Zoom Communications, Inc.

Hello again, everyone, and welcome to Zoom's Q1 FY23 earnings release. As a reminder, today's earnings release is being recorded. And now I will hand things over to Tom McCallum, head investor of relations. Tom, take it away.

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of Q1 fiscal 2023. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.com. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of 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 full fiscal year 2023, our expectations regarding financial and business trends, impacts from macroeconomic developments and the Russia-Ukraine war, our market position, opportunities, growth strategy, and business aspirations, and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we'll 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 statement we may make on today's webinar. And with that, let me turn the discussion over to Eric.

Thank you, Tom. Thank you, everyone, for joining us today. As we continue to ask you on the strategic pillars I shared with you last quarter, we are very grateful for the support and trust we have received from our customers and investors. Let me start with some recent news, then touch on our new product launches, and finally discuss some exciting customer wins before handing it over to Kylie. Just last week, we closed our acquisition of Solve, which we believe will strengthen our capabilities around conversational AI and accelerate the adoption of our contact center product. The nature of the customer experience is undergoing a fundamental transformation as enterprises increasingly look to engage their customers in more exceptional, personalized, and effortless ways. We recognize this shift and started solving a key laser focus on providing the very best conversational technology and empowering customer support leaders to deliver better experiences. We believe SOVI's technology will broaden our contact center offering with the scalable self-service and AI capabilities that truly enable fast and personalized customer resolutions, improve agent productivity, and valuable insights. We are very excited to join forces with SOVI and help our growing number of contacts and customers set new standards for customer service. A key part of our strategy is to enable more and more business workflows within our platform. And I'm super excited about our recent launches of Zoom Whiteboard and Zoom IQ for sales. Zoom Whiteboard is arming teams with the power of continuous collaboration in an easy-to-use solution that provides a virtual space to collaborate before, during, and after a meeting. And to help sales teams reach their full potential, we have launched Zoom IT for Sales, a conversational AI solution that analyzes customer interactions to surface key insights, actions, and content from sales meetings. These new product launches encapsulate our strategy. to move into adjacent workflows, both horizontally and vertically, in order to ensure our customers are getting more and more out of our platform. Now, moving on to customer awareness, we are very happy to share that Humana, one of the nation's leading health and wellbeing companies, has expanded their relationship from Zoom meetings to include approximately 24,000 zoom phones to integrate a voice and video in their communications platform thank you amana i also want to thank avs budget group a leading global provider of mobility solutions operating three of the most recognized brands in their industry so it is budget and zip car for except for expanding from being a zoo meetings and a zoom rooms customer to being a broader ucas customer they continue to stay seamlessly connected having added approximately 10 000 zoom phones across many of the global offices and car rental locations and in addition to zoom meeting and zoom phone our ucas solution includes a very robust persistent team chat product that further drives collaboration in a seamless and integrated way. Our chat product is used by a number of large enterprises, including a Fortune 10 company with over 130,000 users. I also want to thank Lumio, a preeminent leader in residential solar and home experience. Lumio is a happy Zoom meetings customer who recently enabled their 4,000 employees to enjoy the use of Zoom chat. Lumio chose Zoom chat for its ease of deployment and to enhance communication collaboration across their team. The next movements are very special because they demonstrated the strength of our platform offering and how the contact center is a critical component of the platform. I want to thank Team Health, the leading physician practice in the U.S., for their trust in Zoom. Their innovation-focused team is committed to delivering the best quality experience possible for their employees, healthcare providers, and customers. Alongstanding our Zoom meetings, Zoom webinar, and Zoom rooms customer, Team Health recently expanded their service with thousands of Zoom phone licenses across their organization. And their journey did not end there. Given their seamless experience across our platform, they saw potential value in adding our Zoom contact center. to modernize internal IT support services across their tens of thousands of employees and healthcare affiliates. And the last, but certainly not least, I want to thank Franklin Covey, a leading provider of leadership, individual effectiveness, and business execution training and assessment services. Franklin Covey started as a Zoom meetings and a Zoom events customer In Q1, recognizing Zoom's expansion into the contact center and improving UCaaS capabilities, they decided to deploy Zoom Phone together with Zoom Contact Center. They saw them as going hand in hand to support many of their external call center needs in the U.S., including voice and video channels, as well as skill-based routing. We look forward to continuing our journey with Franklin COVID by delivering additional capabilities as we enhance and expand our context and offering. Thank you, Ximena, Avis, Lumio, Team Health, and Franklin COVID. I'm so grateful to have such a great group of customers. We hear every day from our customers about just how much impact Zoom's unified communication platform has had on how they communicate internally and externally. Recently, we commissioned Forest Consulting to quantify Zoom's business value and provide a framework for organizations looking to understand their unified communications investment. The study indicates that Zoom's unified communication platform could provide a 261% return on investment over three years for a composite organization in their model with a payback in just less than six months. This did not come as a surprise to us or our customers. who see and feel the value of Zoom every day, but it does set a healthy bar for what organizations can strive to accomplish with our flexible, scalable, and growing suite of communications solutions. And as companies look to empower hybrid workforces, Zoom can drive further efficiency gains through our robust Zoom Rooms offering. And there are intangible benefits as well. A new study from Gardner found that employees with more flexibility in terms of work style and location felt more connected to their organization's culture. We have found this to be true at Zoom and are working to help our customers realize similar goals by enabling productivity and belonging across their teams, whether they be in person, remote, or hybrid. As always, let me also thank our global Zoom team, customers, partners, and investors for their great trust and support. And with that, a positive word to Kelly. Thank you.

Thank you, Eric. And hello, everyone. Let me start by also extending my warm welcome to the Solvay team. We are thrilled to have you join the Zoom family. I'll first discuss the results for Q1 and then provide our outlook for Q2 and FY23. In Q1, total revenue grew 12% year over year to $1.074 billion, near the high end of our guidance. The growth was primarily driven by strength in our enterprise business, which saw a steady increase in customers as well as improved renewal rates year over year. We also saw ongoing success in Zoom rooms and Zoom phone, which reached 3 million seats during the quarter. Renewals in online improved sequentially, but growth was impacted mainly by international headwinds, including the strengthening of the dollar and the Russia-Ukraine war. Revenue from enterprise customers grew 31% year-over-year and represented 52% of total revenue up from 45% in Q1 of FY22. The number of enterprise customers grew 24% year-over-year to approximately 198,900. We expect revenue from enterprise customers to become an increasingly higher percentage of total revenue over time. Our trailing 12-month net dollar expansion rate for enterprise customers in Q1 came in at 123%. This was in line with expectations as existing enterprise customers continued to expand their investments in the Zoom platform, with growth rates beginning to normalize following the very high rates of expansion previously. We saw 46% year-over-year growth in the up market as we ended the quarter with 2,916 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 24% of revenue up from 19% in Q1 of FY22. Our America's revenue grew 15% year-over-year. Our APAC revenue grew even faster at 20% year-over-year. The performance in Americas and APAC was partially offset by the flat year-over-year growth in EMEA. This was primarily due to continued headwinds in the online business. On a quarter-over-quarter basis, we believe the Russia-Ukraine war has broadly impacted our online business in Europe and is expected to weigh on the balance of FY23 as well. 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, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, income tax benefits from discrete activities, and undistributed earnings attributable to participating securities. Non-GAAP gross margin in Q1 was 78.6%. an improvement from 73.9% in Q1 of last year and 78.3% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co-located data centers. Given the improvements we are seeing so far this year, we expect gross margins to be in the range of 76 to 78% for the remainder of the year, which is higher than our previous view of the mid-70s. Research and development expense grew by 105% year over year to approximately $85 million, driven by our focus on innovation. As a percentage of total revenue, R&D expense increased to 7.9% from 4.3% in Q1 of last year. Our new product launches reflect our ongoing investments in expanding Zoom's platform and our commitment to delivering on our customers' evolving needs. We plan to further invest in R&D to reach our long-term target of 10 to 12%. Sales and marketing expense grew by 40% year over year to $267 million. This represented approximately 24.9% of total revenue, up from 20% in Q1 of last year. We remain committed to investing in worldwide sales capacity, channel partners, and product marketing across the Zoom platform. G&A expense grew by 26% to $93 million, or approximately 8.6% of total revenue. Non-GAAP operating income expanded to $400 million, exceeding the high end of our guidance of $350 million, as we are seeing the benefit of efficiencies in our cloud operations. This translates to a 37.2% non-GAAP operating margin for Q1 compared with 41.9% a year ago and 39.2% last quarter. Non-GAAP diluted earnings per share in Q1 was $1.03 on approximately 307 million non-GAAP diluted weighted average shares outstanding. This result is 15 cents above the high end of our guidance and 29 cents lower than Q1 of last year. Now, turning to the balance sheet. Deferred revenue at the end of the period was $1.3 billion, up 22% year over year from $1.1 billion. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3 billion, up 44% year over year from $2.1 billion. We expect to recognize approximately 63% of the total RPO as revenue over the next 12 months, as compared to 72% in Q1 of last year, reflecting a shift towards longer-term plans. As a reminder, our seasonality of renewals is front-end loaded and tapers through the year, and therefore our collections follow the same trend. This leads deferred revenue to peak in Q1 and moderate over the rest of the year, reflecting the smaller renewal base. As such, we expect Q2 deferred revenue to grow at approximately 9% to 10% year over year. We ended the quarter with approximately $5.7 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $526 million as compared to $533 million in Q1 of last year. Free cash flow was $501 million up from $454 million in Q1 of last year. Our margins for operating cash flow and free cash flow remain strong at 49% and 46.7% respectively. For the fiscal year, we would expect free cash flow margins to be roughly three to five points lower than our non-GAAP operating margin, taking into account the lower deductions for stock-based compensation caused by the recent stock volatility. The Section 174 requirement to capitalize and amortize R&D expenses could further impact our free cash flow if Congress does not defer, repeal, or otherwise modify the existing legislation. Over time, assuming a more normalized SBC environment, we would expect our free cash flow margin on an annual basis to track approximately at or above our non-GAAP operating margins. Last earnings, we announced our billion-dollar share buyback plan. As of the end of Q1, we had purchased $132 million of stock, representing 1.2 million shares. Now, turning to our FY23 guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow substantially faster than our online business. It also assumes that our year-over-year total revenue growth rate will modestly accelerate in the fourth quarter of FY23. For the second quarter of FY23, we expect revenue to be in the range of $1.115 to $1.12 billion. We expect non-GAAP operating income to be in the range of $360 to $365 million. Our outlook for non-GAAP earnings per share is 90 to 92 cents based on approximately 308 million shares outstanding. As mentioned last quarter, due to our multi-year history of profitability, we have fully utilized our NOLs. We continue to expect our tax rate to approximate the blended U.S. federal and state tax rate in FY23. For the full year of FY23, we expect revenue to be in the range of $4.53 to $4.55 billion, which would represent approximately 11% year-over-year growth. We are raising our non-GAAP operating income to be in the range of approximately $1.48 to $1.5 billion, representing a non-GAAP operating margin of approximately 33%. Our outlook for non-GAAP earnings per share is $3.70 to $3.77, based on approximately 309 million shares outstanding. Before we conclude, I'd like to update you on our recently issued inaugural ESG report. The report includes information regarding our ESG initiatives and policies, environmental performance and targets, details of Zooms and our employees' charitable contributions, diversity metrics, and an index providing standardized reporting according to the SASB framework. 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. Kelsey, please queue up our first question.

Thank you, Kelly. And again, everyone, we are moving into our Q&A session. And as a reminder, please limit yourself to one question to ensure that we can hear from everyone today. And our first question will come from Mita. Pardon me, Amita Marshall with Morgan Stanley.

Perfect. Thanks so much, guys, and congratulations on the quarter. You know, clearly you guys are seeing a lot of traction on the phone front. I just wanted to get a sense of, as you look into fiscal 23, just what you think could be kind of other categories of kind of ancillary products that could contribute to growth and just when you would expect kind of those categories outside of core video to be more than a 10% of revenue. Thanks.

So we're super excited, of course, about recently launched products including Whiteboard and Contact Center. We saw some Contact Center deals. You heard some of those names that Eric talked about at the beginning of the call. And then, of course, Zoom Rooms continues to be a really important part of our strategy going forward, especially with, I think, the ever-evolving status of what flexible and hybrid work is going to look like in the future. In terms of when I expect any of those products, I think, you know, on a combined basis, we do see the combination of those products exceeding 10% of revenue today. We've always committed that as soon as any individual product gets to 10%, of course, we'll start disclosing that. I think that's not likely to happen in FY23, but probably in FY24 or FY25, you'll start to see some of those, you know, product lines coming into their own and, you know, producing at least 10% of revenue. Great. Thanks.

Congratulations.

Thank you, Nita.

Thank you.

And our next question will come from Matt Stotler with William Blair. Hey, Matt.

Hey, guys. Hey, thank you for taking the question. Maybe just one on contact center for me. Obviously good to hear some early wins there. We'd love to get an update, I guess, more broadly on kind of the adoption, you know, overall demand that you're seeing for that product, specific use cases that you're seeing customers kind of roll that out for. And then as you think about the functionality roadmap from here, you know, what are the most critical pieces? Obviously, nice to see Salvi coming in. But on that side, we'd love to get your thoughts on that going forward as well.

Yeah, Matt, that's a good question. First of all, we are very, very excited to already have several contact center paid customers, right? Because of their trust, the proven UCAS, you know, the capabilities. And for those customers, they already deployed Zoom meetings and also either already deployed Zoom phone or they are going to deploy Zoom phone. They prefer deploying Zoom contact center as well because we already built a very scalable call routing engine already, right? And a lot of features call contact center features already built in. And also, we try to not only just focus on one use case, like enterprise IT services. Broadly speaking, this is a much bigger opportunity for us. We keep adding more and more features, like recently we acquired Sobe, compositional AI capabilities. And even some other core features, like workforce management, Q&A module, like CSAT, all those features. We are going to add it to Zoom contact center. We are going to become a very, very, you know, I would say very meaningful large enterprise contact center service provider. We're very excited. The team worked extremely hard. And, yeah, very excited. Very helpful. Thank you. Thank you.

And our next question will come from Michael Funk with Bank of America.

Yeah, hi. Thank you all for taking the question tonight. Now, along a similar line of thinking, thinking about the added capabilities, you know, whether it's Zoom, phone, or contact center, how is that changing your sales strategy in the way that, you know, the way you interact with customers? And then how should we think about that also affecting the sales cycle, potentially lengthening that as you add a more complex solution? Thank you.

Yeah, Kelly, feel free to tell me. I think, first of all, I do not think that's complex because the trust is established. Customers always ask about our product roadmap. They want us to offer more value to them. based on the very consistent front-end experience and seamless backend architecture. And the customer already deployed Zoom meetings, Zoom chat, and also deployed Zoom phones, Zoom rooms. Now, given the contact center, it's no brainer customers, yeah, I trust your brand, I trust your capabilities, and would like to test your contact center as well. That's the reason why when we announced the Zoom whiteboard, also see the early adoption, it is pretty good in order to mention the Zoom IQ for sales, because we received a lot of feedback from customers. they trust Zoom, they want us offer more value. You know, look at all those use cases, starting from a sales department, you know, support department, contact center, meet the other department. We're going to add more and more value, new services, new product innovations and features, because I do not think that that will, you know, introduce any, you know, complex sales process because the trust already established. It's more like an officer, even for new customers, when they do a reference check with other very happy customers, I think it is, again, it's a pretty straightforward sales process.

Yeah, I would just add that, sorry, You know, Land and Expand is a very tried and true sales strategy for Zoom from the very beginning. And working with our account teams, we have these experts in the overlay team that come in and continue to do Land and Expand. And it's working very, very well. So I completely agree with Eric. It isn't adding complexity. It's just continuing to build our relationship with our customers, which is what we've been doing since day one.

Hey, well, thank you both so much. Thank you, Michael.

Cash Franken with Goldman Sachs has the next question.

Hello, Eric and Kelly. How are you? Eric, I was deeply intrigued by your launch of the Conversational AI product through the acquisition of LBA. Can you just give us a sense as to the product roadmap? How does it integrate with the Zoom platform? And relative to embedded competitors in the conversational intelligence space, what would be Zoom's competitive differentiation in the industry? It feels like at one level you're entering the CRM market, not in the way Salesforce.com and so on and so forth, but you're getting into a level of customer engagement, which is very different than the video meeting platform. Can you tell us a little bit more about that? Thank you so much.

Yes, great question. So, you know, first of all, you look at a contact center. That's a huge market, right? A lot of use cases, right? Also, by the way, a lot of enterprise customers today, they still deploy on-prem contact center solutions. In the next several years, they are going to migrate to the cloud. I'm excited that I think, you know, to have a customer seamlessly migrate to cloud offering, we need to make sure they know any feature regressions, similar to what we did before to have a customer migrate to phone, right, from on-prem phone to cloud phone. With that aside, a lot of features, right, you know, just, you know, corner cases, right, we have to add, right? This is one, right? This is more like a no-brainer. I'm not saying that's a key demonstration, but we have to add that. That's one. two is you look at the ai you know ai is something new you've got a lot of other contact center solution providers they do not have ai capabilities before right now this is something new and we are doubling down on that you know that is a one you know what is i would say the key differentiation and how to move faster at a much better ai capabilities in terms of overall you know key differentiation i would say the video is a key use case Right. And how to further improve the interaction between the customers or IT support with employees and how to turn on the video, how to analyze the video composition, you know, like a speech to text transcription. Right. And recently, like Zoom IQ for sales. That is very important for us. In terms of integration with ServiceNow, with Zendesk or others, I think this is a feature we have to add. I do not think that's a key differentiation because every contact center solutions, they all have that, right? So again, we think that's a huge opportunity ahead of us. Because customers also like the new solution, the modern solution, not like the old architecture, very hard to innovate. By giving the progress we made over the past seven years for Zoom Phone, we are going to do something similar. That's why I'm very excited.

Thank you, Eric and Kelly.

Thank you, Cass. And moving on to Siti Panagrahi with Mizuho.

Hi, Siti. Hi, Siti.

Hey, thanks for taking my question. I wanted to ask you about your fiscal 23 guidance. You talked about FX headwinds. Maybe could you give us some more color on the FX headwinds and also the impact from Ukraine war on the EMEA side, which mostly going to impact online segment. So what should we expect in terms of growth rate or churn on the online segment versus enterprise?

Yeah. So in terms of FX, where we're seeing the impact, of course, is in the euro, the pound, and the yen. And when we look at the trends that we've seen in Q1 for the combination of both the strengthening of the dollar as well as the impact for the war, it built into our guidance and expectation that the combination of those two factors is having about a 1% impact on revenue. And that's largely... The impact of the war is largely on the online segment. We haven't really seen the impact in the enterprise. The FX, of course, is extending across both of the segments.

Thank you. Thanks, Kelly.

And our next question will come from Ryan McWilliams with Barclays.

Hey, guys. Good to see you again. Another one on guidance. Kelly, how should we think about Zoom reaching your second quarter revenue guide from a segment standpoint? Just wondering here, given some fluctuations in your online business, maybe we can see some strength in next quarter.

Thanks. Yeah. So if you remember last quarter, we talked about that enterprise would be growing in 20% plus for the year and that online would be flattish. We said that flattish meant that it could be a little bit above zero. It could be a little bit below zero depending on the quarter. And then the other thing we've talked about is that inflection point coming in Q4. So you should expect that Q2 is also going to be another volatile quarter for the online segment, given all the factors we just talked about, but that we really continue to see strength in the enterprise, and that's where the growth for Q2 will be driven from. And then by the time we get to the back half of the year, that's where we're really going to start to see that stabilization of the online segment.

Thank you, guys.

Thanks, Ryan. And moving on to Rishi Jaluria with RBC.

Wonderful. Hi, Eric, Kelly, Tom, thanks so much for taking my question. I wanted to drill into the NRR that we're seeing across the board. I appreciate all the color, but maybe can you give us a sense for how have you seen the NRR for 100K customers generally trending? Have you seen that hold up? Has that gone down? And maybe just help us understand usage patterns for your largest customers. Thank you.

So thank you, Rishi. As a quick reminder, last quarter we shifted to the new metric of net dollar expansion for our enterprise customers. This is as we're starting to split out – sorry, enterprise segment, I should say. So as we're starting to split out the business between enterprise and online, as we think that's really the most appropriate way to look at the business going forward and how we're managing it internally. So that metric did – historically we had – disclosed 130% or above. It came down to 123, which is really right in line with what we were expecting as you think about the overall growth rate of the company. And as we've indicated, we expect the enterprise segment to be growing 20% plus. The net dollar expansion should be tracking, you know, the deceleration, if you will, and it should be tracking to that as well. And that's why it's coming in right at 123, which is just what we would expect.

Yeah, but sorry, just to quickly follow up. If we were to think specifically at the $100K level, right, because I'm sure there's more churn going on at kind of the medium level versus your six-figure customers, without putting a number on it, how would you say that the NRR for that cohort of your largest customers has trended over time, and how is it trending now?

Yeah, it's higher than the 123%. So that's, that's what I would say is we really continue to see strength in both the new bookings as well as renewals in in that segment of our customer base.

Wonderful. Thank you.

Yep.

Cities Tyler Radke has the next question. Hi, Tyler.

Hey, Eric. Hey, Kelly. Thanks for taking the question. A question on the cost side of the equation here. So, you know, you outperformed, I think, by 400 or 500 basis points this quarter on operating margins, yet it seemed like it's still a decently strong hiring quarter. Can you just talk about you know, if you're finding more efficiencies in the business or if there's something specific this quarter. And then as I look at your gross margins, again, it sounds like you're expecting them to come down between 76 and 78. You were above that this quarter. So just anything in terms of new capacity or, you know, call center stuff being deployed that would impact kind of that trajectory. Thank you.

Sure. So actually gross margins were stronger than we expected in the quarter. And if you remember NQ4, the way that we talked about the outlook for gross margins, even though we don't explicitly guide to them, was we talked about expecting them to be in the mid-70s for the balance of the year. So actually 76 to 78 for the rest of the year is higher than we were anticipating coming into the quarter. And that improvement, as we really have made a lot of in terms of optimizing our cloud usage and getting that into the colos thanks to our DevOps team. And that is really helping drive the improvement in the operating margins going forward. And as you said, we do continue to see strength in hiring, continuing to attract great talent, which we're really excited about, continuing to invest in R&D, which is really important for the long-term innovation and commitment to our platform.

Thank you. Yeah.

And our next question will come from William Power with Baird.

Good afternoon. Thanks for taking the question. So I guess, Kelly, for you, as you look at the fiscal Q2 revenue guidance, it came in a bit stronger than I think we in the street might have been, yet the full year is still pretty consistent. Any other color just as to the puts and takes in the second half of the year? And I guess just as part of that, just trying to understand the key drivers around your confidence of reaccelerating revenue revenue growth and fiscal Q4? What are the key drivers of that?

So when we gave Q4 guidance, and it continues to be the case today, we continue to see strength in our enterprise business, and that's both on new bookings as well as renewals. And then when you think about the opportunity coming with all of these new product introductions, super excited about Zoom events, which came last year, of course, Zoom rooms and their strength, the new contributions that are possible from Whiteboard as well as Contact Center. That's what we think is going to drive the growth continue through the rest of this year. And then online, while we saw some volatility in Q1, as we've talked about at length already, and we expect to see some of that continue into Q2, by the time we get into Q3 and Q4, there's a couple of things that are happening. First of all, The team has done an amazing job with new initiatives around pricing and packaging and localized payment types, which is really driving strength across the board, especially internationally, as well as the fact that we see stabilization occurring just because of the aging of our cohorts. We go all the way back to last year's analyst day, and we showed you that chart, right, which shows how once cohorts get to that 16 months of tenure, they really start to stabilize in terms of retention rates. That has continued to hold cohort after cohort, even when there's volatility earlier on. And so by the time we get to Q3 and Q4, you start to see, you know, 75%-ish plus of our cohorts in that tenure, which in and of itself drives a lot of stability in the online business. which leads to not only stabilization, but potentially growth in the back half, which is what we're modeling today. Okay, great. Thank you. Yep.

And we'll move on to Parker Lane with Stiefel, who I think might be having some difficulties with his video, so he may not appear on video today. Hi, Parker. But, Parker, if you'll go ahead and come off mute, that would be great. All right.

Hey, sorry about that. It's Max Osmond. It's on for Parker Lane. Yeah, we're in transit today, both of us. So sorry for the no video. But just thinking about the customer announcements that you made, it feels like there's a good variety of industries. Is there any industry that you're noticing that you're seeing a lot of demand from that maybe kind of lagged behind everybody else during COVID and is still going through the transition or has started a transition that others haven't?

Yeah, I would say it's pretty consistent, right? You know, look at our installer base from allocation, healthcare, financial services, and it's pretty consistent, right? You know, customer would like to install it, not only meetings and also the Zoom phone, down to the Zoom, the contact center, but also more and more customers are deploying the Zoom chat solution as well. That persistent team chat works extremely well. They like that solution. That's also free. And having said that, I think I did not see like any specific you know specifically you know that's you know the vertical industry right you know that you know kind of you know make a big difference like compared to other you know industries and overall it's very consistent you know look at our installed base and we need more and you know need us to deliver more you know value more services to them you know take a wide board for example right look at the early adopters across industries right as pretty promising

All right, we will go ahead. Thank you. Thank you. We'll move on to Matt VanVleet with BTIG.

Hi, good afternoon. Thanks for taking the question. So I guess thinking about overall direct sales headcount investments that you look to be making over the next year plus, any specific skew across various regions that you're finding you want to invest more heavily in? And then sort of alongside of that on the channel side, how much of that is driving this pretty significant increase in Zoom phone versus direct sales and kind of where investments are going to go around channel enablement as well?

So we are continuing to invest in our sales organization globally, but you'll see it as a percentage over a year-over-year basis, greater investment happening internationally, including channels. So we've made huge progress in our channel investment and contribution in the U.S., but that's largely nascent still internationally. And the team is doing a really great job of looking for, you know, not only master agents, but carriers. And it depends on which works best depending on each of the regions. But that is a significant area of focus for us this year.

Great. Thank you.

Yep.

And moving on to Alex Zukin with Wolf Research.

Hey, guys. Can you hear me okay?

Hi, Alex.

So Kelly, maybe just for you, can you remind us what the difference is in either the operating margin or free cash flow margin profile between the online and enterprise business? Because it looks like you massively outperformed on cash flow at the same time as the online business actually declined 2%. And so I want to understand just how much reliance is there, you gave a free cash flow margin target for the full year, at least a range, how much of that is based on the performance versus the enterprise business. And then Eric, if I think about the stock-based comp, what's the plan for the company? How should we think about that on a go-forward basis in terms of either repricing people's RSUs, giving more shares? Just curious how you're thinking about that.

Eric, do you want to go first?

Yeah, you can address the first one.

Okay, so Alex, The impact that you've seen in the outlook we're getting from free cash flow is much greater impact from stock-based comp than from sort of any change in the balance of online versus enterprise. So what's happening because of the stock volatility, we've seen much fewer stock-based comp deductions as employees are choosing to hold on to their options or their RSUs at this point, and either not exercising or the deduction itself just isn't as great. So that's really the significant contributor to why there's a difference that we've given from the Q1 performance to the outlook for the rest of the year.

Yeah, so, Alex, back to your second question. I think, you know, our company culture is deliver happiness, right? My number one priority is to make sure all Zoomies feel happy, right? Together we make our customers happy. Prior to COVID, we had a little bit over 2,000 employees. Look at it today, almost 7,000 employees. And we hired so many employees over the past few years. Guess what? With this joint resume, the stock price was too high. We cannot control the price, but we can control the delivering happiness to our employees. Certainly for all those employees who joined over the past few years and the stock price probably much higher than the stock price today, we did issue the new stocks for them, right? Ultimately, you know, how to make sure those employees happy every time, you know, every quarter, every week. We look at are there any things we can do differently to make sure our employees happy? You know, this is always ongoing effort. That's our number one priority as always.

And Kelly, just maybe just ask the question. I meant in terms of the differential, in terms of the margin profile of the two businesses, is there is one of them inherently more profitable than the other?

Yes, the online business, as we've said before, contributes more substantially from an operating margin as well as cash flow perspective because they largely are untouched by our sales organization. So they don't, you know, they don't have the associated expense from a commission's perspective. They may have credit card fees associated with it, but, you know, that's a few points versus the commissions. That's the biggest difference you're going to see between those two. Got it. Thank you. Yep.

And moving on to Matthew Nicknam with Deutsche Bank.

Hey, guys, thank you for taking the question. I'm wondering, have you seen any paring back or moderation of investment from some customers in light of growing macro concerns? And if so, is it varied by either geography or customer size? Thanks.

I think we really haven't, especially in enterprise, we have continued to see strength in renewals as well as addition new customers and expansion into additional products. So we really haven't seen that in terms of concern. I think You know, we've heard from other people that what they're really focused on might be, if they're limiting spending, it's focused more around potentially hiring or travel. And, of course, Zoom is a great alternative, you know, if they're focusing on limiting internal travel. And so we really haven't seen that impact to date.

Thank you.

James Fish with Piper Sandler has the next question.

Hey, thanks for the question. Hey, thanks for the question. Deferred revenue grew about eight, nine points faster than you anticipated this quarter, but it did seem like durations extended a little bit. Are you guys incentivizing customers or the sales team to extend those durations, or is it more a factor of the product mix? phone and contact center picking up, which if it's the latter and we're seeing kind of long-term RPO grow faster than current RPO, I guess why wouldn't we see deferred revenue grow as you get more multi-year deferred revenue up front and that help the free cash flow margins versus the operating margins?

So our compensation structure around this or incentives for either reps or customers has not changed, James. We do have discounts in place for customers in terms of multi-year agreements, but that has been consistent over time. And we As we're seeing more and more of the revenue contribution coming from enterprise, we are, and I think as we've moved sort of past the COVID buying cycles, we've seen people go back to buying more and more longer term agreements. We also have seen a lot of initiatives even online in terms of opportunities for customers to buy annual rather than monthly. And the team has done a really great job of incenting that as well. So we are seeing kind of an overall shift across both segments of business to longer term. The reason you could see an increase in non-current RPO but not necessarily deferred is because they don't always pay all of those multi-year terms up front. They could have a three-year deal but only pay a year. Less often they'll have a three-year deal but pay monthly. But it's not uncommon to have like a three-year deal but only pay one year in advance.

Okay. So booking three years billing annually. Makes sense.

Yeah.

Thanks, Kelly.

Happy birthday next week.

You too.

Itai Kudron with Oppenheimer has the next question.

Hey, guys. Nice quarter. Kelly, a couple quick ones for you. On the phone, subscriber additions, great to see the 3 million milestone. But if my math is right, it took you kind of nine months to get from 2 million to 3. It took you seven to get from 1 to 2. Are we seeing a deceleration in the pace of phone additions or maybe my math is wrong here? And then on the duration of the enterprise contracts, it's great to see that customers are signing longer term contracts. Can you talk about duration, how that has changed quarter over quarter? And how do I think about the discounting that comes along with the longer duration contracts in mind?

So first of all, around Zoom phone, we actually said we achieved 3 million during the quarter, not at the end of the quarter. So we are sitting above 3 million and we're at the end of the quarter. So I don't think you actually can't do the exact count based on the information we've given. And so I wouldn't assume there's a deceleration in that rate. And then in terms of the longer term contracts, It's a little bit of what I was just discussing with James. It's that I think people, customers, as they move past the pandemic and really thinking about how they're going to support their employees in this post-pandemic flexible hybrid work, they're committing to our platform and they're committing to it in a longer term, especially as they're bringing on multi-products and seeing the efficiency that they get. It makes sense for them. Our structure around that has not changed. So we do, as we always have, offer discounts for size of deal, multi-products, multi-year willingness to pay up front, but that hasn't changed. It's just as customers continue to see the value of Zoom and committing to that for a longer term.

Very good. Thank you. Ita, just to quickly, on the one hand, we've got to look at the number of the seats, the paid seats sold. On the other hand, also do not forget the quality of service, right? You know, we kind of deliver a platform to make a workforce happy. Let's say you talk with some other cloud-based phone service providers. You talk with their customers and talk with our customers. And, you know, we make a customer happy. And a blessing not only for all those on-prem, you know, the phone service, you know, customers might migrate for on-prem to cloud, but also some other cloud-based, you know, the customer also migrated some other cloud-based, you know, phone services to Zoom platform as well. It further proves and we deliver a better experience, make a customer feel happy. That's our mantra.

Very good. Thank you. Thank you.

Thank you, Yitang.

Shipley Seyrafi with FBN Securities. We'll move on to the next question.

Yes, thank you very much. So with your guidance for deferred revenue growth of like 9% to 10% in Q2, it looks like with your revenue guidance, you're getting to be slightly negative on a billings basis in Q2. So my first question is, do you think that's the low watermark in terms of billings growth this year? And then secondly, related to that, Do you think that the deferred revenue growth can accelerate meaningfully in the back half, especially with the easy compares in the back half for deferred?

Yeah. So remember that our renewals are front end loaded. This goes all the way back to early in the pandemic when we had that large inflow of bookings in Q1 and that it's Q1 is still the high point for renewals and that that declines through the year. And so based on that, our collections and our deferred, you know, it's not one-to-one, but they largely follow that similar trend because you have this large inflow of deferred revenue in Q1 that then is getting amortized throughout the year. And then the renewals, as they're lesser each period, are not the same rate to necessarily reveal what's being amortized over the year. So that's why we have that trend. And you won't necessarily – I mean, it's going to change over time as we start moving to more and more of our new bookings to a normalized seasonality of, you know, back half of the year. But that is going to take some time, given just the large amount of bookings we saw a few years ago in Q1. And then in terms of Q2 being the low watermark, you know, that it's not – it could be even lower in Q3 as we're still continuing through that renewal cycle that I just described.

That's a billing statement or a revenue statement?

Billings. I'm sorry, yes, billing.

In Q3. Thanks.

Patrick Wall-Ravens with JMP Securities. Please go ahead with your question.

Hi, you've got Aaron on for Pat.

I was going to say, my Patrick, how you've changed.

Given the layoffs, hiring freezes, and hiring slowdowns we're seeing throughout the tech sector, can you give an update about what you're seeing on the hiring front and your hiring approach and the changes you've made?

Yeah, we had a very strong hiring quarter in Q1. We continue to attract great talent. And as we mentioned in our prepared remarks, we are still continuing to invest in innovation. So very focused on hiring in R&D. as we continue to build out our platform and produce new products, and then also very committed to continuing to hire in sales and marketing as we continue to expand our sales capacity on a global basis and focus on product marketing also on a global basis. So while we are always focused on being as efficient as we can around G&A and COGS, we are continuing to invest there as well at the levels that we need to continue to support the expansion of the business.

Just quickly, Patrick, you look at our, you know, the revenue, you know, the base, plus extremely, you know, positive in terms of cash flow, right? So why not double down on R&D, new product, and AEs account exactly, right? You know, I think we are, you know, more flexible, much better positioned, right, given this sort of greater resignation, economic downturn. And, yeah, that's why we're very excited about the future, you know, more innovative services and more efficient. Thank you. Thank you.

And the next question comes from Ryan Koontz with Needham.

Hi, thanks for the question. I wanted to ask a little bit, Eric, about your contact center strategy a little more. Was Solvee an existing partner that you worked with previous to the deal? And do you envision Solvee being a standalone play where you can use that to augment existing other contact centers? Or how do you envision Solvee we're just going to roll right into the Zoom platform and be a holistic offer.

Thank you. Yeah, first of all, we are very excited about the software acquisition. You know, this is a great team. Laser focused on, you know, conversational AI with the talents and technology. First of all, we are going to embed that into our overall contact center offering. That's number one for sure. Into Microsoft, You know, if we needed to also keep making that product as a standalone product, you know, keep doubling down that and sell that service as a standalone service, you know, and in the next few weeks, you know, a few months, we are going to discuss that. But overall, we've got to look at a bigger picture, right? Customers, they need a full-blown, great contact center experience from Zoom, right? And to solve a product, be part of that. And many customers already told us, very excited about this acquisition. Got it. Thanks, Ari. Thank you.

And we'll now hear from Michael Turan with Wells Fargo.

Hey there. Nice to see everyone. Thanks for taking the question. Kelly, you mentioned the outlook calls for a modest acceleration of growth in fiscal Q4, thinking through the drivers and assumptions there just beyond compares. Is there anything you can add to help us think through how much of that comes from some of the online headwinds rolling off of the model, the seasonal profile of enterprise coming through as we get closer to the exit of the year, or just other pieces to be mindful of? And On the EMEA impacts and the flattish growth that you're seeing there in Q1, anything you can add just around if that changes, if that's a change in terms of the fiscal year outlook and how much of that could be incremental versus the targets and what you're seeing when you frame the outlook in Q4 for us? Thank you.

Sure. So the acceleration in Q4 is coming from both online and enterprise. So online is due to the great initiatives that they're working on in terms of pricing and packaging and payment types and local payment currencies. as well as just the aging of the cohorts, that they just get a lot more stable as they age past that 16-month term, if you will. And what we're seeing is by the time we get to Q4, we're going to have 75-ish percent of our online cohorts that have aged to that level. So that really brings a lot of stability to the online segment and should return it to not only being stable but also growing. And so that's really exciting. And then the enterprise, we continue to expect growth to expand due to just expanded sales capacities. Eric just talked about continuing to invest in AEs, investing in our international channel, as well as contribution from all these amazing new products that are continuing to grow and find their sea legs, if you will, and will really contribute to get to the back half of the year, including whiteboard, contact center events, all of those things that we'll start to see more and more contribution from those. And then what else did you add? Oh, EMEA. So increment, again, incremental EMEA, that is really, I think, difficult to predict right now, given the state of what's happening in EMEA. You know, as I talked about, the impact from FX as well as the war is approximately 1% of revenue counted in our current outlook and guidance that we've given. So, you know, if things change, In any way, we're to improve dramatically sooner than that. There could be upside, but, you know, I think we're all in a wait-and-see mode there.

Very helpful. Thank you.

Moving on to Peter Levine with Evercore.

Thank you for squeezing me in. maybe to follow up on the uh i think the prior land expand question with you know you have phone contact center core meetings it would seem like there are a number of different buyers across the board that you have to go after right to gain market share so for one on the enterprise side i'm assuming you're seeing spell cycles um if you're selling phone contacts and the whole package is taking longer um because there's more approvals but really asking is like how should we think How do you synchronize your go-to-market leverage now that you have the platform and you're still off?

Eric, do you want to talk about that? Sure, absolutely. So in terms of a go-to-market strategy, similar to what we did before, I think it works extremely well, and to build trust with customers. And given that we have so many very happy customers over the past two years, and we truly help the world, help people stay connected, for any new services, they are very happy to try to test the services. Because of that, I would say the opportunity is huge. And we already established a trust. You know, customers are really not like, oh, just looking for other solution, just to work. They really need to have some solution that can truly make an employee workforce happy, right? And inside of that, you know, Zoom IQ for sales, right? After we launched that, we already have several paid customers. The reason why is the customer trust our brand. And during the upsell, you know, the period, right? We always talk to the customer, hey, we have this service, have that service, right? And overall, I think if trust, All is there, you know, any new and opposite opportunity should be relatively easier, even if the buyer is different, because the CIO, you know, they already made a decision, right, to standardize Zoom, the meetings, the phone, down to the contact center, Zoom IQ for sales, whiteboard, and also, by the way, do not forget about, you know, also, you know, precision chat solutions as well, right? And that's the reason why customers look at it as a full UC stack. Zoom has everything. That's the key, that's why customers trust us. By the way, we build everything by ourselves, very consistent front-end experience, very scalable backend, and also very efficient architecture as well. That's why we are very optimistic about Google to market strategy. In terms of marketing, for sure, we do not need to spend so much money to promote a Zoom brand. Zoom already became a world. How to make sure folks on those vertical marketing, some in-person events, and also the the you know stay as close as possible with the prospect and customers and that's our focus right not like previously we really focus on the brand you know the marketing that's not our focus market enterprise marketing now thank you thank you peter and we have time for one additional question which will come from matthew harrigan with benchmark

Thank you. Can you talk about how the advent of private 5G networks, especially relative to the limitations of Wi-Fi on the security side, really helped the enterprise opportunity over a period of time, both as far as the TAM and the specific alternatives that you offer for that?

Yeah, Matthew, first of all, thank you for waiting for such a long time to answer the questions. Thank you. I think, you know, look at a Wi-Fi or corporate land network or 5G. Actually, you know, from our perspective, right, you know, as long as any technology can help improve customers' connectivity, make the connection stable, you know, we are very happy, right? You know, especially, you know, between 4G and 5G. 5G is great, but not every country already deployed 5G. And also, you know, look at our optimization technology, right? And you can support a very unstable network. even 5g you know and we also you know i can optimize more if if if you need it but overall i think anything from infrastructure leader can help improve customer with collaboration experience you know well offered right that's why you know we do not care about 5g or 6c you know i think we just make sure we build the application can leverage those advanced infrastructure to truly deliver happiness to our customers thanks eric congratulations thank you messi appreciate it

And, again, this does conclude our Q&A session for today. So, Eric, I'll turn things back to you for any closing or additional comments.

Well, thank you all. I really appreciate it. Again, thank you for everybody's hard work. Thank you for every customer and partner investors. We truly appreciate it. Thank you again. Thank you.

Bye, everybody. Thank you, Eric. And, again, everyone, that does conclude today's earnings release. We thank you all so much for your participation. Enjoy the rest of your day, and we'll see you next quarter.