Zoom Communications, Inc.

Thank you everyone that's joined us so far. We're just going to give it a few seconds to let everybody sink into the call and we will begin shortly. Okay, hello, everyone, and welcome to Zoom's Q2 FY23 earnings release webinar. As a reminder, today's webinar is being recorded. And now I would like to hand things over to Tom McCallum, head of investor relations. Tom.

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal 2024. 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 financial slide deck with financial highlights that along with our earnings release include a reconciliation of gap to non-gap financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the third 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 strategy and business aspirations, and product initiatives, and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results that we discuss in detail in our filings with the SEC, including the 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.

Hey, thank you, Tom. Hi, thank you, everyone, for joining us today. So before starting, I'd like to welcome Dr. X.D. Huang as our CTO, who joins us after a successful career at Microsoft, where he most recently served as Aira AI CTO and the tech new father. Dr. XD joins us at an optimal moment in our AI journey. In the past few months, we brought several new AI innovations to the market and announced an aggressive roadmap aimed at empowering our customers to work smarter and serve their customers better. And as we develop and deploy AI solutions, we strongly believe that technology should advance trust. We are privileged to have countless customers rely on us for their communications needs. We don't take that for granted. Earlier this month, we took the additional step in stating that Zoom does not use customer content to train our AI models or third-party AI models. I'm proud of the approach we are taking by putting customers' privacy needs first, Zoom is taking a leadership position in ensuring customers can use our AI features with confidence that their content is protected. Now, let me share how we have advanced in our mission of one platform delivering limitless human connection. we launched Zoom Scheduler, which serves to reduce the hassle of scheduling with people outside your organization. And Intelligent Director, which uses AI and multiple cameras to provide the best image and angle of a participant joining from a confident room. We also launched many new offerings like Zoom Clips, which enables asynchronous video conversations. And more and more customers are getting on Zoom Team Chat, driven by increased adoption of Zoom One and new features like Continuous Meeting Chat, which connects the transient in Meeting Chat feature to the persistent Zoom Team Chat product. Currently, we have two Fortune 15 companies, one major consulting firm, a global F&B brand, and a leading law firm using Zoom Team Chat as a core means of text-based communications. Our contact center product has surpassed 500 customers, and we are rolling out about 90 new features and enhancements per quarter. We launched workforce management in early July to help customers streamline customer communications, manage agent needs, and transform their customer experience, all from a single unified platform. WFM is already to a great start, and we look forward to adding additional products to this suite to expand our native customer experience capabilities and revenue streams. We have progressed rapidly in our integration of WorkVivo. After looking it out internally, I could not be more impressed with the product and confident in the value it will bring to our customers in terms of building culture across a distributed workforce, ultimately delivering upon our strategic appeal of enabling hybrid work. Speaking of which, a few weeks ago, we announced internally a structured hybrid approach, asking our Zoomies that live within commuting distance to come into their local office twice a week. Zoom is purpose-built for hybrid work, and it's on us to understand what our customers are experiencing in their hybrid journeys and what works and does not work for them. We believe that this approach will enable us to continue to innovate for our customers and deliver what they need to be to succeed. Now moving on to some of our customer wins. First, we are very excited to expand with the United States Postal Service. In Q2, the postal service added a Zoom team chat or 21,500 users to their existing Zoom for Government deployments. Let me also thank Brookdale Senior Living, the largest operator of senior housing in the United States. Brookdale started as a Zoom meetings customer in fiscal 2020. A year later, it began evaluating Zoom phone And in Q2, they went all in on the cloud and upgraded to Zoom One in order to unify their communication needs and one integrated product. Let me also thank Purdue Farms. Like many of our customers journeys, Purdue started years ago with an initial Zoom meetings deployment. Last fall, they went all in with the Zoom One Enterprise Plus. However, the story does not end there. In Q2, Purdue added a Zoom Contact Center due to its native integration with their existing Zoom phone deployment and our ambitious innovation roadmap. Let me also thank Vermont Industries. Vermont came on board as a Zoom customer a little over a year ago with meetings and phone, and it quickly became a major platform adopter, including Zoom One and the Zoom Contact Center. And in Q2, with the goal of utilizing AI to better service their customer and also their employees, they added a Zoom virtual agent due to its accuracy of intent understanding, ability to route issues to the correct agent, ease of use, and quality of analytics. We are so delighted to see our partnership with Vermont grow so quickly, and we are committed to innovating further to support their operations. Finally, let me thank Dollar General, America's general store, for choosing Zoom's WorkVivo platform to connect employees and the digital heartbeat for the company. Dollar General will roll out WorkVable's employee engagement platform for its roughly 190,000 employees to enhance the employee experience at the individual, group, and district levels, drive employee dialogue, and reinforce its strong culture. Again, we are very excited to welcome and expand with USPS, Brookdale, Purdue Farms, Vermont, Dollar General, 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 Q2. Here are a few milestones. First, operating cash flow grew 31% year over year to $336 million. Second, Zoom phone reached roughly a half a billion dollars in annualized run rate revenue. And finally, we are excited that Zoom Contact Center has surpassed 500 customers in only six quarters. In Q2, total revenue grew 4% year over year to $1.139 billion, which includes $10 million of pressure from foreign exchange. This result was approximately $24 million above the high end of our guidance. Our enterprise business grew 10% year over year and represented 58% of total revenue up from 54% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3.2% from 3.6% in Q2 of FY23. The number of enterprise customers grew 7% year over year to approximately 218,100. Our trailing 12-month net dollar expansion rate for enterprise customers came in Q2 at 109%. We saw 18% year-over-year growth in the up market as we ended the quarter with 3,672 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 26% in Q2 of FY23, and include some of the amazing names that Eric highlighted earlier. our America's revenue grew 6% year over year, while EMEA and APAC declined by one and 3% respectively. Absent currency impact, both EMEA and APAC would have been approximately flat year over year. On a quarter over quarter basis, all regions grew 3%. Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains or losses on strategic investments, restructuring expenses, and all associated tax effects. Non-GAAP gross margin in Q2 was 80.3%, an improvement from 78.9% in Q2 of last year. We are pleased with the strength of our gross margins as we continue to optimize usage across the public cloud and our co-located data centers for both existing and emerging technologies. For the full year, we expect non-GAAP gross margin to be approximately 79.7% as we make additional investments in new AI technologies. Research and development expense grew by 6% year over year to approximately $104 million. As a percentage of total revenue, R&D expense increased to 9.1% from 8.9% in Q2 of last year, reflecting our investments in expanding our product portfolio, including Zoom Contact Center, AI, and more. Looking ahead, investing in innovation will remain a top priority for Zoom. Sales and marketing expense decreased by 3% year over year to $276 million. This represented approximately 24.2% of total revenue, down from 26% in Q2 of last year. As a reminder, Zoomtopia will be held in Q3 of this year and will drive incremental marketing investment in the quarter. G&A expense declined by 19% to $73 million, or approximately 6.4% of total revenue, down from 8.2% in Q2 of last year, as we continue to achieve greater efficiencies and experience one-time savings in the quarter. Non-GAAP operating income grew by 17% to $462 million, exceeding the high end of our guidance of $410 million. This translates to a 40.5% non-GAAP operating margin, a meaningful improvement from 35.8% in Q2 of last year. Our effective tax rate in Q2 was 18.5%. For the remainder of the year, our tax rate is expected to approximate the blended U.S. and federal state rates. Non-GAAP diluted earnings per share in Q2 was $1.34 on approximately 306 million non-GAAP diluted weighted average shares outstanding. This result was 28 cents above the high end of our guidance and 29 cents higher than Q2 of last year. Turning to the balance sheet, Deferred revenue at the end of the period was $1.37 billion, down approximately 2% from Q2 of last year. This was in line with the high end of the expectations that we shared last quarter. For Q3, we expect deferred revenue to be down 4% to 5% year over year, partially driven by shorter billing frequencies on enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, our RPO increased 9% year over year to approximately $3.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 61% in Q2 of FY23, indicating lengthening contract durations on a year over year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year. Operating cash flow in the quarter grew 31% year-over-year to $336 million. Free cash flow grew 26% year-over-year to $289 million. Both results include the approximately $60 million cash payment related to the legal settlement that we discussed last quarter. Our operating cash flow and free cash flow margins were 29.5% and 25.4%, respectively. We ended the quarter with approximately $6 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Given the strength in profitability and collections, we are increasing our cash flow outlook for FY24. We now expect free cash flow to be in the range of $1.2 to $1.23 billion. Turning to guidance. For Q3, we expect revenue to be in the range of $1.115 to $1.12 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 $400 to $405 million. Our outlook for non-GAAP earnings per share is $1.07 to $1.09 based on approximately 309 million shares outstanding. We are also 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 $4.485 to $4.495 billion. At the midpoint, this represents approximately 2% year-over-year growth or 3% in constant currency, which we expect to be neutral in the back half of the year. Our increased total revenue guidance reflects a consistent view on enterprise with tempered expectations for online for the remainder of the year. We expect our non-GAAP operating income to be in the range of $1.685 to $1.695 billion, representing an operating margin of approximately 38%. Our outlook for non-GAAP earnings per share for FY24 is $4.63 to $4.67, based on approximately 308 million shares outstanding. Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support. Before opening up for Q&A, we are excited about our premier user conference, Zoomtopia. It will be in person in San Jose as well as on Zoom events. We look forward to sharing more about our expanding platform, new innovations, and customer testimonials. Please join us at Zoomtopia on October 3rd and 4th. David, please queue up our first question.

Thank you, Kelly. As Kelly mentioned, we will now move into the Q&A session. When I call your name, please turn on your video and unmute. As a reminder, in an effort to hear from everyone, please limit yourself to one question. Our first question will come from Mark Murphy with JP Morgan.

Oh, thank you so much. And congrats on solid execution in the quarter. I'm curious if you can comment on the Zoom scheduler product. It looks like a very attractive add-on option in a clear efficiency gain. I understand that that's going to be free for some period of time and then looks like $6 per month for certain users. I understand it's going to be included in some of the other bundles. But can you just comment on how that's going to work? Maybe Eric, you can touch on the efficiency gains from that product. And Kelly, any type of a framework for the revenue potential out of that particular product?

Yeah, so I can talk about the product side. Katie, feel free to tell me on the revenue potential. I think Mark, you are so right on. I guess probably you already tried it out. It's indeed very attractive. You know, the reason why you look at the whole customers, including Zoomies, right? How we schedule a meeting. Let's see, Mark, I want to schedule a meeting with you next week. It's so complicated, right? I need to reach out to your EA, reach out to my EA, or we need to think about a calendar schedule. It's so hard. Meaning across the company, scheduling is so complicated, right? How do I have customers and simplify that experience? That's why I decided to introduce Zoom Scheduler, right? And also, there's some other startup solutions out there. The customer, they would like to, you know, leverage Zoom platform because, you know, they already use meetings, phone, team chat. One more click, they can schedule a meeting with, you know, someone from an outside organization. We really like that experience. That's why we decided to build that. And, you know, we already have, you know, free trial. And as a customer, we already had paid a customer already and also be part of a Zoom one as well down the road. And actually... It's doing very well and really simplifies the way for you to schedule meetings with any other side of your organization. We're pretty excited about that opportunity.

Yeah, I think in terms of its overall contribution, Mark, it's at a very attractive price point and will grow over time, certainly. But also we think that what it does is make the product continue to be where you live and it makes especially our larger enterprise customers that much more retentive as it continues to spread the platform and how you spend your day.

Thank you so much. Thank you, Mark. Hopefully you tried that. Thank you, appreciate it.

Okay, our next question comes from Mita Marshall with Morgan Stanley.

Oops, Mita, we can't hear you. Because I'm on mute.

So one of the questions that I had was just what you were seeing in terms of the environment. You know, I know that your upside kind of came from the enterprise, just wanted to get a sense of you know, how the environment changed during the quarter, if there were any changes during the quarter, and just whether kind of that upside came as a result of kind of better upsells or just more, you know, deals kind of getting closing in shorter order. Thanks.

Yeah, thank you, Mita. So I would say in terms of Q2 versus Q1, the environment has been pretty consistent. We continue to see momentum in Zoom One, in Zoom Phone. There are still, I would say lengthened sales cycles out there and customers really making sure that they take advantage of doing their full due diligence. But we're really excited about the vision that we can paint for them, not only around obviously the existing platform, but what's also coming from an AI perspective. And I think our customers are finding that very attractive, as you heard from the customers that Eric talked about, seeing a lot of momentum of customers that were originally meetings customers really moving either into Zoom One or adding on Zoom Phone and considering Contact Center as well. Great, thanks.

Who's next?

David, who's next?

Apologies. Our next question comes from Cash Rangan from Goldman Sachs.

Hi, Cash. Oops. Sorry, Cash.

Got it. It looks like the enterprise business has seen stability with respect to attrition, et cetera. I'm curious to get your thoughts on the online business. With that, it's still a substantial portion of the revenue. and anything that you have identified that could help stabilize the efficient levels. And also just while we're at it, what is the pricing power of Zoom? Like if you talk about customers worried about inflation and doing shorter term contracts, that I guess on the flip side means that you could raise prices. So I'm wondering how much leverage you have with that. Thank you so much.

So in terms of the online segment, we were really pleased with the continued improvement that we're seeing in the retention rates or the churn rates. They are really at historic lows. And so that's really great to see. And Wendy and her team continue to innovate. We just saw a little more volatility and that's what we indicated in sort of tempered expectations for the rest of the year, but really pleased with the ongoing progress that we're seeing in that segment of the business. And then, you know, in terms of the pricing power. I mean, Eric, feel free to chime in, but certainly we continue to have these discussions with our customers when it comes up for renewals, looking for opportunities to potentially expand their usage of the portfolio. Moving them from Zoom meetings to Zoom One is a very common upsell mechanism or I should say movement that we're seeing with our customers today and considering is there an opportunity potentially given the value that they're seeing in the platform potentially for a price increase at renewal as well.

Yeah, just to quickly, in terms of pricing power, and most of businesses, they still will employ experience as the number one part, right? That's why they really want to, you know, kind of give a customer the best service, you know, like a Zoom platform. You know, otherwise, you know, probably they do not have a lot of experience when it comes to price. That's not the case, right? And most of the customers we talked with really appreciated the value and ease of use and quality of Zoom service.

Thanks so much. Thank you, Cass. Appreciate it.

Our next question comes from Michael Funk with Bank of America.

Yeah, hi. Thank you for taking the question today. You know, congratulations on the new logo additions. You know, good momentum there. And the phone ads as well. Just wondering, Kelly, I mean, what has to happen with some of the other metrics that did decelerate during the quarter? NDRR decelerated sequentially. You know, online churn up sequentially. Enterprise customer additions also slowed sequentially. So, you know, thinking about the acceleration and revenue growth we've been expecting or hoping for, Which of those metrics is going to turn first? And how much visibility do you have into that term?

Yeah, so a couple of things. Let me just comment on a couple of the metrics that you called out specifically. First of all, for the online term metric, as a reminder, we expect Q2 and Q4 to be seasonally higher than Q1 and Q3. So while it was up over Q1, it was down over Q4. And that's because of summer and winter holidays. So I think that 3.2 number is a really great number. And we are going to continue, and Wendy and your team are continuing to focus on opportunities to improve that. You know, in terms of the enterprise, we're really focusing on some of the approaches we've talked about earlier. Certainly, Zoom Phone is one of the key drivers in terms of expanding our customers' use of the platform. That doesn't necessarily result in new customers, but you could see that in the enterprise customer metric as that starts to expand. Also, the success of Zoom One is going to drive that expansion of more customers in the $100,000. So I think those are the metrics that you should watch as great indicators as our enterprise team continues to sell Zoom Phone, sell Zoom One, sell Zoom Contact Center. And then of course, as AI becomes more front and center, you'll get to see that as well.

Okay, so just quickly then, so The NDRR for enterprise, that should improve as we exit the year. Is that an expectation? So 109, that should improve off that number?

Remember, it says it's a trailing 12-month number. It may come down a little bit more yet, but then start to inflect potentially at the back half of the year, but it might be into early of FY25.

Okay. Thank you, Kelly. Thank you, Eric. Thank you.

Our next question comes from James Fish from Piper Sandler.

Hey guys, thanks for the questions. You know Kelly for you or Eric, are you seeing optimizations on your seats showing a slowdown or similar pace to what you've seen more recently? Is there any way to talk about the linearity in general? And Eric, we get the investment behind AI and it seems like it's causing gross margins to drop a couple of points and guide sequentially. I guess, what can you say that gives confidence that this isn't just further price degradation or just a higher level of conservatism on the other side of the coin?

Eli, you wanted to address the first one?

In terms of the optimization of seats, what we've seen is, I think we talked about this sales motion before, that our reps have the opportunity to really get in there and talk to our customers. And they've done a great job about logo retention. And even if they are customers, because they've had a dislocation in their employee base, taking that opportunity then to replace that revenue with an upsell of another product like Zoom Phone and showing them how overall we can drive such a great ROI for them and save them. And our sales team has been incredibly successful at that. And so that's what we're seeing, even though there's still a little bit of sifting, I would say, of seats in there, we're seeing lots of momentum on those upsells at that renewal period. And I just wanted to highlight, in terms of gross margin, we had 80.3 this quarter, and we only guided to 79.7. So it's not even 100 basis points of degradation. Fair enough. Eric can talk about the reasons and why that is and what we're investing in.

Yeah, yeah, gross margin is very, very strong. Again, you know, in terms of impact, it is a short-term, not long-term. The reason why, you know, when it comes to AI, it's becoming more and more important. Many of our customers told us, you rely on Zoom platform, you know, like all the features today, you know, like a meeting summary, you know, someone can, you know, take a meeting notes manually, right? How to leverage AI, improve the productivity and efficiency, right? For sure, you know, we needed to invest more. The good news, we already invested. you know, two to three years ago, right? And that's why some of the features are already ready, but how to further double down on that investment, right? You know, we hired a Dr. XT and also invested a lot of, you know, the GPUs as well, our team, and we have a higher confidence and those AI features will help a customer a lot, right? And also our strategy is very differentiated, right? You know, first of all, I have a federated AI approach, and also the way we look at those AI features, how to help a customer improve productivity. That's very important, right? And the customer already like us, not like some others who give you a so-called free service and then charge your AI features a crazy price. That's not our case. We really care about the customer value and also add more and more innovations. At the same time, the way for us to look at innovation is not only for incremental innovation in terms of leveraging AI, but also how to leverage AI to build some brand new services. to innovate, to deliver even more value than customer expected. That's why we can, you know, monetize to leverage AI technology. That's why we keep investing more. Again, the goal is about some brand new AI services, like Zoom IQ for Sales, just one. A lot of other services we're going to build down the road. So stay tuned, you know, for the Zoomtopia.

Thanks, Eric. Thanks, Kelly. Thank you. Our next question comes from Matthew Van Vliet, BTIG.

Good afternoon. Thanks for taking the question. I wanted to dig in a little bit more on the trends you're seeing in the contact center. Can you help us with what situations you're seeing the most success in? Are these mostly have sort of meetings and phone? And then sort of within that, you know, are you seeing more sort of internal help desk type situations? Or are you seeing kind of higher volume customer facing deployments as well?

Yeah, Matt, it's a great question. You know, first of all, I can tell you, you know, take a Zoom for example, you know, we already, you know, and deployed the contact center within Zoom since a year ago, right? And, you know, our support team are very happy about our own deployment. It works extremely well, right? Because of all those innovation and integrations. Speaking about customers, right? You know, for sure, even if we had a loss of innovations every quarter, But in the brand recognition, it still will take some time. That's why quite often, all the existing customer, they would like to deploy Zoom contact center integration very well with the Zoom phone. And also, they found a new use case like internal hyperdesk, IT hyperdesk as you said. At the same time, we also have some contact center customers who did not have a Zoom phone, who even did not have a Zoom meeting. They like a contact center. I think given the speed of innovation, I think we have a higher confidence, not only in SMB, but also more and more, many of our customers, when they realize the value of Zoom and Zoom Contact Center, I think something similar to what we did for Zoom Phone as well. When we started, only SMB customer, existing customer, we soon realized, wow, that's a huge value. And why not try or test it out at Zoom Contact Center as well? So that's the path for our work to further grow our contact center business.

Great, thank you. Thank you. Our next question comes from Ryan Kuntz with Needham.

Hi, thanks for the question. I wanted to ask about the healthy growth we're seeing here in the $100,000 accounts. Is that primarily displacements of legacy vendors that we're still seeing? Or are these other kind of competitive wins, greenfield type wins? And can you share anything about the effective playbook you're using at market there to expand these big logo wins? Thanks.

Yeah, I think some of that, Ryan, points to the ongoing success we're seeing with Zoom One. Customers really like the ability to buy the bundle which meets all of their needs, and it's a great opportunity to see the value, especially your previously existing meetings customers seeing that opportunity. We do continue to see Greenfield, especially, you know, Eric just highlighted contact center sometimes is a way that they're coming in the door now, which is amazing. And then also we still have a lot of customers that are meetings customers that are upgrading to phone as well. So it's a combination of both new customers that come in at that level, as well as customers that grow up to that level over time.

Got it. Any general changes in the pricing environment at market?

No, especially from Q1 to Q2, there weren't really significant changes. As I mentioned, there's still, I think, lots of scrutiny around deal, but no other real changes in the environment.

Got it. Reliable. Thank you.

Brian.

Our next question comes from C.D. Panagrahi with Mizuho.

All right, thanks for taking my question. My question on contact center again, that's a huge opportunity considering like 80% legacy is still here to move to cloud. And you're starting from a clean slate, just building yourself in house. Eric, how are you trying to differentiate, I mean, among other cloud vendors right now in the contact center space? And Kelly, should we think about this contact center next leg of growth? Is this adoption should be like phone, what we have seen in the last few years?

Yeah, so speaking of differentiation, you know, first of all, we've built the content center service from the ground up, right? This is absolutely the new multi-architecture and also video is part of that as well. AI is heavily, you know, AI components, you know, we heavily invest in AI, you know, and also at the same time, a seamless integration with other product as well. That's why we have a high confidence, right? And not like some other vendors, you know, already there for a long, long time, right? and the architecture may not be modern, and the performance, the quality, and so on and so forth. However, how to make sure every enterprise customer during their RFV process, they do look at a Zoom. When they look at a Zoom, we have a higher confidence. We can compete. And also, we just had a lot of innovations around the workforce management platform as well. And essentially, Zoom contact center will become our full contact center suite. not just the one part, versus the target SMB and enterprise and also with AI. I think we are innovating very fast to compete against any other cloud-based or on-prem based and content center vendors.

And is that going to be similar to like phone kind of adoption?

Yeah.

Sorry, go ahead.

Only six quarters old today. So it's very relative, right, to the existing ARR base. It's small. It's growing very quickly, though. So it won't be visible to you probably for at least another four to, I don't know, four to five to six quarters probably. But we're really pleased with the growth. And then As Eric mentioned, when you start considering workforce management, of course, Zoom virtual agent, quality management, which is coming, it starts to be a platform unto itself that could really be a significant growth driver over time.

Great. Look forward to seeing you at Zoomtopia. Thank you. Thank you.

Our next question comes from Rishi Jaluria with RBC.

Oh, wonderful. Hey, Eric. Hey, Kelly. Thanks so much for taking my question. Two quick ones. First, look, I appreciate a lot of the investments you're making around generative AI. And I know it's early, but I want to think about how do you think longer term about your strategy around monetizing generative AI? Is it around specific modules and discreetly charging for them? Is it about gatekeeping them behind higher tiers and using that to drive upgrades? And maybe alongside that, You know, you're starting to see better adoption, I think, of your non-core products, including, you know, ZoomVote at half a billion in ARR. Eric, you called up some great customer wins on ZoomChat. How do you think about using generative AI as kind of a connective tissue to drive more usage of non-core products and maybe even of the entire ZoomOne pricing and packaging? Thank you.

Yeah, that's a wonderful question. So you look at, you know, the Zoom platform, right? So not only do we have meetings, right? So some, you know, people still thought it was just a meeting company episode. That's not the case, you know, a full platform company, right? You know, for those companies deployed like a team chat, USPS deployed Zoom team chat, a lot of companies deployed Zoom phone, right? and a wire board, you know, Zoom contact center as well, you know, scheduler, you know, and also the Zoom clips. As we build more and more services, right? And essentially, when we double down our platform, how do we look at everything from customer perspective? How to add more value? Let's take a Zoom one, for example. Custom say, I really like Zoom. I already paid and deployed the entire platform. A lot of features, take this gen AI features, like a meeting summary, and to leverage gen AI to write a team chat, a meeting query. And let's say you are later to the meeting, how to get a quick real-time summary about what had been discussed over the past five minutes. all those gen AI features can make the entire platform not only sticky, but also more value, right? So, you know, quite often, you know, some, you know, customers say, yeah, you can charge, and some other competitors do that. We are taking a different approach. We think if you add more value to customers, and they are going to more, you know, very likely to move on to your entire platform, right? That not mean we cannot monetize AI. How do you think about AI? to build a new services, right? You know, give an example, back in 1995, 1996, I mean, internet was sort of born. You know, when every, you know, let's say, you know, the stores, right? When they embrace internet, you do not want them to increase the price. Lianfeng Zhao, Ph.D.: : Right you buy online why increase price, however, you can leverage Internet to build a new services right. Lianfeng Zhao, Ph.D.: : A new innovations that's why we're taking a different approach, not as i'm other competitors, they give us our free service, but it generally I oh my God they charge you a crazy price. I do not think that's fair to customers, right? We are taking a different approach and more value to leverage AI to our existing customers, you know, focus on the feature improvements to leverage AI. At the same time, given our speed of innovation, how to leverage AI to build some brand new AI services to monetize. That's our goal. That's our direction. Also, that's our differentiated pricing strategy as well. Hopefully, you know, my answer is clear. Otherwise, let's talk more at Zoomtopia.

Yeah, very helpful. I'm looking forward to it. Thank you.

Appreciate it. Thank you.

Our next question comes from Alex Zukin with Wolf Research.

Hey, guys. Thanks for taking the question. I guess, so when I sit back and look at the quarter, this quarter looks a little bit different than last quarter. You grew sequentially your revenue base on enterprise and online for the first time together in some time where both of those things happen. Your enterprise billings actually grew as well. And so- I look at the guidance and it looks like we're taking a step back. And I appreciate the conservatism and the macroeconomic environment. I appreciate the fact you've got changes you're still working through in the go-to-market. But help us understand if we look at the trends as they've, you know, has churn stabilized to a point where we can expect, for instance, on the online business that this is a new floor we can count on. Because if I look at the exit rate for enterprise revenue, I don't think it's at the rate that Any of us sitting here would be jumping up and down about, you mentioned NRR on the enterprise side starting to, I think you said inflect, but maybe go back up in the first half of next year. What's the right way to interpret the enterprise growth exiting this year and into next year? Then I've got a quick follow-up.

Yeah, so in terms of online, I would say that we are very pleased with the performance that we're seeing in the churn rate itself. And I do think we're stabilizing around a new level that is back to historic levels. And I think that's a reasonable assumption to make going forwards. And then in terms of enterprise, we're obviously not in a place that we're going to comment on FY25 yet. We're not going to do that on this call. But enterprise, when you look at it from a... How do I say this for you? When you look at it in terms of the growth rate that you're expecting, you can back into what it is. And we are, as you say, still considering no improvement from the macro at this point. And as you said, continuing to have the Salesforce settle into our new structure. You know, we're thrilled to have Graham leading the organization. We, you know, some of the transitions took a little bit longer in EMEA and APAC than the rest of the world, as you've heard us talk about. But, you know, as we're coming into Q3, the pipeline is strong. It's stronger than it was as we were coming into Q2. So I think those are the factors you can take into consideration as you're looking for the growth rate for the rest of the year.

Okay. And then maybe Eric, for you, obviously the evolution of Zoom from a point solution to a platform is nice to watch. You've talked about Zoom One. You've now given us that $500 million annualized number for Zoom Phone. What's the penetration today for Zoom One within the enterprise base? And what's the penetration for the phone product in the enterprise base? And where does it go from here in your mind? Like what does success look like for you?

Yeah, I think Zoom phone penetration is doing relatively well, but Zoom One, I think, you know, still has a huge opportunity, right? Zoom One is not only for Zoom meeting on the phone, right? Also the team chat, if the customer wanted to deploy our free, great team chat solution, and a whiteboard and a lot of other services, right? I think a huge opportunity, especially for media and a lot of size customers. And we needed to kind of share the value, you know, as I said earlier about like GNI AI features, all those kinds of things is part of a Zoom One, right? So leverage all those, you know, the cool features, right? To, you know, to penetrate more, you know, and about a Zoom One is the market share, right? And Zoom Phone itself is doing relatively well, but, you know, huge opportunity ahead of us for Zoom One penetration. And I would say we just started. So, you know, I give one example, I take a USPS for example. When they realize, wow, you have a great team China solution. It's also part of Zoom One and also it's free. That's amazing. I would test it. Why not deploy Zoom One, right? So many more customers, when they realize the full potential of a Zoom One platform, I think that's the value, right? We need to focus on, so.

Perfect.

Thank you guys. Thank you, Alex.

Our next question comes from Peter Weed with Bernstein.

Thank you. And maybe this kind of falls up a little bit of what Alex was just getting at. But, you know, first off, I want to say it's really exciting to see the progress on Zoom Phone and Contact Center. It's been amazing to watch that. And, you know, all the checks I do with folks are very positive on things that are going there. You know, I think, Kelly, you commented a few minutes ago, and we're alluding to it, I think, with Alex here, you know, that NRR may come down a bit, you know, before it starts reaccelerating. Maybe by the end of this fiscal year, maybe the beginning of next year, we start to see some line of sight to some benefit there. I'd really love to kind of dig into like what will drive that improvement. And kind of when I split the customer base, you do a really nice job of reporting both on greater than 100K and less than 100K. Like some quick math suggests where it's been really painful recently is on the greater than 100K customers. And I'm trying to figure out like on that reacceleration, is it about kind of reigniting those greater than 100K? Is the opportunity with the less than 100K like growing them up because they're less mature? And like, really, what is it that you are going to be delivering with these customers to reignite that between those customer bases?

So one of the things I commented on is that we have seen some dislocation in our customers' own employee base and that our sales reps do a great job when they're talking to those customers about helping them potentially right-size if they have downsized in their employee base, but upselling and retaining that revenue in other parts of our platform. So As there's still pressure in the macroeconomic environment, you're going to see that a little bit, right? So maintaining logos, even maintaining the same amount of revenue, but would have been an upsell if not for a downsell due to seats. So part of it is just an ongoing potential change in the macro, which we have not factored into the guidance that we gave. And then the continued acceleration of all these new products that we keep talking about. Phone is obviously doing really well and has well hit its stride. But remember, that's taken three to four years to accomplish. And so contact centers, we expect to follow the same. It just needs a little more time. And then you heard about all the additions into the contact center platform itself with ZVA, with workforce management, and quality management that's coming. all of those will continue contribute to growth over time and then you know eric sort of hinted thinking about the ways that ai over time is going to help with both retention as well as potential opportunity to grow revenue so it's just some of these things just have to grow a little bit or you know age a little bit and mature into the stage that they're contributing in a way that you can see them

And how high do you anticipate NRR being able to get, you know, once all that stuff works out? I mean, obviously you've seen some of those headlines, so you kind of know how much you were like, darn, like I lost this and it would have been so much better. Like if you're looking forward, like what should we aspire to be getting NRR back to? And like, how soon do you think we can get there?

Yeah. You know, Peter, we'll talk about that more when we're ready to give FY25 guidance, but not, not today.

Yeah, I can answer a little bit more, Peter. So the question you asked were very similar to what are the articles about Zoom One. Actually, you know, today is the problem is, you know, Zoom is a too strong brand on meeting side, right? Many of our customers, unfortunately, they even did not realize we have a lot of other services, not to mention a Zoom One platform, right? That's the number one challenge we are facing. How to make sure all those, even for existing customers, They also think, oh, it's just a meeting. That's not the case, right? When we share a great story, make sure most of our customers or public, they realize our Zoom, not only just the meetings, has a full platform. I think the inflation point will not happen until then. Thank you. Thank you.

Our next question comes from Taz Kujagi with Wedbush.

Hey, guys. Thanks for taking my question. Two questions. First one for you, Kelly. I think you had a price increase of the online business in Q1, and that was being phased out, I think, in different geos at different times. Has that been rolled out across the globe? And if you can comment on any tailwind you saw from that price increase in the Q2 online business?

Yeah. So it has been very effective in general in terms of maintaining strong retention rates and moving customers from monthly to annual as they continue to see value when we've rolled out this price increase. And given that it's been in effect for the full time now, we're not going to break it out separately, but it certainly is overall having a great impact and including in the momentum for online. And it is, I believe it's live in every market at this point.

Got it. And then one follow-up on contact center. I know it's pretty early. You've just started, you know, you've just had, you know, your first early customers, but any comments on price points you're seeing and a cash rate of seats? So let's say a customer has a hundred seats of Zoom meeting. When customers buy a contact center, what is kind of the tax rate that you're seeing for these early customers?

Yeah, I mean, it's very different, right? In terms of it's not anywhere near, like phone typically is near one-to-one and sometimes even more one-to-one for the attach rate. Contact center is very different. It depends on the use case we're seeing of the customers. If it's an internal help desk or if it's like, you know, one of our largest deals today was a BPO where it is their business, right, to drive contact center. So I don't think there's necessarily a standard ratio that you can look at because it varies so much based on use cases. And then in terms of pricing, as a reminder, our list price for contact center is highly disruptive. It's $70 per seat. And given, you know, comparing that it's, it's, Given comparing it to the other competitors in the market, it's a really, I think, brings a lot of value to our customers. So while enterprise customers and larger customers are going to get discounts, we've certainly been able to manage to maintain price points given how disruptive and competitive it is compared to others in the market.

Can I sneak in just one more clarification, Kelly? You mentioned that we won't have visibility into contact center revenues for another four to six quarters. It's still very early. Were you implying that it'll be close to 10% of revenues in four to six quarters?

No, no, no, no, no, no, no. I don't mean to imply that at all. I just mean that, um, I see Matt laughing, um, that over time, right. You started to see zoom phone and we talked about like more milestone metrics and how it was contributing. That's what I was saying. I, I, I mean, that would be the fast growth rate if that were to occur.

Got it. Thank you guys. Thanks a lot.

Thank you. Our next question comes from Matt Stadler with William Blair.

Yeah, Heather, thank you for taking the question. Maybe just a follow-up on Zoom Phone. If I look at the disclosure this quarter, you know, 500 million ARR, and last quarter, Zoom Phone reached 10% of revenue. The implication would be, you know, something in the ballpark of, let's say, 10%, maybe a little more sequentially in terms of growth for Zoom Phone ARR. We'll just dig into or double-click on, I guess, what's driving that growth, right? Is that indicative of the success you're seeing with Zoom 1? Is that evidence of go-to-market maturity there? Is it some large customers like the BPO you just mentioned kind of ramping up? Anything you'd like to call out there?

Yeah. I mean, actually, Matt, it's all of the above is what I would say. As we are talking to our customers about renewals, taking the opportunity to talk to them about the value of Zoom 1 or talking about just helping them I think every CFO and CIO across the world today is trying to think about how do they drive more efficiency in their organization. And Zoom Phone is a great way to do that when you look at it compared to the ROI, especially of having an on-prem solution. And then also with Contact Center, if Contact Center is a driving force, Zoom Phone is a very natural adjacency to it. So I think it's a combination of all of that and it's just gonna continue to create more and more synergies as Zoom Contact Center especially continues to mature.

Yeah, just quickly, you know, when we talk with our customers, we really like, you know, have a both, you know, they deploy both Zoom meetings and a Zoom phone together, the content center, the new opportunity. In particular for those customers, you know, I think they don't want to deploy a point of solution, right? If you just have a phone business, it's really hard. to build a sustainable business. Customers see, you know, phone and meetings, you know, they need a very similar integration. Like, you know, have a phone call, one more click and jump into a video meeting, right? So that's, you know, that kind of similar experience really help us, you know, further accelerate our phone growth, right? If you just offer a point of solution as really not scalable, not sustainable, and down the road, more and more customers, they would like to move on to a platform player like Zoom. Got it, thank you. Thank you.

Our next question comes from Sterling Audie with Moffitt Nathanson.

Hi Sterling. Hey guys. All right, Kelly, for the online outlook, how much of this is that, because it seems like the online guidance is a little bit worse than what we had before. How much of this is macro? How much of this is execution? And Eric, one for you. When we think about AI and all the innovation that you're driving, How much of that AI innovation is just going to be driving and differentiating the core Zoom products versus bringing a premium monetization kind of pricing model or specific AI SKUs?

Eric, you want to go first?

Sure. Yeah, so first of all, in terms of online study, you know, I know you have a pro account, you know, hopefully you still have a pro account, you know, and you for sure can contribute to our online growth. So speaking about AI, I think, you know, we are taking a different approach. As I said earlier, from an architectural perspective, it's different, federated AI. In terms of monetization, right? Again, we look at how to leverage GenAI to improve our call meeting experience and deliver more value, make the service more sticky. Customers appreciate Zoom always offer more and more features and values. At the same time, we do not kind of charge them a crazy price, increase the price a lot at all. That's why we build a trust. They want to go to full Zoom platform. At the same time, GenAI does bring huge opportunity. In terms of modernization, in terms of the new service, as I said earlier, how to leverage GN AI to build some brand new service. You cannot only count on low-hanging fruits. You already deployed this service. I have a GN AI feature now. You need to pay a crazy price. I do not think that's sustainable. Customers do not like it. Right that's our approach, how to leverage AI to make sure existing customers happy and leverage AI to build new services focused on innovation, innovation and innovation that's our approach.

Thank you Eric and Sterling in terms of online you, I would say. we're pleased with the execution and where you see that is the ongoing stabilization in the churn rate. You know, that I think has been really, really well done and stabilized over the last four quarters now. And I think that's a really great indication of the ongoing improvements in the platform, the buy flow, the movement of customers from monthly to annual, where We do see some ongoing headwinds is in the overall macro, which is driving more for the top of the funnel. And that's where Wendy and her team continue to focus on new pricing packages, new payment currencies, things that they can focus on to expand the top of the funnel so that over time, and then eventually starting to add new products as well that can be sold online. That's what will eventually drive this. Ideally, we want it to not only be stable, but to be a growth driver as well.

Makes sense, thank you.

Thank you, Studi. Thank you.

Okay, we have time for one more question. And that last question goes to William Power with Bard.

Okay, great. Thanks for sneaking me in. Maybe one more question on contact center. Great to see the traction there. I wonder if perhaps Eric, you can update us on where you are with respect to go to market. I know that had been a big focus. How much more room and opportunity is there on that front? And then I guess the second part of that is it feels like there's a big opportunity with respect to AI and contact center and being a new entrant. How do you think about the opportunity for whether it's virtual agent or other capabilities to help you be even more disruptive in that market?

Yeah, great question. So, yeah, speaking of go-to-market, I think, you know, on product front, we have a high, high confidence, you know, compared to the innovation speed, we had so many features and a workforce management, a lot of other features have been reduced every quarter. But in terms of go-to-market, I think, you know, not like what we did before for meetings, right? You know, by and large, more like a driven, primarily driven by a direct business. Hyundai is different. You know, for sure, we need to double down, triple down on the indirect channel, right? you know, embrace all of the third party, you know, partners and a master agent and so on and so forth. And I think we need to invest more on that front. And, you know, essentially, you know, this is one of the things, you know, why, you know, not like a Zoom phone, you know, quickly receive the excited revenue, but even have a greater context on a product. As long as, you know, you see the progress on the market front, I think, you know, we will see the greater result. And in terms of AI, not like other vendors, right? They already have a content center sort of solution for a long, long time. When you look at AI, kind of architecture, not a flexible, right? How to add AI to that, to all those existing layers. When we build a content center, contact center, we already realize the importance of AI, right? That's why, you know, we have a very flexible architecture. Not only do we build organic, you know, AI features, but also, you know, we acquired Solvay and also the virtual agent and so on and so forth. You know, organic growth and also the acquisition certainly help us a lot in terms of product innovation. And AI is going to put a big role, you know, for the contact center. We have high confidence, you know, we can, you know, do very well on that front.

Thank you.

Thank you. Okay, this concludes our Q&A. I would now like to pass things back to Eric for closing comments.

Oh, thank you all for joining us for the Q2 earning call. I really appreciate it for your great support and very, very grateful. And thank you. Appreciate it.

Bye, everybody.

We thank you all for your participation and we look forward to seeing you again. This concludes today's conference. Enjoy the rest of your day.

Thank you.