Zoom Video Communications Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 20, 2024

There are 18 speakers on the call.

Operator

And I will now hand things over to Charles Eveslage, Incoming Head of Investor Relations. Charles, over to you.

Speaker 1

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for Q1 of fiscal year 2025. 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 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 Q2 and full fiscal year 2025, 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 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 we may make on today's webinar.

Speaker 1

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

Speaker 2

Thank you, Charles. Thank you, everyone, for joining us today. Our rapid innovation over the years has taken us far beyond video conferencing. Every step of the way has been guided by our mission to solve customer problems and enable greater productivity. In the process, we have very deliberately created a communication and collaboration powerhouse with AI infused natively across the platform.

Speaker 2

Time and time again, we are recognized as a leader by Gartner, G2, TrustRadius and many others. And we are so pleased that in March, Fast Company added Zoom to their press leaders list of the world's most innovative companies of 2024. Further validating our dedication further validating our dedication to providing our customers with a high quality open collaboration platform powered by AI that just works. In March, we announced the Zoom Workplace, our AI powered collaboration platform designed to help our customers streamline communications, improve productivity, increase employee engagement and optimize in person time. Within the launch of Zoom Workplace, our new enhancement and capabilities like multi speaker view, document collaboration, AI powered portrait lighting, along with upcoming features and products like Ask AI Companion, which will work across the platform to help employees make the most of their time.

Speaker 2

The Workplace launch also boosts Zoom Phone, Team Chat, Events and Viaboard with many more AI combining capabilities to help make customers more productive. One of the core pillars of Zoom Workplace is optimizing in person time and embracing flexible work. Our services portfolio has expanded from Zoom Rooms into integrated adjacencies like workplace reservation, visitor management, and digital signage. As of the end of Q1, the cumulative number of Zoom Rooms licenses purchased was over 2,000,000. And in the last 3 months, we provisioned over 100,000 desks in workspace reservations to support in office work.

Speaker 2

Leading financial services and legal firms such as Capital One and Coodie use Zoom Rooms to support their globally dispersed hybrid workforce. And others like Flex and Beata Home Healthcare have expanded from Zoom Rooms to Workspace Reservation in order to optimize in office time. Zoom Workplace is also designed to increase employee engagement through the integration of Workvivo into our platform. In Q1, we landed a major telco customer on WorkWeivo. We bought approximately 100,000 seats.

Speaker 2

And Workville was named META's only preferred migration partner for its customers as it retires workplace for META. Our success in employee experience represents an important beachhead for us in upselling customers on the full suite. Zoom Workplace exists alongside and is designed to seamlessly integrate with our business services, including Zoom Events, Revenue Accelerator, Contact Center, Virtual Agent, and others. Zoom Contact Center, launched only 2 years ago, is ready for prime time. We now support PCI compliance, opening the door for customers that have a payment processing in their workflows.

Speaker 2

We also received a FedRAMP moderate authorization for our essentials and premium skills, allowing US government agencies and entities doing business with them to leverage Zoom contact center. We have launched all key social channels, including Facebook Messenger, WhatsApp, and Gmail, and have enabled direct transfers between contact center agents and other departments via Zoom phone, helping to further bridge the employee and customer experiences. As a result of how far the product has come, we have seen strong growth in the number of deals where we have beat or displaced a Gartner Top 4 CCaaS player. We have also strengthened our channel partnerships, leading to a significant increase in our channel with and ability to compete for larger deals. ASPs are heading north buoyed by the popularity of our higher tier packages that allow agents and managers to learn further to lean further into AI with AI expert assist, workforce management, quality management, and more.

Speaker 2

Now let me recognize some of our amazing customers. 1st, let me thank Expedia, who needs no introduction, for becoming a lighthouse Zoom revenue accelerator customer in the quarter. Leaning heavily into our AI products to drive revenue. A power user of Zoom phone for years, they wanted to better automate workflows, coach sellers, and drive efficiencies. We partner with them on an initial quadruple digit Zoom revenue accelerator deal, which includes working directly with our team to improve and tailor the product based on their business model and industry specific use case.

Speaker 2

We're so excited about this AI centric partnership to drive value for Expedia and continuously improve our platform based on customer feedback. Let me also thank Major League Baseball. A year ago, MLB made a highly strategic decision to adopt the Zoom contact center. In Q1, they chose to expand our successful partnership by integrating Zoom quality management into the Zoom Connect Center deployment. This enhancement further strengthens their engagement strategy and streamline business operations.

Speaker 2

MMB was particularly impressed by the interactive features, enhanced accessibility, and the ability of Zoom quality management to support Virtupha engagement. Let me also thank Sander Stone, a nonprofit health system specializing in mental health and substance use disorder treatments for individuals, families, and veterans for doubling down on Zoom. Seeing strong value from their existing Zoom meetings, Zoom phone and Rooms deployment, in Q1, they expanded the Zoom phone and added Zoom Connect Center in order to leverage AI to provide better care and Zoom TV chat in order to streamline communications in all from a single platform. I'm also very excited to share that we greatly expanded our footprint with a leading global financial services firm who doubled their Zoom phone seats to over 100,000. We're so pleased to see more customers adopting our Zoom Workplace and Business Services product in order to reap the benefit of our modern natively integrated AI powered technologies.

Speaker 2

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

Speaker 3

Thank you, Eric, and hello, everyone. Let's start with some exciting milestones for our emerging products in Q1. We saw additional traction in Zoom contact center as we reached 90 customers with over $100,000 in ARR, representing a 246% year over year growth. This was driven by our recently launched higher pricing tiers as well as our success in larger deals. Zoom Phone saw continued expansion upmarket.

Speaker 3

With the addition of the Marquee Financial Services quarter customer Eric just mentioned, we now have 5 customers with 100,000 or more Zoom phone seats. Zoom AI Companion has grown significantly in just 8 months with over 700,000 customer accounts enabled as of today. These customers range all the way from solopreneurs up to enterprises with over 100,000 users. Embedding AI across all aspects of Zoom Workplace and Business Services is a key priority as we continue to drive productivity and engagement for our customers. Now let's dive into the financial results.

Speaker 3

In Q1, total revenue came in at $1,141,000,000 up 3% year over year. This result was approximately $16,000,000 above the high end of our guidance. Our enterprise revenue grew 5% year over year and represented 58% of total revenue, up from 57% a year ago. Online average monthly churn came in at 3.2% as compared to 3.1% in Q1 of FY 'twenty four. The slight uptick in churn was related to tightening up the grace period for unmade payments, which pulled some churn forward.

Speaker 3

Absent this change, online average monthly churn would remain consistent with the last two quarters at 3.0%, the lowest we have ever reported. We saw 8% year over year growth in the upmarket as we ended the quarter with 3,883 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 30% of revenue, up from 29% in Q1 of FY 'twenty four. As a reminder, our classification of enterprise versus online is determined by how we engage the customer, with enterprise referring to customers who are supported by our direct sales team, resellers, or strategic partners, and online referring to customers who self serve. During Q1, as part of an effort to improve the customer experience and drive greater efficiency in our operations, we transitioned 26,800 enterprise customers with low ARR to online.

Speaker 3

The number of enterprise customers at the end of Q1 after accounting for the transition was approximately 191,000. It is important to note that while the customer transition had a noticeable impact on our number of enterprise customers in Q1, the associated revenue was de minimis, representing an approximately $4,000,000 shift from enterprise to online. Additionally, our trailing 12 month net dollar expansion rate for enterprise customers in Q1 came in at 99%, which was not affected by this transition. Our Americas revenue grew 4% year over year, while EMEA increased by 2% and APAC declined by 2%. The APAC performance was due to the FX headwinds in Japan and Australia.

Speaker 3

Moving now to our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, acquisition related expenses, net gains on strategic investments and all associated tax effects. Non GAAP gross margin in Q1 was 79.3%, which was slightly lower than 80.5% in Q1 of last year, mainly due to our investments in AI Innovation. In Q2, we will incur one time investments to upgrade our data center backbone and expect gross margins to dip to 78% for the quarter. For the full year of FY 'twenty five, we continue to expect our gross margin to be approximately 79%. Non GAAP income from operations grew by 8% year over year to $457,000,000 exceeding the high end of our guidance of $415,000,000 This translates to a 40% non GAAP operating margin for Q1, an improvement from 38.2% in Q1 of last year.

Speaker 3

Non GAAP diluted net income per share in Q1 was $1.35 on approximately 315,000,000 non GAAP diluted weighted average shares outstanding. This result was $0.15 above the high end of our guidance and $0.19 higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1,350,000,000 down approximately 1% from Q1 of last year. This was roughly 3 percentage points higher than the range we provided last quarter, partially due to tightening up our discounting practices last year.

Speaker 3

For Q2, we expect deferred revenue to be up approximately 1% year over year. Looking at both our billed and unbilled contracts, our RPO increased 5% year over year to approximately $3,670,000,000 We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, consistent with Q1 of last year. Operating cash flow in the quarter grew 41% year over year to 588 $1,000,000 Free cash flow grew 44% year over year to $570,000,000 Our operating cash flow and free cash flow margins expanded to 51.5% and 49.9%, respectively. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management and higher interest income. We ended the quarter with approximately $7,400,000,000 in cash, cash equivalents and marketable securities excluding restricted cash.

Speaker 3

Last quarter, we announced the authorization of a $1,500,000,000 share buyback plan. As of the end of Q1, we had repurchased $150,000,000 of stock, representing 2,400,000 shares. Now turning to guidance. For Q2, we expect revenue to be in the range of 1.145 to $1,150,000,000 representing approximately 1% year over year growth. We expect non GAAP operating income to be in the range of $415,000,000 to $420,000,000 Our outlook for non GAAP earnings per share is $1.20 to $1.21 based on approximately 316,000,000 shares outstanding.

Speaker 3

We are pleased to raise our top line and profitability outlook for the full year of FY 'twenty five. We now expect revenue to be in the range of $4,610,000,000 to $4,620,000,000 which represents approximately 2% year over year growth. We still believe that Q2 will be the low point from a year over year growth perspective and for it to improve from there. We forecast our non GAAP operating income to be in the range of $1,740,000,000 to $1,750,000,000 representing an operating margin of 37.8 percent at the midpoint. Our outlook for non GAAP earnings per share for FY 'twenty five is $4.99 to $5.02 based on approximately 319,000,000 shares outstanding.

Speaker 3

Moving on to free cash flow. Please remember that due to the timing of U. S. Federal and state tax payments, we paid 2 quarters' worth in Q2 and minimal amounts in Q1. Primarily due to the seasonality and AI related CapEx, we expect free cash flow in Q2 to decrease by approximately 50% to 60% quarter over quarter before normalizing in Q3 and Q4.

Speaker 3

With the strength in free cash flow in Q1 and increased outlook for operating income in FY 'twenty five, we now expect free cash flow to be towards the high end of our range of $1,440,000,000 to $1,480,000,000 for the full year. Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support. Kelsey, please queue up the first question.

Operator

Thank you so much, Kelly. And like Kelly mentioned, we're going to go ahead and move on to taking your questions. When I call your name, please turn on your video and unmute. And as a reminder to try to hear from everyone, please limit yourself to one question. So our first question will come from Meta Marshall with Morgan Stanley.

Speaker 4

Great. Thanks. I appreciate it. And congrats on the quarter. A couple of questions.

Speaker 4

Maybe just to start with, you could just give a sense of what you're seeing kind of on the SMB side of the environment, just given kind of commentary from others throughout the quarter? And then second, just maybe on BB and E, and you noted last quarter that you expected fiscal Q2 to kind of be the down point of the year, if that still kind of holds as you look throughout the year? Thanks.

Speaker 3

Sure. So hi, Meta. As we're looking at the outlook for the rest of the year, as we mentioned, we do still expect Q2 to be the low point from a year over year growth perspective and that the net dollar expansion rate will follow similarly behind that. When you look at the in quarter net dollar expansion, you'll see that it actually was consistent quarter over quarter. So we're starting to see that stabilization, and we think that that's a really good indicator that the net dollar expansion rate on trailing 12 months will similarly follow.

Speaker 3

And then in terms of SME, we saw, I think, similar performance across all of our different segments of our enterprise business and both you heard about some of the amazing customer wins that we had in the up market, but also some really nice ones in SMB as well.

Speaker 4

Great. Thanks. I'll pass it on.

Operator

Thanks, Meta. And we'll now move on to Samad Samana with Jefferies.

Speaker 5

Hi, good evening. Thanks for taking my question. So Eric, I wanted to dig into the CCaaS side. As you mentioned, the product is ready for prime time and we took investors to see it at Enterprise Connect as well a a couple of months ago. So I was wondering if maybe you could just help us understand, I understand the payment side, but when you think about Primetime, how would you define that?

Speaker 5

Is the uptime gotten better and you're clearly seeing larger logos? So how should we think about what prime time means, right? Should we see an inflection in larger customers going forward?

Speaker 2

Yes, great questions. 1st of all, just over 2 years ago, right, we launched our Zoom contact center. You look at our quarterly progress, every quarter we added so many you know, the the customers. Right? So that's what I'm seeing.

Speaker 2

Why is customer trust of a contact center, the the product? In terms of prime time, look at it just recent quarter. Right? You know, like, I gave you 2 examples. Right?

Speaker 2

You know, so, like, one of the the Silicon Valley based cloud or software company. You know, they deployed, you know, our competitor solution, which is one of the top 3, you know, cloud is CCaaS, you know, the the provider. And guess what? You know, they they straight to our contact center platform because they really like our feature set, you know, similar to integration. And those are great uptime and also a lot of AI features built in.

Speaker 2

Right. That's one example. Another example, we're also competing we're competing against another also one of the top 3 CCaaS vendors, right, for the most for the largest deal in Q1. You know, guess what? We won.

Speaker 2

And this is not a small deal. It's not like a few, you know, the the the hundred. That's more than 1,000 seats. That's another big deal. Right?

Speaker 2

And so those 2 are just examples. Also, you look at our, you know, total, you know, installer base. Just look at the ARR more than 100,000, right, for those customers. Right? And you look at the end of q one, we have around 90 and the new deals like that, right?

Speaker 2

You look at it compared to last year, almost 250% year over year growth. I think with all those, you know, the factors in, I would say, yeah, this is prime time. The most important thing is the customer trust our brand. They know and we listen to customers and we innovate. That's the reason why our countercenter, we're making very good progress is, you know, the prime time.

Operator

Our next question will come from Michael Funk with Bank of America.

Speaker 6

Yes. Thank you all for the question tonight. And Eric, you touched on it briefly with the last question, but love to hear about the competitive environment today, maybe to contrast it with 12 or 24 months ago and specifically pricing and how pricing is changing, whether or not you are more competitive, less competitive? And then I guess related to that, if you're seeing more competition from Microsoft on the video side.

Speaker 2

Yes. So sorry. You're talking to pricing on the contact center or overall the

Speaker 6

Really really, the entire platform, now that more competitors are likely bundling solutions, just the general pricing trends.

Speaker 2

Overall, I think only one competitor, they bundled a solution together, which is the Microsoft, right? So over the past few years, right, for sure, there's some impact. You know, you already saw the number over the positive several years because there are bonding and strategies. However, if you look at our installed base, you know, like a year ago, we increased the online price and we do see a very positive feedback because we appreciate our service. And also look at our, you know, the installer base and a lot of customers really like our service.

Speaker 2

The reason why and the reason why it is our in the customers that our customers employees, they like Zoom. They truly enjoy using Zoom. Right? When they use other competitors' product, guess what? They do not like it.

Speaker 2

Right? Even as the bundle, you know, the the the price is sort of free. However, when customers, they deep dive, they look at a total cost of ownership in terms of support cost and AI cost. Guess what? I think we are much better positioned now.

Speaker 2

That's the reason why I think, you know, not like every time we talk customer this customer always, you know, channel us, hey, you know, your your price or all those kind of things, can't really appreciate. Right? They want to deploy the best of breed service. That's the reason why I we do not see, you know, the the the big, you know, price pressure, you know, over the, you know, at least in the in the last quarter. And I think we've maintained our press the strategy very well.

Speaker 2

So

Speaker 6

Okay. And just quite quickly, see your last comment there, didn't really see price pressure last quarter. Should I take that to mean that pricing is stabilizing relative to where it was, Pricing is getting better?

Speaker 2

I think so because you look at overall online churn, right, in kind of a historical low, right, as Kelly mentioned earlier, Right? And also look at our enterprise customer as well because we have a lot of other services upsell, you know, entire, you know, the product suite. And I think it's a much better position now.

Speaker 6

Great. Thank you, Eric. Thank you, Kelly.

Speaker 2

Appreciate it. Thank you.

Operator

We will now hear from Rishi Jaluria with RBC Capital Markets.

Speaker 7

Wonderful. Thanks, Eric. Thanks, Kelly, for taking my question. I just wanted to ask, following up on the CCaaS side. Eric, you made the comment that you have either displaced or beaten each of the top 4 CCaaS vendors as ranked by Gartner.

Speaker 7

Can you provide a little more color on those wins? Maybe? And what vector did you tend to win those on? Was it on pricing? Was it on certain features and capabilities you have that they don't have?

Speaker 7

Maybe help us understand and provide more color. That'd be helpful. Thank you.

Speaker 2

Yeah. So, yeah, just to give you 2 examples. So a lot of other examples. So, you know, if you look at it just the 2 examples, I do not see just one factor, you know, and to let to let a customer make that decision. They look at it, 1st of all, do they trust this vendor or not?

Speaker 2

Right? And they look at a product roadmap, look at existing features set, look at integration, look at AI features. They also look at the pricing. And, you know, all those factors, they think, you know, because, you know, so some customers, they trust with Zoom a years ago, right? Many years ago, they deploy Zoom phone.

Speaker 2

They say, yeah, this is a great story. You know, we are going to replicate that story. That's the reason why customers, yes. But interestingly enough, you know, those customers, some of the logos we went in Q1, they are not even not Zoom customers, but they trust our brand. They know we are very innovative.

Speaker 2

You look at all other C Class vendors. Guess what? Their solution was were not a build recently. It's a long time ago from on prem to cloud. And it's really sort of a clunky interface.

Speaker 2

And that's the reason why we have a high confidence where we can win more deals. Right. Thank you. Thank you.

Operator

Our next question will come from C. T. Panigrahi with Mizuho. C. T, please go ahead.

Speaker 8

Thank you. I saw the demo of your Zoom workspace, very impressive in terms of like AI feature, like Ask AI companion that you added, Eric. So I have a couple of questions. Firstly, like how do you see the Zoom workspace? How do you plan to do the what's your strategy in terms of branding or go to market push this product?

Speaker 8

And do you see this more traction on the more on the low end like small business segment or more on the enterprise side? And if you combine this workspace with AI, should we expect this to drive more free to paid migration? And if so, when should we start seeing that effect? Thank you.

Speaker 2

Yes, it's a great question. It's great to know you like Zoom Workplace. I think it's not when we drive you know, the revenue growth adoption, not only SMB enterprise customers. Overall, if you take a step back, right, you look at Zoom Workplace, look at the first, you know, the the the 10 years, right, in Zoom, one of the journey. Essentially, more like our slogan is mid happy.

Speaker 2

Right? For now, we have a collaboration platform and customers, they can live within a platform to get to get all the work done. Right? That not mean they should use everything from Zoom, but we do have a collaborative platform. We also can coexist with other vendors where, like Microsoft or Google, ServiceNow, Salesforce or Atlassian, all those, the the the the SaaS leaders.

Speaker 2

At at the same time, you know, you look at it, the the customer requirements. Right? And when they use Zoom meetings, you know, from phone or team chat, whiteboard and a content center, a lot of things together. That's a full collaboration, you know, platform. Used to be, you know, from meet happy, not with work happy.

Speaker 2

Right? That's sort of our slogan evolution. Right? And also, AI is a part of that. Look at our work with these customers.

Speaker 2

Guess what? AI is not only a part of that, but also at a no additional cost. Right? So that's just our vision. And essentially, you know, in the form of, you know, many, many years ago from one application service provider and into a full collaboration suite.

Speaker 2

And SAP customer for sure, they like that. Enterprise customer, they want to deploy the best of the business service. They also like that too. So Plus is the open platform. That's the reason why we are doubling down our workplace, the platform to become a work happy platform.

Speaker 8

Thank you.

Speaker 2

Thank you.

Operator

Moving on to Catherine Trebnick with Rosenblatt Securities.

Speaker 9

Hi. Thanks for taking my question. Can you update us on the partner program? What I'm really trying to dig into is really how you are positioning yourself competitively against Rang and the traditional partners? Thanks.

Speaker 2

You cut it?

Speaker 3

Eric, are you want me to take that? Okay. Go ahead. Yes. So we continue with our partners and with our direct sales organization.

Speaker 3

We continue to win, I think, not only against other providers in the phone cloud, but also, as Eric just mentioned, on the contact center side as, I think, several vectors. It's around pricing and total cost of ownership. It's around the momentum because of the ease of use of deploying and selling this product. We believe that our partners should be able to see that value in not only the deal the end user, but also in their deals as well. And so if you're asking about compensation to the partners, we continue to ensure that our partner programs are competitive but also appropriate.

Speaker 3

We are always thinking about the impact to them as well as to our internal margins. And as you've heard us talk about last quarter and also this quarter, we have some additional partnerships that we've been named as the preferred partner migration for not only Meta, but if you remember also Twilio as well.

Speaker 9

Yeah. Yeah. Thank you.

Speaker 2

Yeah. Just quickly add on to volatility side. Those are partnerships, you know, most of the time, because the reason why I have all those good partners because the customers, they ask me for that. Right? Because they say, yeah, they really want to do more business with Zoom.

Speaker 2

And this reason why I have assumed many partners recently like Avaya or Meta. Right? This is great examples. So

Operator

Thanks, Catherine. And Ryan McMillan with Barclays. Please go ahead with your question.

Speaker 10

Appreciate it. Kelly and Eric, you beat me to it as usual. I was going to ask about the Meta and Avaya partnership. So great to see that they chose Workvivo as the migration partner for their workplace solution. I guess to double click on that, do you have any sense of the timing on how these customers could move over And how would you frame the opportunity for this partnership?

Speaker 10

And then just on the Avaya partnership, love to just hear, like, kind of what exactly that partnership is trying to get at, how that can open the door for more customer relationships between you guys. Thanks.

Speaker 2

It looks like I know your question now. So thank you for asking those 2 questions. So in terms of a major partnership, right, I think in a major such as a great company looks on the, you know, a lot of AI, llamas 3, and it's great, you know, open source. That's the reason why, you know, and they wanted to retire their workplace for Meta product. You know, for sure, they talk to their customers and understand, you know, we have a Zoom work of Vivo platform is very preferred, you know, solution.

Speaker 2

And many, you know, as I mentioned earlier, right, we just went a very large tackle deals. It's not a small deal, 100,000 seats. Right. So the very mature platform is a lot of innovations. That's the reason why Zoom became a preferred partner.

Speaker 2

We're going to work together. Right. To make sure all those workplace for matter customers have a smooth transition. Right. In the next, I think, in the next 12 to 18 months, you know, I can work, you know, working together with Meta, with customers, make sure the entire transition period are very, very similar.

Speaker 2

So we have a high confidence, you know, they are a greater, partner and not not only in the past, but also a greater partner. I mean, Meta. So and we are well, again, are very excited about that partnership, about that, you know, the transition. In terms of our deals, right, so, you know, our, you know, they have a loss of very, very big large enterprise customers who deployed both UCaaS and CCaaS solutions. Those large enterprise customers, they are not fully ready to migrate everything to the cloud.

Speaker 2

You know, you look at integrations, many, many years effort they put is almost impossible to migrate to cloud overnight. However, they also want to leverage a lot of, you know, the features like AI features, a lot of innovations. Right? So there's reason why the customer, they share it with both of us, both, you know, online from Avaya. And so, you know, when they are not ready to move to the the cloud, they also do another step is in an on premise solution.

Speaker 2

Guess what? This is a hybrid architecture. How to leverage Zoom work for this client? Right, to talk with Avaya on prem in future servers. Right?

Speaker 2

And on the one hand, the Zoom Zoom work for this client has a lot of rich features they can leverage. On the other hand, they also can simultaneously integrate with Avaya on prem feature servers. I think that's, you know, it's the women partnership by benefit us, benefit Avaya, benefit the customers, in particular for all those very, very big, very complicated, you know, the the enterprise customers. That's the reason why I think this hybrid architecture will help customer a lot.

Speaker 10

Appreciate the color. Thanks, guys.

Speaker 2

Thank you.

Operator

Baird's William Power has the next question.

Speaker 11

Okay, great. Hopefully, you hear me okay calling from my mobile. I guess, Kelly, for you, can you talk about the enterprise growth outlook from here? Should we expect that to trough in Q2 as well and then accelerate? And I guess tied to that, maybe just help us understand your level of confidence in raising the full year guidance to reflect the Q1 be given we're still pretty early in the year here.

Speaker 3

Yes. So hi, Will. Yes, we expect that enterprise growth will follow the similar trend that we've discussed for the entire company with Q2 being the low point for FY 'twenty five from a year over growth perspective and then seeing reacceleration in the back half from there. And in terms of our confidence for the year, we applied a similar approach that we always do to setting guidance, which

Speaker 9

is, you

Speaker 3

know, talking to our sales organization, of course, looking at the pipeline that we're seeing, also the trends that we're seeing with online and what's on deck in terms of initiatives, what's the performance we're seeing for churn, and then looking at all of that, putting it together and coming up with our outlook.

Speaker 9

Thank you. Yep.

Operator

We will move on to Tyler Radke with Citi.

Speaker 12

Hi, Kelly. Hi, Eric. Thanks for taking the question. Kelly, to start off, just on the enterprise customers, appreciate the explanation on the movement of some of those customers moving online. Although I think if I back that out, it's still declined sequentially.

Speaker 12

So I was wondering if you could unpack kind of the drivers of that enterprise customer number and then how you're thinking about growth of that long term? And then second of all, just as we think about the billings outlook, I think that came in a little bit stronger for the Q2 despite revenue being a little bit below consensus. Should we think about that as kind of I guess what are the puts and takes on that that would be kind of driving the divergence, any change in billings terms we should be thinking about?

Speaker 3

Yeah. So first of all, on the enterprise number, it it didn't decline quarter over quarter. I just want to be clear, even if you back out those numbers. So it it should be up. We've discussed this in the past that as our strategy, especially on selling Zoom Phone and Contact Center, is selling into our existing install base and that as more of our revenue growth is coming from these emerging products and selling into our existing install base, that you should expect those customer ads to to not grow at the same rate that they did historically, but it did grow quarter over quarter.

Speaker 3

So I just want to be clear about that. And then in terms of we've said this before too, which is I know it's not always what you want to hear, but in terms of billings and RPO, really the best indicator that I can give you of the future is our revenue guidance itself. So there are changes in the trends in terms of we do I should say this way. We continue to see strength and movement from monthly to annual to multi year billing terms, so that's really positive, as well as we see expansion and growth into those longer tenured customers in online, which typically also means they've expanded into longer billing terms. And we've also seen some benefit, as we mentioned, as we've really been more thoughtful about our discounting practices, which includes fewer free periods in the enterprise.

Speaker 3

And so all of that is leading to the growth that you're seeing from billings and the deferred revenue side of things.

Speaker 12

Great. Thank you.

Speaker 9

Yes.

Operator

We are moving right along. So we will now hear from Alex Zukin with Wolfe Research.

Speaker 13

Hey, guys. Thanks for taking the question. First, I just want to acknowledge we saw something from you guys this quarter we haven't seen in a long time, accelerating enterprise revenue growth, accelerating enterprise billings growth and declining OpEx. So just maybe stack rank for us, like if you look at all the things you called out, whether it's contact center, phone, WorkVivo, even the sales product and the quality management product you referenced in the prepared remarks, Eric, StackRank, where those kind of landed in terms of the driving factors or the driving force behind that acceleration? And then I got a quick follow-up.

Speaker 4

Yes. Kerry,

Speaker 2

you want to take it?

Speaker 3

Yes, sure. Let me talk about revenue, and then you can talk about sort of the business momentum in general. But Zoom Phone continues to be a very strong growth driver, very pleased with the growing momentum we are seeing from contact center. And then WorkVivo also gaining in its own right. In terms of relative overall dollars, WorkVivo is still a smaller component of the business, but is growing very, very quickly.

Speaker 3

So certainly contributing and some really exciting customers that are coming to to Zoom as a result of of both contact center and Workvigo. And also we had 1, a new customer coming from, the Zoom revenue accelerator as well this quarter. So that's really exciting to see these emerging products that are bringing new customers and new logos to the company. So I think in terms of momentum, we're excited across all of those thresholds, but kind of in that order.

Speaker 2

Yeah. Yeah. Alex

Speaker 3

Eric, anything else you want to add? Yeah.

Speaker 2

Alex, that's a great observation. I think to echo what the Caddy side, that momentum is boils down to our product strategy. Essentially, there are 2 key pillars. The first one in the Zoom workplace. The second one is business services.

Speaker 2

You look at the workplace, Zoom workplace, right, for those customer deploying meetings and a phone now, and they have a Zoom work with this client. And then they try to consolidate, right, some other solution like Zoom and Team Chat. It's as great a flexible, you know, very scalable chat solution is part of that at a no additional cost. When they deploy other wireboard solutions, look at Zoom as a wireboard. Zoom has a meeting for scheduler functionality as well.

Speaker 2

Right? You know, a lot of features is part of the the the Zoom workplace. But what's more important is that they look at it that they take the the Zoom meeting summary for feature, for example. That's our AI feature. When they test the feature, their feedback is not only positive.

Speaker 2

They say, wow, I cannot believe that. It's worked so well, Plus, at a new additional cost, they also trust like our AI vision as well. This is kind of a workplace. You know, plus, you know, the reason why the matter is this great company to remind why they pick up Zoom work with people because they also look at it from their customer perspective. They want to pick out the best, you know, the partner who can deploy a greater solution.

Speaker 2

Right? AI, a part of that. You know, Workview also part of our workplace platform. You look at the business services, you know, contact center for support team, revenue accelerator for sales team, events sessions for marketing team, and all those new services. Right?

Speaker 2

Also, we have asked a lot. You know, again, you know, back to the the contact center story, a lot of opportunities, a lot of enterprise customers buying the largest deal on prem solution. You know, they are thinking about which collaborative contact center solution they can trust. They can count on in the next 5 to 10 years. Zoom is a much better platform.

Speaker 2

That's the reason why I think that's kind of, you know, and the momentum, you know, is coming, you know, really focused on the enterprise side. So

Speaker 13

And Eric, maybe just on pricing. You got to ask this question a couple of times. It feels like you're talking about it being stable. You also raised price and you didn't see a real change in churn. I guess, I know you don't like raising price too many times.

Speaker 13

But if you think about just the strategy of continuing to add a tremendous amount of value, whether it's through consolidation or incremental functionality like sales or quality management, is the what is if you look at the ACV uplift in those two accounts that you called out for Expedia and MLB and you look at that across your pipeline for adding those types of features assuming some kind of attach rate, what's that opportunity look like for you guys?

Speaker 2

Yes, I can talk about the business side. Kelly, feel free to chime in on the revenue side. I think you look at this is Expedia is a great example, right? And the deployed revenue accelerator. Right?

Speaker 2

Again, those are business services. Right? It's kind of, I would say, very compelling service. Right? You know, we are not against, you know, competitor compare a competitor to the other competitors.

Speaker 2

A, we are going to dramatically lower the price. That's not our case because that's a huge value. AI is part of that, not like a workplace. AI and node is additional cost. Right?

Speaker 2

However, here, AI is putting a very big role for all of the business services. Right? And also, most of them, you know, are enterprise customers. Right? That's the reason why I think, you know, we are doubling down all those business services.

Speaker 2

And the pricing is, you know, it's kind of, not like when we offered a meeting service many years ago. Right? It's the best pricing, best product, better service. And however, here is a very different story. Right?

Speaker 2

You know, we compete against, you know, any other competitors. Also, the the the the price is, you know, also, you know, customer like that as well, you know, because they do not want to view Zoom at all. It's just a low price. That's not a case of business services because of the huge value.

Speaker 3

Yeah. In in terms of the revenue upside, Alex, it it kind of varies by product because certain products have much higher ASPs, for example, like Zoom contact center than meetings. But, of course, the the attach rate in terms of number of seats isn't 1 to 1. Right? There's a there's a a lesser ratio there.

Speaker 3

Zoom phone, you know, we we saw an attach rate of generally 1 to 1 or do see a attach rate, I should say, of 1 to 1 from meetings to phone, sometimes even greater when we look at customers that we've talked about here before, that have a bigger attach rate because they have phones in retail locations, for example. So it just varies. The thing that I will say is generally a lot of these emerging products also have better gross margins, which is helpful when you look at something like like contact center because of the ASP, especially with the rollout of the pricing tiers. We saw the ASPs for those products almost double from quarter to quarter with the rollout of the new pricing tiers. And I think that will continue as the features and functionality, especially in those upper tiers, continues to expand.

Speaker 13

Congrats, guys. Thanks a lot.

Operator

Thanks. Matthew VanVliet with BTIG has the next question.

Speaker 14

Hey, good afternoon. Thanks for taking the question. I guess on the last point, as you include more AI companion in the mix, you know, how are you how do you feel like that's actually monetizing maybe more seats, a larger opportunity at those individual customers than maybe limited by only phone or only meetings. How is the workspace and sort of bringing all this together helping drive deal sizes higher?

Speaker 2

I think the AI combining not only to have our meetings and the phones or team chat is across the entire Zoom Workplace program platform plus all the business services. Right? And because our federated approach, you look at our workplace, you know, the the deployment, right, for the entire collaboration platform and not only make all those services better, but also is, you know, customer appreciated. Right? We saw, you know, the the trading customer more.

Speaker 2

Right? You know, they they do add more value to customers because at no additional cost. Right? That's kind of a power, you know, part of the the the Zoom UI company. At the same time, in terms of monetization, as I mentioned earlier, look at all of our business services.

Speaker 2

You know, AI is a key differentiation. Right? Lever AI and also and, you know, we charge a premium price as well. And that's because of the value. At the same time, you know, we also, you know, are going to leverage, you know, AI companion build a lot of new things, new services like Ask AI Ask AI that will be introduced later this year and also some other new services we're working on as well.

Speaker 2

But overall, I think AI for the existing collaboration customers and more value for new services. Right? And also, you know, we can charge a premium price plus also can leverage AI company to build a new services, you know, given the edge AI, you is coming and there's a lot of new opportunities.

Speaker 9

Thank you.

Speaker 2

Thank you.

Operator

We will now hear from Ryan Koonce with Needham.

Speaker 15

Thanks for the question. First, Kelly, quick housekeeping one. The reclassification of customers, is that expected to change any of your KPIs like NER and like that, kind of turning those in the right direction at all?

Speaker 3

I mean, no significant. As we mentioned, although the number was pretty significant, the revenue shift from enterprise to online was only $4,000,000 and we as we indicated, it didn't change because it was so de minimis, the impact on net dollar expansion calculation, for example, didn't it didn't make it didn't move it at all.

Speaker 15

Got it. Helpful. And Eric, maybe a quick strategic question on events. Any update there in terms of how the ecosystem is building out? I know that's a complex market to penetrate.

Speaker 15

Any updates you have for us there? Thanks.

Speaker 2

Yeah. Great question. I do not think I gave a few examples about that. But I can tell you, Zoom events are doing extremely well. And you look at every quarter contribution to our revenue growth is, you know, the reason why is kind of is, you know, we had a webinar a long, long time ago.

Speaker 2

Right? You know, and and then Zoom introduced Zoom sessions, events. It's a very, you know, trustable brand to offer the most flexible, you know, the events service. And I think of that service, you know, is going to help us more and more because you look at any other competitors. Right?

Speaker 2

You know, most important competitor take up, you know, the very large man. They even do not have something similar, you know, and this is probably their product on par with our webinar. Now we have these events and sessions. Right? You know, we are the we offer the best events and sessions, you know, and for our customers.

Speaker 2

That's the reason why for almost every enterprise customer,

Speaker 9

and then

Speaker 2

they look at it, the the very large events And Zoom is, you know, the best platform. Our competitor even don't have that. So oh, by the way, I also forgot to mention, actually, it's not only for events in itself. Essentially, a lot of customers use Zoom for for to improve their working, in the marketing, you know, the the the efficiency. Right?

Speaker 2

How to drive the leads generation, you know, and our workflow, right, integrated very well with our events and sessions. Great. Thank you.

Speaker 9

Thank you.

Operator

And we will now hear from James Fish with Piper Sandler.

Speaker 9

Hey guys, thanks for the question here. Maybe just bridging the phone and contact center opportunity, whether it's kind of hard to probably parse this out in the entire installed base. But as we think about those greater than 90 contact center accounts over 100 ks, maybe could you go over the overlap of adoption conversions across those spaces relative to the last year? Thanks guys.

Speaker 2

Yes, sure. So, yeah, Kelly, feel free to chime in because you look at it, you know, when we started, we saw, you look at it, you know, the quarterly, the content center, you know, the deals we went. We thought of probably most of customer will be the existing customer, right, either meeting customer, the phone customers. However, that's not right. And it's and quite often, some customer, they are not a meeting customer, not a phone customers.

Speaker 2

But, you know, they became the 1st customer to deploy this contact center. So that means, you know, we have a lot of opportunities for existing installed base. So we need to double down on that because the product already works very well. And plus, you know, buyers are different. We also that's the reason why we invested more to our channel partnership as well.

Speaker 2

I think, you know, more and more existing installed base, right, after they heard about our content center's, you know, success story, I think we are going to see acceleration of contact center business growth.

Speaker 9

So. Thank you. Thank you.

Operator

We have one additional question, which will come from Michael Turrin with Wells Fargo.

Speaker 16

Hey, thanks for squeezing me in. Kelly, you had a few comments on tightening discounts, tightening grace periods, just as things for us to

Speaker 17

be mindful in terms of

Speaker 16

the model. I'm wondering if that's somewhat standard operating procedure for Zoom or if that's coming from more confidence that the business is now stabilizing. And if you're just able to help us with visibility you have from here into Q2 marking the low point in terms of growth and any additional driver details on drivers there is useful. Thank you.

Speaker 3

Yes. I think that the discounting we started working on being more thoughtful and disciplined about that last year. We've talked about that several times before. And you're starting to see the impact and the benefit of that rolling through the results this year, which makes sense as customers are coming up for renewal, especially some of those ones that are on annual accounts. And then in terms of tightening up the gunning period, I think that it's just, you know, as we continue to mature as an organization and really be thoughtful about not only what's good for our business, but what's good for our customers as well and seeing that it was just the right time.

Speaker 3

And we continuously go through and look at our financial and accounting policies and make sure that those align with what's, again, right for the business and right for our customers as well. I think it's more about that and less about sort of anything else that's happening in the business other than just being thoughtful and maturing into some of those policies.

Speaker 2

Thank you. Yeah.

Operator

And again, that is all the time we have for questions today. That concludes our questions. So I'll turn it back to Eric for any closing comments you might have.

Speaker 2

Yes. Thank you all for joining us today. Really appreciate. And we are working as hard as we can to truly deliver happiness to our customers and partners. And also I'd like to leverage this opportunity to thank every Zoom is for their hard work and really appreciate.

Speaker 2

Thank you all for your time. See you next quarter.

Operator

Thank you so much, Eric and Kelly. And again, everyone, this concludes today's earnings release. We thank you all for your participation. Enjoy your summer and we will see you next quarter.

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Key Takeaways

  • Zoom Workplace launched as an AI-powered collaboration platform offering features like multi-speaker view, document collaboration, AI portrait lighting, and upcoming Ask AI Companion, integrating Meetings, Phone, Team Chat, Events, and Whiteboard.
  • Zoom Contact Center achieved PCI compliance and FedRAMP moderate authorization, added social channels (Facebook Messenger, WhatsApp, Gmail) and AI capabilities, and is now regularly displacing Gartner Top 4 CCaaS providers with rising ASPs.
  • Q1 financial results showed revenue of $1.141 billion (+3% YoY, $16 million above guidance), non-GAAP operating margin of 40%, free cash flow of $570 million (+44% YoY), and a raised FY 2025 revenue outlook to $4.61–4.62 billion and non-GAAP EPS to $4.99–5.02.
  • Enterprise and upmarket momentum continued with enterprise revenue up 5% YoY, 3,883 customers contributing over $100,000 in trailing-12-month revenue (30% of total), and strong net dollar expansion despite minor customer reclassifications.
  • Major AI-centric customer wins included Expedia’s large Revenue Accelerator deal, MLB’s expansion into Contact Center and Quality Management, Sandstone Health’s deployment of AI-infused services, and a leading global financial services firm doubling Phone seats to over 100,000.
AI Generated. May Contain Errors.
Earnings Conference Call
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