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spk14: Hello, everyone, and welcome to Zoom's Q1 FY25 earnings webinar. As a reminder, today's webinar is being recorded, and I will now hand things over to Charles Eveslage, incoming head of investor relations. Charles, over to you.
spk10: Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of fiscal year 2025. 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. It 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 press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the second quarter and full fiscal year 2025, 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 risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar. And with that, let me turn the discussion over to Eric.
spk09: Thank you, Charles. Thank you everyone for joining us today. Our rapid innovation over the years has taken us far beyond video conferencing. Every step of the way has been guided by our mission to solve customer problems and enable greater productivity. In the process, we have very deliberately created a communication and collaboration powerhouse with AI infused natively across the platform. Time and time again, we are recognized as a leader by Gartner, G2, TrustRadius, and many others. And we are so pleased that in March, first company added Zoom to their price leaders list of the world's most innovative companies of 2024. Further validating our dedication to providing our customers with a high quality open collaboration platform powered by AI that just works. In March, we announced the Zoom Workplace, our AI-powered collaboration platform designed to help our customers streamline communications, improve productivity, increase employee engagement, and optimize in-person time. Within the launch of Zoom Workplace, a new enhancement and capabilities like multi-speaker view, document collaboration, AI-powered portrait lighting, along with upcoming features and products like Ask AI Component, which will work across the platform to help employees make the most of their time. The Workplace launch also boosts Zoom Phone, TeamChat, Events, and Wireboard with many more AI-compiling capabilities to help make customers more productive. One of the core pillars of Zoom Workplace is optimizing in-person time and embracing flexible work. Our species portfolio has expanded from Zoom rooms into integrated adjacencies like workplace reservation, visitor management, and digital signage. As of the end of Q1, the cumulative number of Zoom rooms licenses purchased was over 2 million. And in the last three months, we provisioned over 100,000 desks in workspace reservations to support in-office work. Leading financial services and legal firms such as Capital One and Cudi use Zoom Rooms to support their globally dispersed hybrid workforce. And others like Flex and Beata Home Healthcare have expanded from Zoom Rooms to workspace reservation in order to optimize in-office time. Zoom Workplace is also designed to increase employee engagement through the integration of Workvivo into our platform. In Q1, we landed a major telco customer on Workvivo, who bought approximately 100,000 seats. And Workvivo was named Meta's only preferred migration partner for its customers as it retires Workplace for Meta. Our success in employee experience represents an important beachhead for us in upselling customers on the full suite. Zoom Workplace exists alongside and is designed to seamlessly integrate with our business services, including Zoom events, revenue accelerator, contact center, virtual agent, and others. Zoom Contact Center launched only two years ago is ready for prime time. We now support PCI compliance, opening the door for customers that have payment processing in their workflows. We also received FEDREP moderate authorization for our essentials and premium skills, allowing U.S. government agencies and entities doing business with them to leverage Zoom Contact Center. We have launched all key social channels, including Facebook Messenger, WhatsApp, and Gmail, and have enabled direct transfers between Connect Center agents and other departments via Zoom phone, helping to further bridge the employee and customer experiences. As a result of how far the product has come, we have seen strong growth in the number of deals where we have beat or displaced a Gartner top four C-class player. We have also strengthened our channel partnerships, leading to a significant increase in our channel wins and ability to compete for larger deals. ASPs are heading north, buoyed by the popularity of our higher tier packages that allow agents and managers to lean further into AI with AI expert assist, workforce management, quality management, and more. Now, let me recognize some of our amazing customers. First, let me thank Expedia, who needs no introduction, for becoming a Lighthouse Zoom revenue accelerator customer in the quarter. Leaning heavily into our AI products to drive revenue. A power user of Zoom phone for years, they wanted to better automate workflows, coach sellers, and drive efficiencies. We partnered with them on an initial quadruple-digit Zoom revenue accelerator deal, which includes working directly with our team to improve and tailor the product based on their business model and industry-specific use case. We are so excited about this AI-centric partnership to drive value for Expedia and continuously improve our platform based on customer feedback. Let me also thank Major League Baseball. A year ago, MLB made a highly strategic decision to adopt Zoom Connect Center. In Q1, they chose to expand our successful partnership by integrating Zoom quality management into their Zoom Connect Center deployment. This enhancement further strengthens their fan engagement strategy and streamline business operations. MMB was particularly impressed by the interactive features, enhanced accessibility, and the ability of Zoom quality management to support virtual engagement. Let me also thank CenterStone, a nonprofit health system specializing in mental health and substance use disorder treatments for individuals, families, and veterans who are doubling down on Zoom. Seeing strong value from their existing Zoom meetings, Zoom phone, and Rooms deployment, in Q1, they expanded Zoom phone and added Zoom Connect Center in order to leverage AI to provide better care and Zoom team chat in order to streamline communications in all from a single platform. I'm also very excited to share that we greatly expanded our footprint with a leading global financial services firm who doubled their Zoom phone sales to over 100,000. We're so pleased to see more customers adopting our Zoom workplace and business services product in order to reap the benefit of our modern natively integrated AI-powered technologies. And with that, I'll pass it over to Kelly. Thank you.
spk08: Thank you, Eric. And hello, everyone. Let's start with some exciting milestones for our emerging products in Q1. We saw additional traction in Zoom Contact Center as we reached 90 customers with over $100,000 in ARR, representing a 246% year-over-year growth. This was driven by our recently launched higher pricing tiers, as well as our success in larger deals. Zoom Phone saw continued expansion upmarket. With the addition of the marquee financial services quarter customer Eric just mentioned, we now have five customers with 100,000 or more Zoom Phone seats. Zoom AI Companion has grown significantly in just eight months with over 700,000 customer accounts enabled as of today. These customers range all the way from solopreneurs up to enterprises with over 100,000 users. Embedding AI across all aspects of Zoom workplace and business services is a key priority as we continue to drive productivity and engagement for our customers. Now, let's dive into the financial results. In Q1, total revenue came in at $1.141 billion, up 3% year over year. This result was approximately $16 million above the high end of our guidance. Our enterprise revenue grew 5% year-over-year and represented 58% of total revenue, up from 57% a year ago. Online average monthly churn came in at 3.2% as compared to 3.1% in Q1 of FY24. The slight uptick in churn was related to tightening up the grace period for unmade payments, which pulled some churn forward. Absent this change, online average monthly churn would remain consistent with the last two quarters at 3.0%, the lowest we have ever reported. We saw 8% year-over-year growth in the up market as we ended the quarter with 3,883 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 30% of revenue, up from 29% in Q1 of FY24. As a reminder, our classification of enterprise versus online is determined by how we engage the customer, with enterprise referring to customers who are supported by our direct sales team, resellers, or strategic partners, and online referring to customers who self-serve. During Q1, as part of an effort to improve the customer experience and drive greater efficiency in our operations, we transitioned 26,800 enterprise customers with low ARR to online. The number of enterprise customers at the end of Q1 after accounting for the transition was approximately 191,000. It is important to note that while the customer transition had a noticeable impact on our number of enterprise customers in Q1, the associated revenue was de minimis, representing an approximately $4 million shift from enterprise to online. Additionally, our trailing 12-month net dollar expansion rate for enterprise customers in Q1 came in at 99%, which was not affected by this transition. our America's revenue grew 4% year over year, while EMEA increased by 2% and APAC declined by 2%. The APAC performance was due to the FX headwinds in Japan and Australia. Moving now to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains on strategic investments, and all associated tax effects. Non-GAAP gross margin in Q1 was 79.3%, which was slightly lower than 80.5% in Q1 of last year, mainly due to our investments in AI innovation. In Q2, we will incur one-time investments to upgrade our data center backbone and expect gross margins to dip to 78% for the quarter. For the full year of FY25, we continue to expect our gross margin to be approximately 79%. Non-GAAP income from operations grew by 8% year-over-year to $457 million, exceeding the high end of our guidance of $415 million. This translates to a 40% non-GAAP operating margin for Q1, an improvement from 38.2% in Q1 of last year. Non-GAAP diluted net income per share in Q1 was $1.35 on approximately 315 million non-GAAP diluted weighted average shares outstanding. This result was 15 cents above the high end of our guidance and 19 cents higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.35 billion, down approximately 1% from Q1 of last year. This was roughly three percentage points higher than the range we provided last quarter, partially due to tightening up our discounting practices last year. For Q2, we expect deferred revenue to be up approximately 1% year over year. Looking at both our billed and unbilled contracts, our RPO increased 5% year over year to approximately $3.67 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, consistent with Q1 of last year. Operating cash flow in the quarter grew 41% year-over-year to $588 million. Free cash flow grew 44% year-over-year to $570 million. Our operating cash flow and free cash flow margins expanded to 51.5 and 49.9% respectively. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management, and higher interest income. We ended the quarter with approximately $7.4 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Last quarter, we announced the authorization of a $1.5 billion share buyback plan. As of the end of Q1, we had repurchased $150 million of stock, representing 2.4 million shares. Now turning to guidance. For Q2, we expect revenue to be in the range of $1.145 to $1.15 billion, representing approximately 1% year-over-year growth. We expect non-GAAP operating income to be in the range of $415 to $420 million. Our outlook for non-GAAP earnings per share is $1.20 to $1.21 based on approximately 360 million shares. Outstanding. We are pleased to raise our top line and profitability outlook for the full year of FY25. We now expect revenue to be in the range of $4.61 to $4.62 billion, which represents approximately 2% year-over-year growth. We still believe that Q2 will be the low point from a year-over-year growth perspective and for it to improve from there. We forecast our non-GAAP operating income to be in the range of $1.74 to $1.75 billion, representing an operating margin of 37.8% at the midpoint. Our outlook for non-GAAP earnings per share for FY25 is $4.99 to $5.02 based on approximately 319 million shares outstanding. Moving on to free cash flow. Please remember that due to the timing of U.S. federal and state tax payments, we pay two quarters worth in Q2 and minimal amounts in Q1. Primarily due to the seasonality and AI-related CapEx, we expect free cash flow in Q2 to decrease by approximately 50% to 60% quarter over quarter before normalizing in Q3 and Q4. With the strength in free cash flow in Q1 and increased outlook for operating income in FY25, we now expect free cash flow to be towards the high end of our range of $1.44 to $1.48 billion for the full year. 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.
spk14: Thank you so much, Kelly. And like Kelly mentioned, we're going to go ahead and move on to taking your questions. When I call your name, please turn on your video and unmute. And as a reminder, to try to hear from everyone, please limit yourself to one question. So our first question will come from Amita Marshall with Morgan Stanley.
spk11: Great. Thanks. Appreciate it. And congrats on the quarter. A couple of questions. Maybe just to start with, you could just give a sense of what you're seeing kind of on the SMB side of the environment, just given kind of commentary from others throughout the throughout the quarter. And then second, just maybe on DB&E, and you noted last quarter that you expected fiscal Q2 to kind of be the down point of the year, if that still kind of holds as you look throughout the year. Thanks.
spk08: Sure. So hi, Mita. As we're looking at the outlook for the rest of the year, as we mentioned, we do still expect Q2 to be the low point from a year-over-year growth perspective and that the net dollar expansion rate will follow similarly behind that. When you look at – if you look at the in-quarter growth, net dollar expansion, you'll see that it actually was consistent quarter over quarter. So we're starting to see that stabilization. And we think that that's a really good indicator that the net dollar expansion rate on trailing 12 months will similarly follow. And then in terms of SMB, you know, we saw, I think, similar performance across all of our different segments of our enterprise business. And both you heard about some of the amazing customer wins that we had in the upmarket, but also some really nice ones in SMB as well.
spk14: Great. Thanks, Opasta. Thanks, Mita. And we'll now move on to Samad Samana with Jeffrays.
spk06: Good evening. Thanks for taking my question. So, Eric, I wanted to dig into the CCAST side. As you mentioned, the product's ready for primetime. And we took investors to see it at Enterprise Connect as well a couple of months ago. So I was wondering if maybe you could just help us understand that. Yeah, I understand the payment side, but when you think about primetime, how would you define that? Is the uptime gotten better and you're clearly seeing larger logos? So how should we think about what primetime means, right? Should we see an inflection in larger customers going forward?
spk09: Yeah, it's a great question. First of all, you know, just over two years ago, right? We launched our Zoom Connect Center. You look at our quarterly progress, every quarter we added so many, you know, the customers, right? So that's one thing, right? Customers trust our Connect Center, the product. In terms of prime time, you look at just the recent quarter, right? You know, like I gave you two examples, right? You know, so like one of the Silicon Valley-based collaborative software company, You know, they deployed, you know, our competitor solution, which is one of the top three, you know, cloud business CCOS, you know, the provider. And guess what? You know, they're straighter to our contact center platform because they really like our feature set, you know, seamless integration, and there's a greater upper time and also a lot of AI features built in, right? That's one example. Another example, we also were competing against another very, also one of the top three, you know, CCAS vendors, right? For the largest deal in Q1. You know, guess what? We won. And this is not a small deal. It's not like a few, you know, the hundred. That's more than 1,000 seats. That's another big deal, right? And those two are just examples. Also, you look at our, you know, total, you know, installer base, you know, just look at the ARR, more than 100,000, right? For those customers, right? And you look at the end of Q1, we have around 90 customers. And the new deals like that, right? You know, look at it compared to last year, almost 250% year-over-year growth. I think with all those, you know, the factors in, I would say, yeah, this is prime time. You know, most important thing is, you know, customers trust our brand. They know and we listen to customers and we innovate. That's the reason why at O'Connor Center, we're making very good progress. It's, you know, it's prime time, so.
spk06: Thank you so much.
spk02: Thank you.
spk14: Our next question will come from Michael Funk with Bank of America.
spk02: Yeah, thank you all for the question tonight. And Eric, you touched on it briefly with the last question, but I'd love to hear about the competitive environment today, maybe even contrast it with 12 or 24 months ago, and specifically pricing and how pricing is changing, whether or not more competitive, less competitive. And then I guess related to that, if we're seeing more competition from Microsoft on the video side.
spk09: Yeah, so, sorry, you're talking about pricing on the contact center or overall?
spk02: Really, the entire platform, now that more competitors are likely bundling solutions, you know, just the general pricing trends.
spk09: Yeah, overall, I think only one competitor, they bundled a solution together, which is Microsoft. Right. So and so, you know, over the past few years, right, for sure, there are some impact. You know, you already saw the number over the past several years because there are bonding strategies. However, if you look at it, you know, our installer base, you know, like a year ago, we increased the online price. And, you know, we do see a very positive feedback because we really appreciated our service. And also look at our, you know, installer base. And a lot of customers really like our service. The reason why, the reason why in the customers, our customers, employees, they like Zoom. They truly enjoy using Zoom, right? When they use other competitors' product, guess what? They do not like it, right? Even if it's bundled, you know, the price is sort of free. However, when customers, they deep dive, They look at a total cost of ownership in terms of support cost and AI cost. Guess what? I think we're in a much better position now. That's the reason why I think, you know, not like every time we talk customer, customer always, you know, channel us, hey, you know, your price or those kinds of things. Customer really appreciate, right? They want to deploy the best service. That's the reason why we did not see, you know, the big price pressure, you know, over the, you know, at least in the last quarter. And I think we've maintained our press, you know, the strategy very well. Okay.
spk02: And just really quickly, I see your last comment there. You didn't really see price pressure last quarter. Should I take that to mean that pricing is stabilizing relative to where it was? pricing is getting better?
spk09: I think so, because you look at it overall of online trend, right? In kind of historical low, right? As Kelly, you know, mentioned earlier, right? And also look at our enterprise customer as well, because we have a lot of other services, upsell, you know, entire, you know, the product suite. And I think, you know, it's a much better position now. Great. Thank you, Eric. Thank you, Kelly. Appreciate it. Thank you.
spk14: We will now hear from Rishi Jaluria with RBC Capital Markets.
spk01: Oh, wonderful. Thanks, Eric. Thanks, Kelly, for taking my question. I just wanted to ask, following up on the CCAS side, Eric, you made the comment that you have either displaced or beaten each of the top four CCAS vendors as ranked by Gartner. Can you provide a little more color on those wins? And what vector did you tend to win those on? Was it on pricing? Was it on certain features and capabilities you have that they don't have? Maybe help us understand and provide more color. That'd be helpful. Thank you.
spk09: Yeah. So, yeah, I just give two examples. So I have a lot of other examples. So, you know, if you look at it, just the two examples, I do not think just one factor, you know, and to let the customer make that decision, they look at it. First of all, do they trust this vendor or not? Right. And look at a product roadmap. look at the existing feature set, look at the integration, look at the AI features, also look at the pricing. And all those factors, they think, because still some customers, they tried to resume years ago, many years ago, they deployed Zoom Phone. They say, yeah, this is a great story. We are going to replicate that story. That's the reason why customers say yes. But interestingly enough, those customers, some of the logos we went in Q1, They are even not a Zoom customers, but they trust our brand. They know, you know, we are very innovative. You look at all other C-class vendors, guess what? Their solution was, were not a build recently, right? It's a long time ago from on-prem to cloud. And it's really, you know, sort of a clunky interface. And that's the reason why we have a higher confidence we're going to win more deals.
spk01: Right.
spk09: Thank you. Thank you.
spk14: Our next question will come from C.T. Panagrahi with Mizuho. C.T., please go ahead.
spk00: Thank you. I saw the demo of your Zoom workspace, very impressive in terms of AI feature, like Ask AI Companion that you added, Eric. So I have a couple of questions. Firstly, how do you see this Zoom workspace? How do you plan to do the, what's your strategy in terms of branding or go to market, push this product? And do you see this more traction on the more on the low end, like small business segment or more on the enterprise side? And if you combine this workspace with AI, should we expect this to drive more free to paid migration? And if so, when should we start seeing that effect? Thank you.
spk09: It's a great question. You know, it's great to know you like a Zoom workplace. I think it's not only drive, you know, the revenue growth, adoption, not only SMB, enterprise customers. Overall, if you take a step back, right, you look at a Zoom workplace, look at the first, you know, 10 years, right, in Zoom, one of those journey. Essentially, more like our slogan is meet happy. For now, we have a collaboration platform and customers, they can live within a platform to get all the worker done. That don't mean they should use everything from Zoom, but we do have a collaboration platform. We also can co-exist. with other vendors very well, like Microsoft, Google, ServiceNow, Salesforce, or Atlassian, all those SaaS leaders. At the same time, you look at the customer requirements, right? And when they use Zoom meetings from phone or team chat, wire board, and content center, a lot of things together, that's a full collaboration platform. Used to be from meet happy, not to the work happy. That's sort of our slogan, evolution. And also, AI is a part of that. Look at our workplace customers. Guess what? AI is not only a part of that, but also at no additional cost. So that is our vision. And essentially, many, many years ago, from one application service provider and into a full collaboration suite. And SAP customers, for sure, they like that. Enterprise customers, they want to deploy the best bridge service. They also like that too. So plus it's an open platform. That's the reason why we are doubling down our workplace platform to become a work-happy platform. Thank you. Thank you.
spk14: Moving on to Catherine Trebnick with Rosenblatt Securities.
spk13: Hi, thanks for taking my question. Can you update us on the partner program? What I'm really trying to dig into is really how you are positioning yourself competitively against Rang and the traditional partners. Thanks.
spk09: Katie? Eric, are you waiting for me to take that? Okay.
spk08: Go ahead. Yeah, so we continue with our partners and with our direct sales organization. We continue to win, I think, not only against other providers in the phone cloud, but also, as Eric just mentioned, on the contact center side as, I think, several vectors, right? It's around pricing and total cost of ownership. It's around... The momentum, because of the ease of use of deploying and selling this product, we believe that our partners should be able to see that value in not only the deal, you know, the end user, but also in their deals as well. And so if you're asking about, you know, compensation to the partners, we continue to ensure that our partner programs are competitive, but also sustainable. appropriate. You know, we are always thinking about the impact to them as well as to our internal margins. And as you've heard us talk about last quarter and also this quarter, we have some additional partnerships that we've been named as the preferred partner migration for not only Meta, but if you remember also Twilio as well.
spk13: Yeah. Thank you.
spk09: Yeah, just quickly add on to what Kelly said. Those are partnerships, you know, most of the time, because the reason why I have all those good partners, because the customers, they ask for that, right? Because they say, yeah, they really want to do more business with Zoom. And that's the reason why I have so many partners, recently like Avaya or Meta, right? This is great examples.
spk14: Thanks, Catherine. And Ryan McMillian is with Barclays. Please go ahead with your question.
spk04: Appreciate it. Kelly and Eric, you beat me to it as usual. I was going to ask about the Meta and Avaya partnership. So, you know, great to see that, you know, they chose WorkVivo as the migration partner for their workplace solution. I guess to double click on that, do you have any sense of the timing on how these customers could move over and how would you frame the opportunity for this partnership? And then just on the Avaya partnership, love to just hear like kind of what exactly that partnership is trying to get at, how that can open the door for more customer relationships between you guys. Thanks.
spk09: Looks like I know your question now. So thank you for asking those two questions. So in terms of a meta partnership, I think in a meta such as this great company, looks on a lot of AI, Lama 3, and this is great open source. That's the reason why they wanted to retire their workplace for meta product. you know, for sure they talk to their customers and they understand, you know, we have a Zoom WorkVivo platform is a very preferred, you know, solution. And many, you know, as I mentioned earlier, right, we just went a very large tech deals. It's not a small deal, 100,000 seats, right? So the very mature platform is a lot of innovations. That's the reason why Zoom became a preferred partner. We're going to work together to make sure all those workplaces for Meta customers have a smooth transition. I think in the next 12 to 18 months, we're going to work together with Meta, with customers, make sure the entire transition period is very similar so we have high confidence. you know, the partner and not only the customer, but also a great partner, I mean, Meta. So, and we have, again, we are very excited about that partnership, about that, you know, the transition. In terms of Avaya deals, right? So, you know, Avaya, you know, they have a lot of very, very big, large enterprise customers who deploy both UCaaS and CCaaS solutions. Those large enterprise customers, We are not fully ready to migrate everything to cloud. You know, you look at integrations, many, many years effort they put, it's almost impossible to migrate to cloud overnight. However, they also want to leverage a lot of, you know, the features like AI features, a lot of innovations, right? So there's a reason why the customer, they shared with both of us, both, you know, Alan from Avaya. And I said, you know, when they are not ready to move to the cloud, they also don't understand it's an on-premise solution. Guess what? This is a hybrid architecture. How to leverage Zoom Workplace client? to talk with Avaya on-prem in feature servers. And on the one hand, the Zoom Workplace clan has a lot of rich features they can leverage. On the other hand, they also can seamlessly integrate with Avaya on-prem feature servers. I think that's the win-win partnership. Benefit us, benefit Avaya, benefit the customers, in particular for all those very, very big, very complicated projects you know, the enterprise customers. That's the reason why I think this hybrid architecture will help customers a lot. Appreciate the color. Thanks, guys. Thank you.
spk14: Baird's William Power has the next question.
spk03: OK, great. Hopefully you can hear me OK calling from my mobile. I guess, Kelly, for you, can you talk about the enterprise growth outlook from here? Should we expect that trough in Q2 as well and then accelerate? And I guess tied to that, maybe just help us understand your level of confidence in raising the full year guidance to reflect the Q1, given we're still pretty early in the year here.
spk08: Yeah. So I will. Yes, we expect that enterprise growth will follow the similar trend that we've discussed for the entire company with Q2 being the low point for FY25 from a year over growth perspective and then seeing reacceleration in the back half from there. And in terms of our confidence for the year, we applied a similar approach that we always do to setting guidance, which is talking to our sales organization, of course, looking at the pipeline that we're seeing, also the trends that we're seeing with online and what's on deck in terms of initiatives, what's the performance we're seeing for churn, and then looking at all of that, putting it together and coming up with our outlook.
spk03: Thank you.
spk14: We will move on to Tyler Radke with Citi.
spk07: Hi, Kelly. Hi, Eric. Thanks for taking the question. Kelly, to start off, just on the enterprise customers, appreciate the explanation on the movement of some of those customers moving online. Although I think if I back that out, it's still declined sequentially. So I was wondering if you could unpack kind of the drivers of that. enterprise customer number, and then how you're thinking about growth of that long term. And then second of all, just as we think about the billings outlook, I think that came in a little bit stronger for the second quarter, despite revenue being a little bit below consensus. Should we think about that as kind of, I guess, what are the puts and takes on that that would be kind of driving the divergence, any change in billings terms we should be thinking about?
spk08: Yeah. So first of all, on the enterprise number, it didn't decline quarter to quarter. I just want to be clear, even if you back out those numbers. So it should be up. You know, we we've discussed this in the past that as our strategy, especially on selling Zoom phone and contact center is selling into our existing install base and that as more of our revenue growth is coming from these emerging products and selling into our existing install base, that you should expect those customer ads to not grow at the same rate that they did historically. But it did grow quarter over quarter. So I just want to be clear about that. And then... In terms of, you know, we've said this before too, which is, I know it's not always what you want to hear, but in terms of billings and RPO, really the best indicator that I can give you of the future is our revenue guidance itself. So there are, you know, changes in the trends in terms of, we do, I should say this way, we continue to see strength in movement from monthly to annual to monthly. multi-year billing terms. So that's really positive. As well as we see, you know, expansion and growth into those longer tenured customers in online, which typically also means they they've expanded into longer billing terms. And we've also seen some benefit as we mentioned, as we've really been more thoughtful about our discounting practices and which includes fewer free periods in the enterprise. And so all of that is leading to the growth that you're seeing from billings and the deferred revenue side of things.
spk07: Great. Thank you. Yeah.
spk14: We are moving right along. So we will now hear from Alex Zukin with Wolf Research.
spk17: Hey, guys. Thanks for taking the question. First, I just want to acknowledge we saw something from you guys this quarter we haven't seen in a long time. Accelerating enterprise revenue growth, accelerating enterprise buildings growth, and declining OPEX. So... Just maybe stack rank for us. If you look at all the things you called out, whether it's contact center, phone, work vivo, even the sales product and the quality management product you referenced in the prepared remarks, Eric, stack rank where those kind of landed in terms of the driving factors or the driving force behind that acceleration. And then I got a quick follow up.
spk09: You want to pick it?
spk08: Yeah, sure. Let me talk about revenue. You can talk about sort of the business momentum in general. But ZoomFoam continues to be a very strong growth driver. Very pleased with the growing momentum we are seeing from contact center and then WorkVivo also gaining in its own right in terms of you know, relative overall dollars where Vivo is still a smaller component of the business, but is growing very, very quickly. So certainly contributing and some really exciting customers that are coming to Zoom as a result of both Contact Center and WorkVigo. And also we had one, a new customer coming from Zoom Revenue Accelerator as well this quarter. So that's really exciting to see these emerging products that are bringing new customers and new logos to the company. So I think in terms of momentum, we're excited across all of those thresholds, but kind of in that order. Yeah, yeah. Eric, anything else you want to add?
spk09: Yeah, Alex, that's a great observation. I think to echo what Kelly said, that momentum is voice down to our product strategy. Essentially, there are two key pillars. The first one in the Zoom workplace. The second one is business services. Look at the workplace, Zoom workplace, right? For those customers deploying meetings and phone now, and they have a Zoom workplace client, and they try to consolidate, right, some other solution like a Zoom team chat. It's great, flexible, you know, very scalable chat. A solution is part of that at no additional cost. When they deploy other wire board solutions, look at Zoom has a wire board. Zoom has a meeting for scheduler functionality as well, right? You know, a lot of features is part of the Zoom workplace. But what's more important is that they look at it, they take the Zoom meeting summary feature, for example. That's our AI feature. When they test the feature, Their feedback is not only positive. They say, wow, I cannot believe that. It works so well, plus at no additional cost. They also trust, like our AI vision as well. This is kind of a workplace. Plus, the reason why the Meta is a great company, true to their mind, why they pick up Zoom WorkVivo, because they also look at it from their customer perspective. They want to pick out the best the partner who can deploy a greater solution, right? AI is part of that. Work view is also part of our workplace platform. Look at the business services, contact center for support team, revenue accelerator for sales team, events and sessions for marketing team, and all those new services, right? Also will help us a lot. you know, again, you know, back to the contact center story, a lot of opportunities, a lot of enterprise customers buying the larger steel on-premise solution. You know, they are thinking about which collaborative contact center solution they can trust, they can count on in the next five to 10 years. Zoom is a much better platform. That's the reason why I think that's kind of, you know, and the momentum, you know, is coming, you know, really focus on the enterprise side. Yeah.
spk17: Eric, maybe just on pricing, you got to ask this question a couple of times. It feels like you're talking about it being stable. You also raised price and you didn't see a real change in churn. I guess I know you don't like raising price too many times, but if you think about just the strategy of continuing to add a tremendous amount of value, whether it's through consolidation or incremental functionality like sales or quality management. If you look at the ACV uplift in those two accounts that you called out for Expedia and MLB, and you look at that across your pipeline for adding those types of features, assuming some kind of attach rate, what's that opportunity look like for you guys?
spk09: Yeah, I can talk about the business side. Teddy, feel free to join me on the revenue side. I think you look at it, this is Expedia is a great example, right? And the deployed revenue accelerator, right? Again, those are business services, right? It's kind of, I would say, very compelling service, right? You know, we are not going to, you know, compare to our competitors. Hey, we are going to dramatically lower the price. That's not the case because that's a huge value. AI is part of that, not like a workplace. AI is an additional cost, right? However, here... AI is putting a very big role for all those business services, right? And also most of them, you know, are enterprise customers, right? And the reason why I think, you know, we are doubling down all those business services and the pricing is, you know, it's kind of not like when we offered a meeting service many years ago, right? It's a better pricing, better product, better service. And however, here is a very different story. Right. You know, compete against any other competitors. Also, the price is, you know, also, you know, customer like that as well, you know, because they do not want to use them at all. It's just a low price. That's not a case of business services because they're a huge value.
spk08: Yeah, in terms of the revenue upside, Alex, it kind of varies by product because certain products have much higher ASPs, for example, like Zoom Contact Center than meetings. But of course, the attach rate in terms of number of seats isn't one-to-one, right? There's a lesser ratio there. Zoom Phone... We saw an attach rate of generally one-to-one, or do see an attach rate, I should say, of one-to-one for meetings to phone, sometimes even greater when we look at customers that we've talked about here before that have a bigger attach rate because they have phones in retail locations, for example. So it just varies. The thing that I will say is generally a lot of these emerging products also have better gross margins, which is helpful when you look at something like Contact Center because of the ASP, especially with the rollout of the pricing tiers. We saw the ASPs for those products almost double from quarter to quarter with the rollout of the new pricing tiers. And I think that will continue as the features and functionality, especially in those upper tiers, continues to expand.
spk17: Congrats, guys. Thanks a lot. Thanks.
spk14: Matthew Van Vliet with BTIG has the next question.
spk16: Hey, good afternoon. Thanks for taking the question. I guess on the last point, as you include more AI companion in the mix, how do you feel like that's actually monetizing maybe more seats, a larger opportunity at those individual customers? than maybe limited by only phone or only meetings? How is the workspace and sort of bringing all this together, helping drive deal sizes higher?
spk09: I think the AI company not only to help our meetings and the phones or team chat, it's across the entire Zoom Workplace program's platform, plus all the business services, right? And because of our federated AI approach, you look at our workplace, you know, the deployment, right, for the entire collaboration platform, and not only make all those services better, but also is, you know, customer appreciated, right, without, you know, the charging customer more, right? You know, we do add more value to customers because at no additional cost, right? That's kind of a power, you know, part of the... my company. At the same time, in terms of monetization, as I mentioned earlier, look at all of our business services. You know, AI is a key differentiation, right? We leverage AI and also, and, you know, we charge a premium price as well and that's because of the value. At the same time, you know, we also, you know, are going to leverage, you know, AI company to build a lot of new things, new services, like Ask AI, Ask AIC, that will be introduced later this year, and also some other new services we're working on as well. But overall, I think AI for the existing collaboration customers and more value for new services, right? And also, you know, we can charge a premium price, plus also can leverage AI company to build new services, you know, giving the edge AI experience It's coming and there's a lot of new opportunities.
spk15: Thank you. Thank you.
spk14: We will now hear from Ryan Kuntz with Needham.
spk15: Thanks for the question. First, Kelly, quick housekeeping one. The reclassification of customers, is that expected to change any of your KPIs like NER and like that, turn those in the right direction at all?
spk08: I mean, no significant, as we mentioned, although the number was pretty significant. The revenue shift from enterprise to online was only four million dollars. And we as we indicated, it didn't change because it was so de minimis. The impact on net dollar expansion calculation, for example, didn't it didn't make it didn't move it at all.
spk15: Got it. Helpful. And Eric, maybe a quick strategic question on events. Any update there in terms of how the ecosystem is building out? I know that's a complex market to penetrate. Any update you have for us there? Thanks.
spk09: Yeah, great question. I do not think I gave a few examples about that, but I can tell you Zoom events are doing extremely well. And you look at every quarter contribution to our revenue growth is, you know, the reason why it's kind of, it's, you know, we had a vibe in a long, long time ago, right? You know, and then we introduced the Zoom sessions, events. It's a very, you know, trustable brand to offer the most flexible, you know, the event service. And I think that service, you know, is going to help us more and more because you look at any other competitors, right? You know, most important competitor, take up, you know, the very large one. They even do not have something similar. And this is probably their product on par with our webinar. Now we have events and sessions, right? We offer the best events and sessions for our customers. That's the reason why for almost every enterprise customer, when you look at the very large events, Zoom is the best platform. Our competitors even don't have that. Yeah. Oh, by the way, also forgot to mention, actually, you know, it's not only for events itself. Essentially, a lot of customers use Zoom, you know, for, you know, to improve their working, you know, their marketing, you know, the efficiency, right? How to drive the leads generation, you know, and our workflow, right? Integrated very well with our events and sessions, so. Great, thank you. Thank you.
spk14: And we will now hear from James Fish with Piper Sandler.
spk12: Hey guys, thanks for the question here. Maybe just bridging the phone and contact center opportunity, whether it's kind of hard to probably parse this out in the entire installed base, but as we think about those greater than 90 contact center accounts over 100K, maybe could you go over the overlap of adoption between phone and contact center, how that packaging of the two is going together? And if you guys are starting to see that pipeline or backlog increase for cloud conversions across those spaces relative to the last year. Thanks, guys.
spk09: Yeah, sure. So, yeah, Kenny, feel free to chime in. Because you look at it, you know, when we started, we saw, you look at it, you know, the quarterly, you know, quarterly, the content center, you know, the deals we went, we thought probably most of the customer would be the existing customer, right? Either meeting customer or phone customers. However, that's not right. And quite often, some customers, they are not a meeting customer, not a phone customers, but they became the first customer to deploy the Zoom Contact Center. So that means we have a lot of opportunities for existing installer base. So we need to double down on that because the product already works very well. And plus, you know, buyers are different. We also, that's the reason why we invested more to our channel partnership as well. I think, you know, more and more existing in sort of base, right? After they heard about our content centers, you know, success story, I think we are going to see acceleration of a contact center business growth. Thank you. Thank you.
spk14: We have one additional question, which will come from Michael Turn with Wells Fargo.
spk05: Hey, thanks for squeezing me in. Kelly, you had a few comments on tightening discounts, tightening grace periods, just as things for us to be mindful in terms of the model. I'm wondering if that's somewhat standard operating procedure for Zoom or if that's coming from more confidence that the business is now stabilizing. And if you're just able to help us with visibility you have from here into Q2 marking the low point in terms of growth and any additional driver details on drivers that are useful. Thank you.
spk08: Yeah, I think that the discounting, we started working on being more thoughtful and disciplined about that last year. We've talked about that several times before, and you're starting to see the impact and the benefit of that rolling through the results this year, which makes sense as customers are coming up for renewal, especially some of those ones that are on annual accounts. And then in terms of tightening up the dunning period, I think that it's just, you know, as we continue to mature as an organization and really be thoughtful about not only what's good for our business, but what's good for our customers as well. And seeing that... it was just the right time. And we continuously go through and look at our, you know, financial and accounting policies and make sure that those align with what's right, again, right for the business, right for our customers as well. I think it's more about that and less about sort of anything else that's happening in the business other than just being thoughtful and maturing into some of those policies. Thank you.
spk14: And again, that is all the time we have for questions today. That concludes our questions. So I'll turn it back to Eric for any closing comments you might have.
spk09: Yeah, thank you all for joining us today. Really appreciate. And we are working as hard as we can to truly deliver happiness to our customers and partners. And also I'd like to leverage this opportunity to thank every Zoomies for their hard work. And I really appreciate it. Thank you all for your time. See you next quarter.
spk14: Thank you so much, Eric and Kelly. And again, everyone, this concludes today's earnings release. We thank you all for your participation. Enjoy your summer and we will see you next quarter.
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