Zoom Video Communications Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 21, 2023

There are 15 speakers on the call.

Operator

Okay. Hello, everyone, and welcome to Zoom's Q2 FY23 Earnings Release Webinar. As a reminder, today's webinar is being recorded. And now, I would like to hand things over to Tom McCallum, Head of Investor Relations. Tom?

Speaker 1

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q2 of fiscal 2024. I'm joined today by Zoom's Founder and CEO, Eric Yuan and Zoom 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 financial slide deck with financial highlights that along with our earnings 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 Q3 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 strategy and business aspirations and product initiatives and the expected benefits of such initiatives. 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 that we discuss in detail in our filings with the SEC, including the 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

Hey, thank you, Tom. Hey, thank you everyone for joining us today. So before starting, I'd like to welcome Doctor. I'd like to thank Steve Huang as our CTO, who joins us after a successful career at Microsoft, where he most recently served as EraAI CTO and the Tech New Father. Doctor.

Speaker 2

XD joins us at an optimal moment in our AI journey. In the past few months, We brought several new AI innovations to the market and announced an aggressive roadmap aimed at empowering our customers To work smarter and serve their customers better. And as we develop and deploy AI solutions, We strongly believe that technology should advance trust. We are privileged to have countless customers Without us or their communications needs, we don't take that for granted. Earlier this month, we took the additional step In stating that Zoom does not use customer content to train our AI models or third party AI models.

Speaker 2

I'm proud of the approach we are taking by putting customers' privacy needs first. Zoom is taking a leadership position in ensuring customers can use our AI features with confidence that their content is protected. Now let me share how we have advanced in our mission of One platform delivering limitless human connection. We launched Zoom Scheduler, Which serves to reduce the hassle of scheduling with people outside your organization. An intelligent director, which uses AI and multiple cameras to provide the best image and angle of participants joining from a conference room.

Speaker 2

We also launched many new offerings like Zoom Clips, which enables asynchronous video conversations. And more and more customers are getting on Zoom Team Chat, driven by increased adoption of Zoom 1 and new features Like continuous meeting chat, which connects the transient in meeting chat feature to the persistent Zoom team chat product. Currently, we have 2 Fortune 15 Companies, 1 Major Consulting Firm, a Global F and B Brand And a leading law firm using Zoom Team Chat as a core means of tax based communications. Our contact center product has surpassed 500 customers and we are rolling out about 90 new features and enhancements per quarter. We launched workforce management in early July to have customers streamline Customer communications, manage agent needs and transform their customer experience all from a single unified platform.

Speaker 2

WFM is already off to a great start and we look forward to adding additional products This is a suite to expand our native customer experience capabilities and revenue streams. We have progressed rapidly in our integration of WorkWeibo. After ruling out internally, I could not be more impressed with the product and confident in the value It will bring to our customers in terms of building culture across a distributed workforce. Ultimately, Drilling upon our strategic pillar of enabling hybrid work. Speaking of which, a few weeks ago, we announced Internally, a structured hybrid approach, asking our Zoomies that live within commuting distance to come into their local office Zoom is purpose built for hybrid work and it's on us to We believe that this approach may enable us to continue to innovate for our customers and deliver what they need to be to succeed.

Speaker 2

Now, moving on to some of our customer wins. 1st, we are very excited To expand with United States Postal Service. In Q2, the Postal Service added a Zoom Team Chat for 21,500 users to their existing Zoom for garment deployed. Let me also thank Brookdale Senior Living, the largest operator of senior housing in the United States. Brookdale started as a Zoom Meetings customer in fiscal 2020.

Speaker 2

A year later, it began evaluating Zoom Phone. And in Q2, they went all in on the cloud and obligated to Zoom 1 in order to unify their communication needs And 1 integrated product. Let me also thank Purdue Farms. Like many of our customers' journeys, Purdue started years ago with an initial Zoom meetings deployment. Last fall, they went all in with the Zoom 1 Enterprise Plus.

Speaker 2

However, the story does not end there. In Q2, Purdue added a Zoom contact center due to its native integration with the existing Zoom phone deployment and our ambitious Innovation Roadmap. Let me also thank Vermont Industries. Vermont Came on board as a Zoom customer a little over a year ago with meetings and his phone and quickly became a major platform adopter, Including Zoom 1 and Zoom contact center. And in Q2, with the goal of utilizing AI to better service Their customer and also their employees, they added a Zoom virtual agent due to its accuracy of intent understanding, Ability to route issues to the credit agent, ease of use and quality of analytics.

Speaker 2

We are so delighted to see our partnership with Valmont grow so quickly and we are committed To innovating further to support their operations. Finally, let me thank Dollar General, America's general store for choosing Zoom's WorkWeibo platform to connect employees at the digital heartbeat for the company. Dollar General will roll out WorkWavell's employee engagement platform for its roughly 190,000 employees We enhance the employee experience at the individual group and district levels, drive employee dialogue and reinforce its strong culture. Again, we are very excited to welcome and expand with USPS, Brookdale, Purdue Farms, Walmart, Dollar General and all of our customers worldwide. And with that, I'll pass it over to Katie.

Speaker 2

Thank you.

Speaker 3

Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few milestones. First, operating cash flow grew 31% year over year to $336,000,000 2nd, Zoom Phone reached roughly $500,000,000 in annualized run rate revenue. And finally, we are excited that Zoom contact center has surpassed 500 customers in only 6 quarters.

Speaker 3

In Q2, total revenue grew 4% year over year to $1,139,000,000 which includes $10,000,000 of pressure from foreign exchange. This result was approximately $24,000,000 above the high end of our guidance. Our enterprise business grew 10% year over year and represented 58% of total revenue, up from 54% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3.2% from 3.6% in Q2 of FY2023. The number of enterprise customers grew 7% year over year to approximately 218,100.

Speaker 3

Our trailing 12 month net dollar expansion rate for enterprise customers came in Q2 at 109%. We saw 18% year over year growth in the upmarket as we ended the quarter with 3,672 customers contributing more than dollars 100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up From 26% in Q2 of FY2023 and include some of the amazing names that Eric highlighted earlier. Our Americas revenue grew 6% year over year, while EMEA and APAC declined by 1% and 3% respectively. Absent currency impact, both EMEA and APAC would have been approximately flat year over year.

Speaker 3

On a quarter over quarter basis, all regions grew 3 Moving to our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, Acquisition related expenses, net gains or losses on strategic investments, restructuring expenses and all associated tax effects. Non GAAP gross margin in Q2 was 80.3%, an improvement from 78.9% in Q2 of last year. We are pleased with the strength of our gross margins as we continue to optimize usage across the public cloud and our co located data centers for both existing and emerging For the full year, we expect non GAAP gross margin to be approximately 79.7% As we make additional investments in new AI technologies. Research and development expense grew by 6% year over year to approximately 100 $4,000,000 As a percentage of total revenue, R and D expense increased 9.1% from 8.9% in Q2 of last year, reflecting our investments in expanding our product portfolio, including Zoom contact center, AI and more. Looking ahead, investing in innovation will remain a top priority for Zoom.

Speaker 3

Sales and marketing expense decreased by 3% year over year $276,000,000 This represented approximately 24.2 percent of total revenue, down from 26% in Q2 of last year. As a reminder, Zoomtopia will be held in Q3 of this year and will drive incremental marketing investment in the quarter. G and A expense declined by 19 percent to $73,000,000 or approximately 6.4 percent of total revenue, down from 8.2% in Q2 of last year as we continue to achieve greater efficiencies and experience one time savings in the quarter. Non GAAP operating income grew by 17% to $462,000,000 exceeding the high end of our guidance of $410,000,000 This translates to a 40.5 percent non GAAP operating margin, a meaningful improvement from 35.8% in Q2 of last year. Our effective tax rate in Q2 was 18.5%.

Speaker 3

For the remainder of the year, our tax rate is to approximate the blended U. S. And federal state rate. Non GAAP diluted earnings per share in Q2 was $1.34 On approximately 306,000,000 non GAAP diluted weighted average shares outstanding. This result was $0.28 above the high end of our guidance and $0.29 Higher than Q2 of last year.

Speaker 3

Turning to the balance sheet. Deferred revenue at the end of the period Was $1,370,000,000 down approximately 2% from Q2 of last year. This was in line with the high end of the expectations that we shared last quarter. For Q3, we expect deferred revenue to be down 4% to 5% year over year, partially driven by shorter billing frequencies on enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, Our RPO increased 9% year over year to approximately $3,500,000,000 We Expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 61% in Q2 of FY2023, indicating lengthening contract durations on a year over year basis.

Speaker 3

As a reminder, our renewal seasonality peaks in Q1 And declined throughout the rest of the year. Operating cash flow in the quarter grew 31% year over year to $336,000,000 Free cash flow grew 26 percent year over year to $289,000,000 Both results include the approximately $60,000,000 Cash payment related to the legal settlement that we discussed last quarter. Our operating cash flow and free cash flow margins We're 29.5 percent and 25.4 percent respectively. We ended the quarter with approximately $6,000,000,000 in cash, Cash equivalents and marketable securities excluding restricted cash. Given the strength in profitability in collections, we are increasing our cash flow outlook For FY2024, we now expect free cash flow to be in the range of $1,200,000,000 to $1,230,000,000 Turning to guidance.

Speaker 3

For Q3, we expect revenue to be in the range of $1,115,000,000 to $1,120,000,000 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 $400,000,000 to $405,000,000 Our outlook for non GAAP earnings per share is $1.07 to $1.09 based on approximately 309,000,000 shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY2024. We now expect revenue to be in the range of $4,485,000,000 to $4,495,000,000 At the midpoint, this represents approximately 2% year over year growth or 3% in constant currency, which we expect to be neutral in the back half of the year. Our increased total revenue guidance reflects a consistent view on enterprise with tempered expectations for online for the remainder of the year.

Speaker 3

We expect our non GAAP operating income to be in the range of $1,685,000,000 to $1,695,000,000 representing an operating margin of approximately 38%. Our outlook for non GAAP earnings per share for FY2024 It's $4.63 to $4.67 based on approximately 308,000,000 shares outstanding. Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support. Before opening up for Q and A, we are excited about our premier user conference Zoomtopia. It will be in person in San Jose as well as on Zoom events.

Speaker 3

We look forward to sharing more about our expanding platform, new innovations and customer testimonials. Please join us at Zoomtopia on October 3rd and 4th. David, please queue up our first question.

Operator

Thank you, Kelly. As Kelly mentioned, we will now move into the Q and A session. When I call your name, please turn on your video and unmute. As a reminder, in an effort to hear from everyone, please limit yourself to one question. Our first question will come from Mark Murphy with JPMorgan.

Speaker 4

Thank you so much and congrats on solid execution in the quarter. Curious if you can comment on the Zoom's scheduler product. It looks like a very attractive add on option, in a clear efficiency gain. I understand that that's going to be free for some period of time. And then, it looks like $6 per month for, for certain users.

Speaker 4

I understand it's going to be included in some of the other bundles, but can you just comment on how that's going to work? Maybe, Eric, You can touch on the efficiency gains from that product. And, Kelly, any type of a framework for the revenue potential out

Speaker 5

of that particular product?

Speaker 2

Yes. So I can talk about the product side. Katie, feel free to tell me on the revenue potential. I think, Mark, you are so right on. I guess probably you already tried it out.

Speaker 2

It's indeed very attractive. You know, the reason why you look at the whole customers or even including Zoom is why how we schedule a meeting. Let's say, Mark, I want to schedule a meeting with you next week. It's so complicated, right? I need to reach out to your EA, reach out to my EA, or maybe we need to think about a calendar schedule.

Speaker 2

It's so hard. You know, meaning across the company, you know, scheduling is so complicated, right? How do I have customers and simplify that experience? That's why I decided to introduce Zoom schedule, right? And also there are some other startup solutions out there.

Speaker 2

The customer do would like to Leveraging Zoom platform because they already use meetings, phone, team chat. One more click, they can schedule a meeting with Someone from outside organization really liked that experience. That's why we decided to build that. And we already have a free trial and You can schedule meetings with any other side of your organization. We're pretty excited about that opportunity.

Speaker 3

Yeah. I think in terms of its overall contribution, Mark, It's at a very attractive price point and will grow over time certainly. But also we think that what it does is make the product continue to be Where you live and it makes especially our larger enterprise customers that much more retentive as it continues to You'll spread the platform and how you spend your day.

Speaker 4

Thank you so much.

Speaker 2

Thank you, Mark. Hopefully, you try that. Thank you. Appreciate it.

Operator

Okay. Our next question comes from Meta Marshall with Morgan Stanley.

Speaker 3

Smita, we can't hear you.

Speaker 6

Because I'm on mute. So one of the questions that I had was just what you were seeing in terms of the environment. I know that your upside kind of came The enterprise, just wanted to get a sense of how the environment changed during the quarter, if there were any changes during the quarter And just whether kind of that upside came as a result of kind of better upsells or just more deals kind of getting closing in shorter order? Thanks.

Speaker 3

Yes. Thank you, Meta. So I would say in terms of Q2 versus Q1, the environment has been pretty consistent. We continue to see momentum in Zoom 1, in Zoom Phone. You know, there are Still, I would say, lengthened sales cycles out there and customers really making sure that they take advantage of doing their full due diligence.

Speaker 3

But, you know, we're really excited about the vision that we can paint for them, not only around, obviously, the existing platform, but what's also coming from an AI perspective. And I think our finding that very attractive. As you heard from the customers that Eric talked about, seeing a lot of momentum of customers that were originally meeting customers really moving either into Zoom 1 or

Speaker 2

David, next?

Speaker 3

David, who's next?

Operator

Apologies. Our next question comes from Kash Rangan from Goldman Sachs.

Speaker 3

Hi, Kash. Oops. Sorry, Kash. Okay.

Speaker 5

Got it.

Speaker 7

Got it. Thank you. It looks like the enterprise Business is seeing stability with respect to attrition, etcetera. I'm curious to get your thoughts on the online business. So that's it's still a substantial portion of the revenue and anything that you have identified that could help stabilize the attrition levels?

Speaker 7

And also, Just while we're at it, what is the pricing power of Zoom? I think you talked about customers worried about inflation and doing shorter term contracts. That I guess on the flip side means if you could raise prices, wondering how much leverage you have with that. Thank you so much.

Speaker 3

Yes. So in terms of the online segment, we were really pleased with the continued improvement that we're seeing in the retention rates or the churn rates. You know, they are really at historic lows, and so that's really great to see. And Wendy and her team continue to innovate. We just saw a little more volatility and that's what we indicated in sort of tempered expectations for the rest of the year, but really pleased with the ongoing progress That we're seeing in that segment of the business.

Speaker 3

And then, you know, in terms of the pricing power, I mean, Eric, feel free to chime in. But certainly, We continue to have these discussions with our customers when it comes up for renewals, looking for opportunities to potentially expand their usage of the, you know, the portfolio. Moving them from Zoom meetings to Zoom 1 is a very common upsell mechanism or, I I should say movement that we're seeing with our customers today and considering is there an opportunity potentially given the value that they're seeing in the

Speaker 2

Yes, just quickly In terms of pricing power and most of businesses, they still view employee experience as the number one part, right? That's why they really wanted to You know, kind of give a customer the best way to service, you know, like a Zoom platform, you know, otherwise, you know, probably they do not calibrate the experience and when it comes to price, that's not the case, Right. And most of the customer we talk with really appreciated the value and ease of use and quality of Zoom service.

Operator

Thanks so much.

Speaker 2

Thank you, guys. Appreciate that.

Operator

Our next question comes from Michael Funk with Bank of America.

Speaker 8

Yeah. Hi. Thank you for taking the question today. You know, so Yeah. Congratulations on new logo additions.

Speaker 8

You know, good momentum there and the phone ads as well. Just wondering, Kelly, I I mean what has to happen with some of the other metrics that did decelerate during the quarter? NDRR decelerated sequentially, Online churn up sequentially, enterprise customer additions also slowed sequentially. So thinking about the acceleration in revenue growth we've been expecting or hoping for, which of those metrics is going to turn first And how much visibility do you have into that term?

Speaker 3

Yeah. So couple of things. Let me just comment on a couple of the metrics that you called out Specifically, first of all, for the online churn metric, as a reminder, we expect Q2 and Q4 to be seasonally higher than Q1 and Q3. So while it was up over Q1, it was down over Q4. And that's because of summer and winter holidays.

Speaker 3

So I think that 3.2 number is a really great number. And we are going to continue and many of your team are continuing to focus on opportunities to improve that. In terms of the enterprise, we're really focusing on some of the approaches we've talked about earlier. Certainly Zoom Phone is one of The key drivers in terms of expanding our customers' use of the platform, that doesn't necessarily result in new customers, but you could see that in the enterprise in the $100,000 So I think those are the metrics that you should watch as great indicators as our enterprise team continues to Salesroom phone, sales in 1, sales in contact center. And then of course, as AI becomes more front and center, you'll get to see that as well.

Speaker 8

Okay. So just quickly then, so the NDRR for enterprise that should improve as we exit the year, is that That case is at 109%, that should improve off that

Speaker 3

number? Remember, it's a trailing 12 month number. It may come down a little bit more yet, But then start to inflect potentially at the back half of the year, but it might be into early of FY 'twenty five.

Speaker 8

Okay. Thank you, Kelly. Thank you, Eric.

Speaker 2

Thank you.

Operator

Our next question comes from James Fish from Piper Sandler.

Speaker 9

Hey guys, thanks for the questions. Kelly, for you or Eric, are you seeing optimizations on your seats showing a slowdown or similar pace To what you've seen more recently, is there any way to talk about the linearity in general? And Eric, we get the investment behind AI And it seems like it's causing gross margins to drop a couple of points and guide sequentially. I guess, What can you say that gives confidence that this isn't just further price degradation or just a higher level of conservatism on the other side of the coin?

Speaker 2

Ellie, you wanted to address the first one?

Speaker 3

So in terms of the Optimization of seats. What we've seen is, I think we've talked about this sales motion before that our reps have the opportunity to really Get in there and talk to our customers and they've done a great job about logo retention. And even if they are customers, you know, because they've had a dislocation in their Employee base, taking that opportunity then to replace that revenue with an upsell of another product like Zoom Phone and showing them How overall we can drive such a great ROI for them and save them. And our sales team has been incredibly successful at that. And So that's what we're seeing, even though there's still a little bit of sifting, I would say, of seats in there.

Speaker 3

We're seeing lots of momentum on those upsells at that renewal period. And I just want to highlight, we only in terms of gross margin, we had 80.3% this quarter and we only guided to 79.7%. So it's not even a 100 basis points of degradation. So

Speaker 9

Fair enough.

Speaker 3

Eric can talk about the reasons and why that is and what we're investing in.

Speaker 2

Yeah. Yeah. Gross margin is very, very strong. Again, in terms of impact, it is a short term, not long term. The reason why when it comes to AI is becoming more and more important, many of our Customer told us, you rely on Zoom platform, like all the features today, like a meeting summary.

Speaker 2

Someone can take a meeting notes Manually, right? How to leverage AI improve the productivity and efficiency, right? For sure, you know, we needed to invest more. The good news, we already invested, You know, 2 to 3 years ago, right? And that's why some of the features are already ready.

Speaker 2

But how do we further double down on that investment, right? You know, we hired a doctor XT And also invested a lot of you know the GPUs as well. I have a team and we have we have a higher confidence And as those AI features, we have a customer lock, right? And also our strategy is very differentiated, right? You know, first of all, I have a federated AI approach.

Speaker 2

And also the way we look at those AI features, how to have a customer improve productivity. That's very important. Right? And because customer already like us, Not like some, you know, others, right, who, you know, gave you a so called free service and as in charge of your AI features, you know, a crazy price. That's not our case, right?

Speaker 2

We really care about the customer value and also add more and more innovations. At the same time, you know, the way for us to look at Innovations not only for incremental innovation in terms of leveraging AI but also how to leverage AI, build some brand new services To innovate, to deliver even more value than customer expected. That's why we can, you know, monetize To leverage AI technology. That's why we keep investing more. Again, the goal is about some brand new AI services like Zoom IQ for sales, just one.

Speaker 2

A lot of other services

Operator

Our next question comes from Matthew VanVleet, BTIG.

Speaker 3

Hi, Matt.

Speaker 10

Good afternoon. Thanks for taking the question. I want I want to dig in a little bit more on the trends you're seeing in the contact center. Can you help us with What situations you're seeing the most success in? Are these mostly have sort of meetings and phone?

Speaker 10

And then sort of within that, are you seeing more sort of internal help desk type situations or Are you seeing kind of higher volume customer facing deployments as well?

Speaker 2

Yeah, Matt, it's a great question. You know, first of all, I can tell you, Take a Zoom for example. We already deployed the contact center within Zoom since a year ago, right? And you know, our support team are very happy about our own deployment. It works extremely well, right, Because of all those innovation and integrations.

Speaker 2

Speaking about customers, right, you know, for sure, even if we're at a loss of innovations every quarter, But in the brand recognition, right, it's still, you know, it will take some time. That's why, you know, quite often, you know, all the existing customer, they would like to deploy Zoom center integration very well with the Zoom phone and also they found a new use case like internal hyperdesk, IT hyperdesk as you said. At the same time, we also have some contact center customers who did not have a Zoom phone, who even did not have a Zoom meeting. You know, they like a contact center. I think given over the speed of innovation, I think we have a higher confidence, you know, not only SMB, but also more and more, you know, media side, any of our customer We realize the value of Zoom and Zoom contact center.

Speaker 2

I think something similar to what we did for Zoom phone as well, right? When we started on SAP customer, existing customer, Whereas we realize, wow, there's huge value and why not try or test it out a Zoom contact center as well, right? So that's the

Operator

Our next question comes from Ryan Kuntz with Needham.

Speaker 10

Hi, thanks for the question. I wanted to ask about the healthy growth we're seeing here in the $100,000 Accounts, is that primarily displacements of legacy vendors that we're still seeing or are these other kind of competitive wins, greenfield type wins? And can you share anything about kind of the effective playbook you're using at market there to expand these big logo wins? Thanks.

Speaker 3

Yeah. I think some of that, Ryan, points to the ongoing success we're seeing with Zoom 1. Customers really like the ability to To buy the bundle, which meets all of their needs, and it's a great opportunity to see the value, especially your previously Existing meetings customers seeing that opportunity. We do continue to see greenfield, especially, you know, Eric just highlighted Contact center sometimes is a way that they're coming in the door now, which is amazing. And then also we still have a lot of Their meetings customers are upgrading to phone as well.

Speaker 3

So it's a combination of both new customers that come in at that level as well as customers that grow up to that level over time.

Speaker 10

Got it. Any general changes in the pricing environment upmarket?

Speaker 3

No. Especially from Q1 to Q2, there weren't really Significant changes. As I mentioned, there's still, I think, lots of scrutiny around deals, but no other real changes in the environment.

Speaker 10

Got it. Real helpful. Thank you.

Operator

Our next question comes from C. D. Panagrahy with Mizuho.

Speaker 5

Alright. Thanks for taking my question. My question on contact center again, that's considering like 80% legacy still yet to move to cloud. And you're starting from a clean slate, just building yourself in house. So, Eric, how are you trying to differentiate among other cloud vendors right now in the contact center space?

Speaker 5

And Kelly, should we think about this contact center next leg of growth? Is this the adoption should be like phone, what we have seen in the last few years?

Speaker 2

Yeah. So speaking of differentiation, you know, first of all, we've built the contact center service from the ground up, Right. This is absolutely the new modern architecture and also video is part of that as well. AI is heavily, you know, AI components, You know, we're heavily invested in AI, you know, and also at the same time, a seamless integration with other product as well. That's why we have a high Confidence, right?

Speaker 2

And in order like some other vendors in order there for a long, long time, right? And the architecture may not be modern and the performance, the quality and so on So on and so forth, right? However, you know, how to make sure every enterprise customer, you know, during their RFP process, right, they do look at Zoom. When they look at Zoom, we have a higher confidence. We can compete.

Speaker 2

And also, we just had a lot of innovations around the workforce management platform as well. And essentially Zoom contact center have become a full contact center suite, not just the one part, right? This is the targeted SMB And enterprise and also with AI, I think we are innovating very fast, right, to compete against any other cloud based or on prem based And contact center vendors.

Speaker 5

And is that going to be similar to like phone kind of adoption?

Speaker 2

Yeah. Sorry. Go ahead. Yeah.

Speaker 3

At least 6 quarters old today. So it's it's very Relative, right, to the existing ARR base, it's small. It's growing very quickly, though. So it won't be visible to you probably for at least another 4 to, I I don't know, 4 to 5 to 6 quarters probably, but we're really pleased with the growth. And then as Eric mentioned, when you start considering workforce management, of course, Zoom virtual agent, quality management, which is coming.

Speaker 3

It starts to be a platform unto itself that could really be a significant growth driver over time.

Speaker 5

Great. Look forward to seeing you at Zoomtopia.

Speaker 11

Thank you.

Operator

Our next question comes from Rishi Jaluria with RBC.

Speaker 12

Wonderful. Hey, Eric. Hey, Kelly. Thanks so much for taking my question. Two quick ones.

Speaker 12

First, look, Appreciate a lot of the investments you're making around generative AI. And I know it's early, but I want to think about how do you think longer term about your Strategy around monetizing generative AI, is it around specific modules and discretely charging for them? Is it about gatekeeping them behind higher tiers and using that To drive upgrades. And maybe alongside that, you're starting to see better adoption, I think, of your non Core products including, you know, Zoom vote at $500,000,000 in ARR. Eric, you called out some great customer wins on Zoom chat.

Speaker 12

How do you think about using generative AI as kind of a Connective tissue to drive more usage of non core products and maybe even of the entire Zoom 1 pricing package. Thank you.

Speaker 2

Yeah. That's a wonderful question. So if you look at, you know, the Zoom platform, right? So not only do we have meetings, Right. So some people still thought it was just a meeting company episode that has another piece, a full platform company, right?

Speaker 2

For those customers we deployed like a TV chat, USPS Zoom TV chat, a lot of company deployed the Zoom phone and a whiteboard, Zoom contact center as well, scheduler, and also the Zoom clips. As we build more and more services, right? And essentially, when we double on our platform, how do we look at everything from customer perspective, how to add more value? Let's take a Zoom app for example. Constance, I I really like Zoom.

Speaker 2

I already paid a deploy entire platform. You know, a lot of features, You know, take this as a general Gen AI features, you know, like a meeting summary and to leverage Gen AI to write a team chat And meeting inquiry and if let's say you are later to the meeting, how to get a quick, you know, real time summary about what what had been discussed over the past 5 minutes. All those Gen AI features can make the entire platform not only sticky, but also more value. Right? So you know quite often you know some you know customers say yeah you can charge and some other competitors do that.

Speaker 2

We are taking a different approach. We think if you add more value to customers and they are doing more, you know, we're likely to move on to your entire platform, right? They're not me which cannot monetize AI. How to think about AI to build a new services, right? You know, give an example, back to 1995, 1996, The Internet was sort of 1.

Speaker 2

You know, when every, you know, let's say, you know, the the the you know, the stores, right, when they embrace Internet. You do not want them to increase the price, right? You buy online, why you increase the price? However, you can leverage the internet to build new services, right? A new innovation, that's why we're taking a different approach.

Speaker 2

Not as some other competitors, they gave us our free service, when 8th gen AI, oh my god, they charge you a crazy price. I do not think that's fair to customers, right? We are taking a different approach and more value to leverage Gen AI to our existing customers, You know, focus on the the feature improvements to leverage GNAI. At the same time, given our speed of innovation, how to leverage GNAI, we build some brand new AI services to monetize, that's our goal. That's our direction.

Speaker 2

Also, that's our differentiated pricing strategy as well. Hopefully, my answer is clear. Otherwise, let's talk more at the Zoom topic.

Speaker 12

Yes. Very helpful. I'm looking forward to it. Thank you.

Speaker 2

Appreciate it. Thank you.

Operator

Our next question comes from Alex Zukin with Wolfe Research.

Speaker 7

Hey, Hey guys, thanks for taking the question. I guess, so when I sit back and look at the quarter, this quarter looks a little bit different than last quarter. You grew sequentially your revenue base on enterprise and online for the first time together in some time where both of those things happen. Your enterprise billings actually grew as well. And so I look at the guidance and it looks like we're taking a step back and I appreciate the conservatism in the macro I appreciate the fact you've got changes you're still working through in the go to market.

Speaker 7

But help us understand if we look at the trends as they've Has churn stabilized to a point where we can expect, for instance, on the online business that this is a new floor we can count on? Because if I look at the exit rate for enterprise revenue, I don't think it's at the rate that any of us sitting here would be jumping up and down about. You mentioned NRR on the enterprise side starting to, I think you said inflect, but maybe go back up in the first half of next year. What's the right way to interpret The enterprise growth exiting this year and into next year? Then I've got a quick follow-up.

Speaker 3

Yeah. So in terms of online, I would say that we are very pleased with that we're seeing in the churn rate itself. And I do think we're stabilizing around a new level that is back to historic levels. And I think that's A reasonable assumption to make going forward. And then in terms of enterprise, we're obviously not In a place that we're going to comment on FY25 yet.

Speaker 3

We're not going to do that on this call. But Enterprise, when you look at it from a from a how do I say this for you? When you look at it in terms of the growth rate that you're expecting, you can even back into, right, what it is. And we are, as you say, Still considering no improvement from the macro at this point. And as you said, continuing to have the sales For settle in to our new structure, we're thrilled to have Graham leading the organization.

Speaker 3

We Yo, some of the transitions took a little bit longer in EMEA and APAC than the rest of the world as you've heard us talk about. But, you know, as we're Coming into Q3, the pipeline is strong. It's stronger than it was as we were coming into Q2. So, I think So those are the factors you can take into consideration as you're looking for the growth rate for the rest of the year.

Speaker 7

Okay. And then maybe, Eric, for you, obviously, the evolution of Zoom

Operator

from a point solution to

Speaker 7

a platform is nice to watch. You Zoom from a point solution to a platform is nice to watch. You've talked about Zoom 1. You've now given us that 500,000,000 Dollar annualized number for Zoom Phone. What's the penetration today for Zoom 1 within the enterprise base and what's the penetration for the phone Product in the enterprise base.

Speaker 7

And where does it go from here in your mind? Like what does success look like for you?

Speaker 2

Yeah. I think Zoom phone penetration is doing relatively Oh, but Zoom 1 I think still has a huge opportunity, right? Zoom 1 is not only for Zoom meeting the phone, right? Also the team chat, if the customer wanted to deploy our free Greater team chat solution and a whiteboard and a lot of other services, right? I think a huge opportunity, especially for media and a lot of size customers.

Speaker 2

And we need to kind of share them on the value. As I said earlier about like Gen AI features, all those kind of things is part of Zoom 1, right? So leverage all those, you know, the the cool features, right, to to, you know, to penetrate more, you know, and about Zoom 1's, the market share, right? And Zoom phone itself, we're doing very well, but, you know, huge opportunity ahead of us for Zoom 1 penetration. And I would say we just started.

Speaker 2

So And I'll give one example. I'll take a USPS for example. When they realize, wow, you have a great team chat solution. It's also part of Zoom 1 and also it's free. That's amazing.

Speaker 2

I've already tested it. Why why not deploy Zoom 1, right? So many more customers When you realize the full potential of a Zoom web platform, I think that's the value, right, we needed to focus on. So

Speaker 7

Perfect. Thank you guys.

Speaker 2

Thank you, Alex.

Operator

Our next question comes from Peter Weed with Bernstein.

Speaker 11

Thank you. And maybe this kind of falls up a little bit of what Alex was just getting at. But first off, I want to say it's Really exciting to see the progress on Zoom Phone and Contact Center. It's been amazing to watch that and all the checks I do with folks are very positive on things that are going there. I think, Kelly, you commented a few minutes ago and we're alluding to it, I think, with Alex here, that NRR may come down a bit before it starts re accelerating, Maybe by the end of this fiscal year, maybe the beginning of next year, we start to see some line of sight to some benefit there.

Speaker 11

I'd really love to kind of dig into like what will drive that improvement and kind of when I split the customer base, you do a really nice job of reporting bolt on greater than Greater than 100 ks and less than 100 ks, like some quick math suggests where it's been really painful recently is on the greater than 100 ks customers. And I'm trying to figure out like on that reacceleration, is it about kind of reigniting those greater than 100 ks? Is the opportunity with the less than 100 ks like Growing them up because they're less mature and like really what is it that you are going to be delivering with these Customers to reignite that between those customer bases.

Speaker 3

So one of the things I commented on is that we have seen Some dislocation in our customers' own employee base and that our sales reps do a great job when they're talking to those customers About helping them potentially right size if they have downsized in their employee base, but upselling and retaining that revenue In other parts of our platform. So if that as this is still pressure in the macroeconomic environment, you're going to see that A little bit, right? So maintaining logos, even maintaining the same amount of revenue, but would have been an upsell if not for a downsell due to seats. So Part of it is just an ongoing potential change in the macro, which we have not factored into the guidance that we gave. And then The continued acceleration of all these new products that we keep talking about, right?

Speaker 3

Phone is obviously doing really well and is well hit its stride. But remember, that's taken 3 to 4 years to accomplish. And so contact centers that we expect to follow the same is just it just needs a little more time. And then you heard about all the additions into the contact center platform itself with ZBA, with workforce management and quality management that's coming. All of those will continue contribute to growth over time.

Speaker 3

And then, Eric sort of hinted thinking about the ways that AI over time is going to help With both retention as well as potential opportunity to grow revenue. So it's just some of these things just have to grow a little bit or, you know, age a little bit and Sure. Into the stage that they're contributing in a way that you can see them.

Speaker 11

Yeah. And how high do you anticipate NRR being able to get once all that stuff works out? I mean, obviously, you've Seeing some of those headwinds, so you kind of know how much you you're like, darn, like I lost this and it would have been so much better. Like if you're looking forward, like What should we aspire to be getting NRR back to and like how soon do you think we can get there?

Speaker 3

Yeah. Peter, we'll talk about that more when we're ready to give FY25 guidance, but not not today.

Speaker 2

Yeah. I can start a little bit more, Peter. So the question you asked were very similar to what are the articles about Zoom 1. Actually, you know, today is the problem is, you know, Zoom is a is a too strong brand on the meeting side, right? Many of our customers, Unfortunately, they even did not realize we have a lot of other services, not to mention a Zoom one platform, right?

Speaker 2

That's the number one challenge we are facing. How to make sure all those even existing even for existing customers, they also think, oh, this is just a meeting. That's not the case, right? When we, you know, and share a greater story, make sure most of our customers or probably they realize our Zoom not only just the meetings had a full platform. I think the inflection point will not happen until then.

Speaker 2

Thank you. Thank you.

Operator

Our next question comes from Taz Koujalgi with Wedbush.

Speaker 13

Hey guys, thanks for taking my question. Two questions. First one for you, Kelly. I I think you had a price increase of the online business in Q1, and that was being phased out, I think, in different geos at different times. Has that been rolled out across the globe?

Speaker 13

And if you can comment on any Tailwind, you saw from that price increase in the q2 online business?

Speaker 3

Yeah. So it Has been very effective in general in terms of, you know, maintaining strong retention rates and moving customers From monthly to annual as they continue to see value when we've rolled out this price increase. And given that it's been in effect for the full time now, we're not gonna break out, but You break it out separately, but it certainly is overall having a great impact and including in the momentum for online. And it is, I believe it's live in every market at this point.

Speaker 10

Got it.

Speaker 13

And then one follow-up on contact center. I know it's pretty early. You've just started, you know, you've just had, You know, your first early customers, but any comments on price points you're seeing and attach rate of seats? So let's say customer has 100 seats of Zoom meeting. So when customers buy contact center, what is kind of the tax rate that you're seeing for these early customers?

Speaker 3

Yeah. I mean, it's very different, Right. In terms of it's not it's not anywhere near like phone typically is near 1 to 1 and sometimes even more 1 to 1 from attach rate. Contact center is very different. It depends on the use case we're seeing of the customers.

Speaker 3

If it's an internal help desk or if it's Like, you know, we've had one of our largest deals to date was a BPO where it is their business, right, to drive contact center. So I don't think there's necessarily a standard ratio that you can look at because it varies so much based on use cases. And then in terms of pricing, as a reminder, our list price for contact center is highly disruptive. It's $70 per seat. And, given, you know, comparing that it's given comparing it to the other competitors in the market, it's a really, I think it brings a lot of value to our customers.

Speaker 3

So while, you know, enterprise customers and large customers are going to get discounts, we've certainly been able to Managed to maintain price points given how disruptive and competitive it is compared to others in the market.

Speaker 13

Can I sneak in just one more clarification? You mentioned that we won't have visibility into contact center revenues for another 4 to 6 quarters. It's still very early. Were you implying that it'll be close to 10% of revenues in 4 to 6 quarters?

Speaker 3

No, no, no, no. No, no, no. Not I don't mean to imply that at all. I just mean that, I see Matt laughing. That over time, right, you started to see Zoom phone and we Talked about like more milestone metrics and how it was contributing.

Speaker 3

That's what I was saying. I mean, that would be a fast growth rate if that were to occur.

Speaker 2

Got it. Thank you guys. Thanks a lot. Thank you.

Operator

Our next question comes from Matt Stottler with William Blair.

Speaker 10

Yeah, hey there. Thank you for taking the question. Maybe just to follow-up on Zoom Phone. If I look at the disclosure this quarter, dollars 500,000,000 ARR and last quarter, 10% of revenue. The implication would be something in the ballpark of, let's say 10%, maybe a little more sequentially in terms of growth for Zoom Phone ARR.

Speaker 10

I will just dig into or double click on, I guess, what's driving that growth, right? Is that indicative of the success you're seeing with Zoom 1? Is that evidence of go to market maturity there? Is it some large customers like the BPO you just mentioned just kind of ramping up? Anything you'd like

Speaker 11

to call out there? Yeah.

Speaker 3

I mean, actually, Matt, it's all of the above is what I would say. You know, it's as we've taken as we Talking to our customers about renewals, taking the opportunity to talk to them about the value of Zoom 1 or talking about just helping them. I think every CFO and CIO across the world today is trying to think about how do they Drive more efficiency in their organization, and Zoom Phone is a great way to do that when you look at it compared to the ROI, especially of having an on prem solution. And then also with contact center, if contact center is a driving force, Zoom phone is a very natural adjacency to it. So I think it's a combination of all of that and it's just going to continue to create more and more synergies as Zoom contact center especially continues to mature.

Speaker 2

Yeah. Just quickly, you know, when we talk with our customers, we really like, you know, have a both, They deploy both Zoom meeting and Zoom phone together, the content center, the new opportunity in particular for those customers. I think they don't want to deploy a point of solution, Right. If you just have a phone business, it's really hard to to to to to build a sustainable business. Customer You know, phone and meetings, you know, some of they get a very similar integration.

Speaker 2

Like, you know, have a phone call, one more click and drop the video meeting. Right? So that's, you know, that kind of a similar experience and really help us further accelerate our phone growth, right? If you just offer a partner solution As really not as scalable, not as sustainable. And down the road, more and more customers, they would like to move on to a platform player like Zoom.

Speaker 10

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Sterling Auty with MoffettNathanson.

Speaker 3

Hi, Sterling.

Speaker 14

Hey, guys. Alright. Kelly, for the online outlook, how much of this is That's because it seems like the online guidance is a little bit worse than what we had before. How much of this is macro? How much of this is execution?

Speaker 14

And Eric, one for you. When we think about AI and all the innovation that you're driving, how much of that AI innovation is just going to be driving and differentiating the core Zoom products Versus bringing a premium monetization kind of, you know, pricing model, you know, or specific AI SKUs.

Speaker 3

Eric, you want to go first?

Speaker 2

Sure. Yeah. So first of all, in terms of online study, I know you have a pro account. Hopefully, you still have a pro account, you know, and then you for sure can contribute to our online growth. So speaking about AI, I think, You know, we are taking a different approach, as I said earlier.

Speaker 2

From an architectural perspective, it's different, federated AI. In terms of monetization, right? Again, you know, we look at how to leverage GNAI to improve our call meeting experience And deliver more value, make the servicing more sticky. You know, constantly appreciate Zoom always, you know, offer more and more features values. At the same time, we do not, you know, kind of charge them a crazy price, increase the price a lot at all.

Speaker 2

Right? That's why we build a trust. You know, they want to go to full Zoom platform. At the same time, Giant AI does bring huge opportunity in terms of monetization, in terms of the new service. As I said earlier, how to leverage GNAI?

Speaker 2

To build some brand new service, you cannot only count on low hanging Fools, you already deployed this service. I have a gN AI feature now. You need to pay a crazy price. I do not think that's sustainable. The customer do not like it, Right.

Speaker 2

That's our approach. How do I leverage GNAI to make sure existing customers happy and leverage GNAI to build new services Focus on innovation, innovation and innovation. That's our approach.

Speaker 3

Thank you, Eric. And Sterling, in terms of online, I would say we're pleased with the And where you see that is the ongoing stabilization in the churn rates. That I think has been really, Really well done and stabilized over the last four quarters now. And I think that's a really great indication of The ongoing improvements in the platform, the buy flow, the movement of customers from monthly to annual. Where we do see some ongoing headwinds is in the overall macro, which is driving more for the top of the funnel.

Speaker 3

And that's where Wendy and her team continue to focus on new pricing packages, new payment currencies, things that can they can focus on to Expand the top of the funnel so that over time and then eventually starting to add new products as well that can be sold online. That's what will eventually drive this. Ideally, we want it to not only be stable, but to be a growth driver as well.

Speaker 14

Makes sense. Thank you.

Speaker 2

Yep. Thank you, Steli. Thank you.

Operator

Okay, we have time for one more question. And that last question goes to William Power with Bard.

Speaker 10

Okay. Great.

Speaker 9

Thanks for sneaking me in. Maybe one more question on contact center. Great to see the traction there. I wonder if perhaps, Eric, you can update us on where you are with respect to go to market. I know that had been a big focus.

Speaker 9

How much more room and opportunity is there on that front? And then I guess the second part of that is, it feels like there's a big opportunity with Respect to AI and contact center, being a new entrant, how do you think about the opportunity for whether it's virtual agent and other capabilities to help you be even more In that market.

Speaker 2

Yeah. Great question. So yes, speaking of go to market, I think on product front, we have a Higher, higher confidence in repair the innovation speed, we've added so many features and a workforce management, a lot of other features have been introduced every quarter. But in terms of go to market, I think, you know, not like what we did before for meetings, right, you know, by and large, more like a driven primarily driven by a direct business. HANA Center is different.

Speaker 2

For sure, we need to double down, triple down on the indirect channel, right? You know, embrace all of the third party partners and master agent and so on and so forth. And I see we need to invest more on that front and, you know, essentially, you know, this is one of the things, you know, why, you know, not like a Zoom phone, you know, Quickly, you see the the the the accelerator revenue, but even have a greater content on a product as long as you see the progress on go to market front. I think, you know, we will see the the greater result. And in terms of AI, not like, you know, other vendors, right, they already have a content center sort of Solution for a long, long time.

Speaker 2

When you look at AI, you know, kind of architecture and auto flexible, right? How to add AI to that, you know, to all those existing layers. We've got a contact center contact center. We already realized the importance of AI, right? That's why, you know, we have a very flexible architecture.

Speaker 2

Not only do we build organic, you know, AI features, but also, you know, we acquired Solvay and also the virtual agent and so on and so forth. You know, organic growth and also the acquisition Certainly help us a lot in terms of product innovation. And AI is going to put a big role, you know, for the contact center. We have a high confidence, We can do very well on that front. Thank you.

Speaker 2

Thank you.

Operator

Okay, this concludes our Q and A. I would now like to pass things back to Eric for closing comments.

Speaker 2

Oh, thank you all, you know, for joining us, you know, for the Q2 earning call. I really appreciate it for your greatest support and very, very grateful and thank you. Appreciate.

Speaker 3

Bye, everybody.

Operator

We thank you all for your participation and we look forward to seeing you again. This concludes today's conference. Enjoy the rest of your day.

Speaker 2

Thank you.

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Key Takeaways

  • Zoom Q2 revenue of $1.139 billion was up 4% year-over-year, beating the high end of guidance by $24 million, with non-GAAP operating margin improving to 40.5% and cash flow growing over 30%, leading management to raise full-year revenue guidance to $4.485–4.495 billion and free cash flow outlook to $1.2–1.23 billion.
  • Zoom continues to expand its product portfolio and AI roadmap, launching Zoom Scheduler, Intelligent Director, Zoom Clips and an aggressive AI innovation roadmap while affirming a privacy-first AI stance by not using customer content to train models.
  • Platform adoption accelerated with Zoom Team Chat gaining Fortune 15 and major law firm customers, Zoom Contact Center surpassing 500 customers, workforce management and deeper WorkWeibo integrations, and a structured hybrid work policy for employees.
  • Significant enterprise wins in Q2 included United States Postal Service, Brookdale Senior Living, Purdue Farms, Vermont Industries and Dollar General, many of which expanded from meetings into Zoom 1 bundles, phone, and contact center deployments.
AI Generated. May Contain Errors.
Earnings Conference Call
Zoom Video Communications Q2 2024
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