3/1/2022

speaker
Operator

Welcome, everyone, and thank you for joining today's earnings call. Today is Zoom's fourth quarter fiscal year 2021 earnings release. This call is being recorded. At this time, I'd like to hand things over to Tom McCallum, head of investor relations.

speaker
Tom McCallum

Thank you, Matt. Let me jump right into the presentation here. This is my favorite cool Zoom meeting feature, slides as a virtual background. Let me just center myself here so I don't cover up the wording. And so hello, everyone. Welcome to Zoom's earnings video webinar for the fourth quarter of fiscal 21. Joining me today will be Zoom's founder and CEO, Eric Yuan, Zoom CFO, Kelly Sekelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.com. 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 gap to non-gap financial results.

speaker
Matt

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Virginia Connect

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speaker
Tom McCallum

During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first quarter of fiscal year 2022 and full fiscal year 2022. Estimated or projected costs, margins, expenditures, and investments are future results of operations and trends regarding the same. our growth strategy and business aspirations for our video-first unified communication platform, our product strategy, our market position and opportunity, and the continued impact of the COVID-19 pandemic on our business. These statements are only predictions that are based on what we believe today. The actual results may differ materially. These forelooking statements are subject to the risk and other factors that could affect our performance and financial results, which we disclose in detail in our filings with the SEC, including our latest quarterly report on Form 10Q, as well as the current report on Form 8K. We filed with the SEC on January 13th, 2021. 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.

speaker
Eric

Thank you, Tom. First of all, I'm not a cat. I'm live here. So thank you all and welcome everyone joining us on today's Zoom video webinar. Fiscal year 2021 was truly a pivotal year for Zoom. characterized by achieving unprecedented success and overcoming tremendous challenges. My heartfelt appreciation goes out to our approximately 4,400 employees for their incredible energy, perseverance, and dedication. Their focus on delivering happiness and building trust enabled us to become a household name and one of the most popular apps of the year. We are so grateful to our customers, partners, investors, and the entire community for asking us during these tough times and humbled to see workers, students, and families flock to our platform and use it in increasingly innovative ways to connect, contribute, and collaborate. As the world emerges from the pandemic, our work has only begun. The future is here with the rise of remote and work from anywhere chains. We recognize this new reality and are helping to empower our own employees and those of our customers to work and thrive in a distributed manner. As companies begin their safe return to the office and reimagine their working models, Zoom is here to help. leading the transformation with an extensive and growing portfolio of offerings and product features. For example, Zoom room enhancement connected seamlessly with Zoom meetings, enabling features like virtual reception, smart gallery, and more to provide a secure, inclusive, and empowering work from anywhere experience.

speaker
Tom

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speaker
Bob

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speaker
Eric

Our evolution from a leading video communications app into a video communications platform will strengthen our position in the new normal by providing customers with a growing set of innovative and integrated collaboration and productivity tools. We are very energized to help lead the evolution to a hybrid future of work that allows greater flexibility for both in-person and virtual connections, a future that we believe will be better for the planet, productivity, and employee happiness. Next, as part of Zoom Phone's second anniversary, I'd like to highlight some exciting deals where we harnessed the power of the channel to secure large enterprise ROAs of Zoom Phone. We are optimistic about the growth in our channel partners, including master agents who work as a liaison between customers and the telecommunications world. These channel partners are force multipliers and have proven to be strong advocates for us. So let me share a few happy customers' stories. First, we are grateful to have the University of Southern California as a long-standing Zoom meeting and a new Zoom phone customer. Our commitment to USC and broad higher education was rewarded when the University and their master agent shortlisted us in an extensive vendor review to modernize their phone systems. After a six-month evaluation of the main UCAS vendors, USC chose to deploy 21,000 Zoom folks were so thankful that USC put their trust in Zoom to deliver an increasingly comprehensive and integrated set of communications services. Another highlight this quarter was the expansion with Equinix, the world's digital infrastructure company. enabling digital leaders to harness a trusted platform to bring it together and interconnect the foundational infrastructure that empowers their success. Equinix has been a Zoom customer for several years and uses Zoom meetings and Zoom rooms for its global employees to communicate and collaborate. They recently expanded their partnership by adding Zoom phones with over 10,000 seats. On top of being seamlessly integrated with Zoom meetings and rooms, they chose Zoom Phone for our global footprint, our ability to serve Equinix data centers with zero-touch provisioning, and our advanced features over other UCaaS offerings. Let me also welcome a director, Siu-Swin. We are very happy to announce that Universal Music Group The world's leading music company is adopting Zoom phones for its global workforce. UMG was looking to replace and consolidate legacy on-prem technologies with flexible cloud PDF solutions. As an existing Zoom meetings and Zoom customer, UMG was drawn to the integrated nature of the Zoom phone product. They will be using Zoom United which will provide their global users with a one-touch experience of video, chat, and voice. Thank you, UMG. These stories are not exceptions. Enterprise customers choose Zoom to replace their legacy phone system because of their positive experiences with other high-quality products that are very easy to use and well integrated. They value our rapid innovation circles and ability to scale for large and global deployments. They also look to us to partner with them to deliver a unified communication solution that will make their users happy and productive. Thank you, Equinix, USC, UMD, and our supportive channel partners. I love you all. With that, let me hand things over to Kelly.

speaker
Equinix

Thank you, Eric, and hello, everybody. As Eric mentioned, FY21 was a pivotal year for us. While the pandemic stress-tested our operations, it also accelerated our growth opportunities. According to Okta's 2021 Business at Work report, which relies upon data from Okta's customers, Zoom was by far the preferred enterprise video conferencing app ranked among the most popular workplace apps overall. and with a top app by number of customers and active unique users. In addition, analyst firm Frost & Sullivan recently recognized Zoom with its 2020 Company of the Year Award, honoring Zoom's dedication to providing customers with innovative solutions that drive growth and deliver new capabilities. Thank you to our amazing customers who made these accolades possible. Bolstering the growth of our product portfolio is Zoom Phone, which has grown incredibly and turned two last quarter. We believe the opportunity ahead is significant as the tamper telephony is forecasted to grow to $23 billion by 2024. We have seen wins from legacy on-prem providers as well as other cloud PBX vendors. Here are a few milestones to mark the anniversary. Illustrating the ability of Zoom Phone to meet the needs for large-scale enterprise rollouts, Zoom Phone finished FY21 with 18 customers, each with over 10,000 paid seats. We closed FY21 with approximately 10,700 Zoom Phone customers with more than 10 employees, up 269% year-over-year. We continue to drive broad adoption across industries and customer sizes, where 60% was in the mass market and 40% from the upmarket. With our base of approximately 467,000 customers with more than 10 employees and our growing channel presence, Zoom Phone is in a strong position as customers look to modernize their phone systems to an integrated communications platform. Now, getting into the results. Let me start with a few of the financial highlights, and then for the full year, I'll review our financial results for Q4, and finally our outlook for Q1 in the full year of FY22. Revenue grew 326% to $2.7 billion as we exited the fiscal year at an annualized run rate of $3.5 billion. we grew non-GAAP operating margin to 37.1% up from 14.2% in FY20. Free cash flow grew by over 12 times to $1.4 billion for the full year. In Q4, total revenue grew 369% year over year to $882 million. This top line result exceeded the high end of our guidance range of $811 million due to strong sales and marketing execution in online, direct, and channel businesses, as well as lower than expected churn. The demand was widespread across products, industry verticals, geographies, new logos, and customer cohorts. The year over year growth in revenue for the quarter was mainly driven by the sharp increase in new customers this year, which accounted for approximately 80% of the incremental revenue, up from 59% in Q4 of last year. We continue to add customers of all size and across industries that we anticipate will provide future upsell opportunities. Let's take a look at the key customer metrics for the quarter. We continue to see expansion in the Yelp market as we ended the quarter with 1,644 customers generating more than $100,000 in trailing 12-month revenue, up 156% year-over-year and 28% quarter-over-quarter. This is an increase of 355 customers sequentially, the highest number of quarterly net ads for this segment. We made great progress in the upmarket and still see a lot of opportunity ahead. For example, we grew the number of global 2000 customers generating at least $100,000 of ARR by more than 100% this year. But that still accounts for only 14% of the total population. We exited the quarter with approximately 467,000 customers with more than 10 employees, adding approximately 33,000 customers during the quarter and 385,000 customers during the year. In Q4, customers with more than 10 employees represented approximately 63% of revenue. We also continue to benefit from significant growth in our segment of customers with 10 or fewer employees. In Q4, customers with 10 or fewer employees represented approximately 37% of revenue, up from 20% in Q4 last year and down modestly from 38% in Q3. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 11th consecutive quarter, as existing customers acquired more Zoom meeting licenses, rooms, webinars, and Zoom phone products. We value their trust in us to build their unified communications on Zoom. Both domestic and international markets had strong growth during the quarter. Our America's revenue grew over 292% year over year. Our combined APAC and EMEA revenue grew 687% year over year, to be 33% of revenue, up from 20% a year ago. In FY22, we intend to make additional investments in international resources to further capitalize on the global opportunity. Now, turning to profitability. The increase in demand and strong execution drove net income profitability from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, and acquisition-related expenses. Non-GAAP gross margin in the fourth quarter was 71.3% compared to 84.2% in Q4 last year and 68.2% in Q3. The year-over-year decline in our gross margin is partially due to the dramatic increase in free usage related to the pandemic, including our ongoing commitment to support approximately 125,000 K-12 domains, as well as the higher utilization of public cloud services. The sequential improvement mainly relates to seasonal audio usage, which decreases during the holiday season. We would expect gross margins to remain around 70% as long as we continue to support free K-12 education. Research and development expense grew by 91% year over year to approximately $31 million. As a percentage of total revenue, R&D expense was approximately 3.5%, which was lower than in Q4 of FY20, mainly due to the strong top line growth. Though we made strides in expanding our team, we remain committed to prioritizing R&D hiring and continuing to grow in order to drive further innovation, expansion, and security on our platform. Sales and marketing expense grew by 90% year over year to $159 million. This reflects an additional $75 million over last year, primarily due to investments in hiring to drive future growth. Sales and marketing expense was approximately 18.1% of total revenue, a decrease from Q4 of FY20 mainly due to strong top-line growth. We plan to continue to invest in adding sales capacity and product marketing programs over the next several quarters focused on capturing market share. G&A expense in the quarter grew by 291% to $78 million as we continued to scale our G&A functions and invest heavily in security and compliance headcount and professional services. G&A expense was approximately 8.8% of total revenue, a decrease from Q4 of FY20. The revenue upside in the quarter carried through to the bottom line with non-GAAP operating income of $361 million, exceeding our guidance. This translates to a 40.9% non-GAAP operating margin for the fourth quarter, a large improvement from 20.4% in Q4 last year, and steady improvement from 37.4% in Q3. Non-GAAP earnings per share in Q4 was $1.22 on approximately 301 million non-GAAP weighted average shares outstanding and adjusting for undistributed earnings. This result is 43 cents above the high end of our guidance and $1.07 higher than Q4 of last year. Turning to the balance sheet, deferred revenue at the end of the period was $883 million, up 283% year over year from $231 million. Also, please note, we have seen a shift in the mix of invoicing to approximately 50% of business being billed monthly, up from approximately 40% in the previous year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.8 billion, up 190% year over year from $604 million. The increase in RPO is consistent with a strong demand and execution in the quarter. We expect to recognize approximately 70% or $1.2 billion of the total RPO as revenue over the next 12 months as compared to 62% or $375 million in Q4 of FY20. We ended the quarter with approximately $4.2 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. This balance includes approximately $2 billion from our follow-on public offering in January. We had exceptional operating cash flow in the quarter of $399 million, up from $37 million in Q4 last year. Free cash flow was $378 million, up from $27 million in Q4 last year. The increase is primarily attributable to strong buildings and collections. Looking into FY22, we expect to increase our capital expenditures related to the build-out of our data center infrastructure to support our growth outlook and drive additional efficiencies. Now, turning to guidance. We are pleased to announce our outlook for FY22 for both revenue and non-GAAP profitability. Although we remain optimistic on Zoom's outlook, please note the impact and extent of the COVID-19 pandemic and people returning to in-person contact still remains largely unknown. Our outlook is based on our current assessment of the business environment. For the first quarter of FY22, we expect revenue to be in the range of $900 to $905 million. We expect non-GAAP operating income to be in the range of $295 to $300 million. Our outlook for non-GAAP earnings per share is 95 to 97 cents, based on approximately 307 million shares outstanding. Both Q1 and full-year share count include the additional shares issued in our follow-on public offerings. For the full year of FY22, we expect revenue to be in the range of $3.76 to $3.78 billion, which would represent approximately 42 to 43% year-over-year growth. We expect non-GAAP operating income to be in the range of $1.13 to $1.15 billion, which would represent approximately 14 to 16% year-over-year growth. Our outlook for the non-GAAP earnings per share is $3.59 to $3.65 based on approximately 311 million shares outstanding. Before concluding, I'm happy to highlight that today we announced the first group of grant recipients from our Ed Innovation Awards program. This is part of our Zoom Cares philanthropic program under our ESG umbrella. We are excited to support their work, which includes promoting diversity from within the teaching profession, entrepreneurial job training, assisting aspiring youth in conflict-affected areas to join the digital economy, and providing access to science-based approaches to reading education. We are proud to sponsor these critical and innovative education efforts around the world and support the next generation of talent. As we look forward to FY22, Zoom is grateful to be a driving force enabling connection and collaboration worldwide with our high quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community and our investors. If you have not yet enabled your video, please do so now for the interactive portion of our meeting. Matt, please queue up our first question.

speaker
Operator

Our first question is from Alex Kurtz with KeyBank.

speaker
Alex Kurtz

Thanks for the question and hope everyone at Zoom is doing well. So could you frame how much Zoom phone versus new customers versus the expansion opportunity is driving the fiscal 22 growth outlook? And as part of that, what churn rates are you assuming as return to office ramps later in the year? Thank you.

speaker
Equinix

um so alex we are really excited about the opportunity of zoom phone ahead as you you heard they performed very well this year they were the zoom phone was the fastest growing product line quarter of our quarter in q4 and we expect to see strong growth as we look towards fy 22. um As you remember, our strategy is to sell into our existing install base. So based on the customers we have today, we see tremendous opportunity for further upsells with Zoom Phone. And then high level in terms of the churn rates, we have seen churn rates stabilize in the back half of FY21. And we do though, they are certainly elevated from pre-pandemic period. And we have assumed that to continue as we move through FY22 and the uncertainty around when people will be able to start to safely move around the world again.

speaker
Tom McCallum

Thank you. Next question, please, Matt.

speaker
Operator

Our next question is from Will Power with Baird.

speaker
Will Power

Great, thanks for taking the question. Yeah, I wanted to touch on Zoom phone as well. Terrific to see the strong results. I wonder if you could help us understand where you are in the evolution of rolling out channel partners. It sounds like that was a key contributor to some of the bigger customer additions. How much more is there to go? How much more of an acceleration could we expect there? And I guess tied to that, as you look at these bigger wins, these 10,000 seat paid customers, What's really helping differentiate you versus the other cloud providers out there?

speaker
Eric

Yeah, so that's a great question. First of all, if you look at it, why, you know, our customers, you know, they chose Zoom over other cloud-based PBX solutions. First of all, you know, look at our existing customers. We already built a chart. They really enjoyed, you know, other very high-quality products. Because of that, they would like to test the Zoom. After they test the Zoom, realize the Zoom phone. After they test that, realize it's feature rich, very reliable, very easy to use, modern architecture, integrated very well with our meetings, Zoom rooms, and other product labs, right? That's the stuff from product perspective, we have high confidence. From a distribution perspective, not only did we drive that growth from our direct sales team, as you see, like, you know, the, you know, the usc.com, right, driven by master agent, I think we're doubling down on that channel partners, especially look at a history of the phone clubs, VBAG growth, primarily driven by the channel partners. I think, you know, our strategy to focus on building a greater partnership with the channel partners, such as master agent, really paid it off. I think we are going to double down on that.

speaker
Will Power

Congratulations. Good luck.

speaker
Eric

Thank you.

speaker
Will Power

Thank you, Will.

speaker
Operator

Our next question is from Matt Hedberg with RBC.

speaker
Matt Hedberg

Oh, hey, thanks for taking my questions, guys, and congrats really on a stellar year. Momentum with the G2K customers, over $100,000 in ARR was certainly impressive, but it still remains just vastly underpenetrated relative to your overall population. Can you talk about incremental steps you're looking at in fiscal 22 to drive even faster G2K or further G2K adoption? And then maybe just as a follow-up for Kelly, $4.2 billion in cash exiting the year. Just thoughts on deploying that? Obviously, there's some CapEx expenditures, but just broader CapEx or cash expenditures.

speaker
Eric

Yeah, maybe Matt, I can address the first part of your question. You are so right. It's only 14% of global 2K customers. So the reason why, you look at our history, the way for us to grow our revenue, our user base is from the bottom up. you know, from one user to user, one department and multiple department, and then we talk to the CIO, right? And we are doing something similar. That's why the huge opportunity ahead of us, because the last year, I think, you know, if you've talked with the enterprise customers, if you don't have a very strong brand, Normally, they even don't want to, you know, talk with you, right? Because of last year, I think Zoom has become a household brand. I think we have more and more opportunities in the pipeline. And we can talk with us now, not only from bottom up, but also from top down as well. Having said that, I think that, you know, the rest of the global 2K customer, especially look at international and, you know, the growth opportunity. I think the future is bright as long as we keep holding on execution.

speaker
Equinix

And in terms of what we're going to do with that $4.2 billion, so we, as you said, we are certainly investing in building out more data center infrastructure, and we are constantly looking for opportunities for other interesting companies, potentially M&A activity. that could add either to our talent or our technology. It's just, as I'm sure all of you know, Eric has a very high bar for both. And so we just haven't quite found the right match yet, but we keep looking. Colin Bourne leads our corporate dev team and his team are just constantly looking and seeing what's out there that looks interesting. So, you know, we'll see. We're certainly open to it. It's just finding the right match for us.

speaker
Eric

Thanks. Well done, guys. By the way, Matt, if any of you have any great advice, we would love all those advice. Thank you.

speaker
Operator

Thank you. Our next question is from Sterling Ante with JP Morgan.

speaker
Morgan

Yeah, thanks. Hi, guys. So were you successful in rolling out all of the countries that you wanted to for Zoom Phone during calendar 2020? What's the plan for 2021? And can you eliminate the need for the Bring Your Own Carrier program that you launched with?

speaker
Eric

Yeah, so, you know, first of all, look at our international penetration by risk for the 42 countries. You look at our Zoom phone and the service. I think look at our phone, you know, the growth, right? 40% from the upper market, you know, 60% are from SMB market. If you talk about the upper market, I think more and more opportunities will come from international customers. The reason why when we started, right, we leave the focus on North American market since the last calendar year. and we started rolling out to more and more international customers i think the international penetration i think will be the catalyst for our future zoom phone girls got it thank you oh our next question is from me to marshall with morgan stanley great thanks

speaker
spk26

You know, as you think about leveraging your platform, digital events is something you talked about at Zoomtopia with on Zoom as another kind of natural adjacency. You know, any traction here to call out on Zoom or just how do you think about kind of finding other use cases or platforms for video usage?

speaker
Eric

Yeah, yeah, Kelly, feel free to chime in. Actually, in terms of on Zoom, We launched, you know, on Zoom Alpha, announced that last October at a Zoom annual user conference. For now, it's, you know, beta, beta, you know, stage now, right? And based on, you know, our talk with those early adopters, you know, and also based on the progress, we think is on Zoom is not only designed for the knowledge workers, for the model consumer, right, to learn the yoga class. And also another part of on Zoom is about the overall business customer, enterprise customer online virtual event. Like this year, Zoomtopia, we will hold that event completely on Zoom platform. Essentially, Zoom has two parts. Consumer driven on Zoom to allow noted workers to make a living, to sell yoga class, teaching anything online over Zoom platform. And also, we are going to expand our webinar platform to be an end-to-end corporate virtual event platform. That market also has huge growth opportunity.

speaker
Kelly

great thanks guys thank you my next question is from philip winslow with wells fargo hey guys thanks for taking my question i also just wanted to dig in on uh on zoom phone uh one of the things that jumped out to me was the 18 customers with more than 10 000 seats i was wondering is there any sort of uh I guess cohort, so to speak, what you're seeing here, are these larger customers from a particular industry? Is their workforce more distributed than others? I mean, anything that you comment on and sort of what the type of customer profile is for Zoom Phone, especially with those bigger transactions and how you think about that going forward?

speaker
Equinix

I think the great news, Phil, is that it's actually spread across all industries. You saw those names that we talked about, right? We had a university, we had an entertainment organization, and a technology company. And that's been, I think the success of Zoom Phone from the very beginning is it's really appealed well to small and large enterprises alike and across all industries. And the reason that we win, right, is based on as Eric mentioned, the trust that they already have in us, as well as the usability and the total cost of ownership, which plays well across all industries, obviously.

speaker
Kelly

Got it. And then just to follow up on that, theoretically, as companies are ramping up to return to office, how do you think about Zoom phone and also additional penetration of just Zoom rooms? It's sort of, you know, with people not being there, it's easy to take away my phone at my desk, but nobody using a conference room. It's maybe easier to upgrade it to a Zoom room. How do you think about sort of the first half there in particular as people prep for potentially return to office?

speaker
Eric

Yeah, first of all, we all want to go back to the office, right? We're stuck at home for such a long time, so painful. But actually, you know, even if we all go back to the office, I think that, you know, the product, you know, video conferencing is one aspect, right, for the growth. But most importantly, if customers, they would like to consult it, you know, phone and video, the same thing, the video and the new voice. Why do they need to have another system? Why do they need to deploy the hardware-deductible phone, right? Essentially, Zoom phone already gives you everything. I think, plus, also Zoom phone is very well integrated with Zoom meetings and Zoom rooms, right? A lot of companies are talking about how to re-enter the office, especially focus on the conference room system. Recently, our innovations, like virtual reception, like a smart gallery view, plus Zoom phone, those two can really help us give customers a unified you know, a collaboration and a communication experience. That's why I got very excited.

speaker
Kelly

Thanks very much. Appreciate it. Congrats on a great Q4.

speaker
Eric

Why do you feel you have a best of what you back on?

speaker
Kelly

Thank you, Eric. Good try. I'll always be branded.

speaker
Operator

Next question is from Tyler Radke with Citi.

speaker
Tyler Radke

The regular room behind me. Can you hear me okay? Yes. Welcome aboard, Tyler. All right. Thanks a lot. Good to see everybody again. I'm curious how you're thinking about, you know, investing and compensating in the direct sales force this year. Obviously you're talking about increased channel leverage, particularly with zoom phone. And I imagine, you know, renewals are going to be a pretty important topic as well for you in, in, So maybe just help me understand, you know, how fast do you expect to grow your direct sales force and if you're changing kind of the way that you're compensating them in terms of the mix of new versus renewals. Thank you.

speaker
Equinix

So the two areas of significant investment we're really focused on for FY22 are exactly as you highlight. It's quota-carrying reps in our sales organization, and it's engineers. And in both areas, when we looked at the FY22 plan, we looked at in terms of what's available in terms of capacity in the organization to absorb that, as well as markets that are available. you can just expect continued significant growth in the AEs, in the sales organization. And then in terms of compensation, we didn't have significant change to our comp plan, but you did pick on, you know, key on one of the key points, which is renewals and retentions. And historically, we have not compensated for that. So we did add a bonus component to the plan for this year to help align the reps, you know, interest along with Zooms as well.

speaker
Tyler Radke

Thanks so much.

speaker
Operator

Next question is from Rishi Jaluria with DA Davidson.

speaker
Rishi Jaluria

Hey, Eric, Kelly, Tom, thanks so much for taking my questions. Great to see continued strong momentum and heading into next year. Wanted to ask about maybe potential areas for expansion. You've obviously had some really great success with Zoom Phone and appreciate the disclosures here. As you think about becoming a broader enterprise collaboration communication platform, where are some other adjacencies that you think you can get into? I know you've hinted at these in the past. philosophically how do you think about the the build versus buy especially just given the amount of capital you have available on the balance sheet thanks yeah so rishi that's a great question so when we started

speaker
Eric

we were later focusing on one thing, this video conferencing app, right? But however, over the past several years, look at it today, I think because of popularity of the video conferencing, a lot of people that are using Zoom during the pandemic crisis, they're still saying that Zoom is just a video conferencing app company. That's not the case. You know, look at the Zoom video conferencing, look at Zoom phone, look at Zoom rooms, look at built-in chat, and look at also webinar. I think a huge opportunity. Almost each area I think we should double down. Also look at brand new opportunities. You look at on Zoom I mentioned earlier. Plus, another thing is about our ZoomX ecosystem. Essentially, Rishi, Donald, you and I, we are going to talk over Zoom, not because we have a business communication discussion, but also more like you and I can play games. We'll be with that entire ecosystem. That's the reason why we talk about how to transform our business from a killer app company to a platform company. With that in mind, I think a lot of opportunities, UC platform, remote work platform, and also the consumer-presumer platform. I think for sure, you know, we cannot build everything, right? We've got to be very careful, right? What we should build by ourselves, what kind of product, new categories we should partner, or maybe, you know, go through the acquisition. That's why I like any advice. But overall, I think to become a platform company will open up a great opportunity for us. We're not only a video conferencing company, Thank you.

speaker
Operator

Thank you. The next question is from Zane Crane with Bernstein.

speaker
Zane Crane

Hi, congrats on another great quarter team. I just want to dig in on the on Zoom offering. It seems like a really great way to improve the conversion rate of kind of prosumers and knowledge workers at the lower end of the market. Can you give us a sense of how much that's improving the paid conversion rate from free users to paid maybe among consumers or independent contractors, freelancers, things like that? Is it a 10% increase? Is it double? And then secondly, on the gross margins for Zoom phone, I know it's still subscale, but how should we think about this, the non-GAAP gross margin for that relative to video conferencing kind of in a steady state long term? I know it's a lot less compute intensive, so I'm curious if that could potentially have higher margins. Thank you. Yeah, then I can address the first part.

speaker
Eric

Kelly will address the second part of your question. And I hope I have a good answer for your first question. Unfortunately, I don't because it's too early to tell. We're still in the beta, right? We try to make sure the product experience is really solid before we announce the GA. For now, it's still beta. Right. You know, you can go to it on Zoom, you know, to register class, to learn a cooking class and learn something that you look kind of a basic features are available. But again, I think it's not a fully ready yet. I think we are very optimistic down the road. Not only do we have a new revenue stream, not only do we have our customers more, but also look at our free users or paid online subscribers, right? We have one more opportunity, you know, either learn something or host on Zoom event. You know, more like a Uber, right? I have a car at the time, I become a Uber driver. That's our strategy. But again, it's too early to tell. I do not have a very solid answer about that yet.

speaker
Zane Crane

Got it. That's helpful. And we're very optimistic. So thanks for the update. Thank you.

speaker
Equinix

And sorry, did you ask about the growth margins for Zoom phone or on Zoom?

speaker
Zane Crane

Zoom phone. Separate question a little bit. I'm curious, since it's less compute intensive, if that could maybe have higher margins, especially since you don't have a free offering for that, like the video conferencing.

speaker
Equinix

Yeah. Pre-pandemic when we looked at this Zoom phones margins were actually slightly under the gross margin for meetings due to the cost for the carriers on either end. So the goal though is as we continue to grow is to have leverage and be able to invest and of course to see efficiencies across the overall platform that eventually those gross margins converge. And that's what we're expecting to see right now given the gross margin being impacted on meetings by the free usage Zoom phone growth margin is probably actually even higher than meetings right now.

speaker
Zane Crane

Great. Very helpful. Thank you. Congrats, Dean.

speaker
Operator

Thank you, Z. The next question is from Brad Zelnick with Credit Suisse. Great.

speaker
Z.

Thank you so much, and it's so nice to see everybody. Eric and Kelly and Tom, wonderful. Great, great Q4. Great year. We're all grateful. Kelly, my question is for you just around the seasonality of the business. Last year was so unusual. How are you thinking about modeling this year from a new business perspective, thinking about seasonality? And I know you caveated in your guidance relative to the uncertainty of COVID, but what's the embedded assumption, even though I totally appreciate that economies reopening doesn't mean that people stop using Zoom?

speaker
Equinix

Yeah, I think... First of all, you have to think about our business in terms of online and direct. They both have become very significant businesses, and there's a little bit of different behavior to the two of them. In the direct business, we expect to move back to a more normalized seasonality, if you will, as you're growing through the year, especially with enterprise buyers to be a little more active. back-end loaded in each of the quarters as well as back-end loaded in terms of the year, especially as we're continuing to add capacity in our sales organization and having those reps ramp throughout the year as well. From online perspective, that is the one that is, I think, a little more uncertain, dependent upon the timing of people potentially returning to work, as well as this integration with OnZoom. And What we have modeled is we believe to be conservative in terms of an acceleration in churn rates. We're doing everything we can, though, of course, to retain those consumers and help them see the value in Zoom so that we don't see that as we move through the year.

speaker
Z.

Great. Thank you so much for taking the question.

speaker
Eric

Brad, thank you very much for wearing a Zoom top of your head. I truly appreciate that. Proudly. Proudly. Thank you. Thank you.

speaker
Operator

Next question is from Bob in Surrey with William Blair.

speaker
Bob

Purdue University Global. Apply now at purdueglobal.edu. Hey, everyone.

speaker
Kelly

Thanks, and let me echo my congrats. Really great job. I want to chat a little bit about one specific competitor. It's our friends at Microsoft. And I'd love to understand in a little more depth how that's playing out. Not today, because obviously the results speak for themselves. But they're ostensibly giving away for free. And we know E5 is not free. We know upgrading to E5 costs. but they have a lot of power in the mid-market and the enterprise. And I guess, how do you feel about what they're doing? Is there the sense that at some point, maybe when you get back to work, it's good enough? Like how are you and the sales team sort of working around this issue of teams, you know, ostensibly giving away for free? That's kind of what I'm getting at. Specific to them, given sort of their scale and their power and their platform and they bundle it, et cetera. Thank you.

speaker
Eric

Yeah, so I can start, Kelly, feel free to chime in. I think, first of all, that's a great question. However, I'd like to take a step back. I think we'll share, I think, the journey of Microsoft themselves, because I think today Microsoft is very different. You know, since Satya took over the CEO job several years ago, I think Microsoft, I think they're open-minded. Satya is the greatest CEO in the world, I really admire him. But quite often when we talk about integration, after we ask them, they would like to work together with us, they're willing to collaborate. That's a very important thing. Like 10 years ago, if something like this, I think we are very nervous or concerned. Today, that's not the case from Microsoft perspective. I gave the in Microsoft CEO, Satya, a great credit, that's why. If you look at it from any user perspective, especially look at the today's workforce almost over one-third are millennials guess what they would like to use the best breeder service if a cio gives them something they do not like they say no i'd like to pay with my own credit card so the best breeder service will win for sure and also if you look at it even from a cio or it perspective they would like to bet on two windows, right? If you're stuck with one window for everything, guess what? What if there's outage? What if in the future, innovation speed slows down? That's why in talking with the enterprise customers, they would like to deploy the best service like Zoom. It's video and voice is much better, right? That's why we co-exist the strategy very well. last but not least you look at the octa report probably that's the most important report for any i.t you know uh professionals right you look at the author report zoom is for sure number one video conferencing app right and in terms of uh you know the position you know in terms of uh you know based on number of the the customers zoom apps ranks number five however there's one matrix is very interesting you look at the octopus microsoft always 365, you know, the deployment of the customers, 42% also deployed in Zoom as well. That proves one thing, customer, they would like to bet on two solutions because we can coexist very well. Again, this market size is much bigger than anyone can imagine. That's why I think that coexistence strategy works very well. And we look at everything from a customer perspective. Sorry, that's a long answer. I'm not sure it answers your question well, but that's based on our vision.

speaker
Kelly

Yeah. That's a great answer. I appreciate the color and the candor. Thank you all. Thank you.

speaker
Operator

Our next question is from Richard Valera with Needham.

speaker
Richard Valera

Thank you. And let me add my congratulations to a really great year and fourth quarter. So a question on the education vertical, which has gotten a lot of sort of attention. And your thoughts on the trajectory of that business for you. You could maybe argue that there's a headwind, maybe decreased usage as folks go back to in-person school. But you guys have, I think it's 125,000 K through 12 customers that are free now, but presumably at some point will be paying. And so I just want to check about how you're thinking about that revenue trajectory and the potential to monetize them? And if the July 31st date on your website is sort of the date that you're going to turn off free, or is that sort of just a placeholder for now?

speaker
Equinix

I think in terms of the future and the opportunity ahead for education, as you noted, we have 125,000 K-12 domains that are using the product and have really become believers in Zoom. And what we expect is that as we look forward to students being able to return to campuses in person, that there's even a hybrid approach in education. We always joke, right, that students are going to hate us because there's no such thing as a snow day any longer. and imagine the benefit that the parents have also received from being able to attend PTA meetings from home, to be able to do parent-teacher conferences. So there are many, many use cases that extend beyond just the students being in the classroom that we foresee these domains wanting to continue to work with us on. And in terms of the date that's on the website, as always, I believe that Zoom will do whatever the right thing is as we continue to assess how the pandemic progresses. The goal of that was really to minimize the disruption in learning, and we remain committed to that.

speaker
Richard Valera

Great. Thanks very much, Kelly.

speaker
Operator

Our next question is from Ryan McWilliams with Stevens.

speaker
Ryan McWilliams

Thanks for taking the question. Can you talk about enterprise Zoom meeting purchasing that you saw in the quarter? Like did enterprise customers increasingly go wall to wall and consolidate pockets of Zoom usage and business silos? And then separately, you know, with the improving Zoom fill momentum that you're seeing, do you see attach rates for contact center increase alongside that? Thank you.

speaker
Equinix

In terms of... you saw the significant growth in the customers with greater than a hundred K of training, 12 months revenue. And that I think is an indicator of all of those enterprise customers that we've seen purchased this year, continuing to roll out and expand in terms of wall to wall. We, you know, we continue to see customers that are adding in terms of number of seats as well as buying broader. So I think it's a combination of both. And then again, in terms of contact center with Zoom Phone. Eric, do you want to talk about that?

speaker
Eric

Sure, sure, yeah. I think in terms of a contact center, and I think for now, I think our strategy to work together with other contact center solutions, like Five9, Genesys, InContact, Talkadex, and others, I think working very well. Because customer, they talk about how do you seamlessly integrate with others. Take Five9, for example. and we're a great partner. You know, Rob and I, we share the same vision, how to further improve that product experience. Awesome, love that. I think to have a much better seamless integration, that's the right approach to truly deliver happiness to our mutual customers.

speaker
Operator

Our next question is from James Fish with Hyper Sandler.

speaker
James Fish

Hey guys, congrats on the awesome end of the year. Really appreciate what you've done. You know, it was an impressive uh enterprise additions this quarter just trying to understand how much of the additions came from moving commercial customers up uh from phone or stop crossing phone within that commercial meetings and small days first new customer wins versus uh other items

speaker
Equinix

Yeah. So hi, James. It's really a combination of all of the above. So we continue to see customers that bought earlier this year deploying and rolling out and adding to their services. You heard some of the great wins that we talked about specifically on the call, as well as continued upsells in terms of just expansion in terms of meetings. And, you know, continuing to make sure that their employees are being as efficient as possible. So it's not something specifically that we break out. I can just tell you that it's a combination of all of the above.

speaker
James Fish

Understood. Thank you.

speaker
Operator

The next question is from Matthew Van Vliet with BTIG.

speaker
Matthew Van Vliet

Yeah, hi, thanks for taking the question. I guess wanted to dig a little deeper, not just on the contact center side, but as customer experience really becomes a greater focus for larger enterprises, just what the opportunity is to embed Zoom from a partnership perspective, either in other software platforms or or just kind of in company websites, things of that nature to help facilitate a more interactive approach with customers and sort of how you can better monetize that in the long run.

speaker
Eric

Yeah, Matt, that's a great question. That's overall our platform play. So today, in addition to having the APIs and SDKs to give the third party companies and partners computer vertical apps like online education, telemedicine apps via our platform SDK, we also introduced the Zoom apps. I think that's, you know, I think that's a future because the reason why is Zoom is not only, you know, built for the business education, but also offer a people-centric interface. You and I, you know, can use Zoom and also have a window, right? You and I play games together. You approve my experience report of integration with the service now, Workday with Salesforce, and all kinds of applications, not only for business apps, but also for consumer apps as well. Today, look at our marketplace. we already have over 1,000 apps published in marketplace. So we are going to double down on our Zoom apps ecosystem. Essentially, that's the future for our platform play. And the download, let's say you have lots of new applications or existing integrations, you have many ways to monetize download. The goal is to offer a people-centric Zoom interface for other applications to be integrated into Zoom. Great, thank you. Thank you, Matt.

speaker
Operator

The next question is from Taz Kajalvi with Guggenheim. And looks like we have Taz on audio only. Hey guys, can you hear me?

speaker
Taz Kajalvi

Yep. Hi.

speaker
spk05

Hi, hi, thanks for taking my question. I have a question for Eric or Kelly on Zoom phone attached versus Zoom meeting. So let's say a customer has both Zoom mix and Zoom phone. I'm assuming that every user would have a Zoom phone. License versus Zoom meetings because only the hosts need Zoom meetings. Is there like a rule of thumb or, you know, what you're seeing in the customer base right now in terms of what the ratio of Zoom meeting licenses to Zoom phones is and what that potentially could be going forward?

speaker
Equinix

Generally, what we see is that you are – Your point is that not everybody needs a Zoom meetings license because only the host needs it. But what we see for most organizations is they actually buy Zoom meeting licenses for all of their employees as they want them to be as efficient as possible. And then they buy a corresponding number of Zoom phone seats as well. So typically when a company is doing or a customer is doing a full deployment, it's a one-to-one ratio of Zoom meetings to Zoom phone.

speaker
spk05

other cases where customers end up buying more or less like is it different by different vertical or customer size or is it typically it's usually one one-to-one

speaker
Equinix

Well, it depends on the stage of where a company is in terms of its rollout and its deployments. I often start with meetings and then add Zoom Phone, and they may take some time to roll it out depending on its market, geographic location. The case, for example, that I do remember where there were more Zoom Phone licenses bought than Zoom Meeting, it was the case of a retailer that had Zoom Meetings and Zoom Phone in their corporate headquarters. But for example, they wanted to deploy Zoom Phone into their retail locations in the malls. And so there wasn't really a need for Zoom meetings in the mall, but Zoom phone was a really great fit for them. So that's really the only case that I remember specifically where there were more Zoom phone seats sold than Zoom meeting licenses.

speaker
Tom McCallum

Got it. Very, very helpful, Colin. Thank you very much, Kelly. Thank you, Cas.

speaker
Operator

Our next question is from C.T. Patagahi with Mizuho.

speaker
spk19

Hey, thanks for taking my question. Eric, I just wanted to ask on the product side, last year, I think more focus you had on security. And are you looking at this year and your product team, what are you more excited about? What were you more focused on?

speaker
Eric

I think, first of all, security and privacy is always very important. Last year, I think Zoom has become a much stronger company because we embrace a lot of consumers. To serve consumers in terms of privacy and security is very different compared to what we did before. But we did learn a lot. We really chipped down on our team size, you know, a lot of, you know, the consulting and third party companies. And I think, you know, today look at Zoom privacy and security policy and the practice is totally different now, right? We have high confidence, but however, we are not going to say, hey, it's done. No, this is ongoing effort. You know, privacy security is a part of our company now. I mean, side of that, we also need to continue innovating, right? That's why, you know, how to transform our business to become platform company. At the same time, any new service, new feature, everything, we have a new process. Make sure privacy security always there, not only for business or government customers, but also what's more important is that for consumers as well, right? I think that's why, you know, the future is bright because not only do we have new opportunities, but also the

speaker
Zoom

privacy and a secure story is much better than before okay thank you thank you okay we have time for one more question and our last question will be from tom roderick with stifle great well hi eric hi kelly hi tom great to see you all congratulations on a fantastic finish to uh what was a crazy year but a fantastic one for you all As we're going on almost a year now of sitting in our home offices and our bosses are telling us in a variety of ways that we're probably not going back to the old normal, whether it's this year or next year or at all, I'm curious for your thoughts on how you think about the way the world has changed and the way that you run Zoom, whether that's more remote offices or R&D specialists in different parts of the world. Is the cost structure sort of permanently changed for your vision of the world? Because it seems like for the rest of us, it is changing in that way. I would love to hear your thoughts on that.

speaker
Eric

Yeah, Kelly, please. Yeah.

speaker
Equinix

Sure. So I think the amazing thing that's happened during this pandemic is it's opened us up to be able to hire talent wherever. We've really taken advantage of the opportunity. Engineers, for example, which are highly competitive, that we are now looking to hire the best talent from anywhere in the globe almost, really focused on, especially in the U.S., diversifying outside of San Jose, which has been a great win for us. In terms of long-term, you know, growth, sorry, expense impact, we have not modeled in this year, at least for FY 22 expenses associated with return to work, as we continue to evaluate when it feels safe to support our employees and moving back into the office and coming back together in person. And once we have more clarity around that, of course, we will assess how that impacts our operating margins.

speaker
Zoom

That's great. I'll turn it back to you. Thank you.

speaker
Equinix

All right. Well, thank you so much for joining us today. We really appreciate it. Look forward to FY22.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q4ZM 2021

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