Zoom Video Communications Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 21, 2024

There are 21 speakers on the call.

Operator

Recorded. And now I would love to hand things over to Charles Ebslach, Head of Investor Relations. Charles?

Speaker 1

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q2 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 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 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 the product initiatives and 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

Hey, thank you, Charles. Thank you, everyone, for joining us today. We had a strong quarter, marked by broadening our Zoom Workplace offering, matching up market with contact center, and deepening the AI capabilities that underpin our entire platform. The rollout of Zoom Workplace features over the last few months represent the most significant upgrade to the Zoom experience in years. We reinvigorated the UI with the simplicity and reliability that has defined Zoom from the very beginning, while also adding to the capabilities of Zoom Meetings, Zoom Team Chat, and Zoom Phone, and strengthening how AI company operates across these modalities.

Speaker 2

We also brought Zoom Rooms, visitor management, and workplace reservation to the next level in order to better support our customers' flexible work needs. And just days ago, we announced the launch of a new Zoom webinar offering that can host up to 1,000,000 attendees, revolutionizing the way organizations can connect with massive audiences and demonstrating the clear scalability advantage inherent in our modern architecture. Earlier this month, we took another major step towards our platform visit by launching Zoom Docs. Docs fits right into our strategy of expanding the platform across more touch points in the productivity life cycle, helping to effortlessly transform information from Zoom meetings into actionable documents, tasks, and knowledge bases so team can stay focused on meaningful work. In Q2, we landed our largest deal for a new contact center customer who chose our top tier elite CX package coupled with Zoom Phone.

Speaker 2

We are seeing increased adoption of our advanced contact center packages as customers seek to utilize our AI capabilities to enhance agent performance. Of our top 10 contact center wins, all represented displacements of major contact center vendors, and 40% were migrations of our 1st generation cloud based solutions. These metrics highlight how well our contact center meets the needs of customers and prospects while also validating our better together strategy. In fact, most of the content center wins represent either existing Zoom Workplace customers who add on content center or new customer to Zoom who buy content center in conjunction with Zoom Workplace. This demonstrates the desire for seamlessly integrated customer and employee experience solutions, which Zoom excels at the delivery.

Speaker 2

The seamless integration of the customer and employee experience rests upon Zoom's AI companion technology as a fabric to unify the whole platform. Today AI companion enhances and employs capabilities using Genentech AI to boost productivity through features like meeting summary, chat compose, image generation, live translation, and enhanced features in contact center. As these features have grown in popularity, we are very happy to share that Zoom AI Compiling is now enabled on over 1,200,000 accounts. But we have only scratched the surface. Our progress broadening Zoom Workplace, building out enhanced AI tools for Contact Center and amassing a large base of AI users sets us up well to transition into the 2.0 phase of AI enabled work.

Speaker 2

In this phase, Zoom AI companion will move beyond enhancing skills to simplifying your work day, providing contextual insights, and performing tasks on your behalf. It will do this by operating across our collaboration platform to ensure your day is interconnected and productive. We'll have more to share about our AI strategy at Zoomtopia in October. We hope you all can join us. Now let me recognize some of our amazing customers.

Speaker 2

First, let me thank TIAA, a leading provider of secure retirements and Oticon Focused Investment Solutions for strengthening their partnership with Zoom. A long time customer, TIAA obligated to Zoom Workplace Enterprise Plus and added Zoom Contact Center and Quality Management in Q2 in order to further enhance the employee and customer experience. I would also like to thank Prime Inc, one of the largest trucking and freight delivery companies in North America. Prime came to us through the channel and chose to further elevate the experience they provided their drivers with Zoom Accounting Center and quality management. But the value did not stop there.

Speaker 2

Recognizing the power of our natively integrated employee and customer experience platform, they added a Zoom Workplace as well as webinar and rooms to support the collaboration and flexible work needs of their corporate offices. In addition, I'd like to thank Lyra Health, a leader in workforce mental health benefits for integrating Zoom's video SDK toolkit into their platform. Lirao has successfully migrated to Zoom, bringing our cutting edge video technology directly into their applications, exemplifying our developer focused approach. Finally, WorkWeivo had an amazing quarter with wins including a leading Southeast Asian bank and a famed European automotive brand. WorkWeivo's success was extended by the META partnership, which contributed some exciting new logos in Q2, including a major North American telco.

Speaker 2

We are so happy to provide these companies with an employee experience platform that elevates the way they inform, connect and engage employees and integrate seamlessly with a broad Zoom portfolio. I'd like to take this opportunity to share the news that after almost 7 years, Kelly has made the decision to leave Zoom. Kelly joined Zoom about 2 years before our successful IPO in April 2019, and her role in that has been a highlight of her time here. She will leverage her skills in helping companies scale and building successful businesses to have another startup in that process for the next Zoom. She has been an integral part of the Zoom journey, steering our IPO in 2019 and continuing the momentum as our customer base rapidly expanded during the pandemic.

Speaker 2

Under her strong financial leadership, Xu has maintained a consistent track record of profitability and cash flow growth. We are conducting a comprehensive search for our next CFO with the assistance of a leading executive search firm. Kelly will be staying on through Q3 earnings. And given that we have a very robust financial organization through her commitment to talent development, I'm very confident that there will be a seamless transition. Wish Kelly all the best.

Speaker 2

Now I'll pass it over to pass it off to Kelly.

Speaker 3

Thank you, Eric. First, I'd like to thank you, of course, and the entire Zoom team an incredible experience over the past 7 years. Zoom has not only made work more productive, but we have transformed the everyday lives of people globally. As Eric mentioned, I am committed to staying through the Q3 earnings. So this is not goodbye.

Speaker 3

We'll get to see each other again, and I will help with the seamless transition. Now back to earnings. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few achievements from the quarter. 1st, Zoom AI Companion reached approximately 1,200,000 accounts enabled as of the end of Q2.

Speaker 3

2nd, we saw amazing traction with Workvivo as we reached 69 customers with over $100,000 in ARR, roughly doubling year over year. And finally, we surpassed 1100 Zoom contact center customers, representing more than 100% year over year growth. Now let's dive into the financial results. In Q2, total revenue came in at $1,163,000,000 up 2% year over year. This result was approximately $13,000,000 above the high end of our guidance.

Speaker 3

Our enterprise revenue grew 4% year over year and represented 59% of total revenue, up from 58% a year ago. Online average monthly churn came in at 2.9%, down from 3.2% in Q2 of FY24. This is the lowest rate that we have ever reported. We saw 7% year over year growth in the upmarket as we ended the quarter with 3,933 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 31% of revenue, up from 29% in Q2 of FY2024.

Speaker 3

Our trailing 12 month net dollar expansion rate for enterprise customers in Q2 came in at 98%. The number of enterprise customers at the end of Q2 was approximately 191,600. Please note, this metric has diminished in value over time as we focus on upselling existing customers and landing larger prospects with Zoom Phone, Zoom Contact Center and other new products. Our Americas revenue grew 3% year over year, while EMEA was flat and APAC declined by 2%. On a constant currency basis, APAC grew 1% and EMEA declined 1% year over year.

Speaker 3

Moving to our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, acquisition related expenses, net gains on strategic investments, net litigation settlements, and all associated tax effects. Non GAAP gross margin in Q2 was 78.6% as compared to 80.3% in Q2 of last year, mainly due to investments in AI as well as upgrades to our data center backbone. For the full year of FY 'twenty five, we continue to expect our gross margin will be approximately 79% before improving towards our long term target of 80%. Non GAAP income from operations came in at $456,000,000 exceeding the high end of our guidance of $420,000,000 This translates to a 39.2 percent non GAAP operating margin for Q2 as compared to 40.5% in Q2 of last year. Non GAAP diluted net income per share in Q2 was $1.39 on approximately 314,000,000 non GAAP diluted weighted average shares outstanding.

Speaker 3

This result was $0.18 above the high end of our guidance and $0.05 higher than Q2 of last year. Turning to the balance sheet. Deferred revenue at the end of the period grew 3% year over year to $1,410,000,000 The growth was roughly 2 percentage points higher than the growth rate provided last quarter, partially due to the continued refinement of discounting practices as well as lengthening building terms. For Q3, we expect deferred revenue to be up approximately 5% year over year. Looking at both our billed and unbilled contracts, our RPO increased 8% year over year to approximately $3,780,000,000 We expect to recognize approximately 60% of the total RPO as revenue over the next 12 months, up from 59% in Q2 of last year.

Speaker 3

Operating cash flow in the quarter grew 34% year over year to $449,000,000 Free cash flow grew 26% year over year to $365,000,000 Our operating cash flow and free cash flow margins expanded to 38.7% 31.4%, respectively. The year over year improvement in our cash flow metrics is due to higher collections from increased billings, higher interest income, and a prior year legal settlement. We ended the quarter with approximately $7,500,000,000 in cash, cash equivalents and marketable securities, excluding restricted cash. Under the $1,500,000,000 share buyback plan, in Q2, we purchased 4,800,000 shares for $288,000,000 This was up from 2,400,000 shares for $150,000,000 in Q1. Turning to guidance.

Speaker 3

For Q3, we expect revenue to be in the range of $1,160,000,000 to $1,165,000,000 which at the midpoint represents approximately 2.3 percent year over year growth. We expect non GAAP operating income to be in the range of $438,000,000 to $443,000,000 Our outlook for non GAAP earnings per share is $1.29 to $1.31 based on approximately 314,000,000 shares outstanding. 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 $4,630,000,000 to $4,640,000,000 which at the midpoint represents approximately 2.4% year over year growth. We expect our non GAAP operating income to be in the range of $1,790,000,000 to $1,800,000,000 representing an operating margin of 38.7% at the midpoint.

Speaker 3

Our outlook for non GAAP earnings per share for FY 'twenty five is $5.29 to $5.32 based on approximately 316,000,000 shares outstanding. With the strength in free cash flow in the first half and increased outlook for operating income in FY 'twenty five, we now expect free cash flow to be in the range of $1,580,000,000 to $1,620,000,000 for the full year. Thank you to the entire Zoom team, our customers, our community and our investors for your ongoing trust and support. David, please queue up our first question.

Operator

Thank you, Kelly. 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. And our first question will come from Meta Marshall with Morgan Stanley.

Operator

Meta?

Speaker 4

Great. Thanks so much. Maybe just a quick question for Eric. Just where are you seeing kind of the most interest in the AI companion products or kind of the most usage? And just how does it inform how you're kind of looking to invest going forward?

Speaker 4

Thank you.

Speaker 2

Yeah. Great question. I think, first of all, I want to share with you, and our customer really like Zoom AI campaign. You know, first of all, it works so well. Secondly, at a no additional cost.

Speaker 2

Not like some of our other, you know, vendors got to charge customer a lot. And in our case, this is part of our package. So in terms of the feature set and, you know, we introduced the AI companion, you know, a while back. Right? So I think you look at almost every product in the Zoom meetings, phone, team chat or Viber everywhere.

Speaker 2

Right? So imparted by AI companion. Look at each product. You take a meeting, for example. Right?

Speaker 2

For sure, the number of use cases like a meeting summary. Right. And we keep improving that quality like in the action item and meeting summary are getting better and better. Like in July, we had another upgrade and quarter wise, even better than previous deliveries. Right.

Speaker 2

And also and we also leveraged our AI companion, right, to empower our business services. Take a contact center, for example. I just gave you a few features we delivered in Q2. Like we leveraged AI to focus on expert assist, you know, a few features, you know, like, you know, automatically and the engagement disposition and automatically wrap up notes. And also, you know, for your next action as well, all those AI features are empowering our business services.

Speaker 2

I just use again, use content center as one example. Right? So we look at all every service, every features, think about how to leverage AI companion to improve our product experience. That's why we're, very excited and a lot of new features. And also, you know, we will be available in next few months quarters.

Speaker 2

And also, you know, October, we have a Zoomtopia. We have been announced a bunch of AI companion enhancements.

Speaker 4

Great. Thanks. Looking forward to it.

Speaker 2

Thank you.

Operator

Okay. Our next question comes from Arun Bahatiya with William Blair.

Speaker 5

Hi. This is Chris on for Arjun. And thanks for taking my question. Real quick, in a similar vein, I wanted to get a better understanding of what's helping drive some of the strong adoption you've seen recently in WorkVivo, where are customers seeing the most value with that? Thank you.

Speaker 2

So in terms of WorkVivo, I think, first of all, it's really helped employee engagement. In particular, given the flexible work, how to seamlessly engage your employees no matter where they are. This is very important. Right? You cannot leverage meetings or phone or chat to do that.

Speaker 2

You have to have a new service. That's the reason why we acquired Workview and before. Right? And that solution works very well. A lot of companies, especially for very large enterprise customers realize the value.

Speaker 2

Right. And, you know, the experience works so well, where it's straightforward UI. And in order to mention, you know, recently, Meta, right, they decided to retire their, you know, the platform, you know, and Zoom is the only platform that supported the platform for migration and for the hybridized. Right? Essentially, when customers look at Zoom platform, on the one hand, communication, on the other hand, collaboration.

Speaker 2

At the same time, engagement become more and more important. That's the reason why Work work Weibo is putting off such a big role. So we closed a lot of new logos in q 2 and quite a few very large deals also in the pipeline as well. So we're very excited about the work Weibo platform. By the way, internally, we're also using WorkWeibo for any announcement, any news, you know, employees just go to the WorkWeibo interface rather than go to the emails or chat messages is really not scalable, not friendly either.

Operator

Okay. Our next question comes from William Power with Baird. William?

Speaker 6

Okay. Great. Thanks. And Kelly, thanks for all the great help here over over the years. So we'll still have it for a little while though, which is great.

Speaker 6

I want to start, I guess, on or macro, right? I mean, that's still kind of center stage have been kind of a new concerns over the health of the consumer. And so I guess I wondered within the online segment, if you could comment on expectations and kind of what you're seeing real time in the market. I mean, the churn rate suggests that things are going relatively well there, at least okay. But kind of what's baked in from a consumer macro standpoint.

Speaker 6

And then the other side of that is just be great to kind of hear what you're seeing on the enterprise in terms of sales cycles, down sells on the video front, etcetera. Thanks.

Speaker 3

Derek, do you want to say anything generally first?

Speaker 7

You want me to dive in?

Speaker 2

Just go ahead. Yes. Thank you.

Speaker 3

So in terms of enterprise, we continue to see growth there and that's you can see that reflected in our guidance for the year. We've had a lot of stability in terms of our retention rates. And this is going to show up eventually in our net dollar expansion that we expect to start to reaccelerate as we come to like the middle of next year. And if you when you have a chance to really look at the guidance, right, you'll see that we are forecasting, as we said, that Q2 would be the low point this year in terms of year over year growth and we would start to reaccelerate in Q3. And that's what's reflected in our guidance, which we're all very excited about.

Speaker 3

In terms of online, as you noted, we see ongoing improvement in our retention rates there, which I think is reflected about all the great progress we're making in the platform, including all of the Zoom AI companion features that Eric just talked about, which are included for our online customers as well that are paying. And so that's been really great to see. I would say the one area that we've seen some headwinds, which is consistent with peers, is in SMB and like the small customers. We've certainly seen some some overall concern about the economy there. But it's pretty close to being in line with what we're originally forecasting for the full year.

Speaker 3

So we're just keeping a very close watch on that.

Operator

Okay. Thank you. Our next question comes from Citi Panagrahy with Mizuho.

Speaker 8

Citi? Hi. Can you hear me?

Speaker 7

Yes. Hi, Sifu.

Speaker 8

Great, great. Thanks for taking my question. And Kelly, it's great working with you. So my question about contact center, it's good to see some traction in the contact center side, but we're hearing from your peers about the macro pressure they are seeing in this market. So how do you see the Zoom contact center features and capabilities compared to your competitors?

Speaker 8

Like what's helping you win against them? And then the question like when should we expect contact center to be a material revenue contributor?

Speaker 2

Yes, I can start with Kelly, feel free to chime in. I think that's first of all, you look at the, you know, the key wins in Q2, right? And we closed the single largest deal in Q2, right? Look at it over the past few quarters, right? So we're making very good progress.

Speaker 2

Look at the large deals, like in q one, if I recall correctly, we closed around 90. And then the q two closed, like, 117 and the large deals. Right? And the reason why customer, they truly trust Zoom because, you know, some customer, they already, you know, our customer for for for a long time and they know we want to innovate together with our customers, like our innovation speed. They like all those features, in particular, some of the features, AI features, we deliver much faster than any of our competitors.

Speaker 2

And also, it not only just the core contact center offering, but also we also came up with our came up with our own workforce management, quality management, not like some other vendors. They had to, you know, and resell other solutions in the integration, not a stimulus. Right. From a customer perspective, realize we're very, very serious about the content center and official side is great. And also the integration with our you know, other, you know, the u UC platform also is very similar.

Speaker 2

And plus and the feedback, especially for our customer, they did a POC. After they test Zoom content center, realize, wow, it works so well and so powerful. And that's the reason why we're gaining momentum. And I think in terms of feature side, we can't you know, we have higher confidence. You know, we we do not lose the customers because feature side.

Speaker 2

So

Speaker 3

And remember, even now with our new pricing tiers that we've added in, we are still very, very price competitive against everyone else in the market. So from a total cost of ownership perspective, when you look at it combined with this modern the most modern architecture out there, I think it's a very compelling reason for our customers to switch.

Speaker 2

And also another thing is every time we made a commitment, we did deliver. That's another way to build trust with that confetti wrap in q2 and the PCI compliance and so on and so forth. Right? We didn't deliver. So Okay.

Speaker 9

Thank you, Steve.

Speaker 7

Thank you, Cindy.

Operator

Our next question comes from Ryan McWilliams with Barclays. Ryan?

Speaker 10

Hey, thanks for taking the question. So now that you're seeing more adoption, Michele, of Zoom Companion, how do you think about the cost of providing these generative AI features and capabilities? And do you think Zoom could eventually charge on a usage basis for power users of the generative AI capabilities? Just trying to weigh cost versus revenue opportunities here. Thank you.

Speaker 2

So that's a great question. And our philosophy is we always look at everything from a customer's perspective. Right? Especially for for, you know, given the macroeconomic environment. Right?

Speaker 2

So every company tried to, you know, save the money, consolidate the cost and so on and so forth. I I think we I do not think we should have tried a customer for AI companion. I mean, you know, when we launched AI companion, right, so we already announced, you know, we do not want to try to customer. However, that's for the workplace, you know, for the business services like a contact center, all those new offering. And I think for sure we are going to monetize, you know, as I mentioned in the previous, you know, earning costs, but new, new solutions or the business services, you know, AIC, I think we are going to charge.

Speaker 2

They are combining. Right? But the workplace, you know, and, you know, our call, you see offering and a collaboration offering with the normal to charge. You know, as I I want to see, you know, really appreciate our AI team's great effort. Right?

Speaker 2

And, you know, focus on the quality, focus on the cost reduction and so on and so forth. I think, you know, that's the reason why some customers look at our offering. You look at the total cost of ownership in terms of support cost, AI cost, and also in the product experience. Customer realize, wow, it's better double down on Zoom deployment. And it's, that's the reason why, you know, we're going to, going to, you know, continue continue winning.

Speaker 2

So

Speaker 10

And then, Kelly, maybe just on gross margins, like the impact of generative AI and maybe what you can do to alleviate some mess up there.

Speaker 3

Yes. I mean, we're guiding to 79% for this year, which we feel reflects the prioritization of AI, but also the very strong discipline that we continue to apply. And we are holding to our long term target for gross margins of 80%. But of course, we think at this point in time, it's very important to prioritize these investments as they really set us up for future growth.

Speaker 10

I definitely think it makes sense to focus on that first. Excellent. Thanks, guys.

Speaker 2

Yes. Just one more thing. I also want to give a credit to our DevOps team. On the way hand, for sure, we are going to buy more and more GPUs, right, and also leverage that. However, our team tried to save the money from other areas, fully automated and so on and so forth, right.

Speaker 2

So that's another way for us to save the cost, right, to make some room for AI.

Speaker 10

Appreciate it. Thank you.

Speaker 7

Thank you. Thanks, Ryan.

Operator

Okay. Our next question comes from Tyler Radke with Citi. Tyler?

Speaker 2

Tyler, are you there?

Speaker 9

Yes. Can you can you hear me okay?

Speaker 3

Yeah. Hi, Tyler. Yeah.

Speaker 9

Hey. Hey. Good good to see you. Thanks for taking the question. Kelly, I I'm wondering if you could just it was great to see the stabilization or actually the the record high in terms of the online renewal rate.

Speaker 9

I'm curious if you could speak to the new business side of the equation. And I know Wendy and team have been doing some initiatives to drive improvements there. But how do you sort of see the new business side of the equation relative to how you were thinking about it a couple of quarters ago?

Speaker 3

Yes. So, Winnie and her team continue to do a great job of adding features, looking for additional offerings to continue to expand our growth there. I think in terms of our quarter, we certainly saw growth and are very pleased to be able to raise our guidance across the board. The one area that we have seen some headwinds, which I think is very consistent with what you're hearing from peers, is in the SMB and the really small business area because everybody is concerned about the future of the economy and being very thoughtful about buying decisions. With that said, it's roughly in line with where we were expecting coming into the year, which is why you've seen us continue to execute against our guidance and be able to raise going forwards.

Operator

Okay. Our next question comes from Parker Lane with Stifel. Parker?

Speaker 11

Yeah, guys. Hi, this is Jack on for Parker. Congrats on the nice quarter. I wanted to touch on that large win in the contact center. What kind of initiatives was this customer looking to accomplish and why did they ultimately choose Zoom?

Speaker 11

Thanks.

Speaker 2

But I think for sure, this customer, they evaluated multiple and a contact center offerings in the market. And, you know, they really want to understand a road map and architecture, especially your AI initiative. Right? And so and, you know, given the the POC, right, they invited multiple solutions and Zoom Zoom excels. And when it comes to comparing against the other vendors, feature side, AI and the price and the, you know, the brand recognition.

Speaker 2

And also, again, they really trust our team. They know we always innovate together with the customers. And this is happening before, like the the Zoom phone as well. And ultimately, it is a voice on to the it voice down to the trust. They know actually we we can innovate.

Speaker 2

We innovate faster. We can innovate it together. And given all the features we promised like before, we didn't deliver. And it's really like the Zoom contact center. It's not like other legacy solutions.

Speaker 2

Right? We're slow to move. We're saluting Bruce AI. We built a new solution with a modern architecture. This is much better experience.

Speaker 2

So and why not? So and I pick up Zoom. So, yeah.

Operator

Okay. Thank you. Our next question comes from Michael Funk with Bank of America. Michael?

Speaker 12

Hi. Good evening. Thank thank you for the questions. And, Kelly, thank you again for all the help over the over the years. I know I'll see you quarter as well.

Speaker 12

Another question on on contact center, if I if I can, just clarification. The recent wins, are they more skewed towards internal or external contact center? So meaning employees versus customers?

Speaker 2

For external, primarily external, right? They use that to engage with their customers and their partners, right? When we launched many quarters ago, right, some of the customer use our contact center for internal, you know, IT help desk. But now, you know, majority just for the the excellent office and for for the support team, customer engagement team. So

Speaker 12

That's very helpful. Thank you, Eric. And then, Kelly, I think you mentioned earlier this year when I met with you that you expected contact center growth to ramp similar to phone growth, that that was a good precedent for, growth expectation. Are you growing above those expectations for contact center or in line?

Speaker 3

We're in in line with that. So it was it hasn't changed dramatically. I mean, we're very pleased with how both phone and contact center are continuing to drive growth, but it's more in line with what we had expected.

Speaker 12

Great. Thank you, both.

Speaker 2

Yes. Thank you.

Operator

Thank you. Our next question comes from Mark Murphy with JPMorgan.

Speaker 13

Hey, thanks for taking my question. Arty on here for Mark Murphy. And Kelly, thanks for all the help you've provided us. Mhmm. One question I have is, when you're looking at Zoom AI Companion, we've heard a lot of great things in the field from customers kind of comparing it to other products that are offered out there.

Speaker 13

Can you kind of remind us about how you guys think about tracking success with the product internally given that you don't kind of charge for it directly beyond having millions of people using it? Is there any way you track it, whether it's utilization, improvement and retention, anything along those lines?

Speaker 3

Yeah. The metric that we've been talking about on here is account activation. So looking at how many it's not individual users, it's actual customer accounts that have activated it. And for you can imagine for larger enterprises, there's usually an approval process that we go through they go through, but we watch that. And then internally, we're watching things like the number of meeting summaries produced.

Speaker 3

So some of the other like usage metrics is how we're evaluating usage and success.

Speaker 2

And also very often, we never have EBCs with our customers. And also they share the stories, right, how Zoom AI combining like it was very accurate summary, action items are helping their employees' productivity as well. And yes, so a lot of very positive feedback about adopting Zoom AI combining.

Speaker 13

That's great to hear. Thank you.

Speaker 2

Thank you.

Operator

Okay. Our next question comes from James Fish with Piper Sandler. James?

Speaker 14

Hey guys, Kelly, it's been great working with you. And my question is more directed at you. You had mentioned here, we're talking about 98% trailing 12 month retention rate. And it sounds as if we're starting to see the bottom of that. In fact, our math would imply you're actually above 100% today on the end period.

Speaker 14

So can you break down what you're getting across expansion mix between upsell of seats and if you are starting to see upsell of seats again, across meetings or other products, any pricing changes, adoption of other products like phone or contact center at this point in terms of how it's impacting that expansion. And I get rounding is involved, but should we not be interpreting that that up market is accelerating at this point, but similar to what we saw from a dollar perspective? Because if you run the math there, it would suggest like 9% potentially if you just use the absolute number.

Speaker 3

Yes. So when you think about the way that we're thinking about looking forward, certainly the growth for the back half of this year and into next year is being driven by the upmarket, very specifically our direct segment, but even within that segment, the upmarket portion of it. If you look at the growth rate of our metrics with customers with greater than 100 ks trailing 12 months, you see that's growing at 7% year over year, which is higher than our overall revenue growth rate, which is a good indicator of that. And so what we see is similar to what we do the end quarter calculation. We've started to see stabilization in our net dollar expansion, and we know that runs ahead of our external reported metric.

Speaker 3

And that's why I said kind of middle of next year, we expect that to start reaccelerating again. And that's being driven by the ongoing performance of Zoom Phone, contact center. Obviously WorkVivo is sometimes an add on. Sometimes those are brand new customers that are coming in. And I would say, I don't know that what we've I mentioned earlier, we've seen stabilization in our retention rates in enterprise as well.

Speaker 3

So that's good in terms of even if seats aren't being added for meetings that we're starting to see some stabilization there in terms of renewal rates from customers.

Speaker 14

Helpful. Thanks again.

Speaker 2

Yes.

Operator

Okay. Our next question comes from Peter Weed with Bernstein. Peter.

Speaker 7

Hi, Peter.

Speaker 15

Thank you. No, boy, this is not gonna be very pretty if I'm on that.

Speaker 3

There you go.

Speaker 15

There we go. Now you should have me in a normal mode on my camera. Yes.

Speaker 3

You look great.

Speaker 15

Hey, thank you very much. I appreciate it. And Kelly, we will miss you. I mean, you've been very open and honest with us over time, and it's been very helpful. I'd love to follow-up that last question on expansion.

Speaker 15

And I think you've been talking about getting to stabilization about now. And kind of when we unpack that number, at least in our model, it does look like on a quarter over quarter basis, the up market definitely saw some strength, whereas the kind of down market was a little bit flatter, which I think historically has always been the case because there's a little bit of cannibalization that comes out of that going into the up market. When you look forward from here, where are you seeing, I guess, those kind of early kind of accelerations going on? And how do you think about those kind of escalating over the coming quarters? Is it the type of thing where like we can start to see this building on itself like quarter over quarter or you just said middle of next year, which makes it seem like this is like one step up and then you expect it to be flat?

Speaker 15

How is that kind of shaping up?

Speaker 3

So let me clarify a couple of things. So what's going to stabilize and start to grow again in the middle of next year is the net dollar expansion rate very specifically. That's because we're on this it's a trailing 12 month metric. What we're seeing in terms of revenue when you look at the guidance is Q2 was, as we forecast, the low point in year over year growth. And now given the strong contribution we're seeing from contact center, from phone, from Work Vivo, we are guiding to reaccelerating growth starting in Q3.

Speaker 3

And that combined with this stabilization in our retention rate in enterprise and ongoing improvement in online, all of that is what's leading to this reacceleration, this strength that we see in the future.

Speaker 15

And when you kind of look at the kind of underlying components then that are kind of driving that strength, I guess it's probably not seats. It's many of these additional, you know, I guess both products and inversions that have been pushed into the market. When you think about the balance between those, you know, getting people to sign up for 1 versus adding a contact center, these types of things, give us some color on the contribution of both of those as this kind of acceleration kind of moves forward.

Speaker 3

Yeah. We do see expansion, land and expand being a motion that we see. Of course, historically, it's been the motion we've seen for meetings, but we also see it for phone. We see it for contact center as well as especially as we keep adding more. Eric touched on this, but we've really expanded the features and functionality on contact center that allow it to really serve externally.

Speaker 3

So things like PCI compliance and FedRAMP and all the social integrations, which are a necessary component for any company to talk to its external customer base. And that's what's really led to some of this acceleration that we're seeing in contact center.

Speaker 15

I appreciate the additional detail. Thank you, Kelly.

Speaker 3

Yes. Thank you.

Operator

Okay. Our next question comes from Peter Levine with Evercore. Peter?

Speaker 3

Hi, Peter.

Speaker 16

Hi, Eric. Thank you for taking my question. Maybe just on capital allocation, Eric or even Kelly, if you think about sit down and think about strategy and you want to retain your competitive advantage, you have $7,500,000,000 in cash. We've seen you move into contact center phone, your productivity apps as well. What's the best way for investors to think about how you plan on deploying that capital?

Speaker 16

You have the buyback in place, but it's been a while since we've seen any larger activity, but maybe help us understand the strategy in terms of what you're thinking in terms of to help reaccelerate top line if it's new product, is it tech? Just maybe help us understand how you're thinking about that.

Speaker 2

Yes. So from a high level, so we look at everything from a customer perspective. Right? Quite often, when we talk about innovating together, right, sometimes customer, they really they better needed this feature. And take a work vehicle, for example, right, customers say, yeah, I really like employee engagement tools.

Speaker 2

We know we cannot build that in a timely manner. We have to go through the M and A. And as we look at our platform play and also plus AI, plus a billing services, There's so many opportunities out there. I do not think we can build everything organically even if we want to, right, sort of what a culture before. But now we are more aggressive.

Speaker 2

Got it to, hey, all too quickly and added those new services or features, right, to beef up our existing offering. And that's just kind of one of the top priorities here we're working on. And because especially given the AI era, right? And you have to move faster. I think in my view, it's more like a loss of M and A opportunities down the road.

Speaker 2

So and that's kind of our strategy. So

Speaker 16

Kelly, if you're willing to share a number with contact center, can you share like a revenue number or at least the target in terms of because when phone hits 10%, you gave us that milestone. Is there an internal plan on when you think contact center will hit 10%?

Speaker 3

When we hit 10%, we, of course, will start disclosing it. But remember, it was in, like, Zoom Phone's 5th year of its life, I think, before it hit that metric. And contact center is, what, in its 2nd year of life? So while we're thrilled with its performance, we aren't quite yet it's going to be a while before it comes to a stage where we would be disclosing the percentage of revenue. That's why, for now we're disclosing customer count and giving you other metrics around like the top 10 being displacements, trying to give you color about what we're seeing in the market, but it'll be a little bit before we get to that metric specifically.

Speaker 16

Thank you very much.

Speaker 2

Yes.

Operator

Okay. Our next question comes from Rich Magnus with Wolfe Research. Rich?

Speaker 17

Hey, guys. It's Rich on for Alex. Just wanted to come back to the large custom ads for contact center you were highlighting and the top 10 wins being displacements. You said 40% were from legacy migrations, so of the 6 that were not replacing the 1st gen solutions, what were the biggest drivers of those wins? Was it pricing, AI functionality or something else that we're missing?

Speaker 15

Thanks.

Speaker 3

So I just want to be super clear about it for a second. So the top 10 wins, all were displacements. 6 of them were replacing on prem existing legacy and 4 were replacing other cloud providers. So I think against all of them, I mean, Eric, you feel free to chime in now, but it just highlights the modern architecture, that contact center that's built with AI at its core from the very beginning.

Speaker 2

And also, Rich, believe it or not, actually, you know, quite often in customer mission, the stability also plays a very important role because in the context of context, and it's very important when customer engage with their customers, you have a very stable. Right? And some of wins customers, they just number of things, they just do not like the stability from other solutions. Right. And those they know actually, you know, Zoom always delivers a very stable service with a scalable architecture and so on and so forth.

Speaker 2

And that's also put that also plays a role as well. Right. I think everything together, I think stability, modern architecture, pricing, AI and faster innovation, I think ultimately together, you know, well, winning. So.

Operator

Okay. Thank you. Our next question comes from Catherine Trebnick with Rosenblatt Securities. Catherine?

Speaker 18

I'm always late. So are you guys. Good to see you both. So my question has to do with contact center. RingCentral not RingCentral, NICE just released their $5 phone.

Speaker 18

And I was wondering, when you talk about contact center, it's pretty much in this bucket. But what's your pipeline looking for UC and contact center? How is that progressing?

Speaker 2

Yeah. Kelly, feel free to chime in. I can comment on their UC offering. So Yeah.

Speaker 3

Why don't you do that first, please?

Speaker 2

Yeah. So again, you know, I I it's hard to to comment on our competitors' move, right, into the UC. And the time will tell. In my view, that's absolutely a mistake, you know, because how could they compete compete against the others, like Zoom and others. Right?

Speaker 2

We had so many years experience with a greater scalable architecture. This is hard to believe they're having to win in UC space. And so I could be wrong, but I know I have a high confidence they are not going to win in UC space. So because a lot of the investment in technology features, integration and scalability stability, again, I do not believe that. So

Speaker 3

Yes. And we see contact center driving new leads for contact center driving need and desire for Zoom phone and we see it come the other way as well, Zoom phone driving. We talked about this in the prepared remarks about this Better Together and that is really inherent with what we're seeing across the platform. And Zoom AI Companion, being able to leverage all of that across the entire platform just brings so much power to it that I think you're going to continue to see the ongoing combination of those two products and the rest of the platform be very strong.

Speaker 18

So just in essence, back to the UC piece, there was no disruption whatsoever even though it was a $5 price.

Speaker 2

Even for $4 a lot in your customers say, why do I want to take a risk before something new? And it's more like today, you already have an iPhone and Android phone. You want to introduce a new phone. Who's going to deploy that? Who's going to buy that?

Speaker 2

So that's my opinion.

Speaker 18

No. I had to ask the question. Thank you.

Speaker 2

Yeah. Great question. Thank you.

Speaker 3

Thank you, Catherine.

Operator

Okay. Thank you. Our next question comes from Matthew Van Vliet with BTIG. Matthew?

Speaker 7

Hey, guys. Can you hear me? Yeah. Hey. It's Spencer on for Matt.

Speaker 7

Thank you for taking our question and congrats on the quarter. I apologize if this was already asked, but how are the AI products and the key functionalities driving expansion with existing customers? How much of it is like premium tiers or upselling to premium tiers of the existing footprint versus selling to new phones, contact centers or just other cross selling products? Thank you.

Speaker 2

I think if you look at an existing, you know, the it looks like installer base, right, for the workplace customers, right, they look at the value. They see they already use Zoom for a long time, like experience. We keep adding more and more value to customers. Guess what? At a no additional cost.

Speaker 2

You know, this essentially, you know, with a long term of trust. They know Zoom, they can trust. Right? And all like some other vendors, hey, you use our free service. Guess what?

Speaker 2

If you're stuck with that platform, they're going to increase price with all the features. That's not our philosophy. Right? So that's for workplace part. On business services, you know, like, take again, take a contact center, for example.

Speaker 2

AI, a company is a key differentiation because the customer trust our AI feature set, as I mentioned, right, every quarter we release some AI features and to to to kind of, you know, and innovate. Right? And I think that part in all free, we are we are going to charge as well. Right? You know, on the one hand, we wanted to add more value to existing customers.

Speaker 2

On the other hand, we can try to customer with some, features for building the services because those features customer really need and also the part of the offering as well.

Speaker 7

Thank you, guys.

Speaker 2

Thank you. Thank you.

Operator

Our next question comes from Samad Samana with Jefferies. Samad?

Speaker 19

Hi, good evening and thanks for taking my questions. So maybe first just on CCaaS, is there anything you can give us in terms of the mix of those 1100 customers? How many of those are maybe like 100 plus deployments versus under that? Just any sense of SMB versus enterprise in the mix there? And kind of related, what's the attach rate of CCaaS into the 100 ks plus installed base that the company has?

Speaker 3

Let me think about this. So we've certainly seen growth in the 100 ks customers for contact center. We're up to 117 that we disclosed. So you can see that they're moving into that realm for sure. And we've been working in the channel and working with partners to also think about how we help these customers with their digital transformation.

Speaker 3

In terms of the disbursement across that, the size of our deals is what I would say is they are definitely getting larger. They're getting larger for a couple of reasons because as we talked about this added functionality, allowing them to use it externally, as well as we talked about this either last quarter or the quarter before that with the introduction of the pricing tiers, if you remember, we started with 1 pricing tier. We eventually added 2 more. And the AI agent assist, like Eric was speaking about earlier, is in the highest tier. We actually saw our ASPs for contact center almost double quarter over quarter because it's such a premium feature.

Speaker 3

And when I looked at the Q2 deals, the majority of them were purchasing in 1 of the top 2 tiers. So all of that is contributing to what I would say is not only expansion in terms of seat count, but expansion in terms of value being derived from the product.

Speaker 19

Got you. And then maybe just on the online retention, it's great to see that improvement there. I'm curious how much of that is due to either the new features that you released versus moving further away from the tightening of the grace period and it's even better than it was before that slight uptick last quarter, right? So is this like the new durable assumption that we should make? Is that pretty reasonable or just how are you thinking through that?

Speaker 3

Yes. So I mean, this is a great question. I get this question all the time where I can turn, keep getting better. I will tell you that we are modeling it to stay at about 3%. I think that's a really positive rate.

Speaker 3

But we continue to see improvements on the platform. And I think that's what you're seeing in this quarter, because we did see a little bit of the pull forward, if you will, last quarter for the change in the dunning period, as you mentioned. But this is a clean quarter, right, meaning that it should really reflect. And if you remember historically, Q2 is a larger typically a larger seasonally high churn period because of summer holidays. Typically for online, we see higher churn rates in Q2 and in Q4 because of summer and holiday breaks, winter holiday breaks.

Speaker 3

And we don't put friction in the cancellation cycle because we want customers to use the product as they need. So I think it's very positive to see this down, this record low churn rate in a seasonally high quarter.

Operator

Yes. Thank you. Our next question comes from Matthew Harrigan with Benchmark. Matthew?

Speaker 14

Thank you. Are you seeing anything in the broad sweep of AI regulation in the U. S. Or Europe that you think can dampen innovation? It sounds like you've modulated some of your data set gathering activity in Europe in response to some political concerns.

Speaker 14

What's your view there?

Speaker 2

I think it it comes to AI. We take a we are taking a very response, you know, response to save approach. Right? That's the reason why when we launched the AI companion, we already mentioned we are not going to use any of our customer data to train our AI modules. Right?

Speaker 2

And we take customer data very, very seriously. Right? And as a customer, they they know that they they trust our brand. They trust what we're doing. And so far, I did not see any impact in terms of, like, regulation.

Speaker 2

And, again, this AI is is moving rapidly. Right? So almost, you know, the the email here, you know, and we all look at the the potential regulation. But so far, impact actually is, you know, to us, to our business, I I think is extremely limited. So even like a meeting summary, and it's a very important feature, customer like that.

Speaker 2

I think we do not use our customer data to train our AI model. And why not keep using that feature? I think there's no impact so far.

Speaker 14

Great. Thanks, Eric. I guess one more brilliant presentation to come from you, Kelly. Thank you.

Speaker 3

Yeah. Thank you, Matthew.

Operator

Our next question comes from Patrick Walravens with JMP Securities. Patrick?

Speaker 20

Hey, this is Austin Cole on for Pat. Just wanted to touch on international, if I'm not mistaken. Kelly, you mentioned EMEA shrank 1% in constant currency and those revenues declined last year as well. And if I just look at where we're at this year, looking like maybe on track to shrink again. Just wondering if you could talk about what your presence is there and kind of how you're seeing demand in those international regions?

Speaker 3

Yes. We've certainly seen the economy in EMEA especially continue to be impacted by the ongoing wars that are happening in that continent. And so that in general, I think all of peers are facing as well. We are we have been in the process. We have a new leadership team that's coming into place there.

Speaker 3

So looking forward to that. And we also are really focused on investing in the region. We just last quarter opened up our London Executive Briefing Center, which is amazing. It's a great opportunity to bring customers and partners and prospects all together and really see the entire expanded Zoom 2.0 story in a beautiful place. And it's really leading I think it's an area that we're really focused on investing and reaccelerating growth.

Speaker 2

Great. Thank

Operator

you. Okay. Thank you so much, everyone. This concludes our Q and A session. I'll now pass it back to Eric for closing comments.

Operator

Eric?

Speaker 2

Yes. First of all, thank you all for asking about all those great questions. We are very, very grateful. And also thank you for every Zumiez hard work, and we are going to continue to innovate. And thank you all for your trust, and I'll see you all next quarter.

Speaker 2

Thank you.

Speaker 3

Bye, everybody.

Operator

This concludes today's earnings release. We thank you all for your participation. Enjoy the rest of your evening. Thank you.

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Key Takeaways

  • Zoom reported Q2 fiscal ’25 revenue of $1.163 billion (up 2% year-over-year), non-GAAP operating income of $456 million (39.2% margin), beat guidance by ~$13 million, and raised full-year revenue to $4.63–4.64 billion with improved operating income outlook.
  • The platform got its most significant upgrade in years with a revamped Zoom Workplace UI, AI-powered enhancements across Meetings, Chat, Phone, Rooms and a webinar service supporting up to 1 million attendees, plus the launch of Zoom Docs to turn meeting content into actionable workflows.
  • Zoom Contact Center now serves over 1,100 customers (+100% yoy), landed its largest new deal in Q2, and saw all top-10 wins displace major vendors (40% from first-gen cloud), highlighting strong “better together” adoption alongside Zoom Phone and AI features.
  • Zoom AI Companion is enabled on 1.2 million accounts, delivering meeting summaries, chat compose, image generation and live translation, and sets the stage for an AI 2.0 phase where the assistant provides contextual insights and task automation across the platform.
  • After a 7-year tenure steering Zoom to IPO and sustained profitability, CFO Kelly Steckelberg will depart post-Q3; Zoom has $7.5 billion in cash and ongoing share buybacks while it conducts a CFO search.
AI Generated. May Contain Errors.
Earnings Conference Call
Zoom Video Communications Q2 2025
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