Zoom Communications, Inc.

and will be muted throughout the meeting.

Over to Tom McCallum, Head of Investor Relations. Tom, over to you.

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings webinar for the third quarter of fiscal 23. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Sekelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also on this page, you'll be able to find a copy of today's prepared remarks, a slide deck with financial highlights that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full fiscal year 2023, our expectations regarding financial and business trends, impact from the 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 discuss in detail in our filings with the FCC. 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 that we may make on today's webinar. And with that, let me turn the discussion over to Eric.

Thank you, Tom, and thank you, Erwin, for joining us today. So last week, we hosted our first fully hybrid Zoomtopia using Zoom Events, and it was great. We unveiled new innovations like Zoom Mail and Calendar, which enable users to frequently navigate across their email, calendar, and other Zoom products all within the same client. At Zoomtopia, many of our customers highlighted how they use our expanding platform to learn more in the world of flexible work. At our first Partner Connect event, we hosted hundreds of channel partners who are very excited about working with us to drive adoption of the Zoom platform globally. And our developer partners showcase add-on apps that connect integrated workflows to Zoom clients. As global organizations adapt to how, when, and where work happens, human connection remains paramount. Zoom is purpose-built to make all kinds of connections possible, effective, and meaningful. We have developed and launched more than 1,500 features and enhancements on the Zoom platform this year. But one thing is how people connect with each other, their organization, and their customers, ultimately opening the doors wide for creativity and collaboration. Of course, Even as we celebrate our innovations and customers, we still face the backdrop of a challenging macroeconomic environment. We continue to see FX pressure and heightened due scrutiny for new business, but remain focused on delivering happiness to our customers by innovating our platform and expanding our go-to-market capabilities. Zoom provides a full suite of communications solutions and an attractive total cost of ownership that enables teams to do more with less. And our new product, like Zoom Contact Center and Zoom My Team for Sales, enable revenue generation and drive productivity. The continued strength of our enterprise growth is a testament to how the value proposition of our platform resonates with customers, even in tougher economic environments. As we enable customers to drive greater efficiency, we also are focusing on our own efficiency. We have always been judicious with investments, prudent about spending, and we have commanded robust margins since our IPO. So this is not a major shift for us. We will continue to drive innovation, customer value, and platform expansion, balanced with an increasing emphasis on efficiency and profitability. We continue to see strong traction with customers spending greater than $100K in training term months revenue, which was up 31% year over year. What's more, these customers are increasingly seeing value in buying the whole platform. With a thousand of customers already buying Zoom One packages, from an industry perspective, The largest deals came from tech, media, and financial services. And we also had notable wins in retail, transportation, and pharma. On the tech front, let me first thank Portrix, the leader and creator of the experience management category, for expanding their partnership with us. Portrix recently upgraded to Zoom One Enterprise, which provides the full power of the Zoom platform to their users and allows them to make meaningful connections with meetings, team chat, wire board, phone, and more in one offering. We are delighted to offer Cortex a broad set of communications products integrated into one secure and easy-to-use platform. Our enterprise segment comprises not only large publicly-traded companies, but also many private companies of all sizes who see great value in enhancing their Zoom implementations by moving towards our full UC platform. Let me give you a few examples. First of all, I'd like to thank Winsure Employer Services, a privately owned professional employer organization for placing their trust in Zoom. In Q3, they added 5,500 Zoom phone seats and 650 Zoom contact center seats, demonstrating the promise they saw in adopting a modern integrated solution for their teams to interact. Let me also thank Chime Solutions for establishing and already expanding their partnership with Zoom, which includes Zoom One and Zoom Contact Center, founded with a vivid focus on bringing jobs and opportunities to end represented communities, Chime Solutions delivers high-touch contact center solutions to mid-sized companies and Fortune 500 corporations. After seeing how well Zoom Contact Center addressed many of the customers' needs and gaining confidence in Zoom's ability to deliver innovation at a rapid pace, they decided to replace their legacy solution with the Zoom Contact Center. Escorting our innovation roadmap for Contact Center will give us opportunity to further enhance our partnership with China Solutions in the quarters and years to come. I also want to thank GP, the number one SaaS-based global employment platform, for choosing Zoom Phone to transform their communication systems and support employees across their organization. DP understood the value of our integrated platform of communication products from their experience using Zoom meetings, Zoom webinars, Team Chat, and Zoom Rooms. DP ultimately opted for Zoom Phone as a missing piece in their UC stack in order to improve their customer experience while also enjoying the savings benefits of a cloud-based PDF solution integrated into a whole communications platform. Also, I'd like to add that GP is Zoom's global expansion employment partner and has played a critical role in our growth strategy, giving us the agility and speed to enter new markets very quickly. Again, thank you, Cortex, Minstrel Time Solutions, and GP, and all of our customers worldwide. And with that, I'll pass it over to Kelly. Thank you.

Thank you, Eric. Let me now turn to the quarter's results and guidance. In Q3, total revenue came in at $1.102 billion, up 5% year-over-year and 7% in constant currency. This result was approximately $2 million above the high end of our quarterly guidance. The growth in revenue was primarily driven by strength in our enterprise business, which grew 20% year over year and represented 56% of total revenue, up from 49% a year ago. We expect enterprise customers to comprise an increasingly higher percentage of total revenue over time. From a product perspective, we had strong growth in Zoom Phone, coupled with contribution from Zoom Rooms and other products. At Investor Day earlier this month, we introduced a new metric, online average monthly churn. In Q3, this metric continued to improve to 3.1%, from 3.7% in Q3 of FY22 and 3.6% last quarter. We are pleased this metric has now returned to pre-pandemic levels. The number of enterprise customers grew 14% year-over-year to approximately 209,300. Our trailing 12-month net dollar expansion rate for enterprise customers in Q3 came in at a healthy 117%. We saw 31% year-over-year growth in the upmarket as we ended the quarter with 3,286 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 27% of revenue, up from 22% in Q3 of FY22. Our America's revenue grew 11% year over year. EMEA continues to be impacted by the stronger dollar, the Russia-Ukraine war, and online performance, which combined led to a decline of 9% year over year. APAC, which was also impacted by the stronger dollar, declined 3% year over year. Now turning to profitability. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlement, net gains or losses on strategic investment, undistributed earnings attributable to participating securities, and all associated tax effects. Non-GAAP gross margin in Q3. with 79.5%, an improvement from 76% in Q3 of last year and 78.9% 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 this, we expect our full year growth margin to be approximately 79%. Research and development expense grew by 59% year-over-year to approximately $108 million. As a percentage of total revenue, R&D expense increased to 9.8% from 6.4% in Q3 of last year. This reflects our ongoing investments in expanding Zoom's product portfolio and delivering on our customers' evolving needs. We expect to exit the year in the range of 10 to 12% of total revenue, consistent with our long-term target. Sales and marketing expense grew by 27% year over year to $301 million. This represented approximately 27.3% of total revenue, up from 22.6% in Q3 of last year. We continue to invest judiciously in sales capacity and channel partner expansion. DNA expense grew by 6% to $87 million, or approximately 7.9% of total revenue, in line with 7.8% in Q3 of last year. Non-GAAP operating income was $381 million, exceeding the high end of our guidance of $330 million as we continue to thoughtfully prioritize investments. This translates to a 34.6% non-GAAP operating margin for Q3 as compared to 39.1% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.07, 24 cents above the high end of our guidance. Due to our share repurchase program, our Q3 weighted average share count has decreased year over year approximately 4 million shares to 302 million. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 14% year over year from $1.2 billion. Looking at both our bills and unbilled contracts, our RPO totaled approximately $3.2 billion, up 32% year-over-year from $2.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 67% in Q3 of last year, reflecting the trend towards longer-term contracts. As a reminder, our annual seasonality of renewals is front end loaded and moderates over the rest of the year, reflecting the sequentially smaller renewal base. As such, we expect Q4 deferred revenue to grow at approximately 2% to 3% year over year. We ended the quarter with approximately $5.2 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Year to date, we have repurchased $991 million of our own stock representing approximately 11 million shares. We had operating cash flow in the quarter of $295 million as compared to $395 million in Q3 of last year. Free cash flow was $273 million as compared to $375 million in Q3 of last year. Our margins for operating cash flow and free cash flow were 26.8% and 24.7% respectively. As previously discussed, this year we have seen larger cash outflows from an increase in cash taxes starting in Q2, which relates to the depletion of our NOLs and the lower tax deductions for stock-based compensation caused by the stock price decline. We now expect free cash flow to be at the high end of our range of $1 billion to $1.15 billion. As a reminder, our range assumes that the Section 174 tax legislation requiring capitalization of R&D expenses will be repealed or deferred by Congress by the end of this fiscal year. Now, turning to guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow in the low to mid-20s, while our online business will decline approximately 8% for the year. For the fourth quarter of FY23, we expect revenue to be in the range of $1.095 to $1.105 billion, which at the midpoint would represent approximately 3% year-over-year growth, or 5% in constant currency. We expect non-GAAP operating income to be in the range of $316 to $326 million. Our outlook for non-GAAP earnings per share is 75 to 78 cents based on approximately 301 million shares outstanding. For the full year of FY23, we now expect revenue to be in the range of $4.37 to $4.38 billion, which at the midpoint represents approximately 7% year-over-year growth or 8.5% in constant currency. This represents a decrease of $15 million from our previous full-year guidance, of which approximately $14 million is attributable to the FX pressure in Q3 and Q4. We now expect our non-GAAP operating income to be in the range of $1.49 to $1.5 billion, representing a non-GAAP operating margin of approximately 34%. This is an increase of $50 million, or 1%, respectively, as compared to our Q2 guidance. Our tax rate is expected to approximate the blended U.S. federal and state rates. Our outlook for non-GAAP earnings per share is $3.91 to $3.94, based on approximately 304 million shares outstanding. Zoom remains focused on thoughtfully balancing growth and profitability through platform innovation, customer value creation, and partner ecosystem expansion. Thank you to the Zoom team, our customers, our community, and our investors. Kelsey, please queue up our first question.

We'll do, Kelly. And as Kelly mentioned, we'll now move into the Q&A session. So when I call your name, please turn on your video and unmute. And as a reminder, in an effort to allow everyone to ask a question, please limit yourself to one question. And of course, our first question is going to come from Meena Marshall with Morgan Stanley.

Great. Thanks so much for the question and congrats on the quarter. Maybe just sticking with the online business for a second and kind of the stabilization of that business. Clearly, you saw the churn statistics improve, but just wanted to get a sense of how you guys are thinking about stabilization there, how you guys are thinking about just initiatives on new ads as well as just free-to-pay conversion. Thanks.

Yeah, so as we shared at Analyst Day a few weeks ago, we're really happy with the continued improvement in the churn, first of all, and it's improved even further in Q3. And the fact that now 70% of those cohorts have moved beyond that 16-month period in which they really see stabilization, and we've continued to see that happen Wendy and her team are really focused on continuing to look at initiatives for conversion. Those include things like adding local currencies, adding local payment types, as well as looking at packages that make sense. So all of that is still in process. And, you know, what we're thinking and we had talked about before is we expect online to stabilize from a dollar perspective in Q2 of next year. And based on our most recent forecast, that is still the case. Great. Thank you.

Moving on to Mark Murphy with JP Morgan.

Thank you very much. I'll add my congrats. Very nice free cash flow performance. I wanted to ask you, Eric, you know, the pace of R&D activity is so rapid at the moment. To what extent do you anticipate that perhaps some of the new product innovations, and I'm thinking of Zoom mail, calendar, Zoom spots, and others, could perhaps enhance the stickiness of the usage patterns, right, or drive engagement and collaboration higher in a way that could maybe benefit either your dollar retention rates or maybe some of the premium plan adoptions?

Yeah, so Marco, that's a great question. That's the reason why we had a very successful Zoomatopia, because we announced so many innovations. Almost every innovation, when we look at that, what we can do to either add value to the existing paid customer to focus on stickiness, or maybe the potential revenue opportunity, right? Look at every feature. I think we always follow that principle. Look at email and calendar. Look at our online paid users, subscribers. And we do not offer to free users, right? For all those online, you know, the pro buyers, if we give the email calendar for free, they can use the email calendar for anything in the service. And for sure, another, you know, great service, which is anything in the community, right? Look at all other features, you know, like a spouse and, you know, all those features certainly can help our enterprise customers, you know, also make our service more sticky. Not only do they use Zoom for scheduling meetings, but also can use that, you know, to mimic the office, you know, environment. So for free users, right, for sure, you know, like even kind of roses for the client, right? So every feature in the vision, I think for sure we'll add more value to our customer, either drive stickiness or drive potential revenue opportunity, like a Zoom, you know, IQ, you know, virtual agent and the contact center, you know, and virtual agent, you might keep like a virtual coach and a lot of features like that. So we're very, very excited. And again, you know, and the feedback from customers are very, very positive, you know, and they're very excited about adopting those new features and enhancements. Thank you. Thank you, Mark.

Credit Suisse's Fred Lee has the next question.

Hi, thank you for taking my question. I was wondering if you could talk a little bit about the macro impact on phone adoption and maybe give us an update on Zoom for adoption overall as you have over the past couple of quarters.

Yeah, so we continue to see strength in Zoom Phone. As a reminder, we announced on the last call that we had crossed over the 4 million seat mark. We also added nine customers in Q3 that have purchased over 10,000 seats. And that brings us to a total of 64 customers in that category. So I think it shows continued strength, especially in the up market, even in these challenging economic times. So we're excited about the prospects that we continue to see there. And as we keep promising you all, we'll break it out when it gets 10% of revenue. So you'll be able to see that then a little more clearly.

Yeah, Fred, to add on to what Kelly said, more and more customers are increasingly looking at our Zoom, the platform, Zoom One UC platform. Usually we look at a product or phone or meetings or webinar or team chat, Now look at a full UC staff, because that will give you a better experience in terms of total ownership of cost. It's also much better. That's why more and more customers are moving towards our full Zoom One platform. And I'm very excited about the opportunities there. Great.

Thank you very much.

Thank you.

And moving on to Michael Turin with Wells Fargo.

Hey. Thanks. Good afternoon. Appreciate you taking the question. On the front-end loaded renewal seasonality, you had a useful tidbit on the deferred revenue growth you're expecting in Q4. Can you just maybe walk through how you gear up for that as a company, given it's a little bit outside the norm on general calendar cycles that we're used to seeing? What kind of visibility do you have into that cohort currently? And is there anything you can do to shift that profile, or is it just kind of gradual that this rolls forward and you've gotten just accustomed to it internally thus far?

Yeah, so as a reminder, this occurred due to the significant increase of customers we had during Q1 in the early stages of the pandemic. And what has happened is due to the practice that we have internally of making it easy for our customers, we co-term when they add on additional products or expand their seat count, for example. So it's continued to actually exacerbate, if you will, when we're upselling customers, that front-end loaded phenomenon. So it will start to level out over time. as we see customers in Q2 and Q4 being our largest seasonal quarters due to the six-month quotas of our upmarket reps. But as you say, we are used to it now internally. Everybody knows this is how it works. We're coming into our third renewal period, and we've seen strength in each of the last two cycles. So we're able to accommodate. We know how it works. And it's not aligned with most of the rest of the industry, which is why we keep reminding you and trying to give you as much color as possible around that.

Appreciate that. Thank you.

And our next question will come from Cash Rangan with Goldman Sachs.

Hello. Thank you very much. Happy Thanksgiving in advance. Good to see you, Eric and Kelly. I had a question on the enterprise business. I think most of us on the call to please me were waiting for the tilt where the enterprise business the strength of the enterprise business can offset the weakness in the online business. As we wait for that, I'm curious to get your take on the expansion rate. I think it came in at 117% or so, and the number of customers, which used to be higher in prior quarters, the number of net new ads in the enterprise still also not quite rebounding and recovering. Can you give us some perspective on how much of this macro versus maybe competition from the likes of team, et cetera. And Eric, how does this play out into the broader adoption thesis for the Zoom platform? When are we likely to see these metrics inflect the other way that could validate your overall thesis that Zoom is not just about video meetings, but a broader communication platform? Thank you so much.

Eric, you want to talk about Zoom 1 first, and then I'll talk about the metrics after that?

Yeah, sure. So that's a good question. And, you know, you look at the customer cortex, right, as we move towards the Zoom One platform, right? So, and leverage, you know, our full UC staff, you know, started from meetings many years ago. They added a phone, you know, a webinar, TV chat, and so on and so forth. I think, you know, the problem was that, you know, previously, you know, when it comes to Zoom, everybody probably assumed that this is just a video conferencing, and that's not the case. That's why we are doubling down on our Zoom One, you know, marketing awareness. Also, talk to the customers, let them understand not only do we offer the best video content service, but also, you know, you look at our other offerings, that's a full UC stack, and also have a contact center as well. I think that will take a little bit of time, but as soon as customers realize, wow, Zoom has a full stack, you know, and plus you also have a very flexible team chat, plus it's free, and it works so well, integrated other UC solutions, I think customers, you know, are showing a great, you know, excitement about adopting the full UC platform. And more and more customers are moving towards our full usage stack rather than just the meetings or phone. And that's why we're very excited because you look at all those offerings working together seamlessly. And in terms of total ownership cost, much better, because many enterprise customers are trying to consolidate their full UC stack. UC stack and collaboration stack is different. But we might use an email or calendar or SharePoint or the office from other vendors. But in terms of UC stack, we want to deploy the best bridge of service. That's why we are going to win on UC stack, plus down to the CC as well. Thank you so much, Eric. Thank you.

Cash, just in terms of like your comment about renewals, I want to highlight, especially in the enterprise, renewals remain very, very strong. We were actually slightly ahead of our internal forecast for Q3. So we continue to see, you know, we've talked about many metrics, growth and expansion in the enterprise. It's just, as you say, we're waiting for that stabilization in online too, because right now it's really having, you know, a dampening effect on the overall growth rate of the company.

Thank you, Kelly. Thank you, guys.

George Iwanek with Oppenheimer has the next question.

All right. Thank you for taking my question. Eric, maybe with all the enterprise progress you're showing, can you give us an update on Contact Center and the adoption that you're seeing there?

Yeah, so, yeah, again, the Connect Center is a new service. We're very excited, in particular for those customers who deploy our, you know, the phone service. They would like to consult at UCN and CC together. And also, we found it interesting use cases as well. You know, not only do those traditional, you know, customer interaction departments, they started deploying the Zoom Connect Center, but also the internal IT desk as well. And again, the contact center cycle is a little bit longer than meetings. However, when we showcase our platform capability and the speed of innovation, customers are very excited. And plus, you look at our own business, right? And if we used to deploy other cloud-based contact center solutions, after we shoot our own contact center solutions, our teams themselves are very, very excited. and a lot of potential pipelines and leads, right, in the pipeline, you know, and also we are doubling down on that. And again, the product side, we have a higher confidence. Go-to-market side, you know, we are gaining taxes, you know, as quickly as possible because, again, it takes some time, plus also leverage the channel and internal go-to-market, you know, the investment. And I think that's a future big revenue driver for us, especially customers like CC and UC together, right, and with much better experience and also the total ownership of cost also much better. Thank you. Thank you.

Moving on to C.T. Panagrahi with Missoula.

Thank you. Thanks for taking my question. Just wanted to ask about macro pressure. You talked about last quarter, you know, sales elongation on the enterprise side. What kind of plans you are seeing, you know, anything worsen and also how that impact your pipeline as well?

So we certainly have seen impact, as I mentioned, from FX. You know, of the reduced guidance of 15 million, 14 of that is coming from FX pressure, and you saw that certainly in our year-over-year growth in Europe and in APAC. In the enterprise, you know, again, renewals stay strong, excitement about the products, but as we discussed, it's continued in terms of additional deal scrutiny. I think all of my peer CFOs now are looking at deals, and that's just – causing elongation in general. Not that things are losing. We're not that we're losing deals. They're just taking longer to get done and potentially some of them pushing over quarters. But we haven't seen that have impact. It's just taking longer and longer, not that they're going anywhere else. It's just taking longer to get those done. Now, the good news is, especially with all of the new products, the consolidation that we offer is is is a really great value story for our customers in terms of you know elimination of additional vendors getting rid of on-prem servers and that continues to be a great story that our customers love thank you thank you ct svb moffitt sterling aughty has the next question thanks hi guys kelly maybe following on that want to want to understand

The 20% growth in enterprise in the quarter versus the guidance of low to mid 20% for the full year, does that mean that there's a little bit of a back-end loaded hockey stick or a bump up that we'll see next quarter? And specifically, I think investors are really interested in trying to gauge how should that business react as we move into next fiscal year in light of the concern about layoffs across all industries and a lot of your Zoom meetings, et cetera, are based on per employee, per seat pricing.

Yeah, so we certainly, and we've talked about this the last couple of quarters, have seen more and more of our deals shifting to the end of the quarter and taking on that more historically natural cycle that we haven't seen since really early in the pandemic. But that is absolutely the case for us. And we have adjusted our forecast for Q4 for some of that linearity as well. we have continued to see, as I keep saying, strength in our renewals. And I think that's because while there's concern about layoffs, there's this other phenomenon about flexible work, right? Everybody wants to continue to working in the way they become accustomed to. And as long as employers are supporting that in their employees, it really means everybody needs a Zoom license. If you're out of the office, even one day a week, you need that Zoom license for phone, for meetings, for whatever, Zoom One. And so I think that is really a compelling reason for organizations to continue to renew with Zoom.

Understood. Thank you. Thank you, Studi. Right. You know, even for those businesses, right? And after deploy the full user stack, you look at a team chat is getting more and more popular. And also the founder, they also can use that for their personal use case as well, right? Because that's free. Now that's why, you know, a lot of, you know, traction, you know, for other part of our entire UC platform.

Our next question will come from Michael Funk with Bank of America. Michael, if you'll please start your video for us. All right, Michael, if you can hear us, please go ahead, start your video and come off mute to ask your question. All right, hearing no response, we'll go ahead and move on to William Power with Baird. And William, if you wouldn't mind doing the same thing. Great, thank you so much.

All right, thanks for taking the question. Probably for Kelly, a pretty notable increase in stock rates, you know, compensation expense. I know you talked about this at the investor day, too, that, you know, you expected given top-ups to be more elevated. It would be great to just get a little more perspective as to how you're thinking about, you know, that going forward. Is this closer to a peak level? Should the world stay at this level? Maybe over a longer-term timeframe, you know, how investors should expect that to trend. And I guess kind of tied to that, You know, you've been aggressive on the stock buyback front. What are the plans there going forward, and how could that tie into how you think about stock-based compensation?

So, first, we believe that the supplemental grant program is really important for the strategy of the company in terms of retaining our employees and keeping them focused and not having to worry about that. And they... supplemental grants vest over the same period as the underlying grant that they're tied to. So you are going to see this level continue for a few years as those grants are vesting through. And many of them originally were four-year grants, so they have two or three years left in which you're going to see that stock-based comp as those underlying shares are vesting. With the stock-based once the stock stabilizes, then you will see less impact on that or less need for additional grants. So we're hoping that we're at that place and that you're going to not see additional supplemental grants in that same level. But until we get past probably another year's worth, we might have some more. In terms of the repurchase, As you heard, we purchased 991 million dollars or 11 million shares. So we have a little bit of room with that. And once we've completed that, we'll evaluate whether or not we want to, you know, ask the board for authorization. We haven't done that yet.

Thank you.

I will now hear from Matt Stotler with William Blair.

Hey there. Thank you for taking the question. Maybe just one more on the online business. It'd be great to maybe get some color, some commentary on the economics of that business, the margin profile, as it compares to the enterprise segment of the business and what the implication there is as that revenue continues to shift, specifically in the context of the updated long-term figures you gave us a couple weeks ago. Yeah.

So we've talked about this before. Our online business is a higher margin business as it's largely, not completely, but largely untouched by companies any person from a sales organization. There are some online account executives that are there to answer questions, but it's minimal compared to our enterprise sales organization. So we've certainly took, we've done a lot of work on modeling what that looks like. And we've taken that into consideration as we laid out our long-term margins that we shared with you at Analyst Day, as we looked forward for the next several years and how we think the mix could shift between the online and enterprise businesses.

Thank you.

Moving on to Ryan. My apologies. Ryan McWilliams with Barclays.

Thanks so much. To follow up on Matt's question, Kelly, can you hear me? Yeah.

Hi.

Yeah. Oh, there we go. Perfect. You previously noted a potential inflection in the online business early to bid next year. With churn now right at around pre-pandemic levels, but we're still seeing revenue declines sequentially in this segment, any updates to this potential inflection? And also, is there any impact from existing Zoom customers upselling to enterprise on this online business segment? Thanks.

So, yes, the answer is yes. There are customers that eventually upsell into enterprise, which is great, right? Because that means they're expanding and they're becoming a bigger customer overall, which we love to see. But that does then, I mean, it's not company term, but it looks like it's moving out of the online business into the enterprise. And in terms of the way we're talking about it is a stabilization of online, and we expect that from a dollar perspective to still happen in Q2 of next year, based on our current forecast that we're seeing.

I'm moving on to Parker Lane with Stifel.

Yeah, thanks for taking the question. Kelly, you referenced thousands of customers that have signed up for Zoom One since it launched, I believe, about five months ago. can you help me understand the profile of those customers a little bit better? Do the majority of them tend to be existing customers that have been migrated onto Zoom One and new packaging, or are you seeing a big net new cohort as well? And then two, is it skewing more enterprise for customers that are thinking about going with Zoom One, or are you also seeing a pretty decent spread across all different size organizations? Thanks.

So Eric, I know you love to talk about Zoom One. Do you want to Talk about it for a second.

I think that, you know, you know, first of all, I think the Parker, you look at our zoom, when we launched a several months ago, right. And I look at all those customers, you know, minimum size enterprise, SMB, they all see the value. No, that's why we see, you know, and almost every, the market is second you know they are moving towards the zoom one package would you do see the value would you not see uh any specific market segment you know truly standing out from all the way from s and b for enterprise and i think that's exactly what we anticipated and

Thank you, Eric. I would just add to that that the key customer wins that we saw in Zoom 1 and Q3 were a pretty balanced mix of new as well as customers that are upselling as they're adding new products to their portfolio. So we're really happy about that. They were seeing traction in both aspects of the business.

Understood. Thanks again.

Thank you. I hear from Shebly Sarafi with FBN Security.

Yes, thank you very much. So I'd like to hear from you what you think your current visibility is compared to, say, three months ago. I noticed that your RPO grew by 32% year to year, which is impressive. But you also had a decline in your CRPO percentage over the past several quarters. Your expansion rate has been declining. And with your guidance for deferred revenue to grow 2% to 3%, With my model, I'm getting billings down 10% year-to-year in Q4, and you've never really had a billings decline in my model. So just talk about the visibility you have right now versus three months ago, and when you think you might see this stabilize. Is it a few quarters or is it a few years? Thanks.

Yeah. So the current RPO, pressure is largely related to the online customers and the decline that you're seeing in online as the long-term RPO really benefits from the direct or the enterprise side of our business, which are managed by the direct business and have more annual and multi-year contracts. That's kind of why you see that shift in terms of the overall percentage of I would say, and then the other impact that we're having that we can't, which is difficult to predict, of course, is FX, right? So you have to consider that, which is more concentrated online than an enterprise. But you heard we, in our guidance that we've reduced, we said about 14 million of that we believe to be attributable to FX. In general, I would say the Economics or the state of our business hasn't changed, meaning our enterprise business and our enterprise sales organization is stable. They're continuing to operate in the same way. The online business, with the improvement in churn, as well as the way that the majority of it now has shifted out, belongs beyond the 15 months. is really helpful in terms of our ability to forecast that business. And so I think the visibility is the same. There's just some different reasons for all those different components that you're talking about. You know, the deferred is, again, the decline you're seeing in Q4 is really due to the front end loaded nature of our business. And then remember, so the front end billing, sorry, the renewals happen at the front end of the year. That's where you're going to see the upswing in billings, the upswing in deferred. and then that gets amortized over the year, so deference coming down, and then we have much lower renewals in Q4 as well. So, you know, the renewals that are filling up the bucket are much, much smaller. So, you mentioned very many factors, and there's different reasons for all of those. Okay.

Thank you.

Yeah. Our next question will come from Peter Levine with Evercore.

Great. Thank you for taking my question. No, I think given some of your customers are pushing back a larger decision, you know, are you able to kind of toggle yourself towards maybe focus more on those back to base opportunities? And then Kelly, just to follow up, you know, can you share how many of those nine, I think you said nine, 10,000 seat phone customers are net new to Zoom and then maybe just share with these legacy TPX replacements or are you going in and replacing another cloud provider? Thank you.

Yeah, so First of all, remember our strategy for selling Zoom phones is selling into the existing install base. So I don't know actually a split between those nine, but I'm sure that the majority of those were existing Zoom customers. And I think... I would say there's a focus on the company that, as Eric has talked about, of expanding not beyond, not to just phone, right, but expanding to the full platform. So that's really what we have our team focusing on now. It's Zoom One, it's Contact Center, it's Zoom IQ for Sales, now it's email and calendar, and really thinking about that complete platform, including Zoom Chat and the adoption within organizations. For all the reasons we've been talking about in terms of retention, flexibility for organizations to reduce vendors, the cost savings, the total cost of ownership that they see by having that combined, for all of those reasons, that's really becoming the focus of our enterprise sales organization.

And our next question will come from Matthew Nicknam with Deutsche Bank.

Hey, thank you for taking the question. I wanted to ask, you mentioned the greater value that customers are seeking out from the broader platform. I'm just wondering, are there specific areas where you see maybe more room to strengthen the platform? And with the compression we've seen in market valuations, how are you thinking about potential inorganic opportunities? Thanks.

Eric, do you want to talk about the platform and the value they see?

Yeah, sure, absolutely. I think, you know, for those customers, right, who deployed a Zoom One platform, right, they really like it. The reason why you look at it as one same client, the same interface, right? And you have a scheduled meeting, you can use our Zoom team chat, communicate with your teammates and customers, make a phone call, wire board there. Now we added an email calendar fully integrated together. I think that's the whole value. And plus, you look at a customer, used to be deploying many other partner solutions. Now with one platform, the full usage stack, that's the value, similar experience. And that's why more and more customers, no matter which other cloud with the solution they deploy, take a phone for example, they deploy other cloud with phone solutions, now they realize the full value of the entire Zoom One platform. We see more and more customers, they just reach out to us, rather than reach out to Zoom to upset. Now they reach out to us, they say, yeah, I see the greater value. And that's why, you know, more and more innovations will be built upon the Zoom One platform. And yeah, I thought Zoom was for the recently announced. And that's our focus. You know, if we double down on our platform, you know, the story.

And just in terms of inorganic opportunities, if we can elaborate on that.

Sure. So, you know, we continue every day to look at opportunities. And yes, the compression evaluation certainly is not lost on us. You know, what we're always trying to balance, of course, is what would it bring to our customers? What would it bring or the impact potentially on our culture? And then, of course, the value and the state of the technology, right? We have a high bar for both talent and technology here at Zoom. So it's been difficult, I would say, to date to find something that really meets all of those standards. Eric is a very hard judge, but that doesn't mean that we're stopping and we continue to look for opportunities every day.

Yeah, also, you know, in terms of the full platform experience I mentioned, our customers, the number one thing is they like our experience. Let's say, you know, if you look at other biggest, you know, service providers, right, you know, how to make sure you have a consistent experience. That's not that easy. That's why, you know, we tend to look at all those greater technology companies like we saw, you know, quite many years ago. Again, if you want to do you know, just to focus on the, you know, the brand new service, you know, we might think about the organic, you know, opportunity, but now look at a UC platform, we already have everything. Now we just need to focus on the go-to-market side, right? And we are, you know, we have a high confidence, right? We're getting more and more attractions there.

Thank you.

Thank you.

Moving on to Alex Hogan with Wolf Research.

Hey, guys. Hi. Just maybe I have one question that's a bit forward and it's a bit hard. But if I look at the four, kind of to Shelby's point, the forward-looking metrics and the implicit guide for enterprise revenue next quarter is about 15% to maintain that low 20s for the full year. If you go forward a second, it does look like growth next year is gonna be kind of in the low to mid single digits, assuming the normalization or stabilization of the online business and assuming some further decel with the macro getting tougher. With OpEx growing nearly 30% this year, how are we thinking about a worsening environment? Like what's the recession playbook for Zoom? We've seen some companies, you know, take some pretty meaningful steps with respect to employees, with respect to dialing up, you know, if you will, the efficiency of the business. What's the plan? What's the recession plan here, maybe for both you and Eric? Yeah.

So... I think that your assessment in terms of, we're not giving, let me just make the caveat first of all, we're not giving FY24 guidance on this call. We will do that obviously at the Q4 call, but your assessment in the way you're kind of thinking about the top line growth is right in line with kind of how we're thinking about it right now. And in terms of then from an operating margin perspective, the way we're thinking about it is as we're working on our FY24 plan, we are being very, very thoughtful about prioritization of investments. That's how I would say it. And as you noted, we have grown our expenses and we've hired a lot this year. And so being very thoughtful about ensuring that they're focused on the right things, that we are prioritized internally. We are committed to continuing on innovation and meeting our customers' needs as well as go-to-market expansion. Those are really the top priorities that we have in making sure that we have resources in the right areas for that. I guess that's what I would say.

Yeah, so Alex, I think we're in a much better position. You look at the efficiency and the potential productivity improvements, like cash flow profitability. And plus, as Kelly mentioned, we have a lot of teammates You know, this year, I think that they are going to reach a full productivity next year. And that's why I think, yeah, you know, I think we can weather the storm, right? And for any, you know, either short or long term, short or long recession. And yeah, we feel very confident, you know, and to drive efficiency and productivity.

And I guess maybe just as a follow up, if I look at the buyback cadence, given on the one side, Kelly, if you're talking about, you know, having to issue shares as long as the stock goes down, On the other side, you have $5 billion in cash on the balance sheet to buy back stock. So how do we, because I get a lot of questions about dilution, particularly given the supplemental share buyback. So at least on that front, what's the right way to think about over the next year, over the next two, three years, how XM&A, how you're going to leverage that cash balance?

Yeah, so... We think based on the share repurchase program that we currently have in place, we've done a good job of being able to offset the dilution from the supplemental shares. We want to be very thoughtful about our cash flows. We just talked about M&A, for example. And so especially as we're focusing on our FY24 plan, are balancing the opportunity for managing dilution as well as earnings on that cash and M&A opportunity. So all of those are being considered as we look forward for FY24. And that's really what we have to say today. We'll have more to talk about when we come back for the Q4 call.

Perfect. Thank you, guys.

Yeah.

We'll now hear from Ryan Kuntz with Needham & Company.

Thanks for the question. What if we could unpack the strength in enterprise and how to think about that revenue growth across different product categories? If it's not quantitative, can you kind of give us an idea where, you know, phone stacks up versus expanded meeting license and any other products look like they can become meaningful, you know, in the next 12 months as you look at that on the enterprise side? Thanks. Yeah.

So really happy with the progress we've seen with Zoom 1, with Zoom phones, and the strength in Zoom rooms in Q3. We also certainly see potential in contact center and sales IQ. They're just so early, you know, that we're seeing progress there and excitement, but it's early stages. So in terms of what they're contributing overall to the dollar amount, it's It's minimal at this point, but we are seeing growth in terms of quarter-over-quarter expansion in those products. So that's really exciting to see.

Got it. Thanks, Kelly.

And our next question will come from Catherine Trepnick with MKM.

Oh, thank you for taking me. My question, appreciate it. One of mine is on your partner program. You got in a new partner executive last July. You know, could you specify any particular areas that he's going to concentrate on to drive more revenue? He just interviewed at one of the CRM magazines and said he wants to get to 50% revenue through the channel. And can you just address some of the ideas that he has to implement?

So, yeah, Todd, Catherine's referring to Todd, who joined us, I think, a couple quarters ago. He's great. at Zoomtopia. He hosted our first partner connect with over 400 partners. We're there. So that was super exciting to see. And while there are lots of opportunities, I think one of the biggest areas of opportunity is international partner expansion. We've done a good job over the last few years of building up master agent and carriers here in the US, but it's still relatively nascent outside the US. So that will be a big area of focus for sure.

All right. Thank you. And James Fish with Piper Sandler, please go ahead with your question.

Hey, thanks for the question. Most of mine have been asked, but I did actually want to ask on the enterprise sales investment that we've been talking about the last couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps who over the last few years really had the advantage of an easier sales cycle with meetings especially? Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point? Thanks.

Yeah. So in terms of our reps, we are constantly looking at opportunities to help make them more productive. And as we were just talking about, we've hired a lot over the last few years. And as we look forward to FY24, we'll be making many fewer hires. So we're really looking for how do we enable the reps? How do we make sure that we have the right overlay teams in the right places to support them? As a reminder, we have specialists that are selling contact center and phone. And that's a really important aspect of making sure that everybody is aligned on serving our customers in the best way possible. So that is a big focus. We also have a new president, Greg Tom, that you all met last quarter. And he's been spending a lot of time helping us think about that, especially as we're moving up in the enterprise stack. And that's his experience as we're his background is. And then, and really focusing on making sure that our comp plans align. That's another thing that we're taking a look at for FY24 as well.

James, another quick point, just to add on to what Kelly said, and also the Zoom IQ for sales, that product certainly added value to drive our team's productivity, right? Especially when reps, they work remotely, right? How to manage their productivity, drive efficiency, take some, you know, actions quickly. I think we deployed Zoom IQ for Sales by end of this month. Literally every rep will be fully trained on Zoom IQ for Sales. Not only do we have our sales productivity and also we'll create a lot of opportunity for us to sell more and more Zoom IQ for Sales. That's a huge value for every sales team to drive productivity. Helpful. Thanks, guys. Thank you, Steve.

Moving on to Matt VanVleet with BTIG.

Yeah, hi, good afternoon. Thanks for taking the question. I guess you highlighted Zoom rooms and curious how much of that uptick do you feel like has been sort of a return to office for a number of companies and really, you know, having that mixed modality of a conference room and still having remote workers in and how much, I guess, sort of risk might that come under over the next several quarters of being a growth lever and As we've seen layoffs, as we see a slower macro, and maybe that's not an additive spend that the companies are going to want to undertake when they're already paying for the individual Zoom licenses. Thanks.

Yeah, I think it's very similar to Zoom meeting licenses in the aspect of as long as you have a hybrid workforce, you need the right technology in your conference rooms. You know, to ensure that you have this inclusive experience that we've all become so accustomed to. And we continue to listen to our customers. Customers work on innovations to ensure that we provide that. But I don't think it's going to go away. I mean, we'll see what happens, right? I think it's still yet to come to see what happens with, like, commercial real estate. However, Zoom rooms and the importance of those in a hybrid workforce, I just – I can't – tell you how important that is. I can't stress enough the importance of that. And that's really what our customers are seeing as well as they're in some sort of state of a hybrid work environment.

Great. Thank you.

And also, Matt, another thing, just quickly, so it used to be like, look at a conference room, right? Most of the uses are used internally, for internal calls. And look at Zoom rooms, that's not the case. A lot of customers are leveraging Zoom, right, to talk to the customers and the partners, right? That's one difference, because that's the reason why the customer likes Zoom, right? When you talk to the customer and partner, you want to make sure they have the best experience, right? And another thing, even for those companies who might think about a length of employees and reduce the number of the employees, guess what? Less desks, but more common rooms. Then otherwise, what can you do to double down on customer and partner interaction? And that's why we still see a great opportunity ahead of us.

Thank you.

Thank you.

And we'll move on to Tyler Radke with Citi.

Hey, thanks for taking my question. Kelly, in terms of the Q4 guide, understand that currency was a bit of a factor there on the lower outlook. But can you just unpack kind of what you're assuming from a macro perspective? Is the Q4 guide relative to what was implied last quarter? Is it incorporating churn getting worse in SMB or weaker net ads? Or maybe you're seeing something on the enterprise side. Just help us understand that. the non-EPEX side in terms of what you're expecting for Q4?

Yeah. So in the online segment of the business for Q4, we expect churn to be pretty much in line with Q3. I mean, it's likely that number is going to bounce around a little bit quarter to quarter, and that's going to all be visible to you now as we report it. But we're not forecasting any dramatic changes there. And then in the online segment, I would say that the business I mean, sorry, in the enterprise segment, I would say the biggest change that we're seeing is just this continued push to deals being at the back end of the quarter. And so that linearity, you know, over the last few years, we had a much more balanced linearity in our enterprise segment. And what that leads to, of course, is deals contributing to revenue in the quarter. And we're seeing much less of that as these deals are going back to the more traditional, you know, back end, really, really back end of the quarter. Now, we have the benefit in Q4 of having kind of the two periods of December 31st closed and then the January 31st closed. But we are expecting the linearity more consistent like with what we've seen in Q3 than what we saw a year ago.

Thank you.

Yep.

And we have time for one additional question from Carl Kirstead with UBS.

Hi, Carl. Hey, great. Thanks for fitting in. Hey, Kelly, I'd just love to ask you about your perceived utility of the billings number. Traditionally, we look at that number as a decent proxy for business momentum. Obviously, minus 10 in 4Q and plus 1% for the full year. I'm guessing you would argue that that's a poor proxy for Zoom's momentum. So can you opine on that a little bit? Because I think maybe there's some consternation about that negative 10 and 5% billings.

Thank you, Carl. I should have said this earlier. So as a reminder, we don't guide to billings. We never have because we don't think that they are a good indicator for us because of the large percentage of our customers that are, especially in the online segment of the business, that are on monthly contracts. And so because they bill and they pay us monthly, they don't show up in that number. And so that's why it isn't really a good proxy for you to use.

Okay. And as a follow-up, Kelly, is there anything else that's skewing that DR number You know, is there any change to invoicing terms or maybe more flexible payment terms to customers that maybe on the margin are impacting DR as well?

Nothing significant. It's really more about, you know, the timing. You're talking about deferred revenue specifically. It's really about the seasonality of the renewals. I can't stress that enough for everybody. Remember, it's the two factors. It's the fact that they bill in Q1. And then, so you're going to see an uptick in billings and deferreds and collections. And then that amortizes over time. And then the billings in Q4 are just a lot smaller. So you have this double impact, right? Now you've amortized a lot of the deferred that was picked up in Q1. So we're down at a lowest period in Q4. And the billings in Q4 are the lightest period to refill that bucket. So it's going to, this is going to be a phenomenon that we're going to see for years to come, as I've talked about until, Over time, we start to see more and more of our bookings happening in Q4, but that's going to take a long time.

Makes sense.

Thank you. Hey, thanks a lot, Carl. Thank you, everybody.

And again, that does conclude our Q&A session for today. I'll go ahead and turn things back over to Eric for any closing or additional remarks.

Thank you. First of all, thank you for every Zoom employee's great work. Thank you for every customer, partner, and investor's great support. You all have a wonderful holiday season. Thank you again. See you in our Q4 meeting. Thank you.

Thank you, Eric. And again, this does conclude today's earnings release. We thank you all so much for your participation. And from our family to yours, may you have a safe and happy holiday season. Enjoy the rest of your day. And again, we'll see you next quarter.