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spk11: Hello, everyone, and welcome to Zoom's first quarter fiscal year 2021 earnings release. As a reminder, this call is being recorded. At this time, I'd like to turn the floor over to Tom McCallum, head of investor relations.
spk09: Thank you, Matt. And then hello, everyone. Welcome to Zoom's earnings video webinar for the first quarter of fiscal 2021. Joining me today will be 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 on the zoom.com website. Also on this page, you will 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 gap to non-gap financial results. During this call, we will make four looking statements about our market size, growth strategy, our estimated and projected costs, margins, revenue, expenditures, investments, and growth rates, our future financial performance and other future events or trends, including the guidance for the second quarter of 2021 and full fiscal year guidance for 2021, our plans and objectives for future operations, growth, initiatives, or strategies, and the impact of Zoom's business from the COVID-19 pandemic. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, and which we discuss in detail in our filings with the SEC, including today's earnings press release and our latest 10Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar. And with that, let me turn it over to Eric.
spk20: Matt, I think Eric's mic, there you go. Thank you, Tom. First of all, thank you all for your time today. I still remember the first time when we had an earning call last year, it was around less than 1,000 participants. Today, we have over 3,000 participants. Thank you all for your time. And I hope you are doing as well as is possible in this unique moment around the globe. To the frontline workers, we thank you for your courage and the tremendous sacrifices you are making to keep us healthy and our community running in this pandemic. Everyone at Zoom appreciates all your incredible work. COVID has brought pain for many, in particular vulnerable communities. The Black community in the United States has also recently experienced shocking and senseless loss. To our communities and customers, especially those in the black community, Zoom is standing with you, not only today, but also into the future. Nearly 10 years ago, we created a Zoom to build a better simpler and more efficient video communications platform. Today, I am proud to see that our platform is serving a critical role beyond our original vision in enabling communication and collaboration for businesses, schools, consumers, and the global community to stay connected and operational during the COVID-19 pandemic. Navigating this process has been a humbling learning experience, giving us a newfound appreciation for what it means to be a video communications technology provider in times of need. And work from home and social distance initiatives have meaningfully accelerated adoption and traffic on the Zoom video communications platform. We have seen many use cases, not only from enterprises to maintain worker productivity as part of the business continuity plans, but also from first-time consumer users for personal and social use to connect with friends and families when physical gathering is not possible. Let me share some metrics that illustrate the demand we experienced in this past quarter. Customers with more than 10 employees grew 354% year over year as we deployed millions of licenses for new customers in the quarter. When new banking customer deployed approximately 175,000 new Zoom enterprise licenses in the quarter. Usage by customers in the global 2000 grew over 200% sequentially. We peaked at over 300 million daily meeting participants, free and paid, joining Zoom meetings in April 2020. up from 10 million in December 2019. Currently, we continue to see elevated levels of participants, even as governments around the globe have begun to see same place restrictions. We had an approximately 20-fold increase in our metric of annualized meeting minutes run rate, which jumped from $100 billion at the end of January 2020 to over 2 trillion meeting minutes based on April 2020's run rate. Scaling capacity to meet this incredible increase in traffic and use cases while providing uninterrupted, reliable, and high-quality services for our customers have been a tremendous undertaking for our team. And we could not have done it without relying on our partners. When the pandemic crisis started, our own data centers could not scale fast enough to handle the unprecedented traffic. Fortunately, some of the top public cloud providers were there to help. Immediately during the crisis, our long-time partner AWS and its CEO Andy Jassy enabled us to meet this rapidly increasing demand. As our demand increased and we had limited visibility into the growth, AWS was able to respond quickly by provisioning the majority of the new servers we needed. So sometimes adding several thousand a day for several days in a row. In April, our customer Oracle also showed great support to help us. Not only did Larry Ellison record a great video to encourage our team to do the right things for the world, but also offered Oracle Cloud support. We also provisioned a number of servers in the Oracle Cloud as the demand for Zoom continued to increase. We are so grateful for their partnership and their responsibilities to provide capacity during this time. While the COVID-19 pandemic has expanded our market opportunities, it also brought us many challenges. Prior to the pandemic, zoom was primarily built for and used by large enterprises and institutions during the crisis with good intentions we opened our platform to unprecedented numbers numbers of first-time users without fully considering the challenges it would it would bring you to those who did not have full id support or established protocols for security and privacy like our enterprise customers. As a result, we have experienced negative requests related to meeting disruption, security, and privacy issues. Since these issues emerged, we have transparently and quickly addressed specific security and privacy issues, including enacted a 90-day plan initiative on security and privacy with a weekly webinar for customers to ask me anything. Acquired KBase team to add engineering expertise to build an end-to-end encrypted meeting mode. Also released Zoom 5.0 client with the new security features and enhancement to give customers unparalleled control over their meetings and data. The new release also included the support for AES 256 bit GCM encryption and ability to report platform misuse to Zoom's trust and safety team. During this period of unprecedented usage growth and negative PR, as the CEO of Zoom, I was also facing tremendous pressure and I reached out to the high tech community and received a great support from fellow CEOs and many of them are my mentors and I can't thank them enough for their advice. I'm also deeply grateful to see the strong support from a valued enterprise customers such as the CEOs from Atlassian, Equinix, HubSpot, Okta, PagerDuty, Poly, SurveyMonkey, and many others, both through public statements and video testimonials. With that, our users trust us to deliver the best and most secure video-first communications platform. I believe our results will continue to make us a stronger company for our customers and the global community. Now, let me discuss a few of our happy customers. We are thrilled to welcome Arm Technology to the Zoom family. Arm Technology is at the heart of computing and data revolution that is transforming the way people live and businesses operate. In Q1, Arm chose to deploy approximately 8,000 Zoom meeting license, 800 Zoom rooms, and 9,000 Zoom phones to deliver a one-touch experience to their employees globally. We are also very happy to welcome Baker McKinsey, one of Baker McKinsey's distinguished strengths is their use of cutting edge technologies to help clients overcome the challenges of competing into this economic world. We feel privileged to be the video communication platform of choice for the number one law firm brand in the world. Thank you, Arm and Baker McKinsey. On a final note, we welcome Lieutenant General H.R. McMaster to serve as an independent director on Zoom's board of directors, Melchemy Sankalingram as president of engineering and product, and Damien Hopper-Campbell as chief diversity officer. Bringing their expertise to Zoom will be instrumental as we navigate rapid growth, transformation, and scale. I want to commend and thank our 2,854 employees for what we have accomplished together and for working tirelessly over the past quarter to support millions of participants around the globe. With that, let me turn things over to Kelly. Oh, by the way, I forgot to mention, today is also our CFO Kelly's birthday. So happy birthday, Kelly.
spk00: Thank you, Eric. And this is the best birthday present I could ever have. Hello, everybody. Q1 was an exceptional and pivotal quarter for Zoom. We are grateful for the incredible increase in demand as millions of doctors and patients, teachers and students, businesses and consumers chose Zoom to deliver critical communication and connection in a time of need. It speaks greatly of their trust in the quality and ease of use of our technology platform. We are also proud of our efforts to support our customers, employees, and the global community during the COVID-19 pandemic. In addition to opening up our platform to deliver free services to over 100,000 K-12 schools in 25 countries and millions of people around the world, especially those in highly impacted by the crisis, we have also donated $1.4 million to COVID-19-focused charities and funded another million dollars of stock to launch our charitable fund, Zoom Cares. The key long-term focus of Zoom Cares includes education, social equity, and climate change. Internally, we provided a one-time bonus equivalent to two weeks of pay for all Zoom's non-commissioned employees to offset costs associated with any disruption caused by the crisis. Not only has the world changed since we last reported results in early March, but so has Zoom's market opportunities and growth trajectory. Let me start by reviewing our financial results for Q1, then discussing our outlook for Q2, and the full year of FY21 that has been recalibrated to adjust to the new trends and scale of our business. Total revenue grew 169% year-over-year to $328 million in Q1. This top line result significantly exceeded the high end of our guidance range of $201 million due to the increase in demand and strong sales execution in the quarter. For the quarter, the growth in revenue was primarily due to subscriptions provided to new customers, which accounted for approximately 71% of the increase, while subscriptions provided to existing customers accounted for approximately 29% of the increase. This demand was broad-based across industry verticals, geographies, and customer cohorts. Let's take a look at the key customer metrics for Q1. We continue to see expansion in the Yelp market as we ended Q1 at 769 customers with greater than $100,000 in trailing 12 months revenue, up 90% year over year. This is an increase of 128 customers over Q4. a record number of ads in a quarter. Further demonstrating the strength in the upmarket was the addition of over 500 customers with greater than $100,000 in annual recurring revenue in Q1. This is a one-time metric that we are sharing to provide more insight to our Q1 results. For customers with more than 10 employees, we added over 183,000 in Q1. exiting with a total of approximately 265,000 customers in this segment. Year over year, we added over 206,000 new customers, growing 354%. While this is remarkable growth, our customer segment with 10 or fewer employees also expanded during this quarter, as individuals adopted Zoom for many personal and social uses. As a result, we have experienced a mixed shift of customer cohorts, where customers with 10 or fewer employees represented 30% of revenue in Q1, up significantly from 20% in Q4. In addition, the increase in customers with 10 or fewer employees also shifted our billing mix, as these customers generally pay monthly rather than annually, like most enterprise customers. Our net dollar expansion was over 130% for the eighth consecutive quarter as existing customers continue to support and trust Zoom to be their video communications platform of choice. Both domestic and international markets had strong growth during the quarter. America's grew at a rate of 150% year over year. However, our combined APAC and EMEA revenue grew even faster at 246% year over year, and represented approximately 25% of revenue. International expansion is a key growth initiative for DOOM. Our global brand awareness has spread more quickly and we have expanded into more countries than we had originally planned for FY21. Now, turning to profitability. The increase in demand and execution drove net income profitability from both GAAP and non-GAAP perspective. For my following comments, I will focus on our non-GAAP results, which exclude the charitable donation of common stock, stock-based compensation expense, and related share-based equity taxes. Non-GAAP growth margin for the first quarter was 69.4% compared to 80.9% in Q1 last year and 84.2% last quarter. Although in early March, we originally guided lower based on an increase in usage of our platform, Our growth margin was further impacted by the elevated demand, especially higher levels of free meeting minutes, including those from K-12 schools in March and April. Higher incremental costs also resulted from leveraging the public cloud providers, which was critical to our ability to meet the sudden exponential growth in usage as the crisis spread and governments instituted stay-in-place policies around the world. Moving forward, as we build additional capacity in our own data centers, we expect to gain some efficiencies, bringing growth margins back to the mid-70s and the next several quarters ahead. R&D expense in Q1 was approximately $21 million, up 66% year over year. As a percentage of total revenue, R&D was 6%, which was lower than Q1 last year, mainly due to the strong top-line growth. In FY21, we plan to continue investing in R&D to drive innovation and security functionality, including leveraging the expertise and resources from top security firms. Also, we recently announced the addition of two engineering centers of excellence where we expect to add up to 500 software engineers in the next few years. The new R&D centers in Greater Phoenix, Arizona and Pittsburgh, Pennsylvania will both be located near top engineering universities. Sales and marketing expense for Q1 was $104 million. This reflects an increase of 69% or $42 million over last year with investments to drive future growth. As a percentage of total revenue, sales and marketing was 32%, a decrease from Q1 last year mainly due to strong top-line growth. Overall, the increase in expense is attributable to record sales hiring and higher sales commissions due to strong execution while we saw efficiencies in marketing. We are expanding our hiring plans for the rest of the year to meet the opportunity presented in this new environment. G&A expense in Q1 was $49 million, up 196% on a year-over-year basis. It represented 15% of total revenue up from q1 last year due to higher accruals for telco taxes from higher billings a one-time license payment and external professional services non-gap operating income with 55 million dollars translating to a 16.6 non-gap operating margin for the first quarter this compares to q1 last year's result of 8 million dollars and 6.7 percent margin Again, the higher revenue plus strong execution across all areas were the main drivers of this additional profit. Non-GAAP earnings per share in Q1 was 20 cents on approximately 295 million of non-GAAP weighted average shares outstanding and adjusting for undistributed earnings. This result is 10 cents higher than our guidance and 17 cents higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the quarter was $552 million, up 270% year-over-year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.1 billion, up 184% from $377 million year-over-year. The increase in RPO is consistent with the increase in demand and strong execution in the quarter. We expect to recognize approximately 72% or $772 million of the total RPO as revenue over the next 12 months, as compared to 64% or $240 million in Q1 of last year. We ended Q1 with approximately $1.1 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. In Q1, we had exceptional operating cash flow of $259 million up from $22 million year over year. Free cash flow, sorry, can you go back? Thanks. Free cash flow was $252 million, up from $15 million year over year. The increase is attributable to strong collections from top line growth, higher percentage of monthly contracts, as well as billing started early in the quarter. Looking ahead, we expect to increase capital expenditures for additional data center infrastructure, And as a reminder, we will see the semi-annual cadence of net cash outflows from ESPP purchases to occur in Q2. Now, turning to guidance. As I mentioned earlier, the current environment has expanded Zoom's market opportunities and outlook as the increase in demand propelled us to a higher growth trajectory than originally planned for this year. This required us to recalibrate our original FY21 plan for the new scale of our business. The COVID-19 pandemic adds an unprecedented new variable to our business model, where historical knowledge may no longer apply. Today, as we present our current best estimate of future quarters based on new assumptions of the dramatic shift in our business, we caution that the impact and extent of the crisis and its associated economic concerns remain largely unknown. Significant variations from our assumptions could cause us to modify our guidance. With that, we provide a higher outlook for FY21 based on our view of the current business environment. For the second quarter, we expect revenue to be in the range of $495 to $500 million. We expect non-GAAP operating income to be in the range of $130 to $135 million. Our outlook for non-GAAP earnings per share is 44 cents to 46 cents based on approximately 299 million shares outstanding. For the full year of FY21, we expect revenues to be in the range of $1.775 to $1.8 billion, which would be approximately 185 to 189% year-over-year growth. Let me help provide a bit more context on the assumptions behind our guidance. As I discussed earlier, we have a far higher portion of revenue attributable to new customers with 10 or fewer employees who opted for monthly contracts. Historically, monthly subscribers have a higher churn rate compared to our annual or multi-year subscribers. In addition, as governments start to ease shelter in place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher term rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2. For the full year of FY21, non-GAAP operating income is expected to be in the range of $355 to $380 million. We expect to deliver non-GAAP earnings per share of $1.21 to $1.29 for the full year FY21 based on approximately 300 million shares outstanding. In closing, we executed well in Q1 and are proud of how our team dedicated themselves to support our customers and global community. Thank you to the entire Zoom team, and everyone, please stay healthy and safe. With that, let's open it up for questions. If you have not yet enabled your video, please do so now for the interactive portion of this meeting. Matt, please queue up our first question.
spk11: Before our first question, actually, Eric has asked me to open the mic for him. Eric, you are unmuted.
spk20: Yeah, already muted. Already unmuted.
spk11: Okay.
spk20: Are you okay? Yep.
spk11: Our first question is from Alex Zukin with RBC.
spk16: Hey, Eric. Thanks for taking my question, and thanks for everything you do. You know, you just delivered one of, if not the greatest all-time quarter in enterprise software history. I think you've been given an amazing opportunity with Zoom becoming not just a verb, but really the poster child for enabling remote work. But with that opportunity also comes a question, which is where does Zoom go from here? How do we think about the percentage of your TAM that's been penetrated in the current environment? What are the most exciting incremental growth drivers? Uh, and what do you have an update for us in terms of the long-term vision of your company? Because it seems like the prior long-term vision, you know, we're, we're there.
spk20: And then I've got a quick follow-up. The article is a great, great question. And if you have a time, probably we should spend more time also wanting to get your advice and what's the future. But anyway, I truly believe video is a new voice. Video is going to change everything about a communication, the way for us to work. live and play is completely changed. From that perspective, a huge opportunity. There's a lot of opportunities ahead of us. However, for now, our top priority is how to make sure we always keep our service up because so many people are counting on Zoom to stay connected. Our top priority is to make sure to keep the service up, double down, triple down on the privacy, security issues, And also down the road, we are going to figure out where we are going to double down on the new growth areas. But for now, I think one thing we know for sure is the time is bigger than we thought before, right? And it's how to capture that view of the new time. I think that's something very important. Also, a lot of other new opportunities, our team, we're going to work together, right, to get there step by step. For now, number one thing is, focus on the car and the product and the user experience, make sure during this pandemic crisis, hopefully it can end very soon, they can leverage Zoom to stay connected.
spk09: Next question, please, Matt.
spk11: Our next question is from Sterling Antti with JP Morgan.
spk07: Yeah, thanks. Hi guys. So Eric, maybe a technology question for you. You know, you did your 90 day program and end-to-end encryption really became a big focal point of discussion around security and privacy. You made the acquisition. Can you update us on when you plan to deploy end-to-end encryption? How will it be deployed? And is there actually an opportunity to monetize it perhaps as an upsell?
spk20: Yeah, Sterian, that's a good question. Before I answer to that question, I'd like to take a step back to share with you what's the industry standard for now, like Zoom or other competitors, because this real-time collaboration industry for a long, long time, I think for now, I think most of the vendors, we all use the AES 256-bit, either GCM or CBC. That's a standard. The reason why, if you enable any encryption, guess what? You cannot use a phone to dial in. You cannot support a traditional old legacy hardware, H.3.3 and SIP devices. And plus, the cloud recording also is not available with some limitations. That's why, for now, most of the industry conferencing vendors do not support this feature. However, we believe we no matter what we needed to support that as well advanced feature to give a customer see your meeting is extremely sensitive you don't want to you know zoom know the session key yeah you can enable this feature with the limited functionality you cannot let us the phone to dial in i'm inside of that we think this feature should be part of our offering we do not want to charge you know with a based on the feature, we charge the customer more, that's not like that. So we want to give to at least the enterprise customer or business customer, free users for sure, we don't want to give that, right? Because we also want to work together, say with FBI, with local law enforcement, in case some people they use Zoom for the bad purpose, right? I think we also published a wider paper, I think a week ago, and published it in the GitHub, We got a lot of feedback. And our team, for now, we are working on execution now. So, you know, I think soon we are going to do our release date. You know, for now, we are still reviewing our white paper. So we have confidence this will be a very good feature for our enterprise customers.
spk07: Thank you.
spk20: Thank you, sir. Yeah, you can join us as a beta tester. Sounds good.
spk09: Great. Next question, please, Matt.
spk11: Our next question is from Nikolay Belyov with, Bank of America, Merrill Lynch.
spk19: Kai, can you guys hear me? Yes. Hi, Kai, happy birthday and look forward to chatting with you on Thursday at our conference. My question is, I would like for you guys to provide us with a little bit more context on the guidance. I was wondering what trends you saw in the business during the month of May. And what gives you confidence that those prosumers, the increase in the mix from 20% to 30% are going to stay for the rest of the year? Just trying to get more color around the confidence in the guide.
spk00: So in the guidance, what we have considered, especially around those prosumers, as you call them, the monthly users, we assume that there is... an escalated that the term will be escalated in terms of historical so we've assumed a multiple multiples of what the historical turn rates have been and also we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment with that said um i want to make sure you understand that while we did see an increased growth of monthlies is about half of our sales in the quarter came from monthly subscribers When you look at the sales from our direct sales organization, the percentage of monthly subscribers was consistent with historical. So we didn't see an increase in monthly subscribers in the up market. We saw the same percentage as we have historically. And those typically, you know, the churn in that segment when they're annual or multi-year is a fraction of what the monthly subscribers are.
spk19: And Kelly, in this context, if I may ask a follow-up, billings grew 350% and CRPO grew around 220%. Why the discrepancy here, and what does it mean to revenues, and how revenues flow through from CRPO and Billings?
spk00: So thank you about the question about Billings and RPO. As you know, we don't provide specific guidance around Billings or RPO. Given the fact that it's actually been exacerbated with the growth in the subscribers, They are just very difficult for metrics. They don't apply because of the high rate of monthly billings and subscribers. They're just not good metrics for us. Got it.
spk09: Thank you. Next question, please, Matt.
spk11: Our next question is from Alex Kurtz with KeyBank.
spk01: Yeah, thanks. Zukin's earlier question about growth opportunities, kind of a once in a lifetime opportunity to reimagine investments in new products, new sales coverage. And I mean, just look at your operating income this quarter, next quarter, right? You couldn't have imagined that at the time of the IPO. So as the team and the board look at the next 12 months, you know, is there something that you guys are really laser focused on that you could take all this extra cashflow and reinvest back into the business?
spk20: Yeah, Alex, again, that's a great question. So, you know, even, Before this pandemic crisis, not only do we offer the video conferencing service, but also we have a Zoom phone system. Don't forget about that one. It's also a huge opportunity. In particular, we believe video and voice, those two are going to be converged into one service. That's still a huge opportunity. This pandemic crisis, I would say, on the one hand, accelerated the video adoption. On the other hand, it was brand recognition plus a lot of prosumers, right? A lot of new use cases, like online education, you know, telemedicine, telehealth. For sure, we would like to double down on that. But in terms of specific opportunity on one new service, you know, we are going to work on that in the next several months. And as I mentioned earlier, for now, we needed to make sure still keep having people stay connected. Another thing also we know for sure is the way for us to work in the future is totally different. And how to make sure, you know, focus on the home experience, right? So make sure that you have very consistent experience when you work in the office and work in the home. A lot of innovations will be upon that as well. I truly believe in a lot of opportunities, but we've got to be very careful. You're so right. Where we should have doubled down, where we, you know, may not leave to our, you know, the, the partners to develop those applications or leverage those opportunities upon our platform.
spk01: Thanks. And then a quick question for Kelly. In the areas where they've been lifting the quarantine, the shelter-in-places, have you seen any kind of change in churn in those regions, whether it's in the U.S., Europe, or Asia?
spk00: It's really too early to tell, Alex. We've taken, again, a conservative approach to that, but it's to really tell, as most places, even where they're starting to ease shelter in place, people are taking their time to go back to work.
spk01: Makes sense. Thank you.
spk09: Next question, please, Matt.
spk11: Yes, our next question is from Phil Winslow with Wells Fargo.
spk17: Great. Thanks for taking my question. Two questions. First for Kelly, then one for Eric. You know, Kelly, what do you think about retention? That's something that's come up a lot on this call. What programs do you have in place to make sure that all these users that you've added, you know, stick to the platform? I wonder if you'd talk us through the programs you've had in place. And then also, you know, Eric, what do you think about Zoom Phone in particular, not just retention, but also upsell of Zoom Phone? You know, similar thing, you know, what is going to be the messaging, you know, to customers? How do you think about the potential, you know, a year from now, six months from now, et cetera, attaching a full unified communication suite to that video customer?
spk00: Yeah. So, in terms of retention, first of all, for all of our customers, new and existing, we have a great customer success team that is focused on ensuring training, usage, adoption happen in all of our customers. as well as we are looking for opportunities with our monthly subscribers to put forward offers to them to see if they would like to upgrade to an annual contract that will you know helping them evaluate as well so philip you know back to your second question so you know as i mentioned earlier we believe the video and voice those two are going to be converged into one service you know our you know we our team
spk20: You know, we share our vision, you know, to our existing installer base. You know, take a QM, for example. You know, one of the very large, you know, global pharmaceutical companies, they were our happy Zoom video conferencing customer. In QM, they deployed a Zoom phone, which is our largest phone deal. You know, around 18,000 phone licenses, right? Because they like the one consistent experience. You know, more and more opportunity like that. like call your phone number, one more click, I can upgrade the video with the same experience. I think that's a huge opportunity. Not to mention a lot of enterprise customers, for now, they still deploy on-prem and PBX solution. I think this pandemic crisis will help them to accelerate their migration from on-prem to enterprise, will further boost the cloud-based PBX adoption. So we think that's a huge opportunity ahead of us.
spk17: Great. Thanks guys. And I do appreciate you enabling my kids to still go to school. Thank you.
spk20: By the way, I like your, what's your background?
spk17: Thank you. Thank you. Branding, marketing.
spk20: Yeah. Love it.
spk09: Great. Next question, please, Matt.
spk11: The next question is from Pat Walravens with JMP.
spk13: Oh, great. Thank you. And happy birthday, Kelly. Thank you. So Eric, you started as an enterprise company. Um, but you know, now so many individuals are using zoom to connect with their friends and their families and their classmates. You know, when I go to say goodnight to my daughter at night, uh, I get, I get a lot of daddy. I'm talking to my friends, come back later, you know? So how is that changing your strategy going forward? What's your consumer strategy?
spk20: I think that's a great question. You know, my kids also use Zoom as well for their online classes. I believe, you know, back to the voice, right? You know, the voice, no matter where you are using the voice, like a phone call, right? You know, my kids and myself are in the office, on the way, in the home. That's the same experience. Used to be, you know, we built a Zoom, only enable knowledge workers for business communication and collaboration. But now, given that video conferencing is going to become a mainstream service, the boundary between the consumers or enterprise customers is not that clear anymore. We've got to maintain a very consistent experience. So that's why a lot of features with beautiful customers can be easily, seamlessly used by consumers. However, we've got to make sure, right? For enterprise customers, we already have all those security features built in. How to easily let consumers enable that. This is the challenge we are facing. In terms of opportunity, I do not think we need to have a specific consumer strategy. Our strategy is all for one service. No matter where you are, no matter what you do, no matter which device, it just helps you to stay connected. It's more like a infrastructure service. Now, more like an internet service provider, you cannot say, hey, you are using internet for what? For business collaboration or for consumer? It's the same thing now.
spk13: Yeah.
spk20: That's huge.
spk13: Kelly, if I can ask Kelly a quick question, and thank you, Eric. I know sometimes when you are replacing a competitor and they have an existing contract, you sign up the customer, but then you let them have, you know, however many months are left on the competitor's contract for free. Yep. When you do that, how do you account for that? Does that count as one of your new customers? And does that have any impact on billings or RPO?
spk00: So we do count them as a new customer and under the new revenue standard for 606, the entire revenue gets amortized over the full period, including the free period.
spk13: Okay. Okay. And so, and then, and so would you, that would go into billings too then?
spk00: Yes. We do build them up front.
spk13: And you build them up front. Thank you very much.
spk00: It depends on what their period is, but yes, we're part of it.
spk09: Thank you. Next question, please, Matt.
spk12: Great. Thanks. I just wanted to ask a question on as you go forward with hiring salespeople, has with the influx of new customers, do you change from looking for more gatherers versus hunters? And just, you know, as you look to layer on Zoom phone, is the channel strategy still as important or is an overlay sales team kind of more important going forward? Thanks.
spk20: Yeah, so on the one hand, for sure, you know, we already doubled down on our sales hiring by starting, you know, later last year. I think we made a very good progress in Q1, not only for hunters, BDR, SDR, you know, a kind of executive with those quota carrying reps, but also for the phone, right? So it used to be, look at our video conference service, you know, primarily driven by our direct sales team, but the phone business is very different. That's why we really, you know, shift our, you know, focus, not only for, for direct sales, but also we embrace our partner program, like a master agent, and it really helped us a lot during the Q1. I think we are going to do more and more, you know, on partner deals, on, you know, channel sales program, or on our phone business. I think that, you know, the team is, you know, is working very hard on that.
spk12: Got it. Thanks, and congratulations.
spk20: Thank you.
spk09: Thank you. Matt, next question, please.
spk11: Our next question is from Heather Bellini with Goldman Sachs. Hey, Heather, can you unmute?
spk14: Sorry about that. Look, I just wanted to say, first of all, thank you for the company and with your steering acting the way it did over the last few months, which has been just such a trying time for so many. But not only, obviously, did you enable all of us to stay in touch and working, but just being able to still connect with family and friends. So thank you, I think, on behalf of everybody. My question has to do with your view. I mean, you've been asked a little bit about the Zoom phone cross-sell opportunity here, and I know you touched on it a little bit already, but I'm interested in, again, a little bit about your vision on how you can expand your offerings given how much broader your customer base is now. So I guess the two parts are, what are you seeing in terms of uptake of Zoom phone, is there anything you can share with us about penetration rates or, you know, the seat count that you're at now, or maybe just how you might have seen adoption inflect in the quarter? So anything around that, just so we can see how that's starting to take off given how many more new customers you've added. But also when you look at this evolving collaboration market, what's next for you all? Because you have phone, you obviously have video. So, should we expect a chat service at some point just so we could close the loop on the entire messaging experience? So, any thoughts you have there? Thank you so much.
spk20: Thank you, Hazel. Maybe, Kelly, you can address to the phone questions. I've answered to the second part of the question.
spk00: The primary demand and focus of our new customers and expanding customers in Q1 was really ensuring business continuity, and so they were focusing mostly on the video communications platform. But as our focus for Zoom Phone is to sell into our existing stall base, it now creates a huge opportunity for more sales in Q2 and the rest of this year. So we're really looking forward to that team having an expanding customer base to sell to.
spk20: To answer to a second question, you look at the video collaboration business, as I mentioned, the phone, you add up the phone together, I think it's a huge market. In order to mention, we also have online business. Online business used to be a small portion of our total net MR growth. For now, given the popularity of the video conferencing, a lot of consumers and prosumers, they all use Zoom. You know, for let's say, you know, online, you know, happy hour, online learning, teaching class, it can be, the use case is much more broad. You know, for sure we can monetize that. One thing for sure we know, we are not going to support an advertisement model, right? We are not going to support that. We never wanted to sell customer data. So that's something we know for sure we will not do it. However, in terms of how to embrace all kinds of prosumer-driven use cases, I think that's a lot of ways to monetize. Online subscription, you already see the number. As long as we keep the service up, keep the innovation, I think we are getting more and more online buyers as well. So regarding the new services, I think video voice, that's our company DNA. In terms of a chat message, you know, we also have a built-in chat, but also we really look at everything from a customer perspective. They deployed Slack, you know, this is great. We have a wonderful integration with Slack. It's a great service. And a customer deployed Max of Teams, you know, we also integrated with Max of Teams very well. And some customers, they want to standardize on Zoom platform, okay too. We also have a chat built-in, right? So from that perspective, we are taking a very open, flexible approach and look at everything from a customer perspective. But overall, we are going to laser focus on video and voice, enterprise, business, and consumer, consumer as well. Thank you, Heather.
spk09: Thank you, Heather. Matt, next question, please.
spk11: Yeah, our next question is from Walter Pritchard with Citi.
spk05: Hi, thanks. Question for Kelly. I'm wondering if you could you can hear me okay I'm wondering if you could help us understand on the churn side obviously unprecedented demand for those you know under 10 employee monthly type customers any order of magnitude you can put around the sort of churn versus what it's been historically that you're thinking about in the forecast and then I had one follow-up yeah all I would say is that we're taking a very conservative approach assuming that
spk00: The historic norms don't necessarily apply to this new cohort, both from the magnitude as well as the potential around economic uncertainty. So the way we're forecasting it is using multiples of the historic turn rate.
spk05: And then maybe if you get into the obviously next quarter is going to be just sort of more of what you have this quarter in terms of a full quarter of all the business. But as you think about the quarters beyond that, how do you think about just a sustainable level of new customer ads? I mean, do you feel like what's happened here has pulled forward? multiple years of demand or do you think it has opened up awareness so much to to what you do that um you could actually see higher levels of new customer ads as we get past this uh this big bump up that we've seen with covid yeah i mean we certainly have seen a lot of pipeline creation in quarter in both q1 and in early q2 so that's been positive to see and remember that our
spk00: selling strategy around Zoom Phone as well as Zoom Rooms is to sell into our existing customer base. So this just creates a whole new opportunity around those future products and selling those products in the future as well.
spk09: Okay, thank you. Thank you, Walter. Next question, please, Matt.
spk11: Next question is from Zane Crane with Bernstein.
spk03: Hi, thank you guys. Eric, Tom, Kelly, and everybody at the Zoom team. I just want to say thank you for your corporate leadership and the role of corporate citizenship that we all needed during this time, especially in the things you guys have done in the educational space. I'm wondering, how do you think about balancing the data security and privacy concerns versus ease of use? It seems like that's always a balancing act where if you lean too far one way or the other, you're going to upset one type of customer. And that becomes even more complex now that you're heavily moving into the consumer space. How do you balance that from a technological and user interface perspective? And then I have one follow up to that.
spk20: Yeah, thank you. This is a great question. So our service was built for serving enterprise customers. And we have all kinds of security features built in. Normally, we work together with the enterprise IT team to evaluate our service from a security perspective. And they are going to enable or disable those security features and have official onboarding process. And we really understand how that process works. And however, during this pandemic crisis, we have lots of first-time users. As a CEO, I think I should have done a better job. Reason why, not only do we offer our service, but also we should play a role of IT for those first-time users. in terms of enabling password and waiting room or display screen share, a lot of features. This is a mistake I made. So we learned a hard lesson. And that's why I say when we look at enterprise customers and consumers, there's a little bit of difference in our philosophy. For enterprise customers, just to keep adding all the security features. However, for prosumers, it's different. Sometimes you're so right. Whenever there's a trigger of a conflict, That's why we doubled down our security team. We wanted to leverage this opportunity to completely transform our business to be the most secure solution. However, if there's a conflict between privacy security versus usability, I think privacy security is more important than usability. Like three clicks, yes, customer may not like it. They want two clicks. But if there's a privacy issue, yeah, we still want to have three clicks. So that's why, however, we do have a team. We review every use case, every feature. We wanted to make sure, focus on the privacy security. At the same time, do all we can. Don't lose the ease of use. That's also critical. So that's why we hired a lot of security researchers, engineers, to make sure, on the one hand, we are very secure, safe to use. On the other hand, also, how to balance. This is an ongoing effort. We are committed.
spk03: Very helpful. And just a quick follow-up to what Heather was asking. She mentioned chat. I've been thinking, is there an opportunity for embedding more cloud-based storage or file sharing to enable more real-time collaboration and file sharing or editing while on a Zoom call? Is that something you guys have considered? I know you have a partnership with Dropbox. Is it something that would maybe make sense to build out yourself or even acquire some capability along those lines?
spk20: Yes, great question. So yeah, we already announced the partnership with Starbucks before recently also partnership with the box as well, you know, with the seamless integration, we also support it, you know, Microsoft Drive and Google Drive as well, essentially, within the meeting interface, you want to share the files from those club, you know, providers, I think overall, we focus on the customer experience. As I mentioned earlier, a video and a voice is still, you know, we're critical to our business, you know, in the future. So, you know, for now, we just want to integrate interoperative with other, you know, best of breed service suppliers.
spk09: Excellent. Thank you guys. Congrats. Thank you. Thank you. Question please Matt.
spk11: Our next question is from Bob and Siri with William Blair.
spk02: Hey guys. Uh, thanks for my question. Um, I just have one, uh, it's really around competition, right? In the last few months, given your success and given COVID we've seen, you know, blue jeans being acquired. Texas IPO ring central announced their own video solution. I'd love to understand none of these actually imply anything immediately material in a competitive environment, but obviously the investments are playing out in that environment. I love to think about how do you think about navigating through this and differentiating? Um, you know, obviously the scale you have is differentiator, but how do you think about the competitive technology differentiation in the space? Love to, Eric, get your thoughts around that. Thank you.
spk20: Yes. I'm so sorry. I lost it for several seconds and pressed one button.
spk02: Sorry. I know. Maybe I did, too. But did you hear it? It's around competitive environment, around RingCentral, introducing video. It's around Pexel. How do you think about the competitive environment? Has it changed? And how do you navigate it?
spk20: Yeah, so you look at a competitive landscape, I think you know, this pandemic crisis does not change anything. And we still need to focus on the video and also we have a phone service, you know, take for sure, you know, the market opportunity is much bigger than before now, right? You take a real central point example, and they were focusing on the phone service. We put on video, we added a cloud with PBX. They added a video conference. We were a good partner before. For now, the market is bigger. I would say, you know, any competition is always good. for consumers, right? And if there's no competitors, that's not good for end users. So we are okay. So we do everything from an end user perspective.
spk02: Great.
spk20: Thank you.
spk02: Fair enough. Thank you. Thank you. Next question.
spk11: Our next question is from Ryan McWilliams with Stevens.
spk06: Hey, thanks for taking the questions. So I attended a Zoom wedding last month and it went great. And my own wedding in September might be over Zoom. So I just wanted to say thank you for providing a backup plan there. You know, really a standout quarter and congrats on the execution. For Kelly, for the second quarter, would you expect new recurring revenue added in the second quarter to be above the recurring revenue added in the fourth quarter of last year? I just have one follow-up.
spk00: New recurring revenue in Q2 to be greater than Q4? Yeah, based on the outlook, I think that it will increase the historicals in front of me. It is an increase over what it would be as compared to before. Yeah.
spk06: Perfect. Yeah. I mean, I can't really compare it to the last quarter. And then, Eric, just on drafting off Vaughn's last question, you mentioned in your comments that enterprise communications continue to be a fragment of market, low overall cloud penetration rate. But with both competitors and customers now trending towards one platform for cloud video and voice, over the next few years, do you see this market consolidating around maybe one to two competitors for enterprise communications?
spk20: Yes, it's too early to tell. But overall, I truly believe the best breed of service provider will survive and thrive. Because customer, when it comes to the video and voice, You know, you've got to make it work anytime, everywhere, right? Any device. It's not that easy. Otherwise, you know, the reason why during this pandemic crisis, you know, customer trusted Zoom to use Zoom because it just works. And the quality and a lot of innovations. And that's why I think, you know, video voice is not that easy. You can build a basic service, you know, with all the basic features okay. But to make it work in 7 by 24, no any outages, and also focus on innovation, it's not that straightforward. And that's why I think as long as we keep working harder, really listening to our customers, to be the first vendor and understand their pain point, understand their use case, to be the first vendor to come up with a solution, even if we have so many competitors, I think we are OK. Because again, this is a huge market opportunity. you know, kind of serve every customer. But as long as we keep listening to our customers, keep the innovation, I think we should be okay now.
spk09: Thanks. Thank you. Thank you, Ryan. Congratulations. Can we have the next question, please, Matt?
spk11: Our next question is from James Fish with Piper.
spk18: Hey, thanks for the question. Kelly, happy birthday. I'd agree that June 2nd is the best day of the year in my humblest of opinions. You guys talk about churn in the second half of the year. I think you can look at sort of some verticals like education or some of the consumer additions that you guys had in the quarter as essentially not sustainable in terms of that 300 million users. How should we think about that 300 million user number in terms of what was added in education, for example?
spk00: Sorry, James, can you just repeat the last part of that? How should we think about the 300 million user number in what?
spk18: Just curious where you think that 300 million user count is actually, what number is actually sustainable within the current customer base?
spk00: So I just want to clarify that 300 million is daily participants, both free and paid. So that was the peak that we saw in April. It has come down a little bit in May on average, but we still continue to see a high level of usage of both free and paid users. So I think Certainly over the long term, we expect it to grow beyond that 300 million number.
spk20: By the way, James, those 300 million meeting participants, that's just a meeting participant. That number is not unique. If you join five times in a day, we'll be counting five, right? And from free users or paid users, yeah.
spk18: Yeah, totally understand. And then just a quick follow up. It's the eighth quarter in a row plus 130% net renewal rate. But could we get more color there as to how much stronger this quarter was from an upsell rate compared to the past few quarters?
spk00: Yeah, we've committed to providing the metric of being greater than 130 just because it bounces around for each period. And we don't want you to read too much into that. So that's the guidance that we're going to provide today.
spk18: Got it. Thanks and congrats again. Thank you. Matt, next question, please.
spk11: Our next question is from Itay Kidron with Oppenheimer.
spk08: Hello. Great quarter, and happy birthday, Kelly. Fantastic. I had a couple of questions. First, on Global 2000, you talked about how it grew 200% quarter over quarter. Those are generally very sophisticated organizations with a lot of IT dollars. And they move very quickly. I guess my question is, is the penetration rate with meetings at this point pretty much at 80% to 90% with that customer base? Have we fully explored with the ones that have purchased with you? Are they already where they need to be given how fast they can usually move? And then the second question relates to phones. Kelly, you mentioned that, regarding our previous question on phones, that a lot of the focus has been on video right now, but you see there's an upcoming, you know, expansion opportunity going forward. I guess the question is, considering the environment, is the environment helpful in accelerating phone adoption, or perhaps the other way around? If IT organizations are looking to cut and expand, you already have an established phone system, and everybody's using their cell phones from home, I guess, at this point. Is phones something that can get a boost from COVID as well, given that it's not walking into a vacuum? Every company has a phone system, whereas very few have a very broad adoption of video.
spk00: Okay, so in terms of your first question around penetration of the global 2K, THAT ISN'T A METRIC THAT WE SPECIFICALLY DISCLOSE, BUT THE GOOD NEWS IS THAT IT'S NOT AS HIGH AS YOU THREW OUT THERE, SO WE STILL HAVE LOTS OF OPPORTUNITY TO GROW IN THAT SEGMENT TODAY, EVEN WITH THE SIGNIFICANT GROWTH THAT WE SAW QUARTER BY QUARTER. AND THEN IN TERMS OF THE PHONE, I THINK THAT GIVEN THE LAND AND EXPAND STRATEGY AND the significant increase we saw in new customers this quarter, we think there is a lot of opportunity ahead. And that phone, we talked about this probably before, but phone seems to really be the last area of IT that has been taken to the cloud. And as people have adopted more of Zoom and they come to trust and rely on the ease of use and the reliability of the platform, phone is just the next natural step for them to take. So we're really excited about that opportunity and don't believe that the COVID pandemic should be an inhibitor to that.
spk20: So Kelly right on. So it had to add on to what Kelly said. If you look at the phone as a separate service, you're so right. Especially during this pandemic, I have a cell phone number. Why do I need to deploy another service? It doesn't make any sense. However, if you think the phone is a part of a video, The phone and the video are the same thing, the same service. You will know that, and the girls will follow as well. This is our vision. We think of phone and voice the same thing. The same product, the same service, the same backend, the same experience. That's why we see the huge opportunity. If you want to sell a phone service as a separate service, it's not a part of video conference service, you are so right. There's no reason for us to deploy a separate service, just the same phone number. What's the point? That's why I think we have a huge opportunity because our architecture, because of the phone and Zoom, we do the same service. So that's a very different place.
spk11: Good luck, guys.
spk09: Thank you. Thanks, Itai. Matt, next question, please.
spk11: Next question comes from Will Power with Verit.
spk04: Great. Thanks for taking the question. I wondered if we could drill down a bit into the education segment, either in terms of revenue or paid users, something to give us some context and how you're thinking about education in the second half of the year as we get back to school. Obviously, still a lot of uncertainties around that. And I guess the other part to that is, are there any learnings from some of these countries where they've gone back to school in terms of usage, whether they're South Korea or elsewhere?
spk00: So we don't break out with specific revenue by verticals, but what I can tell you is that from a growth perspective, education was the highest vertical with growth on a quarter-over-quarter basis. So we saw very strong execution and demand there. And looking forward, as a reminder, many universities and schools have announced that they are potentially hosting all of their classes in the fall remotely. So we expect that demand to be strong, even as we see certain restrictions of shelter in place.
spk20: And by the way, we offer free service to more than 100,000 K-12 schools around the globe. And, you know, I think you're so right. After the summer, you know, are they going to keep using Zoom for online classes or, you know, what we should do? I think that's, yeah, we are going to work on that. For now, it's just to help those K-12 schools. And because our, you know, primarily we focus on the higher ed before. And now we have more and more K-12 schools. That's a very different game.
spk09: Great. Thank you, Will. Hey, Matt, we have time for probably one more question, please.
spk11: All right. Well, our final question then will be from Tom Roderick with Stiefel.
spk10: There we go. We'll get the mute off. Hi, everybody. Thanks for taking my question. I appreciate it. So I guess the question, a lot of questions have been asked on the top line, but you had to scale up massively in a way that 90 days ago, we couldn't possibly have expected this. You started to see a little bit of this in China and perhaps even at the time of the last call, Europe. So you had some awareness, but Kelly, even at that time, you were talking about gross margins in the you know, in the 80% range. Can you just talk a little bit more about what you did and how you managed to scale that business up so quickly? And then would love to hear just about the elasticity of that going forward to the extent that some of the monthly users do churn. Do you have the ability, this may actually interact with the Oracle partnership that was announced in late April. Would love to just hear a little bit more about that, the ability to scale up and scale down and how quickly you can do that.
spk00: So first of all, I think huge thanks and credit to the entire employee base of Zoom. Many of them worked extended hours and lots of weekends to support our customers and this increased demand. Also huge thanks, as Eric mentioned, to many of our partners as well who helped us scale up as we saw this unprecedented and it was difficult to forecast the expansion in our capacity that was needed. In terms of the ability to scale up, what we're focused on, of course, is we were, like in gross margin, focusing on adding in the public cloud. And over time, we'll start to add more capacity in our colos to start to moderate that gross margin impact a little bit. As well as in other areas of the business, we scaled up with third-party resources to help us. And over time, we'll look to backfill those with direct employees, which is more cost effective, but help us get through this unprecedented increase in demand.
spk20: And also, Tom, during this pandemic crisis, our top priority is to show our corporate social responsibility. Essentially, we do all we can to help people stay connected at no cost. We even look at, hey, if you had several thousand servers, what's the cost? No, don't worry about that. This is the time to help people stay connected But down the road after the pandemic crisis, you know, it's sort of ended soon. I think, you know, for sure we are going to go back to our, you know, the gross margin, you know, focus. Yeah.
spk10: Thank you all. It's been a unique 90 days. So looking forward to the next 90. Appreciate it. Thank you, Tom.
spk09: Eric, do you have any final closing remarks before we turn off the webinar?
spk20: yeah i want to say thank you all thank you every every zoom employees thank you all the users customers thank you for your trust thank you for our shareholders and we will do all we can to truly deliver happiness to you we will not let you down thank you for your support and truly appreciate
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