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spk16: Hello, everyone, and welcome to Zoom's third quarter fiscal year 2022 earnings release. I'd like to remind everyone this call is being recorded. At this time, I'd like to turn it over to Tom McCallum, head of investor relations.
spk07: Thank you, Matt. And let me welcome everyone as well to Zoom's earnings video webinar for the third quarter of fiscal 2022. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom 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 four looking statements, including statements regarding our financial outlook for the fourth quarter and full year 2022. Zoom's expectations regarding financial and business trends, Zoom's growth strategy and business aspirations to help customers embrace change, enable hybrid workforces and grow their businesses, product features and the expected benefits of such features, and Zoom's continuing to fortify its position as a leading brand in its industry. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar. And with that, let me turn the discussion over to Eric.
spk21: Thank you, Tom. In the spirit of the upcoming holiday season, I want to recognize the hard work of Zoom's global workforce and thank our customers, partners, and investors for their steadfast trust and support. We continue to fortify our position as a leader brand in our industry. We are honored that Gartner named us a leader in the 2021 Magic Quadrant for meeting solutions for the sixth consecutive year and for unified communications as a service for the second consecutive year. Zoomtopia 2021 was bigger and more successful than ever before. We hosted nearly 34,000 live virtual attendees on our platform and 277 speakers, including customers like Choice Hotels, iLife and HubSpot. And we did it on Zoom events, our all-in-one solution for virtual and hybrid events. Zoom events allowed us to streamline event preparation, enhance audience engagement, and conduct better post-event communication and analysis. Its multi-track functionality enabled us to draw our analysts directly into the Zoom Topia agenda so that participants could move seamlessly across the endless day track, all the tracks of Zoomtopia and the all connecting lobby. At Zoomtopia, customers shared how they use Zoom to enable flexible co-located workforces and grow their businesses. We demonstrated how Zoom apps, which already have 67 apps after only a few months, has the potential to enhance meeting productivity and collaboration. More and more businesses are building products on our platform that connect interrelated work streams to the Zoom client, both inside and outside of the meeting. We were also super excited to unveil the Zoom Video Engagement Center, which enhances our customers' ability to communicate with their customers through our omni-channel solution. And it shows our broader commitment to the contact center space. It's expected to be generally available early next year. Whether it's the ability to virtually wireboard in and out around the meeting or utilize AI to transcribe or translate a meeting live, Zoom will help you demonstrate that previously futuristic capabilities have arrived. We're working hard to develop and deploy the technologies of the future to address current business needs and reimagine how we communicate and work in a flexible hybrid world. Now, let me recognize a few big wins for the quarter. We are very excited to have Carrier Global Corp, the leading global provider of healthy, safe, sustainable and intelligent building and coaching solutions as a longstanding Zoom meetings customer and now a new Zoom phone customer as well. Following several months of extensive vendor reviews of leading UCaaS vendors, Carrier selected Zoom Phone to modernize their phone systems for a large portion of their nearly 53,000 employees across 180 countries. We are so thankful that Carrier chose Zoom to deliver an increasingly comprehensive, secure, innovative, and integrated set of communications services. In addition to Carrier, we had many other upsells this quarter. For example, one of the world's largest global retailers decided to add 20,000 Zoom phone licenses to their existing meetings, rules, and a webinar footprint in order to better manage their global offices, distribution centers, and retail locations. This demonstrates our strong value add to the retail vertical and builds upon previous success stories like Tapestry and Target. We also had several notable Zoom meetings with in Q3, including a very large expansion for leading federal system integrator, which puts them at 45,000 users, demonstrating the security and reliability of our Zoom for Government platform. A competitive win with a global technology forum for 16,500 meeting licenses to modernize the way their employees communicate. An expansion within our big four audit and big three consulting clients, which added more than 35,000 meetings licenses in a quarter to their existing strong meetings footprints. Thanks for our customers, investors, and the hard work of our approximately 6,300 employees. We've grown over the past decade from a video conferencing solution to a communications platform that encompasses unified communications, as well as developer and event solutions. All these services provide an indispensable platform for individuals, enterprises, and developers to connect, collaborate, and build in a hybrid world. And with that, let me pass it over to Kelly.
spk19: Thank you, Eric. And hello, everyone. Let me start by reviewing our financial results for Q3 and then discuss our outlook for Q4. In Q3, total revenue grew 35% year over year to $1.05 billion, exceeding the high end of our guidance of $1.02 billion. The growth was primarily driven by strength in our direct and channel businesses, which grew at twice the rate of our online business, as well as improved churn in both online and direct segments. From a product perspective, we saw strong demand for Zoom video webinars, Zoom room, and phone. Zoom phone had year-over-year revenue growth in the triple digits and reached 30 customers with over 10,000 paid seats. The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, with existing customers accounting for 26% of the incremental revenue, up from 19% a year ago. Let's take a look at the key customer metrics for the quarter. We saw 94% year-over-year growth in the up market as we ended the quarter with 2,507 customers generating more than $100,000 in trailing 12 months revenue. These customers represented 22% of revenue, up from 18% in Q3 of last year. We exited the quarter with approximately 512,100 customers with more than 10 employees, up 18% year over year. In Q3, customers with more than 10 employees represented 66% of revenue, up from 64% last quarter and 62% in Q3 of last year. These trends suggest that our customers with more than 10 employees are expanding their use of our platform, adding more products and seats aligned with our go-to-market strategy. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 14th consecutive quarter as existing customers increased their spend with Zoom and we saw strong upsells of Zoom Phone and Zoom Rooms. For Q4, we expect this metric to be modestly below the 130% mark as the denominator of this trailing 12 month metric reflects the significant growth in our customer base. Both domestic and international markets had strong growth during the quarter. Our America's revenue grew 30% year over year. Our combined APAC and EMEA revenue grew 47% year over year to be approximately 33% of revenue up from 31% a year ago. On a quarter-over-quarter basis, Asia Pacific had another strong quarter driven by growth in Australia and Japan and bolstered by the investments we have made in our international teams. However, as we discussed in Q2, we saw headwinds to our online business in EMEA, mainly related to summer seasonality. Now, turning to profitability, which was strong 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, net litigation settlements, net gains on strategic investments, and undistributed earnings attributable to participating securities. Non-GAAP gross margin in Q3 was 76%, an improvement from 68.2% in Q3 of last year and stable with Q2 of this year. We remain committed to our multi-year strategy of building out our data centers to support further improvements in gross margin. Research and development expense grew by 169% year over year to approximately $68 million. On a sequential basis, we added over $13 million in R&D expense, primarily due to expansion within our engineering and product teams globally. As a percentage of total revenue, R&D expense doubled year over year to 6.4%, demonstrating our commitment to innovation and product development. Sales and marketing expense grew by 68% year over year to $237 million, or approximately 22.6% of total revenue. primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in global sales capacity and marketing across our core and new products. G&A expense grew by 12% to $82 million, or approximately 7.8% of total revenue. This was lower than Q3 of last year as we expanded our G&A functions prudently to meet our new scale. The revenue upside in the quarter carried through the bottom line with non-GAAP operating income of $411 million, exceeding the high end of our guidance of $345 million. This translates to a 39.1 non-GAAP operating margin for Q3 compared with 37.4% a year ago and 41.6% last quarter. Non-GAAP diluted earnings per share in Q3 was $1.11 on approximately 306 million non-GAAP weighted average shares outstanding. This result is 3 cents above the high end of our guidance and 12 cents above Q3 of last year. This result includes a $70 million provision from income tax. a significant increase from last year, mainly due to fully utilizing our NOLs, as well as a decrease in our stock-based compensation for tax purposes. Turning to the balance sheet. Deferred revenue at the end of the period was $1.2 billion, up 39% year-over-year from $855 million, and slightly up quarter-over-quarter. Looking at Q4, we expect the year-over-year growth rate in deferred revenue to be in the mid-20s. This is driven by the cyclical decline in the average remaining term of our annual customer contracts, which are front half-weighted. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.5 billion, up 51% year-over-year from $1.6 billion. We expect to recognize approximately 67% of the total RPO as revenue over the next 12 months, as compared to 72% in Q3 of last year, reflecting a shift back towards longer-term plans. We ended the quarter with approximately $5.4 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $395 million as compared to $411 million in Q3 of last year. Free cash flow was $375 million as compared to $388 million in Q3 of last year. It's important to note that as we progress beyond the initial phases of the pandemic growth and continue to invest to support our new scale, our working capital is normalizing. In Q4, we expect to incur a one-time $85 million cash outflow related to a legal settlement, which we disclosed and booked as a gap expense in Q1. As a reminder, due to the seasonality of renewals being front and loaded and tapering through the year, our collections will follow the same trend. We also expect further CapEx investments in building out our data centers to support future gross margin expansions. Now turning to guidance. We are pleased to raise our outlook for FY22. This outlook is based on our current assessment of the business environment. Specifically, it assumes that our direct and channel business will continue to grow while our online business will be ahead when in the coming quarters as smaller customers and consumers adapt to the evolving environment. For the fourth quarter of FY22, we expect revenue to be in the range of $1.051 to $1.053 billion. We expect non-GAAP operating income to be in the range of $361 to $363 million. Our outlook for non-GAAP earnings per share is $1.06 to $1.07, based on approximately 307 million shares outstanding and a tax rate of approximately 10%. Due to our multi-year history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the U.S. blended tax rate in FY23. For the full year of FY22, we expect revenue to be in the range of $4.079 to $4.081 billion, which would represent approximately 54% year-over-year growth, up from our previous guidance of 51% issued in August. We expect non-GAAP operating income to be in the range of approximately $1.598 to $1.6 billion, which would represent approximately 63% year-over-year growth. Our outlook for the non-GAAP earnings per share is $4.84 to $4.85, based on approximately 306 million shares outstanding. 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 Zoom team, our customers, our community, and our investors. Matt, please queue up our first question.
spk16: Our first question is from Sterling Auti with JP Morgan. Yeah, thanks. Hi, guys.
spk18: Eric, you mentioned kind of evolving into a communications company. And I'm wondering, as you think about the over 400 million business phone users that are on legacy technology, how do you anticipate capitalizing on that opportunity? Meaning, do you expect a big portion of those will end up coming on to either a video platform like Zoom, Zoom Phone, or will they start to just rely on their cell phones to make communication calls?
spk21: Yes, Stephen, that's a great question. You know, as you see, right, in Q3, and, you know, a great customer like a carrier, right, and they expanded, you know, to deploy the Zoom phone, right, and it's not 100,000, tens of thousands deployed, right? So you look at the phone industry, right, I mean, the cloud-based PBX industry, I think it's doing very well to replace legacy on-prem systems. Also, if you look at those existing cloud-based phone providers, most of them developed technology stack many years ago. However, with those especially for large enterprise customers, when they migrate from on-prem to cloud, they do not want to deploy another solution because the video and voice, those two are converged into one service. In particular, for those customers who already deploy Zoom video platform, essentially, technically, Zoom Club is the PBX system already there. We just need to enable and configure that. Otherwise, you have two separate solutions. That's why we have a high confidence that Every time a lot of enterprise customers, they look at all those cloud-based phone solutions, Zoom always the best choice. That's why I think, you know, the huge growth opportunity for all, you know, for our unified communication platform, video and voice together, and to capture the wave of this cloud migration from on-prem to cloud.
spk16: Got it. Thank you.
spk21: Thank you.
spk16: Next question is from Parker Lane with Stifel.
spk01: Yeah, thanks for taking my question. I was hoping you could dive into the Video Engagement Center a little bit, the initial reception that customers have had to that solution, and who do you ultimately envision the target customer will be here? Is it going to be more lightweight, small business, medium-sized business that are looking for a contact center offering, or do you envision taking it upstream over time?
spk21: Yeah, this is a great question. So we were very excited you know, at a Zoom Power BI to announce our Zoom Video Engagement Center. Because, you know, the reason why, you know, we decided to invest resources on that is based on our customers' feedback. In terms of a growth trajectory, I would say it's very similar to what we did before for our Zoom phone, right? You build a greater solution to leverage the same platform, And you can start from existing customers, SMB customers, soon afterwards, you can, you know, route it out to a lot of enterprise customers. That's our, you know, contact center, you know, vision, right? Essentially, I think, you know, this is a market, you know, this contact center market is growing very well. However, a lot of enterprise customers, guess what? They still deploy on-premise solutions. you know, for the next several years, I feel, you know, the opportunity is huge for us, right? Especially customers who produce Zoom video and a phone together as a natural extension for our unified communication platform to have very scalable, secure, and, you know, and the same platform solution, you know, which is our, you know, the solution to the contact center space.
spk01: Got it.
spk21: Thanks, Eric. Oh, by the way, we do have quite a few, you know, beta customers in the pipeline, so.
spk16: Next question is from Taz Kajalji with Guggenheim.
spk20: Hey guys, can you hear me okay?
spk05: Yep.
spk20: Hi, I have a question for Kelly. Kelly, can you give us some more color on your mix across different products? We've had strong growth in Zoom phone, Zoom rooms for the last couple of quarters. Is the combination of phone plus rooms now more than 10% or is that still below 10% of the overall business?
spk19: Sorry, it's a combination of phone and rules.
spk20: Oh, the non-meeting business, is that less than 10 or has it crossed the 10% threshold?
spk19: Well, none of our product segments on their own is greater than 10% because it's likely that we would break that out if it were. If you add a few of them together, yes, there are a few of them. If you put them together, they would exceed greater than 10%. But on an individual basis, not any of them is greater than 10% at this point.
spk20: Thanks. Thank you.
spk19: Yeah.
spk16: Next question is from Meena Marshall with Morgan Stanley.
spk24: Great, thanks. I wanted to ask just about the traction of customer ads. You know, we've seen the customer ads slow down a little bit and just wondering how you think about kind of sales and marketing resources, directing them more towards upsells, which is clearly showing a lot of traction versus kind of new customer acquisition and just how you think about that in the budgeting practice and how we should think about that going forward.
spk19: Yeah, so it's exactly the strategy that we've been planning for and thinking about media when you think about for Zoom phone, for example, and Zoom rooms, the strategies to sell and the existing install base, which by definition just means these customers are going to grow larger and larger and contribute more over time. depending on which segment of our business, the upmarket business, the majors and enterprises, right? They work on an account basis. So they get to retain those accounts, which is great because they build these long-term multi-year relationships with them. They understand their needs and they continue to grow those accounts as they continue to see what they need. And then in the lower, like the mass market, we do have both expansion as well as acquisition teams, which work really well because that allows them to focus on growing, you know, certain teams to grow, but other teams to be really out there hunting and continuing to add to our new logos. And then from a marketing perspective, you know, we've grown so much of brand awareness around, that now we're really focusing on ensuring that everybody knows about Zoom meetings, now also knows about Zoom phone and Zoom rooms and the other solutions that we could bring to bear for them.
spk24: Great. Thanks.
spk16: Next question is from Alex Zukin with Wolf Research.
spk17: Hey, guys, thanks for taking the question. So to one question, but it's multi-part, Kelly, and it's both for you. The question for us is, you know, after the summer, how should we think about the visibility in the model, particularly around churn with the sub-11 cohort? And then If we look at the guidance that you gave implicitly for billings, it looks like it's about a 6% year-over-year growth. If I look at the guidance for revenue, it looks like 19% growth. You know, maybe there's some upside to that. Maybe it's over 20. It's your toughest comp. But as investors start to look at next year, the street has you at 17%. So your implicit billings guide suggests the potential for single-digit growth. Is next quarter the trough that we start to build off of? I think that's a question I'm getting at least from a lot of investors.
spk19: So in terms of, let's talk about the churn first or the visibility. And As we talked about on the Q2 call, you know, the historical trends that we've seen in our business have changed pretty dramatically. But what we saw as we came through kind of the second half of Q3 was that some of the churn that we were experiencing earlier in the quarter was really summer seasonality. And as we saw people move back towards vacations kind of in the back half of September, that we saw that strength and that usage returning. So these are all learnings that we will use now to apply to our modeling for FY23, as well as the fact that, remember, we looked at, we showed you some of those detailed aging of the tenures of the cohorts at Analyst Day. And as those continue to age, that adds a lot of stability in that underlying business. By next year, over 50% of them are going to have moved beyond sort of that 15-month mark, which is where that churn really, really stabilizes. So that's really good news in terms of the volatility is going to continue to decrease over time. In terms of FY23, I know that's the big question on everybody's mind, but we are going to hold any comments in terms of FY23 guidance until Q4, at which point, of course, we'll be prepared to give Q1 and Q3. in full FY23 guidance.
spk21: Who's next?
spk16: Oh, sorry. Matt Stottler with William Blair. I was on mute.
spk19: Hi, Matt.
spk03: Hey, everybody. Good to see you. Thanks for taking the question. Maybe just one on the free user base. I know that you guys have always carried a supported a number of free users and opened that up during the pandemic. You've talked previously about thinking through monetizing this base of users. Anything you can share in terms of, I guess, on one hand, an update on the size of that base, that potential opportunity, and then updates on how you're thinking about the ability to monetize that over time?
spk19: Eric, do you want to talk about monetization of free users over time?
spk21: It's true. So, Matt, you know, first of all, you know, when we started, right, you know, free user base is always like a marketing platform, right, to promote our brand and give us a network, you know, effectiveness of our service platform, you know, so that's how we, you know, introduce the free service premium and 40 minutes limitation. I think for now, you know, given the brand recognition and again, what had happened, you know, last year, I think we got it to you know, take a step back, look at our free user online business, right? And essentially, on the one hand, we would like to double down our enterprise market because that business is doing extremely well. On the other hand, we've got to be very creative to look at how we leverage our huge, you know, free user installer base, right, all over the world, right? You know, we started, like, you know, the advertisement program for free users from international market And down the road, you know, we're going to look at that in business as well. Because not only do we focus on the, you know, kind of conversion rate, right, from free to paid, that's not a traditional model, right? We've got to be creative. The huge opportunity, right? And to think about how to modify that free user base differently. I think that's, you know, I think our team put a lot of effort on that. And, you know, that's something we are very excited. Thank you. Thank you, Matt. Thanks, Matt.
spk16: Next question is from C.T. Panagrahi with Mizuho.
spk22: Hey, thanks for taking my question. I just want to ask about your investment on go-to-market side. So as you are coming off of these two strong renewal quarters, what are the areas you are investing right now as you are normalizing growth? Is it certain regions or certain verticals? So could you give some kind of color on that?
spk19: Yeah, we certainly are continuing to invest in the sales organization, especially outside of the U.S. You've seen strong growth in international, and we really have the opportunity to continue to leverage. The brand awareness has grown significantly, not only in the U.S., but also globally, and so that's a huge opportunity for us, as well as you know, ensuring that we have the right sales team to support Zoom events, Zoom phone, and soon our video engagement center as well. So those are all the areas of investment we're thinking about, especially for FY23. Thank you. Thank you, CD.
spk16: Up next, we have Ryan McWilliams with Barclays.
spk15: Hey, good to see you guys again. Kelly, just on your existing customer growth, anything that called out there, maybe until the fourth quarter, And I would imagine meetings still makes up the bulk of your growth with existing customers, but anything to call out maybe in the changing mix between meetings versus phone and rooms with these existing customers? Thanks.
spk19: Yeah, I mean, Zoom phone continues to be a really strong growth driver in general, especially as organizations are thinking about what's going to be their future of work strategy and enabling their employees to work from anywhere over time. And then Zoom rooms, of course, is also really important consideration now as companies are thinking about welcoming their employees back in the office. The conference room strategy has become even more important than it was pre-pandemic. I think it's unlikely, we'll all agree, it's unlikely we're all going to be sitting around conference rooms together in the future. Having any sort of a hybrid approach means that you need to make sure that it's inclusive. And the best way to do that is through the Zoom rooms technology, things like Smart Gallery, which are really some of the opportunities that we're helping our customers solve today.
spk21: So just quickly to add on what Kelly said, you look at the hybrid work, the content room is extremely important. That's why you look at Zoom rooms, right? It's uniquely positioned. It's much better than any other solution always there to support hybrid work. Not to mention the Zoom events also can support, you know, the new hybrid events, you know, the services as well, right? That's why, you know, huge opportunity for us to support a hybrid work in paradigm shift. Yes.
spk19: Thanks, Ryan.
spk16: Next question is from Tyler Radke with Citi.
spk13: Hey. Hey, everyone. Thanks for taking my question. Kelly, I wanted to ask you about just some of your comments on the turn rates. I guess first, did they perform in line with your expectations this quarter, just kind of giving the moving pieces with summer seasonality? And then as you think about Q4, would you expect turn rates to get better because of less kind of summer seasonality in Europe. And then I just wanted to clarify when you talk about the online business being a headwind, does that mean that you expect the online revenue to decline year over year? Does it just mean it's going to grow slower than the rest of the business?
spk19: So in terms of how the online churn performed in Q3, it performed better than our expectations coming in at the beginning of the quarter. And we were Happy to see that it was more seasonality aligned rather than, you know, true potential departures as people were, you know, making other choices or going back to meeting in person. So the seasonality nature of that was good news to see in that rebounding in the middle of the, kind of in the middle to the back half of September. And then we expect Q4 to be relatively consistent with Q3 in terms of turn However, we do see some impact from the holidays towards the end of December. And those holidays vary by the global location, but we do see kind of slowdowns based on that. In terms of what we expect from online going forwards, we do expect online revenue to grow more slowly than the direct and channel businesses as we look to the future, which is what we saw in Q3, for example, as well. But we'll give more specifics around that when we give guidance on the Q4 call.
spk16: Thank you. Next question is from James Fish with Piper Sandler.
spk23: Hey, guys, nice quarter. I just wanted to go back to wanted to go back to Matt's question on advertising. You know, first, how would this actually work? Can you get more color? There would be kind of banner within the application pre or post video and be more display based advertising or performance based. And then also just wanting to understand how much of this is really to try prevent some. of your more commercial and enterprise customers from lowering their number of meeting seats to free seats, rather than just trying to monetize more of that online consumer S&P base. Thanks.
spk21: That's true, Jeff. So, you know, for now, you know, we're just focused on the pure, the free meetings, right? Meaning the free meeting hosts. We will have a meeting all the free participants. Let's say if you and I join the meeting because we already paid, you know, the enterprise customer or paid assist, we will not, you know, show the display ads, right? It's more like a posting, you know, posting meeting attendee page, right? Because we do have, you know, in some place, but we want to start a step-by-step graduate, right? For now, I'll show the display as the post-ETB page from international market purely for the free meetings. and try to learn, you know, some experience. And again, you know, we got to be creative. There's so many areas where we can be creative, right? Because you've got a daily meeting participant, you know, in terms of a number of free users, it's pretty healthy. Even for those, let's say users, right? You know, maybe they do not pay for our service anymore. They still use our service, right? That's why, you know, the meaning is Zoom still offers us good value to them. We got to think about how to monetize it differently. Again, this is something new for us. and we would like to explore more in the next few quarters. Thanks, Eric. Thank you.
spk16: Next question is from Rishi Jaluria with RBC.
spk08: Eric and Kelly, good to see you both. Thanks for taking my question. I just wanted to ask about Zoom chat. I was really excited to see that launched at Zoomtopia two months ago, really kind of selling this vision of becoming this broader enterprise communication platform. I actually noticed that Zoom chat is live. It's something people can deploy. I know it's an add-on feature. Can you give us any sense of color in terms of customers actually using it today, what that sort of usage within your existing customer base looks like, and what you're doing to actually drive usage of Zoom chat among your customers to just make the whole platform more valuable for them. Thanks.
spk21: Yeah, Rishi, that's a good question. First of all, I can tell you Zoom as a company, you know, we were using our chat for a long time and so many employees, we do enjoy that. And overall, this is a part of our overall UC platform vision because Some customers, I think we did not do a good job to, you know, to mention that, to promote that, because some customers even did not know that, right, before. But, however, look at our chat usage. You know, sorry, we did not publish that number yet. It's pretty healthy, not only for SMB individual users, but also enterprise customers. They deployed both video. And the phone and also Zoom chat is one platform, right? And in terms of functionality, scalability, I think we have high confidence. On the one hand, we do collaborate well with other chat solutions and we integrate very well. On the other hand, for some customers, they really want to deploy the solution for one vendor, you know, for video, voice, and chat. We do have this flexibility, right? I think also, you know, our team, we are innovating as well, right? You know, adding, you know, more and more, you know, very cool functionalities, right? As we announced at Zoomtopia. Again, this is something important for our overall UC platform, and we are going to invest more. All right, well, wonderful. Thank you. Thank you.
spk16: Our next question is from Carl Kierstedt with UBS.
spk09: Okay, great. Maybe, Kelly, Metrics like deferred revenues and RPO are certainly not the most important to watch with Zoom, but they can be indicative of changes in the business. So it's still important to keep an eye on them. And you made some color about DR and RPO. next quarter that I'd love if you could elaborate. I think on DR, you mentioned that it'll grow mid-20s due to a cyclical decline in average remaining term of annual contracts. I'm not sure I totally understand what that means, so I'd love to ask for a clarification. And then likely as well on RPO, you mentioned that we would see a shift back to long-term plans. I'm wondering if you could elaborate on that as well. Thanks so much.
spk19: Yes. For deferred revenue, there's two things to remember, which is the seasonality trend of our renewals is that Q1 is the largest quarter for renewals and Q4 is the lowest. So in terms of new deferred coming onto the books, Q4 is the lowest quarter because of that. as well as the fact that Q1 is the largest quarter when deferred gets added to the balance sheet. But if they're annual contracts, by the time you get to Q4, most of that has already been amortized and recognized. There's only 25% of it, in theory, about left when you come into the quarter. So the combination of the fact that anything added in Q1 is almost fully amortized and will get refilled and renewed back at Q1, and the fact that Q4 is the lowest renewal quarter, those two things are what's driving this trend of deferred, which I know is probably counterintuitive to any other company that you see because of the seasonality that we have. So if you remember at Analyst Day, we showed you an actual chart. that showed how our renewals lay out through the year, and that's what that illustrates. So renewals, like deferred is going to look the same. Collections is going to look the same because they're all being built off of that trend. Does that make sense?
spk09: Yeah, and so the fact that DR growth would slow to mid-20s is due to what?
spk19: It's due to the fact that Q4 is our lowest renewal period, as well as all those annual renewals that came on in Q1, which is the biggest quarter, are now almost fully amortized and recognized.
spk09: Okay. That's helpful. Thank you on DR. Yeah. And on RPO, Kelly?
spk19: And then this has a strong impact on billings and RPO as well, because the The same thing, like the adding to it, the buildings and the collections are happening earlier in the quarter, and the remaining term is being amortized throughout the year. So it's the shortest amount of contract left during Q4. Okay.
spk09: I think I got it. Thanks for that clarification. I appreciate it.
spk19: You're very welcome.
spk16: The next question is from Shelby Seyrafi with FBN Securities.
spk00: Thank you very much. So what is your latest thinking about possibly reviving the 5-9 deal, such as with a higher price? And what's your current thinking about a build versus buy decision in the contact center market?
spk21: Shelby, that's a great question. And unfortunately, Robin is not in the call. Otherwise, probably both of us, it's better for us to answer this question. But anyway, we look at everything from a customer perspective, right? Even this deal did not go through forever, you know, and we still have many mutual customers and we have a great integration with 5.9. And also, I think, you know, from that perspective, it's, you know, everything's the same as before, right? But in terms of the deal, actually, nobody knows that. And let's see, we do not know. Also, but as I mentioned earlier, right, and to have a full stack to support a unified communication in porting the customer, you know, deploy the Zoom video already, and they made it a process to deploy Zoom phone. They also asked about our strategy about, you know, our contact center solution. And this reason why, you know, we're doubling down on our video engagement center, you know, which is our answer to the contact center solution. Anyway, I think, you know, this is where we are now, but I'm so sorry, really hard to know, you know, how to, you know, re-engage or do the deal with 5.9 because it's too popular company, right? And again, and for now, we are doubling down on our video engagement center and also working together with all other, you know, contact center subscription providers like 5.9, you know, to offer a better integration, seamless, you know, experience to our mutual customers. Okay, thanks. Thank you.
spk16: Next question is from Matt Van Vliet with BTIG.
spk02: Yeah, thanks for taking the question. I guess pertaining to the channel and especially with Zoom Phone, are you seeing much traction in terms of potential net new customers coming in where Zoom Phone is sort of the entree into that customer or even as a part of initial deal, especially at the sort of mid-market enterprise level? Thanks.
spk21: Yeah, go ahead, Aked.
spk19: Okay. So, yes, we have absolutely seen the channel be a really important part and a really important growth driver for Zoom Phone especially. This is why focusing on the channel both in the U.S. and growing that internationally is really an important aspect of our growth strategy for the long term here as well. And then we do have the ability and we have seen customers that want to start to sell and to start with Zoom Phone first, and that has been a great opportunity It's a small percentage of our customers that are starting that way, but it's a great opportunity for them if that's what they're interested in is to get them in and get them used to Zoom and then expand over time in terms of understanding the full platform offering that we have.
spk16: Thank you. Next question is from Matthew Nicknam with Deutsche Bank.
spk05: Hey, thanks for taking the question. I want to go back to the question before it was asked, not necessarily related to Five9, but having moved past that acquisition, maybe Eric, how you're thinking about inorganic opportunities on either the UCAS or the CCAS front to really consolidate the market and expand your platform inorganically relative to some of the organic investments that companies talked about. Thanks.
spk21: Again, actually, you know, FireMnet is still a great, you know, partner. You know, Rob and their team is great. They still have a great number of friends, right? So we're still working together, right, you know, to target the mutual customer. That's for sure. But regarding our growth, you know, strategy, you know, for, you know, consulting, you know, UCaaS and CCaaS, first of all, I think, you know, we are doing very well on UCaaS. In terms of CCaaS, you know, the reason why we announced the Video Engagement Center, you know, because, you know, of that, right? Because For some customers, they want to consolidate everything together, and we do have an offering. Also, how to accelerate that growth in addition to, you know, allocating our own resources to grow that business organically, for sure, right? If there's any good, let's say, you know, the technology platform for next generation, you know, functionalities, you know, very creative features, we are very open-minded, right? And Kelly has a big, you know, budget, right, to support that effort, right? Again, you know, if you know of any other cool technology companies that can help us, you know, for the beef up our investment on that front, we are very open-minded. Thank you. Thank you.
spk16: Next question is from Will Power with Baird.
spk12: Great. Good afternoon. So, Eric, you referenced a number of, you know, new customer wins. You really called out Carrier, I guess, in particular, and you suggested it was an extensive, you know, process of We really just love to better understand the importance of being able to bundle video and Zoom phone per carrier. And what in your estimation really kind of sets you apart from the other vendors, you know, they were considering?
spk21: That's a great question. So, you know, first of all, I'd like to take a step back to share with you how we grow our phone platform. It's not like some other cloud vendors probably target those traditional on-prem solutions. You know, our Zoom phone growth, you know, comes from not only for on-prem you know, the growth. But also for other, you know, existing, you know, cloud-based phone solutions, they're probably also suited for us, right? And we have both, you know, those customers coming from both, you know, side. And inside of that, for a lot of enterprise customers, in particular for our existing Zoom video, you know, customers, when they look at the phone, they, you know, this is very large enterprise customers, very complex, you know, environment. Probably they have multiple on-premise solutions. They want to be very careful. They want to partner with a company with a vision, with reliability, security, plus they also want to make sure video and voice, those two can be converged. And after they test our service, they realize, based on the criteria, Zoom is the only solution that can truly satisfy their needs. However, the process is pretty long because, again, enterprise phone deployment is very complex. And even if there were existing customers, they want to be very careful. But after they go through the, you know, RFP process, Zoom is the best position, right? I think we see that very often over the past several quarters. I think that will, you know, probably the pattern, you know, for the future, you know, and the growth as well. Because we have a high confidence as long as enterprise customers, no matter how complex their existing on-prem phone systems are, As long as it goes through the process, evaluate our solutions, I think we have high confidence they are going to go with our solution. Thank you. Thank you.
spk16: Next question is from Patrick Walravens with JMP.
spk06: Oh, great. Thank you. Hey, Eric, what would you say was your primary source of competitive differentiation as a video conferencing solution a while ago? And what would you say it is today is a communications platform.
spk21: So Patrick, that's a great question. When it comes to video conferencing itself, I would say, you know, it sounds very easy, but however, it's really hard because it just works, right? You know, and that's the reason why our customer lack of platform, you know, even if some of the competitors try to edit features, guess what? And, you know, you got to make it work anytime, any device, right? You know, take this, you know, the earning call for example. How many of our competitors, they dare to host earning call on this platform? very free, right? The reason why we have a company is not only Zoom, but also some of our customers, like my great friend, Jan, you know, Pedro Judith, you know, they also hosted, you know, earning costs on Zoom platform because of very reliable, great video audio quality, a lot of other very innovative features. Like early next year, we are going to announce our Metaverse functionality. And Patrick, you can show up as your digital avatar, right, if you want to, right? I think on the one hand, I think it is reliability. It works anywhere, anytime. And plus, you know, always be the first vendor to come up with innovations. That's the reason why I'm winning on that space. I think in the future, I would see more and more innovations and plus support of a developer platform. When you see platform, also will keep help us leapfrog our competitors. Again, it's not like you have a 50 or 100 person you see, you can develop something similar. It's not like that. You need, you know, a huge investment to be on par with our platform. It just works. Exactly. It just works. It's just three words. It's not that straightforward. It's pretty hard.
spk16: Next question is from Steve Enders with KeyBank.
spk04: Okay, great. Thanks for taking the question here. I just wanted to check back on the carrier deal and how that came together. It sounded like on the phone portion, it got a large portion of the seat base there. But I guess what would it take for Zoom Phone to be deployed wall-to-wall within that customer? And I guess what are kind of the learnings of that as you apply that to other customers that are considering Zoom Phone?
spk21: I think, first of all, you know, for the very large enterprise customers, you know, in particular for those, you know, customers who deployed multiple very complex on-premise solutions, the sales cycle for sure is long, right? You know, it's not only just one on-prem to cloud, right? It's multiple solutions in order to mention you need to support a global participant, right? And however, I think a Zoom solution is much better position. I think it normally take, you know, a little bit longer time, you know, compared to Zoom. meeting platform deployment. I think we just need to focus on our product innovation and adopting our, you know, go to market, you know, and then actually more and more, you know, very complex enterprise deployments like Carrier, they are going to migrate to Zoom platform. Again, I think it takes some time, you know, interestingly enough, you know, some of the customers even do not know Zoom platform, right? And however, after they, you know, and test our platform, you know, Zoom solution indeed much better than any other cloud-based phone solutions. You know, we have very, very high confidence. Because again, it's not like hundreds of thousands. Those are tens of thousands, very complex, it's global footprint. It's, you know, it does demonstrate our Zoom phone capability.
spk04: Great, great things. Thanks for taking the question here.
spk21: Thank you, Steve.
spk16: Next question is from Itai Hudron with Oppenheimer.
spk21: Eight times. Yeah.
spk26: Yeah. Hey, guys. Good to see you. I guess I was hoping to focus on the global 2000. Clearly, that was a big part of your focus going forward. And that's where a lot of the sales resources have been invested in over the past year. Maybe you can give us an update on how penetrated are you at this point with the global 2000? And has the competition changed within that category? And the reason I'm asking that Cisco clearly has made a lot of progress in the past year with WebEx and they vow to be even more aggressive in protecting that turf, including that is mainly their turf over there. How do you feel about the competitive landscape there? Win rates might have changed. And, you know, what can you say about progress to date with the Global 2000s?
spk21: So in terms of the progress that we're making, we continue to make progress there, as we talked about earlier.
spk19: devoting resources to international expansion and focus on this is still an opportunity. We're at still slightly under 20% of the global 2K that are spending more than $100,000 a year with us, which just means that there's a huge opportunity ahead for us.
spk21: So, in terms of our competitive landscape, it's just a purely look at the video conferencing service. I think Zoom is a go-to platform. And I think, you know, I really did not see any other, you know, vendors, even for the platform mission, you know, I built it before. I had to not think, you know, is there any competitor even, you know, close to what we can offer. But in terms of, you know, the unified communication as a platform, not only for phone, for meeting, video conferencing, but meetings, CCAS, I think, you know, I think for now we have a huge opportunity to look at our phone groups, right? And essentially, you know, especially for enterprise customers, they are not going to deploy, you know, just multiple solutions for multiple windows, very likely, you know, two windows, right? Probably for enterprise customers as sort of standard. Zoom is very well positioned and compared to any other, you know, the competitors. we did not see anything changed because again, it's not like, you know, you can call by all the features here and there and, you know, underlying technology, right? Is that in the many years effort, right? And it's totally different architecture, reliability, security, And also all those innovations. That's the reason why I think, you know, Zoom much better position. I really don't see any other competitors, right? And know that, you know, and that's, you know, and coming, you know, in this space over the past two years.
spk26: Very good. Thanks, guys.
spk16: Thank you. Next question is from Ryan Coons with Needham.
spk10: Thanks. One for Eric, if I could. With regards to the Ericsson acquisition of Vonage today to bring APIs to the 5G network, do you see this as disruptive to the CPaaS industry? And how does Zoom think about the evolution of video APIs with a programmable 5G platform?
spk21: Yeah, I thought of the news last night, and I'm still digesting that news. First of all, I would say, you know, congratulations, right, to one of the team. And, you know, the hard work is well paid off. And Ericsson is a great company. I think probably this is a great acquisition. And, again, we're still digesting, you know, this news. But from our perspective, and I think we know our vision is very, very clear, right, to focus on enterprise for UC stack. video, voice, CCaaS, events, Zoom rooms to fully support hybrid work, right? And, you know, Ericsson is a great company and probably this will help them solidify the position for 5G and also help them for their cloud vision as well. And yeah, that's probably pretty much, you know, what I think about this deal. Thank you. Thank you.
spk16: Next question is from Chaim Siegel with Eleazar Advisors.
spk19: Tim, you're on mute.
spk14: There we go. There we go. Sorry about that. Oh, really? Great. I wanted to just talk to you about, you started talking about sequential growth a couple of quarters ago, and you talked about it last quarter and just how you're thinking about that because this quarter was a little bit slower, but I don't know how much seasonality plays into it. I know you said you're not talking about next year, but, you know, since we have these, you know, crazy comparisons, I just wanted to know how to think about sequential growth and what's driving it.
spk19: Yeah. So, I can reiterate what we said earlier in the prepared remarks is that, you know, we continue to see strong growth in the direct and the channels business. And that grew at twice the rate of the online business, what we saw in Q3. And that the online business will, we expect to be a headwind as, you know, we're still having these online customers, which are the most volatile. Many of them are still on monthly contracts. And as they are adjusting to the environment and, you know, figuring out how the future of work is going to be for them individually, We expect that to be the challenging headwind. And then in Q4, you'll see a little bit of holiday seasonality as we talked about too.
spk16: Okay.
spk14: Thank you.
spk19: Yeah.
spk16: Next question is from Michael Turin with Wells Fargo.
spk11: Hey there. Thanks for squeezing me in. Nice to see everyone. I like the festive backgrounds. No one's mentioned that yet, but they're nice.
spk20: Thank you.
spk11: Clearly coming off an extended period of impressive growth. I wanted to just ask around the what's next and how you balance staying efficient with staying aggressive. You're still spending around 6.5% on R&D, 5.5 billion in cash on the balance sheet. So with that profile, how do you balance staying on offense given all the market opportunities you have in front of you? And does the mindset shift at all as some of the growth rates moderate? Thank you.
spk19: Yeah, I mean, I can tell you that in terms of Investing in areas like R&D and product specifically, we are still not even spending at the level we would like to be. Our target for that is approximately 10%, so they still have a ways to go. They've come a long way in terms of hiring and investing there, but we still have more opportunity to continue to expand both the product and the engineering teams. And then sales as well. Sales and marketing, we still see opportunity to continue to add sales capacity on a global basis. The areas that we're very, very thoughtful about adding additional investments in and wanting to do that in a very efficient way, of course, is COGS. We work very closely with El Chami and his team to make sure that we're adding, we wanna make sure that we have the right capacity for our customers, but doing that as efficiently as possible. And then, of course, G&A. We want to do everything we can within our G&A functions to support our internal and external customers, but to do that also as efficiently as we can. So that's kind of how we think about investing. So opportunities for growth still in R&D and sales, but trying to drive efficiency through COGS and G&A.
spk16: Helpful. Thank you. Our last question today is from Matthew Harrigan with Benchmark.
spk25: Oh, thank you. You pretty much elucidated the block and tackling issue. So I have one more fanciful question for you. I know you're pretty constructive. on AR and DR in the longer term while recognizing all the rate-limiting steps for consumer adoption. But with all the talk about the metaverse, all the buzz, and it really feels sometimes like people have no concept of even what it is, can you add any thoughts on that and what the potential opportunity for Zoom is over, say, a three-, five-year period? Thank you.
spk21: Matt, that's a great question. First of all, you know, we like a matter was because our team already work on that for a while. The reason why, you know, our vision is to deliver a better, you know, video conferencing experience, you know, even than a face to face in person meeting, right? And AR, VR is a part of that. You know, our team already work on that, right? You know, how to get it there probably take many years effort. For now, this is great concept and a great start, right? And like a digital avatar, right? You know, we, you know, demonstrated that, you know, functionality at Zoomtopia. Maybe next year we are going to have something like that. I think there's more step-by-step to get it there. Again, you know, we already started it before, right? But we are not going to offer a hardware platform. We are going to partner with other hardware vendors, you know, like Facebook, Microsoft, and others, and we offer the software layer. Because that does fit very well to our vision. In the future, with that, you know, AR or VR or Matterverse, maybe the future Matterverse, you and I can shake hands remotely. Seriously, I talked about it three years ago, and we already added resources before. That's why we're very, very excited. And finally, the word of the matter was, but guess what? We already started working on that for a while. Vision-wise, it's very well. That's why we're very excited. Better to macro questions, right? Where we are going to invest. We already invested in that. We are going to double down on that. Because again, it fits very well to our company vision. And matter of course, we played a big role for our future innovation. Thank you. Thank you.
spk16: Eric, that was our last question. So back to you.
spk21: Oh, thank you all. Really appreciate your time. And I'd like to leverage this opportunity to thank all Zoom employees, all the customers, partners, and investors. Wish you all have a wonderful holiday season. Happy Thanksgiving. Thank you all for your time. I'm so grateful. Thank you. Thank you.
spk19: Bye, everybody. Thank you.
spk21: Thanks, everybody. Thank you.
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