contact center, Zoom Phone, those are all Products that customers are going to commit to for the longer term. So I think as you continue to see more and more of those in our pipeline and being sold by the enterprise team, That that duration impact will start to expand again. And then, you know, in terms of the balance between enterprise and online. We're thrilled that enterprise has stabilized a little bit earlier than we expected. Given the days in the month, you have the days in the quarter, that's why we gave a more specific view because it's a little bit tricky when you look at it for the rest of the year.

Speaker 3

And, you know, the guidance contemplates all the things that we already talked about in terms of the pipeline and all the initiatives the online team is working on. And then, of course, The restabilization, if you will, of our direct sales org at the same time.

Speaker 13

Thank you.

Operator

And Ryan McMilliams with Barclays has the next question.

Speaker 1

Great. Appreciate it, guys. And congrats on Zoom phone reaching 10% of sales. Just thinking back a few years, pretty amazing that this metric only came after reaching 5,000,000 phone seats. So Quite the run.

Speaker 1

Look, I love all the AI questions so far, but I guess I'll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to The online segment versus the enterprise segment. And have you seen any changes at renewal on the enterprise side, maybe from an enterprise logo, like Insurance standpoint. Thanks.

Speaker 3

No. So our enterprise renewals, as you know, Q1 is our Highest seasonal quarter and the renewals were exactly in the range of where we expected them to be for the quarter. So that was really great to see. And then in terms of online, you know, where we've seen strength, we've already I think it's increasing the top of the funnel. We've also continued to see strength in annual plans, which is great.

Speaker 3

And this is due to the So just a reminder, when we did the price increase, we didn't increase the price for the annual plan. So it just shows customers, You're committing to the amazing value that they see in Zoom and the discount that they get for committing to the long term. But Of course, that's amazing for us because the lifetime value of those annual customers is so much greater.

Speaker 1

Appreciate the color. Thank you.

Operator

And Patrick Walravens with JMP Securities has the next question. Not sure he's out there. Patrick, do you want to come off mute and start your video for us? Alright. Hearing no response, I

Speaker 15

will let I'll come off mute. I'm gonna turn off the video and you can see why.

Speaker 3

The,

Speaker 5

Eric, can you talk to us a little bit about sort of the And what part of that is appealing to you guys?

Operator

Patrick, so sorry, your audio is cutting out for us. And will you try one more time? And unfortunately, we might have to skip you if it doesn't improve, but try again, please.

Speaker 3

No worries. Eric,

Speaker 5

can you just talk a little bit more about Anthropic and what they believe in with it?

Speaker 2

Sure. Sure. Sure.

Speaker 3

You heard Anthropic. Yeah.

Speaker 2

Yeah. Yeah. I think, yeah, Anthropic, You know, it's a a greater partner and it's a greater team. And when we look at the AI landscape, I think why not double down on that partnership. Right?

Speaker 2

And given our federated AI approach, right, internally we discussed that Happened to be, you know, they are in the middle of raising another round of financing. Right? That's why HODU solidify our partnership. Right? Again, there are greater team The greater technology, and I think it is a no brainer for us to invest in the mind to further solidify the partnership.

Speaker 2

And, yeah. So that's pretty much because, you know, look at our contact center. Right? And it will further empower our contact center offering. Right?

Speaker 2

And also, down the road, it will be applied to, You know, entire, you know, product portfolio. Again, this is very important, you know, to our federated federated approach to AI.

Operator

Thanks, Patrick. We'll go ahead and move on to Matthew Niknam with Deutsche Bank.

Speaker 5

Hey, thanks for taking the question. Just two quick ones on cash flow, maybe for Kelly. First, Accounts receivable, the last 2 years, it's been about a drag of 80,000,000 this quarter, much better, only about 29,000,000, wondering What's changed there in terms of cash collections? And then secondly, in terms of the legal settlement, if you can just quantify And let us know maybe when we should anticipate that. Thanks.

Speaker 3

Yeah. In terms of the settlement, Matthew, we It's not clear exactly when that will be completed in terms of the payment. That's why we said for the the full year, we're updating. It it could be in q2. It could also be in q3.

Speaker 3

That's why we just wanted to give you visibility into that. And then in terms of your first Point about collections. I think, part of that honestly is just the continued improvement that we're seeing in our team around collections And our ongoing DSOs. And also, as we've seen online, you know, when there's more online, especially annual, that The online is mostly paid via credit card. So that is an improvement in terms of our DSOs usually as that's growing.

Speaker 3

It because the DSOs On online are about 3 days.

Speaker 2

Does that helps?

Speaker 5

And the legal settlement, if you could just quantify how much that is?

Speaker 3

It's exactly the amount that's the difference between our previous guidance. That there was let me say it this way. There was no other change to our cash flow outlook other than The anticipated potential net legal settlement.

Speaker 5

Got it. Thank you. Yeah.

Operator

Shebly Sarafy with FBN Securities has the next question.

Speaker 16

Yes. Thank you very much. So you're implicitly guiding for your enterprise growth rate to To accelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. It was only double digits in the past. So, I know you have a lot of changes this year for the sales force, etcetera.

Speaker 16

After this year, do you target double digit growth in enterprise or is it Like an upper single digit growth rate. And also related, the online business is stabilizing at 4.80 for the next few quarters, it looks like. If that if q4, that means 0 growth versus negative growth. Is it a growth business afterwards as well? So I'm just looking After this year, is online a growth business?

Speaker 16

Is enterprise low double digits or up single digit growth rate business?

Speaker 3

All the investments that we are making today are focused on growing the top line and in ways to do that for the future for both online and the direct business. So that's innovation. It's expanding our platform. It's focusing on investing in the go to market teams in terms of what we've talked about earlier, like the contact center, adding leader to Europe, really focusing on marketing in the, in the right way. And we haven't obviously given FY 25 guidance, But the goal is, and we've talked about before, you know, starting to see reacceleration of growth as we exit FY24 And having that continue into FY 25.

Speaker 3

We're so early in the year of FY 24, but lining up Everything to anticipate reacceleration as we exit the year.

Speaker 16

In the enterprise?

Speaker 3

Across Potentially, both safe.

Speaker 16

I'm just saying the enterprise, is it up up up up for single digits or a low double digit growth rate? The way you're targeting it, Not not guiding, just targeting.

Speaker 3

Yeah. I'm not going to get that specific, especially this early. We'll be prepared more prepared to talk about that later this year.

Speaker 5

Okay. Thank you. And we'll move on

Operator

to Karl Keirstead with UBS.

Speaker 15

Okay, great. Hey, Kelly, just to follow on that conversation about Driving for acceleration next year. And earlier on, you talked about innovation being a huge priority. That seems to me like there's the potential to shift a little bit the growth margin trade off as you invest to drive growth next year. I'm wondering if you're intending to signal that High 30s, 40% margins, everybody on the call should consider sort of a peak.

Speaker 15

And then if I could ask a clarification, did Work Vivo Impact at all, your guidance for this year? Thank you.

Speaker 3

Yes. Thank you, Carl. So as a quick reminder, Our long term target operating margin is lower, much lower than where we are operating today. And that is, as we've said in the past, to give us the opportunity as we see opportunities for investment to do We're really focused on doing everything we can to drive top line growth and continue to take market share. In the period of time where we've had Slower growth, we've been focused on balancing that with profitability.

Speaker 3

But as we see opportunities, we absolutely could bring our margins down. So so yes, I think we're at probably the peak of where our margins are, you know, but again, we're always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, Yo. Given they're amazing and we're really excited about bringing them into the family, but they're having really, I would say, minimal impact on both the top line and the bottom line today.

Speaker 2

Okay. Thank you.

Speaker 3

Yep.

Operator

We have time for one No question which will come from Sterling Auty with MoffettNathanson.

Speaker 1

Great, thanks guys. Hopefully my connection holds up. Just wondering back on the enterprise, given the online 480,000,000 a quarter stabilization, It implies the enterprise revenue is well below street consensus. Did we analysts just have the mixed model Wrong or was the disruption or something having a bigger impact on the online or on the enterprise business for the rest of

Speaker 3

the year? I think there's I think there's 2 things. I think first of all, we've seen online stabilize much more than we anticipated or than we had been indicating to all of you. So I think the overall mix For the year, it's probably shaping up to be a little bit different than you anticipated and even on the that we anticipated at the beginning of the year. And then, Yo, we're doing, as I said, we're doing everything we can to focus on supporting our direct sales organization.

Speaker 3

The distraction in Q1 Was not de minimis, right? It was, as I said, it was across not only the reduction, but also a reorganization and some changes to incentives and comp plans. And so, you know, we're very happy that that's All behind us now, and we're all looking forward to do everything we can to support them and regain momentum there.

Speaker 1

Sounds good. Thank you.

Operator

And again, this does conclude our question and answer session. So, I'll pass it back to you, Eric, for any closing or additional remarks.

Speaker 2

Well, thank you all for your time. Really appreciate it for all your support. And thank you. I'll see you all next meeting. Appreciate care.

Operator

Bye, everybody. Sorry, Kelly. And again, this does conclude today's earnings release. We thank you all for your participation. So go enjoy your summer, and we will see you next quarter.

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