Zoom Communications, Inc.

Well, hello, everyone, and welcome to Zoom's Q3 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 third 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 release include a reconciliation of gap to non-gap financial results. During this call, we will make four looking statements, including statements regarding our financial outlook for the fourth 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, which 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 we may make on today's webinar. And with that, let me turn the discussion over to Eric.

Hey, thank you, Tom. Thank you, everyone, for joining us today. In early October, we hosted Zoomtopia, our yearly customer and innovation-focused event, and it was awesome. Like last year, we ran a hybrid on Zoom events. Thousands joined us in person and many multiples of that virtually. Among the impressive attendees were 40 customer presenters, such as JP Morgan, MIT, Boston Consulting Group, HubSpot, and Close, who spoke about their amazing experiences on Zoom and excitement about the future. We also showcased newly released innovations like Zoom AI Companion, as well as Zoom AI Expert Assist and Quality Management for the Contact Center. Zoom AI Companion is especially noteworthy for being included at no additional cost to our paid plans. and has fared tremendously well with over 220,000 accounts enabling it and 2.8 million meeting summaries created as of today. Remarkable growth in less than three months. At Zoomtopia, I also had the pleasure of sharing the stage with FLABS. a global manufacturing and supply chain leader who spoke about how they use Zoom to connect their large distributed workforce of 170,000 employees across 30 countries. Flex started using Zoom meetings in 2017, quickly followed by Zoom Rooms and Zoom Team Chat. Since then, Flex increased Team Chat users by 200% and Zoom Rooms by 245%. They also became power users of Zoom Whiteboard, creating over 13,000 whiteboards. And moving to Zoom Phone allowed them to eliminate 50 to 70% of circuits and infrastructure across the globe and reduce total cost of ownership. We were so happy to have Flex share their journey at Zoomtopia and cannot wait for what is in store for our partnership next. Now, moving on to some of our customers in Q3. First, let me thank Jobbox, who has been an amazing customer for many years, starting with meetings and then extending to Zoom rooms, phone, and events. In Q3, they selected a Zoom virtual agent and a Zoom contact center to provide world-class AI-enabled support to their global user base. Let me also thank Amenta Group, a premier insurance services company, who initially adopted Zoom Phone and Zoom Connect Center on a limited scale in Q1 of this year. Seeing how our modern solution offers superior agility, customization for sales flows, and administrative functionality, in Q3, they decided to standardize their customer-facing sales support on the Zoom stack and add workforce management, leading to a nearly five times increase in their monthly spend with us. I'd also like to congratulate the Virgin Group on their launch of WorkVivo to bring together 60,000 employees across almost 40 Virgin companies on one platform. The Virgin Family WorkVivo platform is helping to drive social connection, encourage collaboration, and boost brand knowledge. It's inspiring to see how the virtual group is bringing the platform to life and strengthening culture with Zoom's work available. These wins are a testament to the investment we are making in our customer experience offering with a rapid pace of new innovations like workforce management, quality management, Zoom virtual agent, and AI expert assist. They also highlight our progress with employee experience, especially with integrating work available into the Zoom client. Thank you so much to Jobbox, Amenta, and Virgin Group. Love you all. 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 Q3. Here are a few milestones. First, Zoom Phone reached approximately 7 million paid seats. Second, Zoom Contact Center reached approximately 700 customers as a quarter end, while Zoom Virtual Agent customers nearly doubled quarter over quarter. And finally, the number of customers on Zoom One bundles that include Zoom Phone grew approximately 330% year over year. These proof points demonstrate our customers' willingness to entrust us with their critical CX and EX processes and their commitment to grow with us as we expand our platform. In Q3, total revenue came in at $1.137 billion, up 3% year over year and 4% in constant currency. This result was approximately $17 million above the high end of our guidance. Our enterprise business grew 8% year over year and represented 58% of total revenue, up from 56% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3.0% from 3.1% in Q3 of FY23. This is the lowest churn rate we have ever reported. The number of enterprise customers grew 5% year-over-year to approximately 219,700. Our trailing 12-month net dollar expansion rate for enterprise customers in Q3 came in at 105%. We saw 14% year-over-year growth in the up market as we ended the quarter with 3,731 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 27% in Q3 of FY23. Our Americas revenue grew 5% year over year, while EMEA and APAC declined by 2% each. On a constant currency basis, APAC grew slightly year over year. 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, and all associated tax effects. Non-GAAP gross margin in Q3 was 79.7%, an improvement from 79.5% in Q3 of last year, but slightly lower than the first half of this year. The strong performance in gross margin was primarily driven by the optimization of usage across the public cloud and our co-located data centers, partially offset by our additional investments in new AI technologies. For the full year, we expect non-GAAP gross margin to be approximately 80%. Non-GAAP operating income grew by 17% to $447 million, exceeding the high end of our guidance of $405 million. This translates to a 39.3% non-GAAP operating margin, a meaningful improvement from 34.6% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.29 on approximately 310 million non-GAAP diluted weighted average shares outstanding. This result was 20 cents above the high end of our guidance and 22 cents higher than Q3 of last year.

Turning to the balance sheet.

Deferred revenue at the end of the period was $1.32 billion, down approximately 3% from Q3 of last year. This was roughly one percentage point better than the high end of our guidance we provided last quarter. For Q4, we expect deferred revenue to be down 6% to 8% 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 10% year over year to approximately $3.6 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months, as compared to 59% in Q3 of last year, 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 67% year over year to $493 million. Free cash flow grew 66% year over year to $453 million. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management, and higher interest income. Our operating cash flow and free cash flow margins expanded to 43.4% and 39.9% respectively. We ended the quarter with approximately $6.5 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Given the strength and profitability in collections, we are increasing our free cash flow outlook for FY24. We now expect free cash flow to be in the range of $1.34 to $1.35 billion, which at the midpoint would represent 13% year-over-year growth.

Turning to guidance.

For Q4, we expect revenue to be in the range of $1.125 to $1.13 billion, which at the midpoint would represent approximately 1% year-over-year growth. Adjusting for currency impact, this projection is slightly higher than the previously implied guidance from our Q2 call. We expect non-GAAP operating income to be in the range of $409 to $414 million. Our outlook for non-GAAP earnings per share is $1.13 to $1.15, based on approximately 312 million shares outstanding. We are also pleased to raise our top line in profitability outlook for the full year of FY24. We now expect revenue to be in the range of $4.506 to $4.511 billion, which at the midpoint represents approximately 3% year-over-year growth. We expect our non-GAAP operating income to be in the range of $1.74 to $1.745 billion, representing an operating margin of approximately 39%. Our outlook for non-GAAP earnings per share for FY24 is $4.93 to $4.95, 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.

Kelsey, please queue up the first question.

Thank you, 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 we thank you in advance for your consideration. Our first question will come from Ryan McWilliams with Barclays.

Hey, guys. Interesting question. Just to start with Kelly, do you notice any changes in the overall macro environment in the third quarter compared to the second quarter? And could you touch on how linearity did throughout the quarter for new bookings? Thanks.

Yeah. Hi, Ryan. So the macro has been pretty consistent from Q2 to Q3. We continue to see similar trends in terms of deal scrutiny, back end loaded. So the quarter from a direct perspective was fairly back end loaded. As a reminder, the online segment of the business is typically pretty linear throughout the quarter. I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac. That was a fairly significant headwind for us, whereas Asia Pac would have at least been flat year over year, if not for that impact.

Thanks, guys.

Moving on to Amita Marshall with Morgan Stanley. Morgan Stanley.

Great, thanks. Maybe just a question on kind of what feedback you're getting on the AI Companion, and that's a pretty big jump in kind of customers using it. So just what features are they really liking, you know, and is it kind of helping with some of the free-to-pay conversion that you guys were hoping for? Thanks.

Yes, great question. I think we are very, very proud of our team's progress. Since we launched the Zoom AI company, as I mentioned earlier, a lot of accounts enabled that. Remember, this is no additional cost to our paid customers. A lot of features, one feature of that is take a meeting summary, for example. Amazingly, it's very accurate. And it really saved meeting hosts a lot of time. And also, you know, our federated AI approach really contributed to that success because we do not count on a single AI model. And in terms of latency, accuracy, and, you know, and also the, you know, the response, you know, the speed and so on and so forth, I think really, helped our AI company. Again, and even for the online pre-users, it also is no additional cost. For sure, for free users, they cannot enjoy this AI company. For sure, it did help. you know, for those of free, you know, to approve for online upgrade. So anyway, so we are, you know, people innovating on AI company. We have a high confidence. That's a true differentiation compared to any other, you know, AI, you know, features, functionalities offered by some of our competitors.

Great. Thanks so much.

Thank you.

Our next question will come from Cash Rangan with Goldman Sachs.

Hi, thank you very much. Good to see the results and happy Thanksgiving. I just had one question, if I could restrict myself to one. The SMB online churn, 3%, I know it came down from 3.1%. Any initiatives that you're undertaking that could bring that number even down more significantly, because I would assume that that would have big implications for your growth rate and margins, which are already quite good. Thank you so much.

Well, Wendy and her team are always working on initiatives. But I think what Eric was just mentioning about AI is probably really going to be a key differentiator and a retention tool in the future. Because as a reminder, all of the AI companion features come included for our paid users. So we're seeing it not only help with conversion, but we really believe that for the long term, it will help with retention as well. You know, I've gotten this question many times and I would say this is the lowest we've ever seen. But also our platform is so much better. It's infinitely better than where it was on a pre-pandemic basis for our online users. And so I think we will. This is how we're modeling is at this level. But I think over time you should continue to see retention just continue to improve.

Thank you so much. By the way, to add on to what Katie said, also the happy Thanksgiving to you as well. So more and more customers realize, wow, Zoom, even for online users, is not only for Zoom meeting, a lot of other features, right? And like take a Zoom team chat, for example. There's this great persistent chatter solution. It's a part of offering, even for free users as well, right? For the paid user, for sure, a lot of other features. The more they spend time on Zoom platform, realize, wow, this is pretty powerful.

not only just for meetings entire platform all right thanks so much eric thank you yeah wells fargo's michael turn please go ahead with your question hey great uh thanks nice to see everyone i guess as a compliment to cash's question you're showing stabilization here on on some of the major metrics the enterprise expansion metric took a step down to 105 and so just Wondering what it takes for that metric to similarly show stabilization. Is it getting to that Q1 renewal cohort and kind of walking through that? Anything on the product side for us to consider or just any other comments right there is helpful. Thank you.

Well, as a reminder, it's a trailing 12-month metric. So as we've, unfortunately, seen our growth rates come down this year, that's following behind it. But absolutely, we believe that AI Companion in general, as well as the success that we are seeing in Zoom Phone, in zoom contact center zoom virtual agent all of those will be key contributors to seeing that metric start start to re-accelerate again as we see our growth rate trying starting to re-accelerate as well thank you our next question will come from michael funk with bank of america

Yeah, hi. Thank you for the question tonight. So just the deferred revenue guidance for 4Q, Kelly, and the commentary on the macro and the rates affecting that. How should we think about growth rate in calendar year 24, given the decline of deferred revenue and impact on new deals in the enterprise?

Yeah, so, I mean, what's very interesting if you look at, right, you see growth in RPO, but you're seeing a decline in deferred revenue, which implies customers, while they're committing for long-term agreements, they are preferring to pay in shorter-term increments to keep their cash and take advantage of the interest rate environment. the the other thing is a reminder right we're going to have a big renewal cycle in q1 and then that's the peak and it's going to come down and we believe that in fy 24 that we're currently in we had the majority of our customers had some sort of renewal period during fy 24 which means that we we believe that we've moved through a lot of our customers that were impacted themselves by a reduction and you know we've talked in the past about how our team has been doing a great job of preserving that spend but to the extent we're helping them right size or transition from zoom meetings to say a zoom one bundle we think the majority of our customers we know the majority of our customers have gone through that renewal period in fy24 so that by the time we get into fy25 hopefully we're in a little more normalized renewal cycles.

Great. Thank you. Yeah.

And moving on to Carl Kersted with UBS.

Okay, great. Thank you. Hey, Kelly, the phone business has been a big part of the Zoom growth algorithm lately. So I'm wondering if you could elaborate on how that part of the business did in the quarter. On the surface, and I know that you round that seat number, but it looks like the sequential phone seat ads might have been a lot less than the last several quarters. Maybe that's rounding, but I wanted to give you a platform maybe to elaborate about that part of the business. Thank you. So

Q3 cyclically, just as a reminder, Q1 and Q3 cyclically are our lower quarters, given that our enterprise reps, some of our enterprise reps are on six-month quarters. So we've historically seen the big Zoom phone addition ad quarters being Q2 and Q4. What we did see in Q3 was that customers in the upper segments, so customers with greater 10,000 seats, grew almost 9% quarter to quarter. So we're seeing a lot of strength in that upper end of Zoom phone. So really happy with that. I mean, that's the largest increase we've had so far this year. And then as a reminder, we haven't always given that metric, honestly, at the exact same period. So it's a little bit hard for you to tell exactly how it's trending every single quarter. And as just in the past, we'll continue to update you on future milestones as they make sense.

Okay, thank you.

George Iwanek with Oppenheimer has the next question.

All right, well, thank you for taking my question. So Kelly, maybe following up on Zoom phones, can you give us a bit of extra color on contact center and the customer attraction you're seeing there?

Yeah, so as we mentioned, we're up to over 700 customers on Zoom Contact Center, and we saw our Zoom Virtual Agent product double the number of customers quarter over quarter. So really excited there. I mean, maybe Eric can talk about some of the features and functionality, but we're thrilled with the progress that we're making there so far.

Yeah, so we are extremely excited about our content center opportunity. And it feels like back to a few years ago when we announced the Zoom phone, right? Quite often, a lot of people mentioned, wow, it will take you guys many years. get recognized deployed by large customers and you know look at what we have today in terms of number of pdc for phone i feel like you know if we ask it well i think we are going to follow a similar similar you know journey and maybe even better because you look at our content center you know and modern architecture extremely scalable and plus a lot of ai features and innovation speed I think whenever a customer really takes Zoom Contact Center seriously, evaluates Zoom Contact Center, the feedback is very consistent. Wow, I did not realize you guys have a so powerful contact center. It's just amazing, right? I think that this further boosted our team's confidence. Let's double down, triple down on our own contact center. Again, it's modern architecture, very scalable. I also shared it with quite a few customers. you know, cases, right, during this call. And we are very, very excited. A lot of, you know, new AI features, you know, virtual agent and a workforce management and so on and so forth. And this is something we are very, very excited. Thank you.

Thank you.

We'll now hear from Peter Levine with Evercore.

Great. Thank you for taking my question here. Maybe for Kelly, as I look at gross margins, how sustainable is it keeping at these levels? I know AI companions being given away from, you know, as a, part of the package, I guess, for paid users. But if you think about the costs around these models, the margin profile, contact center, and phone, how durable is it to kind of sustain these levels? And then second, as you think of the next year, you have to be guided. But what's the best way to think about stock-based comp and dilution as you kind of manage through that?

Yeah, so in terms of our gross margins, we'll obviously give FY25 guidance on our call next quarter. But as we are working on our planning, our DevOps team is doing an amazing job of continuing to optimize around the data centers and being very thoughtful about leveraging capacity to its highest and best use and making room for all of this AI innovation. While we are going to invest, and we're actually going to invest to the extent that XD and the team really believe that we need to, and that for the long term, it's an amazing ROI when you look at what it's going to do for our customers, for our growth, and for our retention. But we do expect there's going to be some impact on gross margins. I mean, I don't think it's going to be significant because the team will continue to operate in the very efficient manner that they do and run our colos that way. But we do expect there's going to be some impact to our gross margins as we move forward. You want to add anything, Eric?

Yeah, sure. You also write down just to echo on Walter Cady's side, you know, led by our CTO XD and his team, you know, our federated AI approach, as I mentioned earlier, really contribute a lot. So, you know, for sure, you know, and it's a cost impact, but extremely manageable, right? And our team really, really, you know i think that you know i had a very smart you know federated ai you know architecture that's why i think you know in terms of cost very manageable but also the quality is pretty good so and we are you know keep innovating on that so thank you very much thanks eric uh peter regarding um stock based comp about a third of our expense this year is related to the supplemental grants so as a reminder those that vests

as along with how the underlying grants are vesting. So there's a couple more years for that to just start to bleed off, if you will.

But you can model that out. Thank you. Yep.

And we will now hear from Patrick Walravens with JMP Securities.

Oh, great. Thank you. Hi. So Eric, what is your ideal customer profile on the contact center side of the business?

That's a great question. I think, you know, first of all, again, this is based on architecture and AI features. I think for now, the medium size, because the reason why for very, very large customers, even if our architecture, everything, everything ready, but sometimes they just want to look at, hey, you know, you are still so early, but even a product fully ready, that's the reason why sometimes even we do not reach out to them. Very large, let's say tens of thousands of Asian customers,

if they take our solution seriously oops did eric freeze or did i freeze i think eric i didn't know if it was me okay um okay let me uh pat you're still here right okay

Yeah, sorry for that. You're back, okay.

Eric, we lost you for a minute there.

Yeah, I'm sorry. So given the new solution, sort of a modern architecture and all the new AI features, my point is if those, let's say like 20,000 or 10,000 agent customers If they look at our solution seriously, we have confidence. Because of that, we want to be a little bit proactive, focus on medium-sized companies, like from hundreds of agents to thousands of agents. That's our sweet spot. But not me, I'm going to stop here. As I mentioned earlier, any very big, large companies, when they look at our standard solution seriously, we have confidence we're going to win. But however, to get there, we are focused on the medium-sized companies. Great.

Thank you. I could give you a quick example, Patrick. We have a customer called Venture, which they provide like payroll and HR services. And they became in the last year, they doubled their Zoom phone seats. They doubled their contact center seats into four digits now. They also have deployed workforce management as well as quality management and ZBA. So really taking advantage of the full suite of Zoom products, not only the contact center and its extensions, but the full suite of Zoom. And I think when they start to deploy like that, they really see the power and it's been very exciting to see them grow.

Great. Thank you both. Thank you.

Our next question comes from Arjun Bhatia with William Blair.

Perfect. Thank you. Can you just touch on the international business a little bit? It seems like it's certainly trailing the U.S., but what gets that business to turn around? And maybe talk about some of your new growth drivers and how they're faring there with Zoom Phone and Contact Center. Thank you.

So, unfortunately, both EMEA and APAC over the last year have been impacted both by currency and then EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New Zealand. So we're very excited about the team. And since we did the reorganization earlier this year, those regions have just taken a little bit longer than the U.S., but we're starting to see that momentum build again and really excited about what they're going to contribute and watching their success in the future.

All right. Thank you. Yeah.

Our next question will come from Alex Zukin with Wolf Research. His video is not on, so he may just be audio only.

Hi, Alex.

Alex, did you want to go ahead?

This is Ethan Brock on for Alex. He's in transit right now. Thank you guys for taking my question. I just had two quick questions. Just how do we think at what level should we expect or when for the NRR of the enterprise cohort to trough? And just any kind of puts and takes around enterprise revenue in the quarter, right? It came in above your expectations. It grew sequentially. And it was positive, like, you know, RPO, CRPO, CRPO bookings, those all accelerated. I guess, is it fair to think that for next year's enterprise growth rate would be above what's implied in the 4Q guide? And just if you can give any more kind of color around the 4Q numbers, kind of what you're expecting in the online churn, that would be helpful. Thank you.

Yeah, so we did see strength in the direct bookings, they were very backend loaded in Q3, which just continues this theme that we've been talking about in terms of the overall macro. And as we look forward to Q4, typically we have the benefit of having year end where customers are having their year end on 1231. And then we have our year end on January 31st. And of course we have our six month quota carrying reps that are coming to the end of their quota cycle. So hopefully taking advantage of their accelerators. But we are expecting similar behavior in terms of even if we have a 1231 sort of bump, we're expecting that to be back and loaded and then January 31st one as well. In terms of your question around net dollar expansion, we don't guide on that. I expect that given your growth rates have come down a little bit more, that there might be a little bit more room for that to come down even further until it starts to stabilize and probably reaccelerate sometime next year.

Okay, thank you. And just a quick follow-up. Just on the comment you made in your prepared remarks around the shorter billing duration, is there just any way to qualitatively think relative to 3Q, if there's any change, just how to think about, obviously, people moving to maybe more different, shorter payment terms, just how we think about that in terms of what's implied in the 4Q guide. And thank you.

Yeah, so we commented first time we started seeing this trend was in Q2. If you remember, we also talked about this in our prepared remarks as we saw this happening. And given the interest rates are high, I don't expect it's going to change anytime soon. I think the good news is from the health of the underlying business, right, customers are committing to longer term duration contracts. They just are preferring to pay on shorter term. And yet we obviously had very strong cash flow in the period. I don't think it's something you should be worried about.

Got it. Thank you very much. And congrats on the next results.

Thanks. And our next question is going to come from Mark Murphy with JP Morgan. Mark will be audio only. Hi, Mark.

Thank you. This is already going on from Mark Murphy. Thanks for taking the question, and congrats on the quarter. You guys called out the Virgin Group and their launch of WorkVivo across, I think, 60,000 employees and a number of the workforce-related innovations you've launched recently. Can you just speak to the adoption of those products and what kind of momentum you're seeing on that front? Thank you.

Yeah, do you want to take that?

Yeah, you go ahead. Yeah, Kari, you go ahead. Yeah.

yeah i mean we're we're really excited about work vivo they you know first of all in terms of operating they're continuing to run as an operating unit which we're making sure that we support them and their continued momentum and we've already talked about we talked about dollar general on the whole last quarter and their amazing adoption so we're we're really excited about that team they When they joined us, we said welcome to the family and gave them an accelerated bookings target, and they are running and achieving against that.

So really thrilled to have them and watching them continue to succeed. Thank you. All right.

Our next question is going to come from Catherine Trebnick with Rosenblatt.

Well, thanks for taking my question. Nice quarter. Has your appetite for M&A changed at all in the last year? All day long on CNBC, they kept saying, oh, we're looking for growth, reacceleration of growth. So I'm just wondering if you're looking at the 6.5 billion and your attitude towards M&A. Thank you.

Yes, thank you, Catherine. M&A is something that we evaluate and think about for as a potential strategy all the time. I have a corp dev team that looks at opportunities on a daily basis. And we have a very strong lens that we look through in terms of evaluating that is, first of all, the technology and what does it bring to our customers we would always want to make sure that our customers continue to enjoy a really high quality product like they do with zoom today we look at the culture to make sure that that it's something that we think would work well with zoom it's usually a really good indicator of the success of of integrating two companies. And then, of course, we look at the lens of valuation and does it make sense? Is it a price that we are willing to pay? And because we have such a high bar, it honestly has been hard to find companies that we love that makes it through. All three of those tests, it doesn't mean that we wouldn't love to find someone that did. There are some really great companies out there. And for one reason or the other, to date, we just haven't found the right match. But it doesn't mean that we won't. And that is why we have purposely retained, I should say, the flexibility of having that cash on our balance sheet so that if we do see something interesting, we're able to act on it.

Moving on to KeyBank's Tom Blakey.

Thank you very much. Good to see you, Eric. Hi, Kelly.

Hi, Tom.

Just wondering quickly on the stability that we were talking about a couple quarters ago in online. It's pretty impressive that we went back and forth on that a little bit here, and it's been very stable, and we talked about the record churn. Can you maybe... maybe update us on that in terms of, do we expect the same type of stability in online into the fiscal 4Q and maybe even similarly into fiscal 25, that'd be helpful.

Thank you. Yeah, so the team has, We've done a lot of work this year on many fronts around online. First of all, stabilizing retention, which you're seeing the benefits of that today, as well as focusing on free-to-pay conversion because it's really important that we're continuing to fill the top of the funnel. Those are things like forced breaks. As Eric mentioned earlier, also being able to procure additional products online, things like whiteboard and scheduler are very well aligned to the strategy of our online buyers. So those are all of the initiatives that Wendy and her team are continuing to focus on. In terms, I mean, we hold ourselves to a very high standard when we say stabilization. What we really want to see is dollar stabilization quarter over quarter. And while it's very, very close, it's not quite there. And I expect it'll be slightly down, just very, very slightly down again in Q4. But as we're working on FY25 planning with the team, really looking forward to initiatives that drive stabilization, and if not, some growth into FY25.

Very helpful. Thank you, Kelly. Yeah.

The next question is from Shebly Seyrafi with FBN Securities.

Yes, thank you very much. You guided deferred revenue to decline 6% to 8% in Q4 due to shorter billing frequencies with enterprise customers. The question I have is, what kind of decline would that have been without that billing frequency change? And relate to this, you're going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up meaningfully in Q1?

Yes. So as a reminder, the way the deferred revenue trends throughout the year is it's always the highest in Q1, and then it declines throughout the year. And there's two things that are happening. First of all, Q1 is the largest renewal period. So the bucket gets filled up and then that's getting amortized through the rest of the year. But also the subsequent renewal cycles are lower than Q1. So it's the inverse of probably every other SaaS company in the world where usually you're adding higher renewals every single quarter. We are actually adding a lower number, a lower amount of renewals every single quarter. So as Q1 is getting amortized down, what's coming in to refill the top of that bucket is coming down every single quarter. And that's why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter over quarter.

Thanks.

Yeah. I want to hear from James Fish with Piper Sandler.

Hey, guys. Thanks for the questions here. Appreciate all the details around some of the product lines. But building off of a few prior questions with that contact center customer count up to about 700 versus the 500 last quarter, if my math's right, given kind of what you guys have talked about with price points, kind of seems like we're nearing 100 million of ARR now or or how should we think about that average seat count at this point? And then, Eric, for you, look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of penetration with the contact center installed basis? Is that acting as sort of a consolidation function underneath for especially that small mid-market? Thanks, guys.

No, you go ahead. Go ahead first.

I think you look at a contact center, right? So not only just for us to offer the whole contact center of capabilities, we want to offer a full platform, including workforce management. This is based on modern architecture, not something like, hey, you have on-prem solution for a long time, you just put it in the cloud. That's not the case. We built everything from the ground up. It's a tight integrated with our core contact center solutions. That's the reason why, you know, you look at our, you know, customers, right, from SMB, minimum size, all the way to large enterprise, I think we are ready. And however, as I mentioned earlier, sweet spot should be, you know, the middle, right? However, one thing is we realized customers, they won't have one seamless experience for everything, contact center, workforce management, virtual agent, AI features, call engine, right? So we are trying to offer all of them. So that's kind of our strategy. In terms of workforce management contribution, it really helped because we tell customers, hey, we offer everything to you. We are not giving to A, letting you deploy other third-party workforce management solutions. We offer all the services, all the functionality to you with one platform.

Yeah, and James, in terms of your ability to kind of understand how those products are progressing themselves, we'll do as we've done with others and announce milestone metrics as we start to see them emerge. They're just so new right now that it doesn't really make sense, but we will do that over time.

I understand. Thanks, Kelly. Thanks, Eric.

Yeah.

Yeah.

We are not ready to share with a number, exact number yet about how many customers deployed a workforce management. So stay tuned, you know, in the future quarters.

And our next question will come from Matt Van Fleet with BTIG.

Ed, good afternoon. Thanks for taking the question. I guess following up one more on sort of the contact center and Zoom phone. In terms of overall customer mix, you're well below 1% penetration on contact center here. Is there a target you think is sort of the next few years of the customers you're going to go after? How high do you think of the roughly 200,000 customers you have have an existing contact center that you've maybe identified and comparably work your way into. And then sort of following up on that, what percentage, if you can share of the over 100,000 customers, 100,000 revenue customers have Zoom phone or Zoom contact center as an attachment there?

So I guess the way that I think, think about contact center and its progress is that it so far is following a very similar roadmap, if you will, than that Zoom phone did. So if you think about, we can see the visibility internally just as we could with Zoom phone. But in terms of ARR as a metric, for example, it's going to take a little while for that to be something that's visible to you but so far it's tracking in a very very similar way that zoom phone did which i think is very encouraging and that you know we need a couple more years and then it starts to be a really significant growth contributor um it just you know start start small and then then grows quickly and that's what we're seeing

And also look at opportunity, you know, very similar as well. Many years ago, a lot of our enterprise customers, their phone, you know, UC deployment is still on-prem. Today, look at most of our enterprise customer contact centers, still on-prem. So, you know, that's why, you know, a lot of opportunity ahead of us. In particular, in our, you know, modern architecture is very scalable, so. Great, thank you.

Needham's Ryan Coates has the next question. Ryan, please go ahead.

Hi, and happy Thanksgiving from Zootopia. Yeah, I came away really impressed with Zoom Rooms and what you're doing there. The innovation really seems years ahead of the market. And I wondered what's your updated view on the room's opportunity for the company? Do you think it's strong enough that you can use that as a lead, as almost a standalone product? And do you see the market opportunity more promising for you with that product? Do you have any go-to-market initiatives, these sort of questions? Thank you.

So, yeah, Ryan, so speaking of the opportunity, you are so right. You know, whenever a customer, you know, for many years ago, right, they deployed Zoom Rooms for more and more customers. When they try to embrace hybrid work, they need to have a modern solution for their comfort rooms. You know, they invented multiple solutions. Zoom Rooms indeed, you know, stands out. It's indeed, you know, years ahead of any other competitors. However, sometimes for customers, when they try to support hybrid work, for now they are in the middle of embracing hybrid work. What's the new layout of the entire workplace and how many companies they need to support and so on and so forth. That's why a lot of opportunities at the same time, we need to work together with customers. Not only for conference room innovation, but also entire workplace, you know, the management. What's the new layout? I think a lot of opportunities, not only for conference room itself, like how to reserve a desk, right? You know, all those... we already built in as a part of, you know, the Zoom rooms. Like one example, like a digital signage and also part of Zoom rooms as well. It's the full, you know, the conference room or workplace, you know, the solution. And that's why, you know, we need to make sure folks on marketing side to share with customer. Again, Zoom rooms is not only just for your conference room solution, but it's also for hybrid work and also for entire workplace, you know, as well. That's great. Thank you. Thank you, Ryan.

Thanks, Ryan.

we'll move on to peter weed with bernstein uh thank you um you know i think for the first time at least as far as i can look at in the model um you know it looks like the kind of larger enterprises greater than a hundred thousand um uh dollar enterprise customers were roughly flat quarter over quarter um but you know we're hearing you know the great stories about customer expansions and the number of those customers has continued to increase which would imply there's a whole nother set of customers that are either shrinking or churning. And it appears that got more pronounced this quarter than perhaps we've seen recently. How should we think about those effects? And is that more churn or is it downgrades? And when customers are churning or downgrading, where are they going? And is this something that is kind of temporary and you see it kind of ending, or is it something where we may have some pain for a bit of time before we get through some effects?

Yeah, so I think we've talked about this the last couple of quarters. We certainly have seen impact in our customers having retraction in their own businesses, in their own employee count. So if that's the situation, then we are working with them. The good news is we have not seen a lot of logo churn. It has been more downselling in terms of right-sizing their meeting license numbers. And yet even in that situation, our team is doing a great job of taking the opportunity to transition them from potentially meetings to one of our Zoom One bundles that includes phone. We talked about in our prepared remarks, we saw that grow over 300% year over year in terms of the number of customers that are using those bundles. and that's great for for many reasons right in terms of retention and having more than one product deployed we see is very advantageous to customer retention So we certainly have worked with many, many, many of our customers this year on ensuring that they have the right package in place. But I also talked about earlier on the call that we know that the majority of our customers have had some sort of renewal period in FY24, meaning that we hope, we anticipate that as we get through the end of this year, we've moved through most of those transitions where organizations have done their own reductions and are aligning their licenses to that.

But it sounds like you're not seeing an uptick in churn. This is mostly just that kind of reduction in force. And once we're through that, then you set a four in so that the expansions can kind of work going forward on all the great things people are buying, which even us at Bernstein, we're great customers that love the product.

Yeah, I mean, that's, we're not giving FY25 guidance, just to be clear. But yeah, but that's in general what we anticipate, just knowing that we've worked through most of our, you know, customer renewals this year and assume that they've gotten through their reductions. Now, you know, it depends on what happens overall with the macro, but that's what we believe to be the case. Yes.

Thank you. Yeah.

Our next question will come from Taz Kuchelgi with Wedbush.

Oops, you're on mute.

I'm sorry, can you guys hear me now? Yeah. Thanks, Hayek. Question on Zoom phones. So Kelly, you gave us the ARR last quarter. We have the Zoom phone seat this quarter. If I do a rough math on the ASP, it comes down to like $7 to $8 or something per month, which seems like almost half or even more of the list price. If you can just confirm that and has that discounted?

Yeah.

gone down gone up so as a reminder you can buy zoom phone either for ten dollars per license per month if you have metered calling on top or fifteen dollars if you get unlimited long distance so it the the asp is going to depend on know which version of that which of the skew the customers are buying and how they come together and then if you think about some of our largest enterprise customers we do discount not just for obviously for zoom phone but the overall value of their purchases or their value of being a customer for longevity in terms of length of cycles willingness to pay up front so

all of those things contribute but it sounds like you're right in we you're right in sort of the ballpark we have not seen a dramatic shift in those discounts up or down and just one follow-up is that similar to what you're seeing in the contact center or since you're I think the list price was 70 for contact center any comment on how the discounting in contact center uh compares to what you've seen in in Zoom phone

yeah no um i don't think if you can correlate them they're very different products with with a very different sales cycle and approach so i don't think you can try to you know take a percentage discount necessarily from one product and expect it to apply to a different one thank you yeah and we will now hear from tyler radke with city

Yeah. Hi. Hi. Good evening. So, Kelly, if I look at the midpoint of your guidance for Q4, it's about one percent growth and there's some currency in there. But how should we be thinking about that as a jumping off point for fiscal year 25? What are kind of the puts and takes that would would cause growth to be higher than that and also lower? It does sound like you're starting to see some stabilizations there. in parts of the business, but just help us frame for how we should be thinking about that trajectory beyond Q4.

Yeah, so we will obviously give FY25 guidance on the Q4 call. However, I do think that the Q4 implied XR rate and considerations around the macro and if it is stabilizing or improving over time are important considerations. We do see, we've talked about many great aspects of our business today, growth in phone, growth in contact center, stabilization, and all online. All could be contributors that could drive growth in FY25 to be slightly higher than the implied Q4 exit rate. But right now, I think you should look at the exit rate, consider the macro, and take all of that into account as you're modeling.

Thank you.

We'll move on to William Power with Baird.

Great, thanks. Make a couple quick follow-ups. I guess, Eric, to an earlier question on AI companion, can you just talk about where you're seeing the greatest usage? I mean, what are customers most focused on, and what's the early feedback look like? And what are customers asking for in AI? Where can you continue to add more value there?

Yeah, it's a great question. First of all, you know, AI combining includes a lot of features like, hey, if you are late to the call, you want to understand what's going on, you know, what kind of, you know, the, you know, the point I missed and so on and so forth, you can quickly ask, right, you know, all those kind of features. And also, you know, use our, you know, team chat. It can help you compose your chat solution. And a lot of features are built upon that, right? So, and one of the key features customers really like is where it's for sure straightforward is a meeting summary, right? And after the meeting is over, we not only do we generate a, Sometimes you record a meeting. For now, you do not record a meeting anymore. You just record a summary. And that feature works extremely well. We do see among a lot of other features, customers already started enabling. I think this one is probably one of the highlights. It's very easy to use. And you see the very, very obvious ROI to enable that feature. So again, it's a lot of other features as well. And for me, I also use the client, the email client. You may connect any other services you can. You can help you compose the email as well. This is a lot of features, right? You know, and down the road, very soon we'll support a wide board with, you know, AI companies as well. Almost every service, entire platform, we're going to have an AI company. So, and a lot of features. So, you know, and the AI company.

Okay, great. Thank you.

Make sure you enable meeting summary and explore so many features. I'm pretty sure you'll love that. So we got a lot of very positive feedback from those early adopters.

And our last question is going to come from Stephen Beresy with HSBC. Stephen, if you want to go ahead. Oh, I believe Stephen just disconnected. Stephen, are you still out there? If you are not, I don't think Stephen is no longer with us. You know what, Eric, I'll just turn it back to you for closing remarks.

Yes. First of all, thank you all for your time to join our Q3 earning call. Really appreciate it. Wish you all and your families have a wonderful holiday season. Thank you again for your great support. Thank you.

Thank you so much, Eric. And again, everyone. Oh, I apologize, Kelly. Again, everyone, this concludes today's earnings release. As Eric and Kelly mentioned, we thank you all for your participation. And from our family to yours, may you and yours have a safe and happy holiday season. Enjoy the rest of your day.