Zoom Communications, Inc.

Well, hello, everyone, and welcome to Zoom's Q4 FY23 earnings release webinar. As a reminder, today's webinar is being recorded. And now I will turn things over to Tom McCallum, head of investor relations. Tom, over to you.

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the fourth quarter and full year of FY23. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.us. 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 first quarter and full fiscal year 2024, our expectations regarding financial and business trends, impacts from the macro environment, our market position, opportunities, go-to-market initiatives, growth strategies, 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 SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar. And with that, let me show you a quick video highlighting our exciting technologies before turning the discussion over to Eric. Kelsey, please queue up the video.

Hello, Eric. How may I help you?

wow that's amazing thank you tom and thank you everyone for joining us today so fi23 was truly a pivotal period in our evolution into a full collaboration platform as you saw in the video we launched multiple innovations to help transform work and expanded our product portfolio to open new markets Since Zoom contact centers released early last year, we have worked hard to expand its features, functionality, and integrations. In Q4, we landed a 2,000-seat contact center deal. Our launch is to date. It truly demonstrated the rapid progress we have made towards becoming a full-fledged contact center solution. and the success of our zoom one bundle which we launched last june contributed to the strong performance of zoom phone which in q4 exceeded 5.5 million states making us a clear leader in the space we closed out the fiscal year with the release of a zoom virtual agent and intelligent conversational AI and chat about a solution that we believe will transform the way businesses assist their customers and employees. FR23 was not without its challenges. We experienced headwinds in terms of currency impact, online contraction, and due scrutiny, which continued into Q4. And a few weeks ago, we made a very tough but necessary decision to reduce our team by 15% and say goodbye to around 1,300 hardworking, talented Zoom colleagues. I want to extend to them my heartfelt appreciation and deepest gratitude for their crucial contribution to Zoom. This painful exercise has been a tremendous learning experience for us and it allows us to look inward to reset ourselves so we can weather the economic environment with greater focus and agility deliver for our customers and achieve zoom's long-term vision now let me discuss our strategic focuses in i524 and beyond first will help redefine teamwork through offering new immersive experiences that improve employee engagement and modern collaboration tools for ideation across locations and modalities and we will give teams everything they need through a single pane of glass second the age of ai And the last language models has arrived. And we want to empower smarter experiences and workflows that are truly enable our customers to benefit from this transformational tools. By embedding AI into more workflows, we can provide our customers with richer, more actionable insights that empower them to work smarter and serve their customers better. zoom iq zoom virtual agent as well as our translation captioning and meeting summary tools are just the beginning we will layer more ai technologies into our products to truly help our customers maximize their roi on our platform and thrive this is in this new era of computing Third, we will offer more and more departments tailored solutions to meet their nuanced digital transformation needs. We constantly solicit feedback not only from CIOs, but also heads of sales, customer experience leads, and many other leaders across various industries. ZoomIQ for Sales was built in this collaborative fashion. and has already added tremendous value to many sales teams. You can expect additional industry-specific and department-specific applications developed both by us and our third-party partners. All of this comes together as a collaboration platform that unites people to unlock their potential, enables more dynamic and intelligent experiences and allow us to reimagine productivity and work. As we navigate this period of technological and economic volatility, our role as a trusted partner providing best-in-class unified communication services has never been more crucial. Again, this is a tremendous opportunity in front of us. and we are very confident that our strong foundation ambitious vision and customer-centric culture will enable us to seize this opportunity and continue to lead the way in the unified communications and collaboration space now moving on to some of our customer wins i want to thank a ramco one of the world's leading integrated energy and chemicals companies for establishing a strategic partnership with zoom this is a landmark multi-year partnership where we will provide a full suite of collaboration services including zoom meetings team chat phone events and zoom rooms in addition We will work together to build a data center in the region and explore the joint development of innovative technology solutions. We are so grateful that Aramco has chosen to partner with Zoom on their digitization strategy. I'd also like to thank Nasdaq, my favorite company, who has been a Zoom customer for several years. Recognizing Zoom's strong reliability, security, and ease of use, they expanded to Zoom One, our all-in-one unified communications and collaborations bundle. As part of this expansion, NASDAQ will be deploying Zoom Phone and also adding capabilities like translation and advanced whiteboard for their Zoom meetings. I want to also thank Raymond James, a leading financial services company, for expanding their relationship with us by integrating Zoom phone to their Zoom meetings implementation for more competent communications package. We are excited to work with Raymond James to provide a highly reliable and secure system enabling their employees to communicate, collaborate, and ultimately thrive in the hybrid work world. I want to also thank Barracuda Networks, which builds cloud-first enterprise-grade security solutions for expanding with Zoom. A long-standing Zoom meetings customer, Barracuda saw the value of having a single platform for all their communications needs and upgraded Waterwall to Zoom One Enterprise Plus in Q4. In addition, Barracuda also chose Zoom IT for sales to enhance sales engagement and Zoom Contact Center to elevate the customer experience. Again, thank you Aramco, Nasdaq, Raymond James, Barracuda Networks, and all of our customers worldwide. And before closing, let me express my warm welcome to Cindy Hughes for joining our board of directors. Cindy brings a wealth of experience and currently is the Chief Digital Officer and Chief Information Officer at AstraZeneca. We are so excited to work with her. I also want to welcome our new chief product officer, Smita Asim, who joins us from a seasoned executive career at Microsoft and Google. We are also super excited to work with her. And with that, I'll pass over to Kelly. Thank you.

Thank you, Eric. And hello, everyone. Let me start with a few of the financial highlights for FY23 and the results for Q4, and then provide our outlook for Q1 and FY24. We delivered solid results in FY23. Here were some of the highlights. Our enterprise business grew 24%. Our non-GAAP operating margin was 35.9%. And we achieved a free cash flow margin of 27%. In Q4, total revenue came in at $1.118 billion, up 4% year over year and 6% in constant currency. This result was approximately $13 million above the high end of our guidance. The growth in revenue was primarily driven by strength in our enterprise business, which grew 18% year over year and represented 57% of total revenue, up from 50% 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. Online average monthly churn decreased to 3.4% from 3.8% in Q4 of FY22 and increased slightly from 3.1% in Q3 as expected due to seasonality. The number of enterprise customers grew 12% year-over-year to approximately 213,000. Our trailing 12-month net dollar expansion rate for enterprise customers in Q4 came in at a healthy 115%. We saw 27% year-over-year growth in the upmarket as we ended the quarter with 3,471 customers contributing more than $100,000 in trailing 12-months revenue. These customers represent 28% of revenue, up from 23% in Q4 of FY22, and span diverse industries such as healthcare, education, government, and more. Our America's revenue grew 10% year over year. EMEA continues to be impacted by the stronger dollar, macro headwinds, and online performance, which combined led to a decline of 9% year over year. APAC, also impacted by the stronger dollar, declined 5% year over year. Now, turning to expenses and margins. A quick note on our GAAP results. In Q4, they included a one-time stock-based compensation expense of $208 million due to the sunsetting of our supplemental grant program, which carries neither dilutive nor tax deduction impacts. Moving on to 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, undistributed earnings attributable to participating securities, and all associated tax effects. Non-GAAP gross margin in Q4 was 79.8%, an improvement from 78.3% in Q4 of last year and 79.5% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our co-located data centers. For FY24, we expect non-GAAP gross margin to be approximately 79.5%. Research and development expense grew by 43% year over year to approximately $103 million. As a percentage of total revenue, R&D expense increased to 9.2% from 6.7% in Q4 of last year, reflecting our investments and expanding our product portfolio. Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing expense grew by 20% year over year to $301 million. This represented approximately 26.9% of total revenue, up from 23.4% in Q4 of last year. As part of our restructuring, we are optimizing our go-to-market strategy to better support our enterprise customers and drive additional productivity. G&A expense declined by 12% to $84 million, or approximately 7.5% of total revenue, down from 8.9% in Q4 of last year, as we focused on achieving greater efficiencies in our back office. Non-GAAP operating income was $405 million, exceeding the high end of our guidance of $326 million as we took actions to reprioritize our investments in Q4. This translates to a 36.2% non-GAAP operating margin for Q4 as compared to 39.2% in Q4 of last year. Non-GAAP diluted earnings per share in Q4 was $1.22, 44 cents above the high end of our guidance. Due to our share repurchase program, our Q4 weighted average share count has decreased year over year by approximately 5 million shares to 301 million. Turning to the balance sheet. Deferred revenue at the end of the period was $1.3 billion, up 11% year over year from $1.2 billion. This is above our guidance as we saw increased commitments from customers and extended contact durations. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.4 billion, up 30% year-over-year from $2.6 billion. We expect to recognize approximately 56% of the total RPO as revenue over the next 12 months as compared to 63% in Q4 of last year. As a reminder, our annual seasonality of renewals is weighted towards the first half of the year. We expect Q1 deferred revenue to be up 0% to 1% year over year, partially due to the strengthening of the dollar starting late in Q1 of FY23. Since then, the major currencies we do business in are down 5% to 10% vis-a-vis the dollar. We ended the quarter with approximately $5.4 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $212 million, up from $209 million in Q4 of last year. Free cash flow was $183 million as compared to $189 million in Q4 of last year. Our margins for operating cash flow and free cash flow were 18.9% and 16.4% respectively. Because the Section 174 tax legislation requiring capitalization of R&D expenses was not repealed in FY23, we incurred an additional cash tax payment in Q4. Despite this payment, we still exceeded the high end of our previously provided range by $36 million for a full year total of $1.186 billion. For FY24, we expect free cash flow to be in the range of $1.2 to $1.25 billion. Now, turning to guidance. For the first quarter of FY24, we expect revenue to be in the range of $1.08 to $1.085 billion, which at the midpoint would represent approximately 1% year-over-year growth or 2% in constant currency. We expect non-GAAP operating income to be in the range of $374 to $379 million. Our outlook for non-GAAP earnings per share is 96 to 98 cents based on approximately 304 million shares outstanding. This outlook reflects the three fewer days in Q1 versus all other quarters. For the full year of FY24, we expect revenue to be in the range of $4.435 to $4.455 billion, which at the midpoint represents approximately 1% of year-over-year growth or 2% in constant currency. We expect our non-GAAP operating income to be in the range of $1.606 to $1.626 billion, representing a non-GAAP operating margin of approximately 36%. Our tax rate is expected to approximate the blended U.S. federal and state rate. Our outlook for non-GAAP earnings per share is $4.11 to $4.18, based on approximately 309 million shares outstanding. Zoom is dedicated to maintaining a careful balance between growth and profitability. We remain committed to innovating our platform, optimizing our go-to-market motions, and evolving our culture to meet the dynamic needs of the market. We are confident that our continued investment in innovation will enable us to provide an even greater value to our customers, while also positioning us for sustained growth. Thank you to the Zoom employees, our customers, our community, and our investors. Kelsey, please queue up our first question.

Thank you, Kelly. And again, everyone, we will go ahead and move into the Q&A session. So when I call your name, please turn on your video and unmute yourselves. And as a reminder, in an effort to hear from everyone, we please ask that you limit yourself to one question. And our first question will come from Fred Lee with Credit Suisse.

Hey, there we go. Can you all hear me? Yep. All right, great.

Hey, Kelly, just a question regarding the full year operating margin guide, which looks like it's coming in around five percentage points above consensus. I was wondering if you could break down where those efficiencies are coming from, how much was coming from the RIF versus efficiencies and other operating expense line items. Thank you.

Yes, thank you. So, as I mentioned in the prepared remarks, we started really focusing on driving efficiencies across the business in Q4. As you saw in the results, this came from looking across all third-party spend, and then as we moved into Q1, of course, the reduction. And so it's really a combination of that as well as looking across all of our business processes, including go to market where there's a restructuring happening to really focus the resources on our enterprise customers and be as efficient as we can in our commercial and small business teams.

Got it. Thank you. And a quick question for Eric with regard to everything that's happening in around AI and generative AI. You know, you've talked a little bit about some of the new product areas where you're expecting some initial impact. So how would you, what kind of analogy can you draw for investors and for us with regard to the uptake of, you know, all things generative AI? A little bit of commentary around that would be greatly appreciated.

Sure. So, yeah, first of all, that's a great question about AI. I think your question about AI is sort of... It reminds me of 1995, 1996, when the internet was, you know, the first wave of internet revolution. I was so excited, that's why I moved to Silicon Valley, right, to embrace that first wave of revolution. And since then, I was stuck for real-time collaboration until today. I can tell you, speaking of AI, I'm as excited as 1995, maybe sorry, I'm wrong, maybe more excited than 1995, 1996, given my engineering product background. I think AI, everyone, you know, sort of faces the challenge at the same time, also have a huge opportunity ahead of all of us, right? Given our strong innovation culture, I think AI can truly help Zoom. right to involve us to to to cut you know sort of you know part of the zoom 2.0 journey right there would be i think a zoom will be the ai first company you know speaking of uh specific features how to leverage ai and even before we talk about chat gpt before you talk about all those ai Actually, we already invest heavily on AI, right? So, you know, some customers may not see that, right? Like noise reduction, even virtual background, a lot of things like that. Even recently, we announced a feature called Zoom Smart Meeting Summary, you know, where we already leveraged GPT-3 to augment our ML, right, to improve that experience. and we are going to double down trip it on ai a lot of features like virtual asian zoom iq for sales our chatter solution air you know even canada as well i think ai can truly empower everything we are doing here and we benefit the customers plus you know we are taking a very open approach and we have our own ai engineers a lot of attorneys working very hard and also are going to partner with other companies open eyes is great company and just talked with recently and you know this is great again I can talk a lot about AI. I'm very, very excited.

Great. Thank you. That was very helpful. Thank you.

And Michael Funk with Bank of America has the next question.

Michael, you're muted. I'm unmuted on my phone.

Now we can hear you, Michael.

Okay. Thank you, Kelly. First for you, Eric, you have a tremendous cash balance. It's a huge strategic asset for Zoom, specifically today when a lot of your competitors don't have that optionality. So what is the argument, in your opinion, against deploying that cash to further your advantage and improve your capacity?

So, yeah, when it comes to money, it's better to delegate it to Kelly. Probably she's better to have a manager.

Thank you, Michael. I don't think there is any argument against deploying our cash, certainly to continue to advance our technology, advance our customer base. And as I said, we are constantly looking for opportunities. And as I've mentioned in the past, we have kind of three main criteria, of course, we look at. We look at the technology as we want to make sure That we would be providing our customers something that works as well as the core of Zoom does today, the core of Zoom platform. We look at the culture to make sure that the organizations could come together very, very well. As you know, we take culture so, so seriously here. And Eric and the whole executive team have spent a long time focusing on building that. And then last but certainly not least is valuation. And that has been tricky in the past. We've seen great assets that we loved but just couldn't get there, as unfortunately all of you know. And so we now see that becoming easier and easier. So I will tell you that Sanjay and his team have been very busy continuing to look for targets for us. And it certainly is a part of our strategy that we're considering for FY24.

Great. Thank you for that, Kelly. And Kelly, while I have you, you know, back to your earlier question about the delta and operating income, fiscal 23 to fiscal 24. You know, we estimated earlier this month about a $260 million benefit from the RIF. Is there an issue with my math around that?

You know, we're not going to get into the specifics around the reduction. I will tell you it was pretty consistently applied across the company, the 15% that Eric mentioned, across the organizations as well as U.S. and some of our other locations outside of the U.S. So you can take that into consideration as you're calculating what you think the savings are.

Great. Thank you, Kelly. Thank you, Eric. Thank you.

We will now move on to Mita Marshall with Morgan Stanley.

Hi, Mita. Hey, great. Thanks. Maybe, Kelly, just for you to start with, you know, maybe versus where we were 90 days ago when you were kind of talking about lower to mid-single digit potential for fiscal 24, just trying to get a sense of is kind of the incremental conservatism, is that more around the enterprise? or the online business, particularly given that you did see some kind of stabilization in the online business in the quarter?

Yeah, I guess I don't know that I would say, I mean, remember on the Q3 call, we weren't specifically giving guidance. We were trying to help sort of give, I think, a little bit of visibility, but we were still right in the midst of doing our FY24 planning. So as we continued to work on that with all of the go-to-market teams and also made this decision around the team and the reduction, putting all of that together came up with what we've now guided to. know we do continue to see headwinds that we we spoke about of course currency is still a challenge and we're going to see some you know as compared to year over year we're going to see some impact in q1 because remember the the dollar really started to strengthen the back half of q1 last year so you should expect to see some year-over-year impact there as well as just these changes in especially the go-to-market teams right now, making sure that we get everybody lined up and looking at where that is. All of that was considered as we set the FY24 guidance.

Got it. And then maybe, Eric, in the past, you guys have wanted to have kind of this singular Zoom platform and let the third-party apps be where you would kind of do the departmental or industry use cases. And it sounded like there was some departure from that. So I guess I just wanted to get a sense of, are there going to be different zoom additions for kind of some of these different verticals? Or, or will it still kind of be largely third party driven?

Yeah, I think that's a good question. First of all, I don't think that we will depart, you know, departure to what we were trying to do before. So maybe it's more like an augment of what we're doing now. Because given a lot of new opportunities, I do not think everything should be done by our, you know, own developers, right? That's why, you know, also want to leverage third party. I do not see me changing that strategy, just more augment, you know, what we're doing today.

Great. Thanks.

Thank you.

And just as a reminder, please limit yourself to one question in an effort to hear from everyone. And we'll go ahead and we'll move on to Mark Murphy with J.P. Morgan.

Thank you so much. So you've added so much value into the product. When we look at the amount of recording storage, the whiteboarding, you have mail and calendar client and so much more that's on the come. Could you update us perhaps on your pricing strategy and whether you think this could be the right time to perhaps increase prices a bit or even to just go out and maybe activate a CPI adjustment that would benefit you?

Yeah, Connie, please go ahead.

Sure. We have announced a price increase for our online customers that will be effective. I believe the date is March 1st. We announced it earlier this month. And We believe that reflects, and that's only for monthly customers, not for annual customers. And we believe that starts to reflect the value, as you said, that we have created for our customers over the last few years. It's been many, many, many years. It predates me since the last time there was a price increase. And then on the enterprise side, we did a pricing update all-inclusive with Zoom One, the bundle that we came up with last year. And we believe that really reflects the best way for our customers to buy and to get full value out of the platform. And that considers all of the products that are included at what we feel is an appropriate price point at this time.

Okay, but so nothing planned outside of Zoom 1 on the enterprise side and nothing more material than what you had already announced? Yeah, that's right. Thank you.

And Piper Sandler's James Fish has the next question.

Hey, thanks, guys. This is Quinton for Jim Fish. You know, in terms of the longer-term vision for Zoom, how is the team thinking about the maturity of the core meetings and phone products at this point? You know, do we need adoption of emerging products like contact center and email or calendar to reaccelerate growth as we look to 25 and 26? Or are there catalysts that can help the core products kind of reaccelerate from the guided 2024 levels? Thank you.

I think great question. I think we should have focused on both. You know, you take, you know, the phone, for example, the market, you know, potential is still huge, you know, and we are doing extremely well and will help us more because given the product, you know, very reliable, it's really innovation and better than any other phone service providers. That's why, you know, on the core part, I see a huge growth opportunity. Having saw that the new product, Zoom Contact Center, virtual agent, Zoom IT for sales, down the road, more and more departmental applications, in particular AI, and it's not a grid layer, I feel like a lot of new opportunity ahead of us. You know, I think in the second half of this year, probably, you know, the... you know transition period for us you know given the you know we launched some content early last year zoom iq for sales as well although the new services plus new services in the pipeline i think will help us you know we need to focus on both the reason why you know our vision is to build an all-in-one collaboration platform right you can live within a zoom interface can get most of our work done right i think that's our vision so thanks very helpful thank you

Rishi Jaluria with RBC has the next question.

Hi, wonderful. Thanks so much for taking my questions. I just wanted to have one, which I wanted to dive a little bit deeper into some of the new features that you're seeing. I know Mark had brought that up earlier, but if you think about chat, mail, calendaring, just to the extent possible, I would love to hear what have you seen in terms of actual uptake rates of these features, right? Because it's available to anyone who's on Zoom One, but how many people are actively using it? And if you think about those customers who are using these additional features or modules, what are you seeing from those customers in terms of anything like engagement, time spent on the platform, retention, ARPU expansion rates, anything like that? Because I think that would really help us get some color into your ability to expand into a broader enterprise communication platform.

Yeah, that's a great question. First of all, I would say, you know, last year we developed more than 1,500 features. I think our team worked extremely hard. But one thing we did not do well, I think we should improve, read about product adoption. And not, you know, say after we finish developing features, we also need to remember, because we don't know it. Again, this is something important for us this year. Having said that, a lot of customers, you know, in order to find a lot of cool features, take a NASDAQ for example, right? They would like to consult it like, you know, meeting with a whiteboard as well. You know, it has a whiteboard, you know, they really like that, right? And also another feature, we also have a team chat, which is a persistent chat of solutions. We use that for many years. A lot of enterprise customers also deploy it. Why do they want to pay for other services after they found it? Wow. zoom has a very skittable you know also very flexible the greater team challenge solution after they they found that they tested they also like that right they also need to adopt all those features you know a lot of things like that you know not to mention the sales department right and opposite of zoom it for serious opportunity again a lot of innovations But we need to focus on product adoption. Let the customer know that a huge value, you know, from the Zoom platform, right? So that's something we need to focus on. And, you know, quite a few probably already use Zoom team chat. I can tell you, again, it's much better. Wireboard as well. So anyway, a lot of features, innovations, we should focus on adoption. Thank you. Thank you.

And we will now hear from Matt VanVleet with BTIG.

Yeah, good afternoon. I guess on that last point, Eric, I'm curious maybe if you could share a few details or some of the winning points around the contact center product. What's driving the adoption there? Are you seeing, you know, replacing existing contact centers or some of these sort of net new where, you know, video is going to be a key component, whether it's field service or things of that nature where video really lends an extra help to it?

Yes, great question. So on product front, right? So, you know, we launched it in early last year, right? Almost one year anniversary now. I think we are going to keep innovating. You know, essentially today, look at our, you know, the contact center customer. We just included the 2006 contact center solution, right? They tested everything and found, wow, Zoom contact center works very well. Not only, you know, for the, you know, just as, you know, like early last year, we went quite a few deals for internal IT hyperdesk. this is a you know for their you know a support agent right a lot of features already built in i think the product front you are adding and more and more features very quickly i think of uh we are doing very well i'm you know i have a huge confidence for our team product team however on go to market side i think you know we should have done a better job you know to be honest with you right and you know because the buyer is different The good news over the past 12 months, we learned a lot. We are going to sort of change our go-to-market strategy and make sure all those traditional customers, no matter which on-premise solution deployed or other cloud or contact center deployed, we should let them know Zoom has very scalable contact center solutions, like those third-party resellers. And also, we need to change our go-to-market model for contact center. because the product works so well. So that part, you know, I think we need to focus on this year.

Great, thank you.

Thank you.

And our next question will come from Tyler Radke with Citi.

Thanks for taking the question. So clearly the profitability guidance was much stronger than consensus. And you've talked about some of the hard decisions you've made as it relates to restructuring. Kelly and Eric, I'm wondering just about your willingness to kind of expand margins from here. Obviously, you're guiding to a pretty low revenue growth for the coming year of about 1%. But how do you just think about the puts and takes on future margin expansion from here in a scenario where you don't get a reacceleration in total revenue?

You know, Tyler, we're always focused on being as efficient as possible in our gross margins. And you've seen, you know, we said we expect to be 79.5% for next year, which is right on top of our long-term target margins. In terms of our operating margins, we want to always watch for opportunities for investment in top-line growth. That's really what we are driving for. So we will continue to make these decisions and continue you watch for opportunities throughout the year if we see opportunities to invest in go to market maybe channel programs anything that we can do to drive top line growth that would be our first priority but as we said in the prepared remarks we're going to balance that with profitability so we're certainly committed to the guidance that we set i don't think we're committing to expanding beyond that today as again our first priority is continuing to accelerate through You know, go-to-market efficiencies as well as continuing to expand our product portfolio.

Thank you.

UBS's Carl Kirsten has the next question, but Kelly and Eric, he's on audio only, so he won't appear to you via video. Carl, go ahead.

I'm good. Thank you. Sorry.

No problem at all, Carl. Thank you so much for letting us know. In that case, we'll move on to C.D. Panagrahi with Mizuho.

Thanks for taking my question, Kelly and Erica. So when you think about this year growth, I know you're expecting some online segment to kind of bottom at some point. So what's your expectation when you think about online segment versus enterprise? And I know this is, again, renewal will come in Q&A too. And what are you now pushing to now customer during renewal? I know last few years it was So what other products you are right now pushing during renewal?

So in terms of the expectations for online this year, they are consistent with what we've been saying for the last couple of quarters, which we expect it to stabilize during mid next year from a dollar amount, meaning starting to see the, you know, we've seen it continue to decline quarter to quarter from a dollar perspective for the last probably five or six quarters. And when we get kind of like Q2 to Q3 of next year, we expect to see that start to stabilize, which is great when you look at all the initiatives that are in place.

And then, I'm sorry, the last part of your question about renewals was about... Yeah, also enterprise part of the business, how you're thinking about the growth and growth.

Yes, so renewals or not, right, there's always an opportunity to talk to our enterprise customers around Zoom One, the platform bundle, which we think is a great opportunity for our enterprise customers to help our prospects and customers understand the full features of the platform. And then, of course, there is a natural opportunity to do that as they're going through the renewals period. And, you know, as we guided, we expect renewals to be strong in Q1. However, there is going to be that impact of currency that, you know, we've already experienced for Q2 through Q4. But unfortunately, we have one more quarter against the previous year comps that there's going to be some impact and some headwinds there.

Great. Thank you.

And Sterling Otte with SVB Moffitt Nathanson has the next question.

Thanks. Hi, guys. Hey, Kelly, maybe just to clarify on that last answer, now that we're in fiscal 24 on that online answer you just gave, you meant that we'd see the term Q2, Q3 of this fiscal year, correct?

Sorry, did I say 20? Yeah, this fiscal year. Yes.

I just want to make sure people didn't think fiscal 25. Not FY25. No.

Thank you for clarifying.

You're welcome. So in terms of question, I want to take the other side of it and go to the enterprise. What's built into the expectation for full year revenue around the enterprise and maybe dive into, you know, at least some qualitative commentary around net retention and what you expect on renewals from customers and what you're expecting from contribution of new customers. So what needs to happen for the enterprise to deliver that side?

so we expect renewals we we talked about renewals over the last year the last 12 months and we expect them to consider continue at kind of the same rate and what we've mentioned in the past is that we have seen some contraction in seats as organizations you know around the world are experiencing reductions so working with them on that but on the other side the opportunity to really bring a lot of value to our customers through our total cost of ownership which includes expansion of the total portfolio so as you saw phone really really resonating very well especially in this economy and contact center while it's still small small from an absolute dollars perspective you know it doubled the the arr for contact center doubled from q3 to q4 So again, small relative dollars, but really exciting to see it coming into its own. And that is what we expect that to continue to contribute through all of this year, but then really start to accelerate from a contribution perspective in FY25. And I do mean FY25 in that comment. And then of course, there's Zoom IQ for sales as well, which is on a

you know kind of a similar trajectory is in terms of contact center that small dollar contribution but you know accelerating in terms of its overall growth got it thank you yeah and we'll now hear from matt stotler with william blair hey kelly hey eric thank you for taking the question um maybe just one on a follow-up on zoom one you mentioned some strength there obviously um you know relatively early days a couple quarters in i would love to get some color on uh you know maybe the portion of new customers they're going with the Zoom 1 bundle versus other paths to buying Zoom products. And then what the characteristics are that you're seeing of those early adopters, right, both in terms of, you know, customer size, you know, whether they're, you know, adopting that for specific departments and rolling that out like you've seen the core, you know, meetings product historically, any color there would be helpful.

I think what's amazing and really interesting about Zoom One is it's not just new customers that are buying the Zoom One bundle. It's existing customers as well that are upgrading. And as a reminder, it includes Zoom meetings, but also Zoom phone. It includes team chat and whiteboard. So really starting to see customers embracing the full effects of the platform. We have a Fortune 10 customer now that is a longstanding customer of ours that that moved on to the Zoom One Bundle and has standardized on Zoom Team Chat, which we're super excited to see. So that's the example of what starts to happen when these customers are really exposed to the full value of the platform that we can bring to them. And I don't know exactly the percentage of how it broke out in Q4, but it is really starting to take the lead in terms of how our enterprise sales teams are selling.

Very helpful. Thank you.

Anything you want to add, Eric?

No, it's great. Thank you.

Moving on to cash ranking with Goldman Sachs.

Hey, thank you so much. Good to see you guys, Eric and Kelly. I sort of understand how we should reconcile the guidance going forward vis-a-vis what seems to be pretty close to the anniversary effect of the SMB attrition. And then we should start to really mirror the growth of the so-called enterprise business. But the guidance still seems to be quite conservative. Can you just help us understand what might have happened? happened at a higher level incrementally relative to this anniversary effect and what we should be seeing by this time, a real acceleration of the business. Thank you so much.

Sure. One thing to remember, Cash, is that while we are expecting the online portion of the business to stabilize from a dollar perspective during the year, it is still down year over year because of what happened in FY23, where it was much higher. The dollar amounts were much higher in those earlier quarters as it came down. So we still have the unfortunate impact of the online segment of the business tamping down the growth of the enterprise business and so that's that's what you're seeing reflected there and so you know the stabilization that occurs this year will really help as we look forwards to next year which we've always said is sort of re-acceleration the back half of this year into fy25 and you know that's what we we see in our internal models today

I'm curious, Kelly, why does it take until fiscal 25 to see the effect, the net effect to be positive? Can you help us understand the timing of why it takes another year from now?

Well, there's the combination of, first of all, online is still down year over year. And so you're not going to start to see the year over year stabilization of online until the back half of it, even though the dollars are stabilizing, right? The year over year comparables are still down until the very back half of this year. And then while we've seen All the strengths we've talked about in Zoom One and Zoom Phone, part of the expected growth is coming from these other newer products that are still so, they're doing great, you know, all positive indicators, but they're still so early in their trajectory. If you remember and think about where Zoom Phone was in its second year of life, That's where Zoom Contact Center and Zoom IQ for Sales. And now you see Zoom Phone, which is about to turn four, I believe, how it's really contributing. So we've just got a little time ahead to get those products maturing and really contributing.

Got it. Thank you so much. Very clear. Appreciate it.

Thank you.

We'll now hear from Berenstain's Peter Weed. Peter, please go ahead.

Thank you. Maybe I'll follow up on that and kind of reinforce what appears to be a reasonably conservative revenue guide this year. When we start to think about some of the things you've chatted about earlier in this conversation, everything from stabilization in the online business, which may even do better than that, perhaps, hopefully, with some of the pricing increases that go on. all of the product that you've been shipping, these types of things. And when we take into account the fact that a year ago on the top line, this business was even a little bit smaller than what we're anticipating quarter one this upcoming year might be. You know, help me understand why we would do as bad, I guess, as only a 1% year over year. Like, what's the downside case that gets us there? Or is this, you know, more of an opportunity to perhaps start to see some of the lift coming out of here? Thank you.

So remember for Q1, there is the definite impact of being three fewer days, which has real impact as compared to three fewer days of REBREC, as well as the impact of currency, which we didn't have last year. So that year over year impact is going to definitely be visible in Q1 of FY24. And then we continue to see in the enterprise market, know elongated sales cycles deal scrutiny um i was sort of laughing with a fellow cfo saying this is the year of the cfo because i have gotten invited to speak at more sales kickoffs this year than you can imagine because every sales team is having to learn how to sell to the cfo and including ours and that is exactly the experience that we're having and so You know, it just means they're taking a little bit longer and everybody's being very, very thoughtful about their purchases. And so all of that was taken into consideration as we set our full year guidance.

But I guess, you know, many of those things are stuff, I guess, in the second half of this year you have been addressing and are kind of carrying forward, so they're not kind of brand new. You know, I would think that some of this, unless you are anticipating another leg down for some reason, are there any additional legs down relative to things that you've been already seeing in the business? Or is this just conservatism on like, we just don't know how long this stuff's going to really be impacting. And we can't really say how much people are going to be, you know, purchasing the Zoom One bundle, you know, which is kind of the standard thing that you're putting out and really how well people are going to react to price increases this year so that it's really created a floor on which we hope to do better then.

I definitely think there is a question as to the state of the economy. And when it comes to investments, while we think we are incredibly well positioned with our total cost of ownership and the value that we bring to our customers, everybody is being very cautious until there's better visibility about the potential of a recession or not and where we're going to come through this. And we expect that could impact us at least through the rest of this year. Thank you.

Taz Khashoggi with Web Bush has the next question.

My question, two questions, one for Eric. Eric, when you spoke about Zoom 1 traction in the quarter, and it's still pretty early, I understand that. But when you sell a customer Zoom 1 from Zoom meetings, what is the typical uplift you're seeing in the deal sizes? Let's say somebody has Zoom meetings today and they're going to Zoom 1. What is the kind of the uptake you get in the deal value there?

yeah normally it's a great question it comes from upper market opportunities right and not of smb customers you know they do not use like a wire board and or some other you know cool features as an enterprise customer you know given economic uncertainty and a challenge a cost reduction they would like they would like to consolidate right into a one platform right and mostly two from a total window perspective when they look at a zoom product they try to understand what kind of other services features they can leverage more and then also talk with my whiteboard and team chat contact center zoom iq for sales right you know more and more opposite opportunity this is a great time for those upper market you know customers especially you know uh commercial and interest customers right because they already trust our brand they know those services take whiteboard for example they know where i don't keep innovating

they know our service will be better than ours why not you know deploy zoom whiteboard this is a great example so so the only deals that we've had so far what is the uplift you've seen in i guess dollars you're getting from that customer how much how much you see typically uh you know i guess as an uptick factor when somebody goes from just using zoom meetings to using zoom one what is the uh what's the uh the i guess the upsell or the uptick in the deal value

It really depends on the customer. The thing that I would point out, though, is it's not just the uplift in the dollar amounts. It's the retention that we see, which is really important to us as customers that have more. I remember at Analyst Day, we showed that chart that like I can't remember exactly what it is. It's more than 50 percent improved retention rates when they have more than one product deployed. And so the value of us having a broader platform in there, including the ones that are much more retentive, like Zoom chat and Zoom phone, really brings a lot of value to us.

Got it. And just one follow-up, Kelly. Typically, we see companies having free cash flow margins higher than operating margins. Yours reversed last year. I think you had a drag from cash taxes and stock-based comps. Is that, again, your guide implies free cash from margin, I believe, lower by about nine points from operating margin. Does that reverse at some point in the future, or do we see that as more of a permanent gap?

Given that we are a cash taxpayer for here... to eternity now. I think you're likely to see it be slightly under, but what we're getting back to, which was very disrupted last year, is a more normalized relationship between those two as we're on more of a normal course now from a cash tax perspective.

Thank you.

Moving on to Matthew Harrigan with Benchmark. Matthew, you're currently muted. If you'll come off mute for us.

I'm sorry. I tried to take myself out of the queue. I sent a message, but evidently- No problem at all.

Thanks, Matthew. See you next time. All right. Well, we'll go ahead in that case and move on to William Power with Baird. William, if you'll go ahead and turn on your video and come off mute for us.

Great. Thanks for squeezing me in. A lot of my questions have been answered, but I do want to ask about Zoom phone. That looked like a particularly strong quarter. I think you know the push around zoom one is probably you know helping but be great to get any other perspective on what seems to be a nice acceleration there in zoom phone adoption and then any color you're able to provide just around you know pricing trends and when does this become a 10 you know revenue component um in terms of when it's going to become uh 10 it's sometime sometime early this year in fy 24

And we are very excited about the momentum. We had 100% year-over-year growth in the product. And it's back to, even in this economy, and especially in this economy, companies looking for opportunities to standardize on one vendor. And also because there is a lot of value to be gained by getting rid of those on-prem servers, as well as the very disruptive price point that we have all the way around. It's just proving to be very, very attractive. And as Eric mentioned, there's still a lot of opportunity in market available. So we expect that to continue. I don't know what to expect. I just want to remind everybody, Q2 and Q4 tend to be our really peak quarters in terms of Zoom phone ads. So while we had an amazing number of additions in Q4, I don't expect that necessarily to be the new bar. You know, we would expect to be seasonally down in Q1, but still very excited that the momentum continues to be up and to the right.

Thank you.

JMP Securities, Patrick Walravens has the next question.

Oh, great. Thank you. I have a really fun question for Eric. So Eric, in 2021, you guys invested in Cvent, And before their deal, and you also invested in Monday. So how do you feel about those two spaces today? How do you feel about event technology? How do you feel about collaborative work management?

So given this is a fun question, maybe actually launch a chat dbt, let it answer to your questions is better. So might give you a fun answer. But anyway, I think Monty.com is interesting, right? Because the reason why I invest in them, a lot of our customers, you know, they also, especially in Europe, right, also deploy their service. You know, they would like, you know, them to integrate with us. And also, they also Zoom customers as well, I think, as far as I know. And, you know, I think it's more like from a customer perspective, right? They want us to work together, right? To integrate with them, right? That's the reason why I invested, right? Take, you know, Zoom 7, for example, and during COVID, right? And a lot of customers deployed, you know, our Zoom and more webinars, Zoom events, right? And especially, you know, for those hybrid events, right, you know, in-person events, you know, we are more like a pure technology platform, right? We also need some other components to help to make sure you have, you know, streamline your events management. That's why we partner with Sieven, right? We see the opportunity to further solidify our relationship. Why not, you know, to invest in them? I think given now is, you know, more and more companies that support hybrid work, I think Sieven, I think they would do well. That's another reason why we invest in them. Yeah. So that's pretty much. Maybe my answer is not as fun as the chat at GBT, but that's pretty much I can do. Sorry.

Great.

Thank you. Thank you.

We do have time for one additional question that will come from Ryan McWilliams with Barclays.

I appreciate you putting me in. My question's kind of in the same sphere as Pat's question, but Kelly, it looks like you filled the remaining amount of your share repurchase authorization this quarter. I guess, how are you thinking about a new authorization for a buyback? And in terms of M&A, would Zoom potentially look at acquisitions where you already have a competing product today, or are you generally looking at adjacent solutions? Thanks.

In terms of M&A, we look at both. You know, we've been very successful in the past by buying those technology tuck-ins to accelerate our development, as you've seen with the Salvi acquisition, which has been a great accelerant for us in terms of contact center and continue to look at those, but also looking at other areas that there might be leaders in the space that make sense for us. So we're continuing to look at both and we Every quarter, we talk to our board about our capital allocation strategy. And of course, M&A is at the top of the list. We do not, as you indicated, have a buyback authorization in place today. We will continue to look for opportunities to deploy our capital in the best way possible for our investors. And right now we, you know, again, as I said earlier, our number one focus is re-accelerating top-line growth and making sure that we have the flexibility to do that if, you know, if opportunities arise. And so that's why for the moment we've decided to hold at least on requesting an authorization for a buyback.

Appreciate the color. Thanks so much.

And again, everyone, that does conclude our Q&A for today. I'll go ahead and pass it back to you, Eric, for any closing or additional comments.

Oh, thank you all. I really appreciate your time. Love you all. Thank you. Take care.

Bye, everybody.

Thank you.

And again, everyone, this does conclude today's earnings release. As always, we thank you all for your participation, and we look forward to seeing you again in the spring and summer. Until then, take care and enjoy the rest of your day.