Zoom Communications, Inc.

Hello, everyone, and welcome to Zoom's first quarter fiscal year 2022 earnings release. I'd like to remind everyone that this call is being recorded. At this time, I'd like to turn it over to Tom McCallum, head of investor relations.

Thank you, Matt. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of fiscal 2022. 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 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 press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the second quarter and the full fiscal year 2022. Zoom's growth strategy, business aspirations to lead the evolution to hybrid work, 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 and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K, as well as the current report on Form 8-K we file with the SEC today. Zoom assumes no obligation to update any forward-looking statements that we may make on today's webinar. And with that, let me turn it over to Eric.

Thank you, Tom, and welcome everyone joining us on today's webinar. I want to start by thanking our customers for their commitment to and trust in Zoom. which drew a strong start to our fiscal year with revenue growing 191% year-over-year, as well as strong profitability and a free cash flow. I also wanted to recognize our more than 5,000 employees. Their dedication to our customers' happiness is an incredible advantage and creates a positive feedback loop that keeps our customers coming back and our employees eager to meet their diverse needs. Our ability to help our customers by increasing their productivity, promoting their employees' happiness and connections to each other, and reducing their travel-related carbon footprint gives our work a great meaning and makes Zoom a great place to work. Our company culture is strong, and we are more motivated than ever. Let me also thank all of you, our investors, for your trust and support. So we are very grateful to our employees, our customers, partners, and our investors. Thank you. As parts of the world reopen, a few things are clear. Many customers I talk to are looking to create hybrid solutions, and they seek to cautiously reopen some offices. And second, each industry, company, and individual varies in their optimal working model. Zoom is here to help each customer calibrate their future working model in their own way. Many companies are redesigning the workplace to enhance the hybrid work experience. So to meet this need, we announced Zoom Rooms features such as Smart Gallery, which puts in room and remote participant in equal footing. Virtual receptionist, participant accounting, and environmental sensors. We have begun to deliver on our platform strategy. In February, we launched our video SDK. In April, we announced our $100 million Zoom apps fund to further build our app ecosystem. Zoom apps is designed to enhance users, to enable users to bring their favorite apps directly into the Zoom experience in a way that inspires collaboration, boosts efficiency, creates healthier habits, and generates much more fun. We will also launch Zoom events, our events platform, which will be focused on our enterprise customers and support an array of virtual event use cases. In a recent survey we conducted, 80% of US respondents agreed that all interactions will continue to have a virtual element post-pandemic. And that figure was even higher in many of the other markets we surveyed. The hybrid model is here to stay, and Zoom events will be an excellent solution for our customers who are looking to create and host company events with a versatile and powerful solution. We are very happy to announce that we closed our largest deal ever in terms of ARR with a leading global financial services firm, that selected Zoom meetings to deploy for over 90,000 hosts. That is only one of the large deals to be closed this quarter. Let me recognize three more industry-leading companies that have increased their commitment to Zoom. First, I want to thank Kimberly Clark, whose trusted brands are an indispensable part of life for people in more than 175 countries for expanding the relationship with Zoom by adding approximately 25,000 Zoom phone licenses. As an existing Zoom meetings and video webinar customer, Kimberly Clark saw the same reliability, value, and innovation in Zoom phone. I also wanted to recognize our partner, British Telecom for advocating for Zoom in the decision-making process at Kimberly Clark. Next, thank you Target Corporation, which serves at more than 1,900 stores and online at Target.com with a mission to help families discover the joy of everyday life for their commitment to Zoom. We're very excited to help Target take their communications initiatives to the next level by expanding their Zoom platform solution while unifying their internal and external communications on our technology. As a longstanding Zoom meetings customer, we truly appreciate their trust and faith in Zoom as a platform and partner. And finally, I want to thank Denso Japan's largest and the world's second largest automotive parts company and a leading company in the Toyota Group. They first joined the Zoom family last year, but last quarter they decided to significantly expand their usage of Zoom meetings and Zoom video webinars for internal and external communications. Zoom now connects 47,000 employees across offices, factories, and homes. Dental side, the introduction of Zoom has contributed greatly to our ability to create a work environment that drives faster decision making. Kimberly Clark, Target, and Dental, thank you. I love you. We are off to a great start in fiscal 2022. I look forward to operating you on our hybrid workspace and platform evolution throughout the year and at Zoomtopia, which will be held on September 13th and 14th in a virtual format. Before handing it over to Kelly, I want to share a quick update. As you know, demand for Zoom phone has been amazing, and I'm very excited to announce our new device category. the Zoom Phone Appliance. I've invited Graham to tell you more. Thank you.

Thanks, Derek. Hi, everyone. I'm Graham Geddes. I'm the head of Zoom Phone and Zoom Rooms, and I'm excited to be joining the call today from, you guessed it, my Zoom Phone Appliance. Our new Zoom Phone appliances allow our customers to take advantage of the powerful audio and video capabilities of Zoom, and they're a great solution for touchdown spaces, huddle rooms, and executive offices alike. We also can't wait to see some of the vertical applications that our customers come up with for this new category as well. And while I'm here, I've got some exciting news to share. I think I'll use the white boarding feature of this device. So at the end of December, we announced reaching 1 million seats of Zoom phones sold. Well, that momentum continues, and I'm excited to announce that we have now surpassed 1.5 million seats of Zoom phones sold as of the end of September. It's been absolutely amazing to see the growth continue to accelerate. Thank you for allowing me to join you today. And now I'll turn it over to Kelly.

Thank you, Graham, and thanks to you and your team for your hard work and for that amazing accomplishment. Hello, everybody. Our impressive growth story continued in Q1. As you can see, we continued to win awards and third-party recognition for our strong security focus, empowering company culture, and lasting impact on society. Thank you to all of our amazing customers and employees who made these accolades possible. In Q1, the year-over-year growth of total revenue remained strong at 191%, reaching $956 million. This top line result exceeded the high end of our guidance of $905 million due to strong sales and marketing execution led by our direct and channel businesses, as well as lower than expected churn. Demand was widespread across products, industry verticals, geographies, new logos, and customer cohorts. It's also worth noting that our fiscal 2020 results have shifted our renewal seasonality, which is now more weighted towards the beginning of the year. To illustrate, we saw approximately four times more deals up for renewal in Q1 of FY22 as compared to Q1 of last year. Our renewals, sales, and online marketing teams really outperformed in securing renewals and the success is a testament to their hard work and our product's strong and lasting value proposition. The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, where new customers accounted for approximately 57% of the incremental revenue and existing customers accounted for 43% of the incremental revenue. This trend towards existing customers was expected considering the tremendous growth in our base last year. Let's take a look at the key customer metrics for the quarter. We saw growth in the upmarket as we ended the quarter with 1,999 customers generating more than $100,000 in trailing 12 months revenue. We exited the quarter with approximately 497,000 customers with more than 10 employees, adding approximately 30,000 customers during the quarter. In Q1, customers with more than 10 employees represented approximately 63% of revenue. We also continue to benefit from solid growth in our segment of customers with 10 or fewer employees. In Q1, customers with 10 or fewer employees represented approximately 37% of revenue, up from 30% in Q1 last year and stable quarter over quarter. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 12th consecutive quarter as customers acquired more Zoom meetings, rooms, webinars, and phone products. For this customer subset, we expect the net dollar expansion rate to remain above 130% for the next three quarters. For customers with 10 or fewer employees, which are not included in this net dollar expansion metric, We expect that cohort to be lower than FY21 and more volatile as economies continue to reopen. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 159% year over year. Our combined APAC and EMEA revenue grew 288% year over year to be approximately 34% of revenue up from 25% a year ago. In recent quarters, we've made significant investments in our international teams, which have already begun to pay dividends. The global opportunity remains large and we'll continue to empower our team to capitalize on it. 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, acquisition-related expenses, and net litigation expenses. Non-GAAP gross margin in the first quarter was 73.9% compared to 69.4% in Q1 last year and 71.3% in Q4. The sequential improvement in gross margin is mainly due to optimization of public cloud resources. We expect gross margin to remain relatively stable in the low 70s as long as we continue to support free K-12 education. Research and development expense grew by 97% year-over-year to approximately $41 million. As a percentage of total revenue, R&D expense was approximately 4.3%, which was lower than in Q1 of last year, mainly due to the strong top-line growth. However, on a quarter-over-quarter basis, expenses grew by 33%, demonstrating our commitment to building out our engineering teams globally and maintaining best-in-class product and innovation. Sales and marketing expense grew by 84% year-over-year to $191 million. This reflects an additional $87 million over last year, primarily due to investments and hiring to drive future growth. Sales and marketing expense was approximately 20% of total revenue, a decrease from Q1 of last year, mainly due to strong top-line growth. We plan to continue to invest in adding global sales capacity and brand and product marketing programs in order to capitalize on our growing leadership position and growth initiatives. DNA expense in the quarter grew by 51% to $73 million as we continue to scale these functions and invest in systems, automation, and compliance to meet our new scale. DNA expense was approximately 7.7% of total revenue, a decrease from Q1 of last year. Revenue upside in the quarter carried through to the bottom line with non-GAAP operating income of $401 million exceeding our guidance. This translates to a 41.9% non-GAAP operating margin for Q1, a large improvement from 16.6% in Q1 last year, and a slight improvement from 40.9% in Q4. Non-GAAP diluted earnings per share in Q1 was $1.32 on approximately 305 million non-GAAP weighted average shares outstanding. This result is 35 cents above the high end of our guidance and $1.12 above Q1 of last year. Turning to the balance sheet, deferred revenue at the end of the period was $1.1 billion, up 98% year over year from $552 million. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.1 billion, up 94% year-over-year from $1.1 billion. We expect to recognize approximately 72% of the total RPO as revenue over the next 12 months, consistent with the level of this metric last year. It's important to remember that deferred revenue and RPO trends are not reliable predictors of future revenue growth due to the large percent of monthly billings in our customer base. In addition, the timing of our renewals has increasingly shifted to the beginning of the fiscal year, with Q1 now representing our largest renewal quarter. We expect sequential increases in deferred revenue and RPO in each of the remaining quarters be lower as our available population of annual renewals is smaller. We ended the quarter with approximately $4.7 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had exceptional operating cash flow in the quarter of $533 million, up from $259 million in Q1 of last year. Free cash flow was $454 million, up from $252 million in Q1 of last year. The increase is primarily attributable to strong sales execution and collections. Looking at the rest of the fiscal year, we expect to increase our capital expenditures related to ongoing data center expansion to support our growth outlook. We also expect a legal settlement, which will be disclosed in our 10Q, to be a cash outflow in late FY22. Now, turning to guidance. We are pleased to raise our outlook for Q2 FY22 and the full fiscal year. Please note that the impact and extent of the global pandemic still remain largely unknown. Our outlook is based on our current assessment of the business environment, as well as our own research and conversations with customers. So the second quarter of FY22, we expect revenue to be in the range of $985 to $990 million. We expect non-GAAP operating income to be in the range of $355 to $360 million. Our outlook for non-GAAP earnings per share is $1.14 to $1.15, based on approximately 311 million shares outstanding. For the full year of FY22, we expect revenue to be in the range of 3.975 to 3.99 billion dollars, which would represent approximately 50% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately 1.425 to 1.44 billion dollars, which would represent approximately 45 to 46% year-over-year growth. Our outlook for the non-GAAP earnings per share is $4.56 to $4.61, based on approximately 311 million shares outstanding. Before concluding, I am happy to highlight that we recently launched our ESG website, which can be found on our investor relations and corporate websites. We also recently published our social impact report, which can be found on our Zoom Cares website. Giving back to the community has always been a key tenant of what we do at Zoom. We look forward to updating our investors as we continue along our ESG journey. As always, 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 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 this meeting. Matt, please queue up our first question.

First question is from Itay Kidron with Oppenheimer.

Milestone today announced one and a half million

I'm trying to think of the past. I think you launched phones in early 2019. So it took, I guess, a couple of years to get to a million and then five months to add another half a million. Although at the beginning, you didn't have the global availability as you had, and plus you weren't pushing as hard, at least at the beginning from a sales standpoint. So help me think about What is the pace of addition, Kelly? Or should we peg this to about 100,000 per month addition? Is that sounds like the more recent kind of track record here? And maybe also you can talk about the success of Zoom United, your ability to kind of bundle meetings, phone and chat together. How much of your renewal activity comes in United right now versus maybe a quarter or two ago? How successful are you in that effort?

So we're really excited about the momentum of Zoom Phone. And it was great to have Graham as a guest star today on our call. And what I think you're seeing and what you're gathering, Itai, is that there's definitely increased momentum happening there. So it took us seven quarters to get to that million dollar, I mean, that million seat level. And then, yes, that was in December, so it's taken us about five months to, you know, add an additional 500,000 seats to that number. So it doesn't happen exactly equally each of those months, right? As you can imagine, there are trends at the end of the quarter, but we absolutely are seeing an acceleration in the momentum there, and we're very excited about it.

And with respect to the United plans, how much of your renewal activity comes in this type of a bundle form?

Yeah, so absolutely. Our salespeople take the opportunity when there's renewal to talk about cross-selling and up-selling. In terms of the specific packages themselves, we aren't going to disclose the actual breakout of that, but a lot of what you saw disclosed in the revenue coming from new customers is the opportunity they saw to up-sell either Zoom phone or webinars or rooms as people are thinking about going back into the office space again.

That's great. Thanks, guys. Good luck.

it just so quickly to add on to what i can decide when it comes to zoom phone girls what's fascinating is that it's about our product innovation reliability security availability all the very cool features you know there are so many customers no matter which solution they deployed before in the on-prem or other cloud based phone solutions they all like zoom solution right very good thanks thank you

Our next question is from Dan Bardos with Bank of America.

There we go. Hey, guys. Hi, Dan. Great to see you. Thanks for taking the question. So, Kelly, you had modeled height and churn in the first half of this year related to renewals coming up. You know, based on what you're seeing, what's the reality? You know, do upmarket renewals really mean height and churn, or is it showing, you know, more of an enhanced expansion opportunity versus what you expected? And maybe just continuing with the churn theme on the other side of the business, you know, the 1 to 10 employee-based I'm just curious, what's the latest of what you're seeing in the second half of this year? Any reason to be more optimistic than when you started this year? Thanks.

So we were really pleased. And as I said, great thanks to all of our renewals and sales and online marketing team for their great work done in Q1 as we had a better than expected result in terms of not only retaining customers, but also upselling them during Q1, especially in that cohort of customers with greater than 10 employees. So that's really exciting to see as we expect that momentum to continue as we carry through the years. We have significant renewals also coming up in Q2 as well. In terms of The customer segment with fewer than 10 employees, as we mentioned in the prepared remarks, we're still expecting that to be more volatile as that's a segment that we've seen over the last 15 months has reacted more quickly to the openings and potential closings of markets around the globe.

I agree. Thanks, guys. Thank you, Daphne.

Our next question is from Alex Zukin with Wolf Research.

Hey, guys. Thanks for taking the question, and congrats on another great report. I guess first for Kelly, and then I've got a quick one for you, Eric. Kelly, the unending debate on the stock, I believe, is that, you know, what does growth look like in 2022? And I know that you're not going to guide there now, and we understand that churn is an unknown factor, but can you help us better understand the trend that you do have control over today? Specifically, how much are you increased your quota carrying capacity relative to pre-pandemic levels? What are you seeing out of the productivity of the sales organization relative to pre-pandemic, and what's driving that productivity today?

Yeah, so first of all, we continue to see tremendous opportunity. We were thrilled with the performance in the upmarket in Q1. As Eric just talked about, we had our largest deal to date, and we had some amazing customer wins. And so we are continuing to invest in our direct and our channel sales organizations especially, and we've seen pretty consistent sales productivity. It's going back to levels that are more reflective of pre-pandemic, but at an elevated level from there, given the benefit we have of the global brand awareness, our expanded portfolio of products, And so we're really excited about the future, especially in that upmarket and international as well. As you heard, they are 34% of revenue. And then, of course, we look to Zoom Phone and the continuing momentum that we're seeing there.

And then, Eric, the return to office is on everyone's mind. You know, looking at some recent articles, I think it's on your mind as well. With that, it would be logical to think about Zoom rooms as really starting to become a material growth driver in this new and developing hybrid world. Can you talk about what you're seeing from that product today? How do you think about the opportunity in terms of just the sheer number of conference rooms that are out there? and what are your most forward-thinking clients doing today, and how is that impacting the spend relative to that you're seeing?

Yeah, Alex, that's a great question. First of all, I want to say I'm a fan of you because of your weekly update, sometimes a daily update about what's going on on SaaS market. Well, well done, Alex. Thank you. I think when it comes to Zoom rooms, that's a huge opportunity, in particular for every business when they are reopening their office. Because the way to set up Zoom rooms or the conference rooms are very different. Like I mentioned earlier, we have a smarter gallery view, which puts in-room participants and remote participants on equal footing. That kind of experience I did not see requested before. But in the future, more and more like that, a lot of innovation on Zoom rooms. I would say this is probably the third revenue driver in terms of usage and lots of new use cases. Also, what's more important is that when it comes to the conference room or Zoom room setup, customers, they like a consistent experience. Meaning when they're back at home, because the future is about a hybrid, when they are working from home, they also want to have a consistent experience. That's another reason why customers not only do they deploy the desktop Zoom meeting or webinar or phone, but also they like the conference room experience as well. So that's another driver for our customers to standardize on Zoom platform for meetings, webinar or the phone. Again, a lot of innovation are in the pipeline for the Zoom rooms. Thank you guys. I appreciate the compliments.

Thank you Alex.

Our next question is from Patrick Walravens with JMP Securities. He's joining through audio only. Patrick, are you there? You can press star six to unmute yourself.

Hi, sorry, in the car. You don't want to see that. Eric, I would love to hear what your, if there's sort of like three strategic imperatives that you have for this year, I'd love to hear what you think they are.

Yeah, so Patrick, yeah, drive safely. Yeah, we like it. I drive very safely. Thank you. I think, you know, I want to share with you my personal, you know, priority. I want to share with the company, you know, key initiatives, right? So I share with our team, you know, when we started the year. For me, I think three top priorities for me as a CEO, right? Number one is really make sure focus on our company culture, to maintain the company culture, to evolve our company culture because you have so many new employees coming on board remotely. Number two is double down my time on the platform, on the platform platform, right? It's not only a killer video conference app company, not only a killer video phone in the business, but also the overall platform. Last but not least, some of the very big, large and strategic deals. That's more like my personal part. If you look at Zoom from a strategy perspective, first of all, I think how to make sure support all those businesses reopen and re-enter the offices. That's very, very important. That's why you see a lot of innovations around that angle, right? Either the conference room or the phone, building chat or meetings. That's number one, you know, the initiatives. Number two is really about the international market expansion. That's a huge opportunity, you know, from 25% to more than 30%. I think we do see a lot of opportunities from other email, iPad, Japan, you know, a lot of opportunities, right? We got to invest more. That's the second thing. Last but not least is overall how to make sure our platform strategy works. how to double down our platform to invite our Zoom events, Zoom apps, and UC platform, and also our SDK business. I think that, you know, essentially that will set us up for the future growth if we can invest more to our platform.

That's super helpful. Thank you so much.

Thank you, Patrick.

Next, we have Sterling Ante with JPMorgan.

Yeah, thanks. Hi, guys. Great to see you. I love the Zoom Pride logo. So first, just wanted to start out with you added about $74 million in revenue quarter over quarter this quarter and about 30,000 customers. If I look at that same addition last quarter, it actually mathematically points to the average new customer being smaller this quarter than what we saw last quarter. Is that what you're seeing in the business or is there something else going on underneath those metrics?

I think that it actually depends on when it is in the quarter in terms of the renewals. So think about especially Q1 has this very weird timing from last year where all of those like the real dramatic change in the business happened on March 15th. So literally halfway through the business. So we don't have the full benefit of all of those renewals yet in this quarter. You're going to see it come in the next quarter. And unfortunately, Q1 is always going to have that kind of funny phenomenon because most people co-term with their original date, which was sometime after March 15th in last year.

Gotcha.

Also, I'd like to add a little bit more. If you look at Q1 or Q2 last fiscal year, in terms of revenue growth driven by a lot of online buyers, like presumably consumer SMB business. Starting Q1, we do see driven by large customers, enterprise customers, right? Also with Zoom as well. We closed our largest ever deal, right? This is a very good sign. I think that's a future trend, right? Driven by our biggest customers.

That makes sense. And then maybe one quick follow up. Can you give us an update on your plans and where you are to monetize on Zoom and Zoom events?

Yes, so on Zoom has two parts. One is about the corporate events. Another one is about a consumer or prosumer events. I think our plan is to launch our corporate event first. Essentially, we have so many webinar customers. They are looking for a lot of new innovations. Essentially, they can run their annual user conference, everything online. That's why we doubled down our events platform. I think we are going to focus on the corporate events first. And then later this year, we also want probably to GA our consumer events. Essentially, if you have time, you have a Zoom meeting host account, you can sell tickets, you can teach anything online. That's more like a the opportunity for the second half of this year.

Makes sense. Thank you.

Thank you, Sterling.

Next question is from Mita Marshall with Morgan Stanley.

Great. Thanks. Kelly, you noted the growth margin pickup was largely due to kind of gains in efficiency, but just was there any contribution from, you know, students maybe returning to in-person and just less usage from students that's worth the calling out? And then maybe second question, just, you know, you also noted that international is continuing to see traction from a lot of those channel investments you made kind of at the time of the IPO. Just, you know, where are you on channel development in the US versus international? And just how do you see that developing? Thanks. Yeah.

So in terms of the gross margin, it really was more around continuing to optimize with our public cloud partners. As we've scaled up, we've had the opportunity to work with them on better pricing packages. And that's really what that's attributed to rather than seeing a dramatic shift yet in students going back to school. As we've talked about before, there is a pretty significant impact on the gross margin due to the free cater as well. And what we expect is that is going to do what you say, though, is going to come in over time. If all of a sudden they were to go back to school, you would see a pretty dramatic step function improvement in the gross margin. But I expect that you're going to see that probably happen starting in the fall as more and more students are able to safely go back to school. In terms of international expansion specifically around the channel, this is a really great question. We had a discussion about that in the last couple of weeks. So the team has done a really good job in focusing on our U.S. channel strategy, especially around Zoom phone and building out our master agent program. And we are now working on building that out internationally. It's probably, isn't guessing, but we're probably where we were in the US a year ago or so. So it's probably about a year behind in terms of our international channel strategy. So it's great that there's opportunity ahead and Laura Padilla and her team are working on that now.

Great, thanks guys.

Next question is from James Fish with Piper Sandler.

Hey, Kelly and Eric, thanks for the questions. And Kelly, actually happy early birthday tomorrow.

Happy early birthday to you too, James.

Thank you. Yeah. You know, Eric, you guys noted a win with Kimberly Clark for Zoom Phone. Yet one of your competitors really cites BT as one of their key partners. Are you penetrating those tech incumbents that have, in theory, really opened up their installed bases more? And I'm specifically talking like Navaya, for example, more than you were last year, as well as what are you hearing with carriers about partnership opportunities?

I think, first of all, I think as Kelly mentioned earlier, right, you know, not only Julian Barber directly to his team, when it comes to Zoom Phone, by and large, a lot of our customers, they already built a great relationship with those carriers or partners or master agents. We are already doubling down on that, right? This is, you know, essentially becoming more and more important to our Zoom Phone growth. That's our strategy. And inside of that, every time we work together with our, you know, channel partners or carriers, pick a British, Telecom, for example, when they work together with our potential prospect, after they evaluate our Zoom service, not only do they realize this service works so well, but also we share the roadmap with them. They say, wow, that's amazing, because compared to any other solutions, I mean, in other cloud-based phone solutions, they really like our roadmap. We really like usability and integration with video meetings, webinars, and also the reliability plus security. And that's the reason why we, you know, British Telecom, they advocated for Zoom at Kimberly Clark. This is huge, you know, the deployment. I think overall we see more and more deals like that. In particular, when customers test our solutions, we have high confidence. Zoom phone is much more innovative than any other solutions already.

That's helpful. If I can sneak in one more. Obviously, some exciting announcements with Zoom phone appliance and other things the last few quarters. I guess, how do you think about chat functionality really outside of the video experience app, as well as kind of the broader customer experience and collaboration markets longer term for Zoom's growth opportunity?

Yeah, so it's a great question. So when it comes to Zoom chat, we already had a built-in chat for many, many years. Some customers even standardized on Zoom video, Zoom phone, and Zoom chat. For error, our approach is always, you know, look at everything from any user from customer's perspective, right? The already deployed Slack is wonderful. And the two best bridge of service, we work together very well. Some customer, they want to standardize everything for Microsoft, it's okay. We also interoperate with Microsoft Teams. You know, some customers, they might be using other chat or standardize everything on our platform. Overall, I think, I do not think, you know, the customer, they would like just to deploy one chatter solution for everything. That's why I think the integration with our meeting and phone, you know, for sure, you know, can help, you know, drive up the usage, you know, for our customers. Again, we are taking a very open-minded approach. No matter which solution, chatter solution they are using, we want to make sure have much better integration experience. Thanks. Thank you.

Next question is from C.T. Panagrahi with Mizuho.

Hey, Eric and Kelly. Good to see you. Thanks for taking my question. I want to dig into the $100,000 customer paying $100,000 segment. So this was a big renewal quarter for you guys. So I just want to understand what sort of changes you have done to drive such success there and what have you learned so that you can apply in the Q2? And then a little bit color on what sort of growth in terms of is that more users or cross-selling products, what you saw in that segment?

Yeah, so first of all, take the last part first. It was really a combination of both. As we talked about some of the customers we mentioned in the prepared remarks, we saw expansion in terms of users, some transition from active hosts to enterprise licenses, as well as additional products being deployed. And what we did, I think we talked about this last quarter, we made sure that especially our upmarket reps were aligned with the goal of renewing as many customers as possible this quarter. So we had a special bonus program in place for them. to help them focus on renewals and it really worked. And that program is in place also for Q2. So we're looking forward to a strong renewal performance in Q2 as well.

Okay, and then quick follow up on that. It's very impressive to see that 90,000 plus user customer. So when you think of your addressable market, and mainly in the enterprise and businesses now looking to reopen, So how many such large customer you could potentially close?

Well, I think the way that we look at it is there is a huge market opportunity already. While we're super excited about deals like this, when you look at, for example, the Global 2K or the Fortune 100, there's still a relatively small penetration in terms of customers that are paying us more than $100,000. I think that In the global 2K, we're still under like 15% that are paying us more than $100,000 annually. So that to me just represents opportunity that is ahead. And we have our sales team is doing a great job of focusing on all of those opportunities. We have regular check-ins with them. And so there's, I mean, the potential is still massive.

Thank you.

Thank you.

Thank you, Siti.

Our next question is from Will Power with Baird.

Great, thanks for taking the question. You know, Eric, earlier on for the previous question, you spoke to some of the areas of strategic focus for you and the team this year. And I think right at the top of that or near the top, you know, was the focus on, you know, turning Zoom into a broader platform and looking at those, you know, opportunities. So as you look out over the next three years and putting Zoom phone aside, which is already having tremendous success and Zoom rooms, as you look at the SDK, you know, slash API opportunity, which is rolling out. You look at Zoom events. You know, what gets you most excited in terms of the bigger growth opportunity? And I guess within that, what are you thinking about today in terms of contact center? We hear all the UCAS providers talk about the importance of contact center. You probably get this right every quarter. Where does that fit into the equation there to you?

Yeah, Will, that's a wonderful question. I think there's so many things. I'm very excited every day, but when it comes to top priority, and I will be excited for next four or five years, I would say number one thing is about Zoom apps. So essentially, you look at Zoom, right? Zoom is more like, when we do the Zoom, it's more like a business communication tool, right? During the pandemic crisis, a lot of consumers, consumers are using Zoom. Again, still for the you know, for the business communication, or maybe consumer communication, right? You know, you look at a Zoom interface, it does not give you a lot of context. How do bringing those contexts This is Zoom people-centric interface. Down the road, before the meeting is over, you and I can play games together. You can approve my exclusive report. We have great integration with Jobbox, SurveyMonkey, with all others. Essentially, Zoom will become an operating system to focus on the people-centric interface. With the Zoom apps, that's a huge opportunity. It's part of our overall marketplace strategy, including Zoom SDK and other integrations. That's the most exciting opportunity. When it comes to contact center, This is part of our UC platform, right? And that's the reason why I mentioned Zootopia and scheduled September 13th and 14th. Stay tuned. You will see something, you know, hopefully, you know, we can do something around the contact center. Again, that's also the big market. Today, we do integrate very well with our great partner, Fireman9, and also the TargetX, Cotelio, InContact, and hopefully we are going to do more. Again, you know, some of the new things, stay tuned. I had a Zoom-topia.

Went forward to that.

Thanks. Thank you, Will.

Our next question is from Matthew Nicknam with Deutsch.

Hey, guys. Thanks so much for taking the question. First, just on Zoom phone, if I could just go back, congrats on the success. Can you give any more color in terms of where you're seeing some of the accelerating growth, both in terms of customer cohorts, It's upmarket versus small business and then talk about some of the geographic mix where you're adding subs. And then just to go back to churn, particularly for the less than 10 employee base. Maybe, Kelly, can you talk about how that trended in the quarter relative to expectations and then talk about what's embedded in your forecast for the second half of the year? Thanks.

So in terms of Zoom Phone, we continue to see success across all segments of our business. As we've said from the beginning, we were really excited about continued expansion into the upmarket. And we currently have 21 customers with more than 10,000 seats of Zoom Phone. So I think that shows that we really are seeing momentum in that upmarket and enterprise customer base. And so that's really exciting. And then international was the fastest growing segment in terms of geographical locations for Doomfone last quarter. So seeing really widespread momentum across that. And then in terms of the one through 10 cohort, you know, we have, we've talked about it consistently being the most volatile cohort. We've seen significant growth as it's, you know, a year, a little over a year ago was 20% of our revenue growing to, you know, the mid thirties currently. That has certainly been a segment that has been a lot more volatile than in the up market due to the fact that, first of all, most of them buy or a majority of them buy on monthly plans. So that's the flexibility that we give them. And we want people to stay with Zoom because they need it. But we have seen volatility in that segment. And we have modeled, when we came into the year, we modeled accelerated churn in that segment. And that's how we're continuing to think about it as we look for the rest of the year.

So, Matt, just to quickly add a little bit of color to what Kelly said, look at the phone deployment. Today, I do not think any customer, no matter big enterprise or 70 customers, they do not have a phone deployment. They already have something, either on-prem or cloud. That's the reason why you can look at our growth. That means our solution is better. Because if we are replacing any other solutions, it's not a brand-new market, right? So that's a replacement. It really helps us to drive up our growth. no matter big enterprise on credit, on private deployment or SMB customers, or even enterprise customer who deploy other cloud based solution. They like our solution.

Got it. Thank you both for the color and congrats. Thank you.

Our next question is from Carl Kirstead with UBS.

Thanks, everybody. Kelly, I'm going to ask you a fairly prosaic question about cash flow. Congrats, by the way. $533 million in operating cash flow, great performance. So, Kelly, I think we and a number of investors make some assumption about the gap between operating margins and operating cash flow margins. So, given that Zoom, you obviously raised your full year operating margin guidance by a decent amount. You might see people apply that gap and raise their operating cash flow margin guidance or estimates as well. But I just wanted to ask you, as everybody is tempted to do that, whether there's anything happening in 2Q, 4Q that you would encourage us to keep in mind as we adjust our cash flow estimates. Thank you.

Yes. So thank you for asking that, Carl. So first of all, Q1, due to the high level of renewals and this being our biggest, was our biggest bookings quarter last year, right? And so big renewals quarter also means the largest billings quarter for the year. So that leads to also the opportunity for exceptional collections in the quarter. So bear that in mind. And this will be the largest billings and renewal quarter of the year. As I mentioned in the prepared remarks, And then as we continue to go through the year, you should go back to see how the relationship between free cash flow and operating margin existed kind of pre-pandemic. If you go all the way back to the sort of more normal operating period, that's what you should start to see as we move through the year. The only kind of exceptional considerations for the rest of the year is we do have ESPC purchases. in Q2 and in Q4. So remember that cash builds up as we go through Q1 and into Q2, and then there's the purchase and the same in Q3 and Q4.

Okay. And then, Kelly, maybe as a follow-up, this dynamic of renewals being front-end loaded this fiscal year, you cautioned us to be careful about our RPO and DR sequentials. Is there anything else that that kind of renewal front-end loading, you know, distorts or changes in terms of the seasonality and any other metric that you'd encourage us to keep in mind?

Well, the one we just talked about, which is billings and collections, right? That's really the impact.

Okay, terrific. Thank you very much.

Yeah, thank you.

Next question is from Shebly Seyrafi with FBN Securities.

Yes, thank you very much. So as kids go back to school, what kind of gross margin uplift are you thinking about is possible in the second half of the year? For example, you just hit 74 percent. Are you thinking about like a couple of points of uplift in the second half? And following that, you have a long term target of 80 percent for the gross margin. Talk about your expected timetable to get there.

Yeah, so currently, in the guidance that we just gave, we have not modeled any impact or benefit from return to school as we are committed to supporting the needs of those schools as long as we're in a situation where it isn't safe for students to return. If they were to all of a sudden go back, which I don't think is how it would happen, you would see certainly a couple of points improvement in the growth margin. I think what will happen likely is it'll be more major than that. And little by little, you'll start to see the growth margin starting to creep up again. But in terms of the timeline around that long-term margin target of 80%, we haven't set a timeline as it remains still unknown how long that service is going to be needed by the schools.

Thank you.

Our next question is from Tyler Ranke with Citi.

Hey, thanks a lot for taking the question, and I loved seeing the demo. I'm glad we didn't have to write our questions using that whiteboard. That might have been a struggle.

Hey, that's a great idea for next time. Maybe we'll get you all.

As long as I don't go first. So Kelly, I wanted to ask you, obviously really strong revenue growth this quarter, but I think most investors couldn't help but notice the magnitude of upside relative to your guidance was smaller than we've seen in the last four quarters. You obviously called out better than expected churn and customer ads look good relative to the street, but just wanted to understand, was there anything unusual that maybe held back more robust revenue upside relative to your guide? Or is this just kind of the new normal that we should expect given you're starting to lapse in tough comps?

Yeah, I think, you know, we talked about this also in last quarter's call as well, as we really started to round the year on some very difficult comps. And also, you know, we're approaching, you know, almost $4 billion in revenue this year. We're becoming a very large company and I think are still very pleased with our guidance of 50% year-over-year growth. But, yes, this is going to be more than normal, which is what I would expect, you know, of a company at this scale, that these are more normalized growth rates.

Great.

Thank you.

Next question is from Matt Stottler with William Blair.

Hey, guys. Good to see you. Thanks for taking the question. I'll just ask one and hop on a little bit late. Again, we have our conference going on, so I'm sorry if somebody asked already. But obviously, the Zoom events platform was great to see. It's something we've been thinking about for a while. We kind of saw the on Zoom release that this is going to be a part of this going forward. I'd love to just double click on, you know, how meaningful the opportunity with Zoom events could be. Obviously it makes a lot of fundamental sense and a lot of companies have been hosting their events on Zoom. But as you think about, you know, what that broader opportunity could look like, you know, whether there's numbers around that or just qualitative, that would be helpful. Thank you.

Eric, do you want to talk about the vision?

Sure. Absolutely. So Matt, so the reason why we built a Zoom events is first of all, we really, you know, received a lot of feedback from the customer side. They already hosted a lot of Zoom webinars. Now they want to do more, especially the pre-events and post-events and how to, you know, run everything virtually on, you know, online, right? Like to take a Zoom copy, for example, you know, from the day when you're planning the, you know, the Zoom copy and all the way to you finish everything, make sure everything you can count on one platform, that's opportunity coming from, right? However, I think, you know, given the, you know, the, you know, the, you know, last pandemic crisis, you feel like a little bit more pressure, you know, for us, you know, how to quickly satisfy the customer need. But we do already have a lot installed base for Zoom video webinar. I think it's more like a natural, you know, migration, right, to the Zoom events platform. Also, as brand-new opportunities, not only during corporate events, but also later this year for the consumer-presumer events, right? You know, as I mentioned earlier, right, you really can host very meaningful events, and you can sell tickets to your participants. We have a tight integration with the payment provider as well. That's the reason why it's going to be another revenue driver on both corporate side and also on consumer side. Thank you. Thank you, Matt.

Next question is from Matt VanVleet with VTIG.

Hey, everyone. Thanks for taking the question. Appreciate it. I guess thinking about the channel question a little bit differently, curious how much of an opportunity is that for the video-only side, or at least the landing spot for the video side, or is that primarily Zoom phone right now? driving most of the channel business?

You know, early on, we saw great success as selling meetings through direct, and we've continued to expand our channel relationship across both meetings and phone, but it's It depends on where the customer is themselves, right? We really want to meet them and provide them the opportunity to have access to our sales organization in whatever manner works for them best. So we do obviously sell both meetings and phone. A larger percentage of our Zoom phone business comes through the channel. I think that's just based on historically how organizations have typically bought. But again, it's really up to the customer. We want to meet them wherever they feel most comfortable.

Great, thank you.

Thank you, Matt.

Our next question is from Taz Kunjalvi with Guggenheim.

Hey guys, thanks for taking my question. I have a question on Zoom Phone. You've been selling through channel partners and direct as well. I had a question about the impact of margins when you sell through the channel versus selling directly because I've heard that there's a lot of spares and residuals you have to pay to the channel partners when you sell through them. So can you talk about the head to margins for Zoom Phone When you sell a deal directly, what's the setting to a channel partner?

Yeah, we certainly have a channel program that we think is attractive and competitive in the market, but I will say we thought a very long time about setting those rates and where they are and aligning them to having a differentiated product. The way that we see it is while there is some impact to the overall margin when there's a channel partner involved, it's really about the broader opportunity to continue to take market share and grow as quickly as possible. And again, back to the last question, we really want our customers to be able to buy in the way that feels the most comfortable to them. So while there is some impact to margin overall, we think that for the long term, it's absolutely sustainable and it's really the best approach as we continue to focus on growing top line.

And just one more housekeeping question. I don't know if you gave us the number of Zoom phone customers this quarter. I think last quarter was 11,000. Maybe I missed it, but can you comment on the number of Zoom phone customers this quarter?

Yeah, we did not disclose that. That's one of the things that we're going to do on a milestone basis. And the next milestone where we are likely to disclose it will be Analyst Day at Dentopia in September.

Thanks, guys. Thank you very much. Thank you.

Our next question is from Jonathan Keys with Summit Insights Group.

Great. Hey, thanks for taking my question and congrats on the quarter. I just wanted to double click on Eric, your comments earlier about phones and that you're winning more and more. It sounds like from other cloud providers, I guess. Is that becoming a bigger part of the wins for phone? Do you see that as indeed the stronger growth trajectory versus replacing the legacy premise phones business? If you can provide any details in terms of, like, any bake-offs between you and the other phone providers, that would be great. I know you may be hesitant, but, you know, more detail, the better. Thank you.

Sure. I think, you know, first of all, you look at only the two years, right, since we launched Zoom, right? Last quarter is 1 million, you know, paid seats. As Graham shared, you know, on his wire board session, it's already 1.5 million, right? It does tell us something, right? It works, right? So today, you look at a lot of enterprise customers, very likely they deployed on-prem solution. That's a huge opportunity for every, you know, the cloud business service provider, including Zoom. So, and Zoom, I think the cloud business is big. That market itself accommodated towards three winners, right? I think we are part of that. And also look at other businesses who already deployed cloud-based phone solutions. Our growth is coming from replacing those solutions. We did see a lot of deals, right? And no matter which vendor, we do see the customer job, the other cloud-based solution switching to us. There are multiple reasons. First of all, we already built our charts. Secondly, look at our solution, it's a modern interface, much better integration with the video because ultimately we think voice and video are the same thing. Those two we convert into one experience. Otherwise, you deploy a separate solution for phone, separate solution for video, From any other perspective, it's not consistent. It doesn't work. Zoom is in a much better position than any other vendors on that front. And also, you look at our other, you know, the functionalities, you know, Zoom events, apps, and also the webinars, Zoom rooms, a lot of other things. Overall, customers like our experience, right? That's the reason why, you know, we look at an opportunity. It could have come from a lot of enterprise on-prem deployment or the cloud-based, you know, you know, opportunities from other service providers. We do see growth coming from almost everywhere. But again, it's too early to tell. It's only two years. Maybe in the next two years, I can share more with some detailed numbers.

Look forward to it. Thank you, Eric. Thank you.

Our next question is from Chaim Siegel with Eleazar Advisors.

Thank you.

We can hear you. Oh, no, I said my question was asked. Thank you.

Oh, okay.

Thank you. My answer is very straightforward. Thank you.

Thank you. We have our next question is from Rishi Jaluria with RBC.

Hey, Eric, Kelly, Tom, thanks so much for taking my questions. Nice to see continued momentum in the business. I wanted to ask a little bit of a philosophical question, which is around hybrid work, right? I mean, I think it's consensus at this point that the workplace of the future is going to be hybrid. But you had this really enlightening survey a couple months ago of 1,500 Zoomers. of what that means and everyone's very sharply divided on what hybrid work is whether that's home as the primary or the office as a primary something in between so a simple kind of question what what does hybrid work mean when you think about that and is there a particular model yes of hybrid work that you think yeah so sorry rich your voice a little bit of broken but anyway so

to answer to your questions. So, I happened to read an article today, you know, from Bloomberg, right? In May, right, I think they did a survey, right, of 1,000, you know, U.S. adults, right? And 39 percent of the respondents, they mentioned they needed flexibility. If you look at the millennials or the Generation Z, the number increased to the 49 percent. Right? So, meaning we need to give the flexibility, you know, to those employees. Otherwise, you're going to lose the talents. So, when it comes to hybrid, first of all, that will become mainstream. However, different businesses, they might have a different way to manage their hybrid work. Like two days in the office or three days in the office. It's different. Right? And also, they might have one week in the office, another week at home. Also, it could be different. But overall, the definition of a hybrid work is about flexibility. To give employees flexibility.

All right. Thank you, Rishi. Okay. We have time for one more question. And that last question is from Tom Roderick with Stiefel.

Okay, great. Thanks, Matt, for the question. Hi, Eric. Hi, Kelly. Great to see you. You know, thinking back to a year ago on your first quarter call last year, and with all the great success, you still spent a fair bit of time on that call kind of walking us all through the big plans on how to beef up security and solve for a lot of the the emerging concerns that were coming with all of this jump in activity. I think it's pretty telling to your success on that front that we haven't uttered the word security once on this call, I think. But I also recognize the threat vectors aren't going away here. Can you just give us an update, Eric, to your thoughts on what you need to do to stay ahead of the security plan? You've reached end-to-end encryption. Your 90-day plan was a success. But what's next? How do you stay ahead of it?

Yes, this is a great question. Before I talk about next, maybe I should take a step back to share what had happened, right? Because, you know, Zoom was built to serve for enterprise customers. We never thought about K-12 schools or consumers, consumers who are going to use Zoom. We never thought about that private pandemic crisis. That's, by and large, most of the challenges coming from that. However, I think we really you know, take that seriously, right? We doubled, more than doubled, I mean, the size of a company. The reason why is we want to allocate more resources on privacy and security. I can tell you, we have almost 200 people working for the privacy and security now at Zoom. We are really doubling down on that. That's one. The two is we are so grateful to our customers. The reason why is, you know, we earn the trust back. They understand what had happened. And that's why a lot of people joined our weekly webinar last May and April, the 90 days, and I'm still running the monthly security webinar, right? We share everything open, transparent. Now, that's the second thing. Third thing, I think security and privacy is not only a feature, it's our core DNA. In terms of process and the functionality, features, roadmap, innovation areas, this is our new approach. Also, we share everything with our customers. So in terms of specific features or enhancement, a lot of smaller things, right? You know, like recently we added notifications. In particular, we added a lot of Zoom apps. And the Zoom apps might, you know, want to understand your meeting, you know, the content, you know, without, you know, telling customers what's going on. That's not as good from a security perspective, right? A lot of smaller innovations on that front. So again, actually, we do spend a lot of time and resources on that. That's still a part of our overall innovation for supporting the privacy and security. It's extremely important for our future goals. It's a great update. Thank you, Eric. By the way, Tom, recently, look at the RSA Security Conference. They are using Zoom as well. We have a lot of security companies who are standardized on Zoom platform. It does help. We take security very, very seriously.

great thank you thank you and that was the last question we have time for today thank you everyone and thank you for joining us thank you all so I really appreciate thank you bye everybody thank