Zoom Communications, Inc.

Well, hello, everyone, and welcome to Zoom's Q1 FY24 earnings release webinar. As a reminder, today's webinar is being recorded. And now I will hand 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 first quarter of fiscal year 2024. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.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 press release include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the second quarter and full fiscal year 2024, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategies, and business aspirations, and product initiatives and expected benefits from 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 that we may make on today's webinar. And with that, let me turn the discussion over to Eric.

Thank you, Tom. Thank you, everyone, for joining us today. As we continue to execute on the strategic focuses, which I shared with you all last quarter, we are very grateful for the support, feedback, and trust that we have received from our customers and investors. Last month, we closed our acquisition of WorkVivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social intranet and employee app into one central hub, forming the heart of a company's digital ecosystem. Incorporating Workvivo's feature-rich technology into our all-in-one collaboration solution will allow us to offer Zoom customers a unified platform that keeps knowledge workers and frontline employees informed, engaged, and connected throughout the workday, regardless of in-person, remote, or hybrid work style. According to Enterprise Apps Today, Communicative employers have mobile workers who are five times more productive and a few three times less burnout. The WorkVivo team is working very hard to capitalize on this opportunity and is 100% aligned with our culture of deliver happiness to customers and employees. We are so excited to join forces with WorkVivo and help our customers raise the bar for employee communication and engagement. Last quarter, we reiterated our strong positioning in AI and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made considerable progress towards that vision. We outline our approach to AI is to drive forward solutions that are federated, empowering, and responsible. Federated means flexible and customizable to businesses' unique scenarios and nomenclature. Empowering refers to building solutions that improve individual and team productivity as well as enhance the customer's experience. and responsible mis-custom control of their data with an emphasis on privacy, security, trust, and safety. At Enterprise Connect, we unveiled ZoomIQ's new set of embedded features leveraging generative AI to support chat and email compose and meeting summary. We are also building new features to summarize long chat threads, catch up tardy meeting participants on what they missed, and brainstorm environment. Last week, we announced our strategic investment in Anthopik, an AI safety and research company working to build reliable, interpretable, and steerable AI systems. Our partnership with Anthopik further boosts our federated approach to AI by allowing Anthopik's AI Assistant Cloud to be integrated across Zoom's entire platform. We plan to begin by layering cloud into our contact center portfolio, which includes Zoom Contact Center, Zoom Virtuation, and now in beta, Zoom Workforce Engagement Management. With cloud guiding agents towards trustworthy resolutions and empowering self-service for end users, companies will be able to take customer relationships to the next level. now moving on to some of our customers wins i would like to thank major league baseball MLB has long used the power of the broader Zoom platform to strengthen its connection to fans and teams. And this quarter, we expanded our relationship by launching a first-of-its-kind partnership that leverages Zoom Connect Center to enhance real-time replay reviews and deliver increased transparency to baseball fans. By introducing Zoom technologies into operations on and off the field, MLB strives to create an engaging and unique experience for its fans and teams. I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom functions as well as Zoom contact center to their Zoom meetings deployment. We brought responsiveness, reliability, and regulatory compliance to this large expansion, and Virginia Tech leveraged Zoom's unified communication platform to build a next-gen solution integrated across meetings, phone, and contact center to serve the entire university community. I would also like to thank Venture Employer Services, which has grown its workforce significantly the past few years through hiring an MNA. In Q1, Venture expanded their existing footprint with us by adding approximately 10,000 Zoom phone seats and 800 Zoom contact center seats, as well as our AI-powered Zoom Virtual Agent and Zoom IQ for sales. It's so exciting to see customers leverage our natively integrated phone plus contact center solutions and invest in our next generation AI-enabled products across their businesses. Finally, I want to thank my plan manager, Australia's leading services provider for the National Disability Insurance Program. MPM shows Zoom Congress Center for its attractive total cost of ownership, the deep integration with Salesforce, and the vision and future roadmap for customer experience. And our journey did not end with contact center. Appreciating the value of the platform, they also decided to standardize on Zoom One. We're so happy to partner with MPM to help them deliver a world-class customer and employee experience to their clients and disability service providers. Again, thank you so much, MRB, Virginia Tech, Venture Services, MPM, and all of our customers worldwide. And with that, I'll pass it over to Kelly. Thank you.

Thank you, Eric. And hello, everyone. We are pleased that we beat our top line and profitability guidance in Q1. Here are a few milestones. First, our non-GAAP gross margin of 80.5% exceeded our long-term target. Second, after adjusting for the three fewer days in the quarter, our online revenue was slightly up sequentially. And last, the moment you've all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter. In Q1, total revenue came in at $1.105 billion, up 3% year over year and 5% in constant currency. This result was approximately $20 million above the high end of our guidance. Our enterprise business grew 13% year over year and represented 57% of total revenue, up from 52% a year ago. As I mentioned in the quarterly milestones, our online business improved meaningfully in the quarter as it benefited from many initiatives, including the price increase and buy flow optimization. In addition, we saw online average monthly churn decrease to 3.1% from 3.6% in Q1 of FY23 and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected. The number of enterprise customers grew 9% year over year to approximately 215,900. Our trailing 12-month net dollar expansion rate for enterprise customers in Q1 came in at 112%. We saw 23% year-over-year growth in the up market as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue up from 24% in Q1 of FY23, and span diverse industries such as healthcare, education, government, and more. As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our America's revenue grew 8% year over year, while EMEA and APAC declined by 8% and 5% respectively. The decline in EMEA was primarily attributable to the outsized impact of the headcount reduction due to local regulations prolonging the process, the Russia-Ukraine war, and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar. 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, restructuring expenses, and all associated tax effects. Non-GAAP gross margin in Q1 was 80.5%, an improvement from 78.6% in Q1 of last year and 79.8% last quarter. We are pleased that we have achieved our long-term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co-located data centers. For FY24, we still expect non-GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies. Research and development expense grew by 25% year over year to approximately $106 million. As a percentage of total revenue, R&D expense increased to 9.6% from 7.9% in Q1 of last year, reflecting our investments and expanding our product portfolio, including Zoom Contact Center, AI, and more. Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing expense grew by 4% year over year to $278 million. This represented approximately 25.2% of total revenue, up from 24.9% in Q1 of last year. G&A expense declined by 10% to $84 million, or approximately 7.6% of total revenue, down from 8.6% in Q1 of last year, as we focused on achieving greater back office efficiencies and savings. Non-GAAP operating income expanded to $422 million, exceeding the high end of our guidance of $379 million. This translates to a 38.2% non-GAAP operating margin and improvement from 37.2% in Q1 of last year. Non-GAAP diluted earnings per share in Q1 was $1.16 on approximately 304 million non-GAAP diluted weighted average shares outstanding. This result was 18 cents above the high end of our guidance and 13% higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 3% year over year from $1.3 billion. This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.5 billion, up 16% year over year from $3 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 63% in Q1 of FY23 and 56% in Q4 of FY23. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent enterprise deals arising from uncertainty in the macro environment. We expect Q2 deferred revenue to be down 2% to 4% year over year, which takes into account the recent trend of shorter durations on enterprise deals and our renewal seasonality, which peaks in Q1 and declines throughout the year. We ended the quarter with approximately $5.6 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $418 million as compared to $526 million in Q1 of last year. Free cash flow was $397 million as compared to $501 million in Q1 of last year. Our operating cash flow and free cash flow margins were 37.9% and 35.9% respectively. Due to a net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY24. We now expect free cash flow to be in the range of $1.14 to $1.19 billion. In FY24 and going forward, we expect our smallest cash tax payments to occur in Q1 and the largest to occur in Q2. Now, turning to guidance. For Q2, we expect revenue to be in the range of $1.11 to $1.115 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 $405 to $410 million. Our outlook for non-GAAP earnings per share is $1.04 to $1.06, based on approximately 307 million shares outstanding. As our online business is stabilizing, we wanted to give you all some additional one-time color on how we see it playing out in the coming quarters. We expect our online revenues to be approximately $480 million in Q2 and be relatively flat thereafter in FY24. We are pleased to raise our top line and profitability outlook for the full year of FY24. We now expect revenue to be in the range of $4.465 to $4.485 billion, which at the midpoint represents approximately 2% year-over-year growth, or 3% in constant currency. We expect our non-GAAP operating income to be in the range of $1.63 to $1.65 billion, representing a non-GAAP operating margin of approximately 37%. Our tax rate is expected to approximate the U.S., federal, and state blended rate. Our outlook for non-GAAP earnings per share is $4.25 to $4.31, based on approximately 308 million shares, outstanding. As we look to reignite growth and maintain profitability, we are committed to doing so in the right way. We are pleased to have recently issued our second ESG report, which includes additional data regarding our greenhouse gas emissions inventory and recommit Zoom to achieving 100% renewable energy for our direct operations by 2030. Our core value of care is as important as ever. It is embedded in how our product fosters emissions reductions while supporting inclusiveness. It's also evident in our corporate and employee giving. You heard it from Eric. We are innovating extremely quickly to bring our customers the immense benefits of generative AI and empower modern collaboration. We are trusted and loved by our amazing and diverse set of customers. And we are fortunate to be one of the most recognized brands in the world. In Q1, we made some very tough decisions related to team size, structure, and incentives that have understandably caused distraction in the short term, but at the same time exemplify our commitment to long-term growth and profitability. With a focus on the future, we have refreshed our mission and vision. One platform delivering limitless human connection. Thank you to the entire Zoom team, our customers, our community, and our investors. With that, Kelsey, please queue up our first question.

Thank you so much, Kelly. And as Kelly mentioned, we will 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 hear from everyone, please limit yourself to one question. And our first question will come from Goldman Sachs' Cash Rangan. Cash, go ahead and come on video for us and unmute if you would, please. All right. Well, hearing no response, we'll go ahead and move on to meet a Marshall with Morgan Stanley.

All right. I think I got mine to work. Perfect. Appreciate it. You know, I noted that you were taking down kind of, or not taking down, but giving back some of the growth margin upside that you saw in the quarter and noted that that was for some of your AI investments. You know, Eric, I guess I'm just wondering how you were judging kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development that's going on versus investments that you want to make. Thanks.

Yes, great question. I think it looks like everyone seems to have just woken up to AI. Actually, we have been busy on AI front for a few years. Look at the past several, two of the largest acquisitions, Solvay and Katz, all of them are AI-based. Internally, we also have an AI team as well, because we understand the importance of AI, in particular, driven recently by the generative AI momentum. I think, first of all, we do have our own AI team. We have our own internally developed AI modules as well. We also will take a very open approach. Essentially, we announced our federated approach to AI. We announced the collaboration with OpenAI and Enterprise Connect. also double down our partnership with anthropic recently as well and down the road maybe some open source models available we are also going to embrace that again you know we look at everything from any user perspective right you know first of all you know we have a team really dedicated on ai and also when we sit down with the customers sometimes customers yes really like anthropic model yes why not we double down that partnership you know we can level their api as well right so We are taking a federated approach, which is to put a customer centric. That's why we are very, very excited about this AI momentum. It can truly improve our product experience.

Great. Thanks.

Thank you.

And moving on to Michael Funk with Bank of America.

Yes. Hi. Thank you, guys. Another question for you, Eric, if I could, just some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate skew? And then how do you monetize AI within your platform? It's a great question.

I would say the answer is, you know, about both. You know, you take, you know, our Zoom IQ for sales, for example, right? It's extremely important, right? When you send all the salespeople back at home or work remotely, how to help them, you know, to improve their productivity. That's the reason why we announced the Zoom IQ for sales and even way before, you know, the generative AI momentum, right? And internally developed, you know, lots of language models really helped us, right? We can monetize that AI empowered Zoom IQ for sales product. At the same time, you look at our feature-rich collaboration portfolio, like a meeting summary, the email and the composer chat message, And Zoom, like Connect Center, Virtual Agent, and also recently in beta, workforce management solution as well. All of them will be empowered based on the AI platform. So on the one hand, we leverage AI to look at almost every feature we have. to empower those features, you know, and also elevate the customer, you know, the product experience. At the same time, a lot of monetization opportunities, right? Zoom IQ4C is just one example, right? As we have more opportunities for us. Again, we think AI does bring tremendous opportunity for us because, you know, we focus on communication. I take a work of vivo, for example, right? We just acquire them in the employee environment. communication and engagement powerful, you know, how to leverage AI to improve that product experience. That's another example. Again, full of opportunities here at Zoom with AI.

Great. Thank you, Eric.

Thank you.

All right. So let's go to Cash again with Goldman Sachs. Cash, I think you're out there driving, so he's going to stay off video.

Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human. I just will turn on that video very quickly on. So, Eric, I'm curious to get your take. So I want you to, if you don't mind, drill a little bit deeper into generative AI. And while a lot of software companies are announcing partnerships with LLMs based on the content and data that they uniquely possess, we're also at a point where many companies are identifying very unique workflows and productivity scenarios that differentiate them going forward. So in that regard, just so... There's a scenario, everybody in UCAS will ultimately have a generative AI strategy. So when you start to have these LLMs work with your core products and given the vast user base and behaviors that you have contained in your knowledge base, how do you think Zoom is uniquely qualified to get productivity scenarios that are very unique I'm sorry, using the same word again, that could be more enduring as a source of competitive advantage because the first chapter of UCAS was all about providing the core capability of the technology, which you did an amazing job of. But I'm curious, the next leg of productivity growth and how you can take this company forward. Thanks so much.

Yeah, it's a great question. You know, we have a great integration with the Tesla cars, right? If you drive a Tesla, just one click, you can join the call. You know, even if you can't hear the video, the audio will be always on. So back to your AI question, I think first of all, you know, you look at the general AI, you know, two things are very important, right? So first of all, you know, if you do not start a few years back, just, you know, given what's going on in the AI industry, AI world, it's, oh my God, a lot of things. However, we already started investing in AI a few years back. We should understand that. reason why you know our zoom iq for sales was developed based on our own you know internally developed a large language model having inside of that are two things you know really important one is just that you know model right so you know you know open eye has a model anthropic and facebook as well you know google and those companies but most important thing is how to leverage these modules to fine-tune based on your proprietary data right that is extremely important when it comes to you know collaboration communication right you know take a zoom you know employee for example for example we have so many meetings right and talk about you know and every day like our system you know use the zoom call to what with the customers we accumulated a lot of you know let's say internal meeting data how to fine-tune you know the model with those data it's very important right not only just for the ai model itself because it will evolve for sure you know and also we're also going to embrace at the same time how to leverage our proprietary data to fine-tune these ai models towards our industry that's very important you know look at you know meeting take a meeting for example right i think you know this is you know probably you know we have way more data than anybody else right given the you know over the past many years experience how to function that model with uh you know those data and i think this is our unique will help us to deliver unique experience to customers if any other company even have let's say you have a greater ai model however how to function it's it's a lot of effort right that's the reason why we think that's uh you know something unique for us to truly empower ai to you know deliver our differentiated experience you know to our customers

Very persuasive. Thank you so much, Eric. Thank you. Appreciate it.

Anyone out here? Oh, I'm so sorry. Please continue. Okay. We'll move on to Tom Blakely with KeyBank.

Hi, everyone. Thank you for taking my question, Kelly and Eric. Good to see you guys. You know, there was some large competitor of yours has been in the news lately with Microsoft possibly needing to create a separate SKU for their teams. a team's product in terms of de-bundling that product. I know how important the collaboration component is to Zoom's vision of becoming the communications operating system for large enterprises. And just noting with Kelly's updated color in terms of online, with the online business stabilizing, which is great, the implied guide for the enterprise businesses for pretty good decel into the second half. So just wondering how Zoom's thinking about, if at all, the potential impact or opportunity there, just again, understanding the importance of the collaboration component to your product. Thank you.

Well, as we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is necessarily related to competition and more due to, as we expected, some distraction internally due to the reorganization, but we feel great about the structure of our sales organization now with Graham, especially as our chief sales officer and Wendy leading the online team, and that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. And, you know, we're just looking forward to seeing that come to light over the next couple of quarters.

Okay, thank you.

And the next question will come from Parker Lane with Stiefel.

Yeah, guys, thanks for taking the question. Kelly, I was hoping you could give us a better understanding of just how, to what degree contract duration is actually compressed during the quarter, how much that will be an impact as we progress through the year. And is that more of a factor in any particular product set or was it pretty much across the board?

Yeah, it was pretty uniformly across our direct segment of the business, especially. to be thoughtful about every decision, which is every buying decision, I should say, which is not new. It's just giving themselves time to make sure that they are getting the product deployed. And we expect it to be not long-term in nature, but in order to reflect that, we've updated our guidance based on, as we talked about, deferred revenue as well for the coming quarter.

Got it. Appreciate the color. Thank you.

We will now hear from Peter Levine with Evercore.

Hi, Peter.

Thank you for taking my question. Maybe, Eric, one for you is, you know, when you think about the use case of AI and you think across like phone, you know, video contact center, you know, where do you envision seeing the most kind of uplift in terms of client adoption of AI? Just curious to know where you're seeing that today.

I think on many fronts, right, you know, like take an anthropic, you know, investment, for example, right, for sure, we are going to leverage that, you know, not for the entire portfolio, but we are going to start from a contact center, you know, the virtual agent and, you know, the contact center related features. But also look at, you know, our call meeting platform, right? A meeting summary is extremely important, right? And it's also, we have, you know, our team chat solution and also how to leverage that to compose a chat. Remember last year, we also have an email candidate as well. how to leverage the generative AI to understand the context, right? And kind of bring all the information relative to you and help you auto-generate the message, right? When you send an email back to a customer or prospect, right? Either chat a message or email, right? You can leverage generative AI as well, right? I think a lot of areas, you know, even like, say, maybe you might be late to the meeting, right? You know, 10 minutes later, you join a meeting. You really want to understand what had happened, right? You know, can you get a quick summary, you know, over the past 10 minutes? Yeah, you just also have to generate AI as well. You also can get that as well. It's kind of almost a lot of key use cases. I think, you know, we'll be empowered. you know by those ai you know the capabilities that's why which we are looking at almost every area right how to leverage general ai to improve in that experience you know take an open eye for example this is a great company and also a lot of companies are leveraging their ai you know not only big companies small companies we also announced the collaboration with them at enterprise connect right so that's why you know as i said earlier you know Three things, right? You understand the large-language model, how to fine-tune that with your own data, and also revisit almost every feature you have. Are there any ways to empower those features? Are there any ways to monetize? That's why we take a holistic approach, and also we like our federated approach to AI. By the way, internally, we do have an AI team. We should understand the large-language models, not something other companies just have to work on to AI and so on. Thank you. Thank you.

And moving on to Rishi Jaluria with RBC.

All right. Wonderful. Thank you so much for taking my questions. Eric, I want to stay on the AI train for a little bit. You've obviously talked about some great use cases and feels like there's a big opportunity. I want to ask about maybe the potential to start to verticalize some of the AI solutions, because it feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real-time signals, for example. And I'm sure that's one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize? And is that something that can make maybe direct monetization a little bit more easy because a value prop is very straight out of the box? Thank you.

Yes, it's a great question. By the way, I downloaded the OpenAI mobile iOS app. I should have asked OpenItali GBT to answer to that question. But anyway, you are so right on. When it comes to vertical, I would say the opportunity, there are two things. One is departmental level. Another one is vertical industry, right? You look at our Zoom IQ for sales, specifically targeted sales use case or sales department, right? Content center is for support department, right? You are so right. Down the road, HR department, even marketing, almost every department, they all use Zoom, right? How to leverage AI to build a differentiated solution, right? That's an opportunity. That's one opportunity. Another opportunity, read about the vertical industry. Take healthcare, for example. Zoom by far is number one on telemedicine. Right. You know how to leverage that. Right. And obviously, you know, those proprietary data. Right. And also working together with the customers. Right. And fine tune this AI model. Right. This is one example. Another example is a lot of law firms are also using Zoom as well. Right. And, you know, how to leverage AI to truly empower those use cases is also another opportunity. I think, as I said earlier, AI truly bring tremendous opportunity to us. So, you know, we got to the level that the good news, we already heavily invested in this area for a few years. Awesome. Thank you so much. Thank you.

And our next question comes from Catherine Trepnick with Rosenblatt Securities.

I got it. Thank you. All right. In the last two years, a lot of changes have happened. First, everybody worked from home and now people are going back to the office. So has that actually changed any of your opportunities when you're looking at marketing your products? I was thinking in terms of Zoom room and then some of the areas where you want everybody to be equal in your Zoom room viewing. So has that changed anything? Have you seen anything different from that?

Yeah, it's a good question. It's good news. This question is not about AI anymore. So you are so right. I think due to COVID, right, there's a lot of consumer use cases, right? Almost every family, they have a video conferencing account like a Zoom account, right? You know, after the COVID, I think, you know, you look at the usage, right? You know, consumer-centric usage, I think less and less. But however, to support hybrid work, You know, enterprise customers, you know, they are getting to leverage video conferencing more and more. Not only just to support remote work, you know, when you try to support hybrid work, you know, how to reserve a desk, all those are basic features, right? You know, how to make sure, you know, when you, you know, join a meeting, you know, from the conference room, right? Remote people, they can see you, right? Not only just one big, you know, square, right? So everyone, you know, who are sitting in the conference room, you know, equally we have a square as well the zoom square right so those kind of experience extremely important right a lot of features are built in upon enabling hybrid work right that's you know even work people is not example right you know during the hybrid work right you know quite often use a chat zoom team chat use the email or use the phone call meetings but sometimes you know also want to you know, and also very exciting news, a recorder video, how to distribute those to employees and sometimes even to customers. That's the reason why we're quite a work favor as well. I think hybrid work is going to stay. That's the reason why in a lot of new use cases, right? How to double down on that? You know, take, you know, Confluent, for example, you know, we have a, you know, the smart gallery view feature, right? Customers like that. However, in some cases, customers are still down at work. I have a huge count room. How to support that? That's the reason why we are working on supporting three cameras, right? That's another way to embrace hybrid work. I think hybrid work does bring another, you know, kinds of, you know, huge opportunity to us, you know, you know especially you know it's hard to convince everyone back to office five days a week even for us you know even if you know i talk with many ceos everyone you know wanted right sometimes you wanted to see employees more but however you know this is kind of to let employee work anywhere it sort of become a fashion it's hard to force employee back at home that's why you have to embrace hybrid work that's reason why zoom can play a much bigger role to support hybrid work

All right, thank you.

Thank you.

And William Blair's Matt Stotler has the next question.

Yeah, thank you for taking the question. Maybe just one on the contact center side. So you obviously continue to innovate on the product front for contact center, but last time we got a deep update, there was still some honing that was needed in the go-to-market front. We'll just get an update on what you're seeing on that front, overall adoption, the contact center product suite, and then what you think are the keys to driving further adoption going forward.

How do you want to take it?

Yeah. So our context planner leader is Scott Brown. He is a great addition to our team. And we are focusing from a go-to-market perspective now in the same way that we took Zoom Phone. We are hiring, we have some on board already, but we were hiring additional contact center specialists who will act as an overlay team and be there to support the account executives to go in as it's more of a technical sale and give them the opportunity to eventually over time all become versed in how to sell contact center. So we're in the process of that today. And as I said, we've approved more reps. So we're excited about making the investment there.

Got it. Thank you.

Yep.

Moving on to William Power with Baird.

Great, thanks. Yeah, I want to ask a question on online. It's great to see that segment finally stabilizing. Maybe kind of two parts tied to that. Any early color with respect to the price increases and what you've seen out of that? And as you look forward for the guidance for online, maybe just some broader framework for how you're thinking about both churn and top of funnel. What gives you the confidence on both those fronts that this really is going to stabilize here? Yeah.

So we've seen a very positive reaction to the price increase When we came into the year and we were modeling it, we've actually seen better than expected retention rates in response to that. So that's been really great. As well as Wendy's done a lot of work around the online buy flow, which has also seen a very positive response. And then we've talked about this in the past, but there's a whole roadmap of other initiatives that are being worked on and continue to be added, including things like additional payment currencies, additional payment types, and additional offerings. So those are all the top of the funnel items you're referring to. And then they've also done a lot of work to the flow when people, the cancellation flow, when people come through, which is also contributing to the improved retention rates. And we feel great about them. Now they've been It was 3.1 in Q3, 3.4 in Q4, and now 3.1 again, or maybe 3, yeah, 3.4, and now back to 3.1 again in Q1. And as we said, we expect Q2 and Q4 to be seasonally higher quarters due to the holidays in those periods and the flexibility we give our customers to come and go as they need the product. So the churn we're very pleased with, and we've seen the behavior exactly as we expected it coming back down in Q1. So that gives us confidence that it's going to be within that range for the foreseeable future.

Thank you. Yeah, by the way, just quickly to add on to what Kelly said, right? So as we add more and more new services, also can help us more upsell opportunities, even for online segment. You take, you know, the Zoom schedule, for example, we announced that a new service, right? You know, and some customers already paid for other services like a calendar date, right? You know, customers say, yeah, I'd like to go with Zoom, you know, deploy something similar, right? This is a part of the package, right? I think a lot of, you know, upsell opportunity for us to target the online segment as well.

Thanks, William, and moving on to C.T. Panagrahi with Mizuho.

Thanks for taking my question. Eric, I just want to dig into this World Cerebral Acquisition. Do you see that as more of a long-term opportunity, or do you see that something that we can think of, this is some sort of technology that you can cross-sell into the base in near term? And what sort of, is there some particular vertical or segment where you can see more tracks on there? Could you give some little bit elaborate in terms of revenue opportunity from that?

Yes, great question. So first of all, you look at our collaboration platform, right? We really want to offer a unified communication and collaboration platform. You know, customers, they can live within the Zoom platform, right? Like in today's, one of the problems we are facing, customers also mentioned for us as well, right? You know, quite often, you know, they send all kinds of messages either to email, it's really hard to find, you know, not scalable, or you send a message to chat, you know, buried in all those public channels, right? You know, customers also want to Essentially, let's say I want a video message. I want to share to the entire employee base or maybe a department of news. All those kinds of content. Are there any other better ways to share and engage with employees? I think that's the reason why we think Vivo can play a bigger role to focus on those kind of use cases right it's not only for for the short term you know missing a key missing element of our entire product follow but also follow in the long run also is uh will help us a lot because of the ai right because how do you make sure you have more data right and really you know collaboration communication you know related data right it's work with you for sure You know, every day when you engage with employees, you know, we are what we will platform. You will generate a lot of data, right? All those data are very, I would say, relevant and meaningful, right? How to leverage AI, right? That's why, you know, in the long run, that certainly can help us more.

Great. Thank you. Thank you.

Next question will come from George Iwanek with Oppenheimer.

Thank you for taking my question. Kelly, maybe building on the stabilization you've seen on the online side, can you give us a sense of what your expectations are from an expansion rate on the enterprise side as you look out over the next couple of quarters?

Yeah, we don't guide specifically around the expansion rate, but as a reminder, it is a trailing 12-month metric. So Given that it's at 112% and you can look at where the enterprise growth rate is, that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect both online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that.

Thank you.

And Wolf Research's Alex Zukin will have the next question.

Hey, guys, can you hear me OK?

Hi, Alex.

So I guess I'll try the two kind of a two parter. One is just a simple how do you plan to monitor monetize generative functionality in the product rather than, you know, making it digital? making it a part of the overall experience. And the second is from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-20s last year in the first half to just over 5% in the second quarter guide implied. That's a much larger rate of decel than I think we all contemplated or thought. Is it upsell? Is it cross-sell? Is it new products that are launching? Is it later revenue recognition? What is it that's driven that rate of decel and how do you... You know, reaccelerate, obviously, but how do you get back to a double digit growth rate in that regard? Because it seems like that's that's where a lot of the evaluation is coming from for the stock.

Kelly, I addressed the first one. You take the second one. I think in terms of how to monetize generative AI, I think, you know, first of all, you take a Zoom IQ for a service, for example. That's a new service to target a sales department. You know, that AI technology is based on generative AI, right? So we can monetize. And also seeing some features, you know, even before the generative AI popularity, we have a live translation feature. And also, that's not a free feature. It's a paid feature behind the paywall. And also, a lot of cool features. Take the Zoom meeting summary, for example. For enterprise and the customers, if you deploy Zoom 1, deploy Zoom 1, they will have those features. For other customers, free, all those SMB customers, if they don't deploy Zoom 1, they may not get those features. That's another reason for us to monetize. I think there's multiple ways to monetize.

And then in terms of the enterprise outlook, as I mentioned earlier, we expected the distraction in Q1 as there was impact to the sales org, not only from the reduction, but also reorganization. And we feel really good about the structure of the sales organization now. And we have also, as I mentioned, we are... prioritizing where we want to continue to invest and just recently committed to adding more reps in the contact center team, for example. We hired a leader in Europe, which we haven't had before. So really excited to have Frederick join us. And all of these, I think, put us to bring us to be very well positioned to execute for the rest of the year. And now we're looking to the sales team to do exactly that. And we talked about we have an amazing platform that's there for them to sell. And we're all rallying behind them to support them to see them execute.

perfect thank you guys thank you I'm moving on to Michael Turin with Wells Fargo hey there thanks uh good to see everyone Kelly on the on the Billings deferred revenue side um you came in a little bit ahead of what you were guiding for a few percentage points from last quarter despite some duration impacts so I'm wondering if there's any way you can help us quantify those duration impacts either on Q1 or the Q2 guide and anything else you can provide just to help us think through seasonality as you've now passed the heavier renewal period, but mentioned maybe some sales transition impacts still out there. Just help us think through just what's contemplated in the guide from a few different levels. Thank you.

Yeah. So I think on the Billing duration impact. As I said earlier, we don't expect this to be a long-term impact. We think it's just indicative of some of the uncertainty that's in the macro environment today. And just watching and being thoughtful about the impact that it's having on deferred. And then you also heard it in terms of our P.O., But we've seen this impact before and we've also seen customers come back then. And I think especially as we continue moving towards more bundles, Zoom One, Contact Center, Zoom Phone, those are all products that customers are going to commit to for the longer term. So I think as you continue to see more and more of those in our pipeline and being sold by the enterprise team, that that duration impact will start to expand again. And then In terms of the balance between enterprise and online, we're thrilled that enterprise has stabilized a little bit earlier than we expected. Given the days in the month, the days in the quarter, that's why we gave a more specific view because it's a little bit tricky when you look at it for the rest of the year. And the guidance contemplates all the things that we already talked about in terms of the pipeline and all the initiatives the online team is working on. And then, of course, the restabilization, if you will, of our direct sales org at the same time.

Thank you.

And Ryan McMilliams with Barclays has the next question.

Great. Appreciate it, guys. And congrats on Zoom phone reaching 10% of sales. Just thinking back a few years, pretty amazing that this metric only came after reaching 5 million phone seats. So quite the run. Look, I love all the AI questions so far, but I guess I'll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to the online segment versus the enterprise segment? And have you seen any changes at Renewal on the enterprise side, maybe from an enterprise logo like churn standpoint? Thanks.

No. So our enterprise renewals, as you know, Q1 is our highest seasonal quarter and the renewals were exactly in the range of where we expected them to be for the quarter. So that was really great to see. And then in terms of online, where we've seen strength, we've already talked about, I think it's increasing the top of the funnel. We've also continued to see strength in annual plans, which is great. And This is due to the, just a reminder, when we did the price increase, we didn't increase the price for the annual plan. So it just shows customers committing to the amazing value that they see in Zoom and the discount that they get for committing to the long term. But of course, that's amazing for us because the lifetime value of those annual customers is so much greater.

Appreciate the color. Thank you.

and patrick wall ravens with jmp securities has the next question i'm not sure he's out there patrick do you want to come off mute and start your video for us all right hearing no response i'm going to call i'll come off mute i'm going to turn off the video and you can see why the uh eric can you talk to us a little bit about sort of the um And what part of that is appealing to you guys?

Patrick, so sorry, your audio is cutting out for us. Will you try one more time? And unfortunately, we might have to skip you if it doesn't improve, but try again, please.

No worries. Eric, can you just talk a little bit more about Anthropic and what they believe in with it?

Sure, sure, sure.

You heard it, yeah.

Yeah, yeah. I think, yeah. Anthopic is a great partner and it's a great team. And when we look at the AI landscape, I think why not double down on that partnership, right? And given our federated AI approach, right, intended to be discussed that happened to be, you know, they are in the middle of raising another round of financing, right? That's why I hope to solidify our partnership, right? Again, they are a great team. great technology and i think this is no brainer for us to invest them right to further you know solidify the the partnership and uh yeah so that that's pretty much because you know look at our content center right and we will further empower our content center offering right and also download will be applied to you know uh entire you know product portfolio again this is very important you know to our federated federated approach to ai and that's the reason why you invested them so

Thanks, Patrick. We'll go ahead and move on to Matthew Nicknam with Deutsche Bank.

Hey, thanks for taking the question. Just two quick ones on cash flow, maybe for Kelly. First, accounts receivable the last two years, it's been about a drag of 80 million this quarter, much better, only about 29 million. Wondering what changed there in terms of cash collections. And then secondly, in terms of the legal settlement, if you can just quantify and let us know maybe when we should anticipate that. Thanks.

Yeah, in terms of the settlement, Matthew, it's not clear exactly when that will be completed in terms of the payment. That's why we said for the full year we're updating. It could be in Q2, it could also be in Q3. That's why we just wanted to give you visibility into that. And then in terms of your first point about collections, I think part of that, honestly, is just the continued improvement that we're seeing in our team around collections and our ongoing DSOs. And also, as we've seen online, you know, when there's more online, especially annual, that the online is mostly paid via credit card. So that is an improvement in terms of our DSOs usually as that's growing. Because the DSOs on online are about three days. So that helps.

And the legal settlement, if you could just quantify how much that is.

It's exactly the amount that's the difference between our previous guidance. Let me say it this way. There was no other change to our cash flow outlook other than the anticipated potential net legal settlement.

Thank you.

Yep.

Shabli Sarafi with FBN Securities has the next question.

Yeah, thank you very much. So you're implicitly guiding for your enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. it was only double digits in the past so um i know you have a lot of changes this year for the sales force etc after this year are do you target double digit growth in enterprise or is it like an upper single digit growth rate and also related the online business is stabilizing at 480 for the next few quarters it looks like uh it that if q4 that means zero growth versus negative growth is it a growth business afterwards as well so i'm just looking After this year, is online a growth business? Is enterprise low double digits or a single digit growth rate business?

All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both online and the direct business. So that's innovation. It's expanding our platform. It's focusing on investing in the go-to-market teams today. in terms of what we've talked about earlier, like the contact center, adding a leader to Europe, really focusing on marketing in the right way. And we haven't obviously given FY25 guidance, but the goal is, and we've talked about before, starting to see re-acceleration of growth as we exit FY24 and having that continue into FY25. We're so early in the year of FY24, but lining up everything to anticipate reacceleration as we exit the year.

And the enterprise?

Across potentially.

I'm just saying the enterprise, is it upper single digits or a low double digit growth rate, the way you're targeting it? Not guiding, just targeting.

Yeah, I'm not going to get that specific, especially this early. We'll be prepared, more prepared to talk about that later this year.

Okay, thank you.

And we'll move on to Carl Kirstead with UBS.

Okay, great. Hey, Kelly, just to follow on that conversation about driving for acceleration next year. And earlier on, you talked about innovation being a huge priority. That seems to me like there's the potential to shift a little bit the growth margin trade-off as you invest to drive growth next year. I'm wondering if you're intending to signal that you know, high 30s, 40% margins, everybody on the call should consider sort of a peak. And then if I could ask a clarification, did WorkVivo impact at all your guidance for this year? Thank you.

Yes. Thank you, Carl. as a quick reminder our long-term target operating margin is lower much lower than where we are operating today and that is as we've said in the past to give us the opportunity as we see opportunities for investment to do so we're really focused on doing everything we can to drive top-line growth and continue to take market share in in the period of time where we've had slower growth. We've been focused on balancing that with profitability. But as we see opportunities, we absolutely could bring our margins down. So yes, I think we're at probably the peak of where our margins are, but again, we're always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, given they're amazing and we're really excited about bringing them into the family, but they're having really, I would say minimal impact on both the top line and the bottom line today. Okay, thank you. Yeah.

We have time for one additional question, which will come from Sterling Otte with Moffitt Nathanson.

Great. Thanks, guys. Hopefully my connection holds up. Just wondering back on the enterprise, given the online $480 million a quarter gap, stabilization, it implies the enterprise revenue is well below street consensus. Did we analysts just have the mixed model wrong or was the disruption or something having a bigger impact on the enterprise business for the rest of the year?

I think there's two things. I think, first of all, we've seen online stabilize much more quickly than we anticipated or than we had been indicating to all of you. So I think the The overall mix for the year is probably shaping up to be a little bit different than you anticipated and even that we anticipated at the beginning of the year. And then we're doing, as I said, we're doing everything we can to focus on supporting our direct sales organization. The distraction in Q1 was not de minimis, right? It was, as I said, it was across not only the reduction, but also a reorganization and some changes to incentives and call plans and so um you know we're very happy that that's all behind us now and we're all looking forward to do everything we can to support them and regain momentum there sounds good thank you and again this does conclude our question and answer session so i'll pass it back to you eric for any closing or additional remarks

Well, thank you all for your time. Really appreciate it for all your support. And thank you. And see you all next meeting. Appreciate it.

And again, sorry, Kelly. And again, this does conclude today's earnings release. We thank you all for your participation. So go enjoy your summer and we will see you next quarter.