Zoom Communications, Inc.

as an attendee and will be muted throughout the meeting.

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

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal 2024. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.us. Also on this page, you'll be able to find a copy of today's prepared remarks and a financial slide deck with financial highlights that along with our earnings release include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the third quarter and full fiscal year 2024, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations, and product initiatives, and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results that we discuss in detail in our filings with the FCC, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today's webinar. And with that, let me turn the discussion over to Eric.

Hey, thank you, Tom. Hi, thank you, everyone, for joining us today. So before starting, I'd like to welcome Dr. XD Huang as our CTO, who joins us after a successful career at Microsoft, where he most recently served as Area AI CTO and Tech New Founder. Dr. XD joins us at an optimal moment in our AI journey. In the past few months, he brought several new AI innovations to the market. and announced an aggressive roadmap aimed at empowering our customers to work smarter and serve their customers better. And as we develop and deploy AI solutions, we strongly believe that technology should advance fast. We are privileged to have countless customers rely on us for their communication needs. We don't take that for granted. Earlier this month, we took additional steps in stating that Zoom does not use customer content to train our AI models or third-party AI models. I'm proud of the approach we are taking. By putting customers' privacy needs first, Zoom is taking a leadership position in ensuring customers can use our AI features with confidence that their content is protected. Now, let me share how we have advanced in our mission of one platform delivering limitless human connection. We launched Zoom Scheduler, which serves to reduce the hassle of scheduling with people outside your organization. And Intelligent Director, which uses AI and multiple cameras to provide the best image and angle of participants joining from a conference room. We also launched many new offerings like Zoom Clips, which enables asynchronous video conversations. And more and more customers are getting on Zoom Team Chat, driven by increased adoption of Zoom One and new features like continuous meeting chat. which connects the transient emitting chatter feature to the persistent Zoom Team Chat product. Currently, we have two Fortune 15 companies, one major consulting firm, a global F&B brand, and a leading law firm using Zoom Team Chat as a core means of text-based communications. Our contact center product has surpassed 500 customers and we're rolling out about 90 new features and enhancements per quarter. We launched workforce management in early July to help customers streamline customer communications, manage agent needs, and transform their customer experience all from a single unified platform. WFM is already off to a great start And we look forward to adding additional products to this suite to expand our native custom experience capabilities and revenue streams. We have progressed rapidly in our integration of Workvivo. After reading it out internally, I could not be more impressed with the product and confident in the value it will bring to our customers in terms of building culture across a distributed workforce. Ultimately, they're relying upon our strategic pillar of enabling hybrid work. Speaking of which, a few weeks ago, we announced internally a structured hybrid approach. asking our Zoomies that live within commuting distance to come into their local office twice a week. Zoom is purpose-built for hybrid work, and it's on us to understand what our customers are experiencing in their hybrid journeys and what works and does not work for them. We believe that this approach will enable us to continue to innovate for our customers and deliver what they need to succeed. Now moving on to some of our customer wins. First, we are very excited to expand with the United States Postal Service. In Q2, the postal service added a Zoom team chat. or 21,500 users to their existing Zoom for Government deployments. Let me also thank Brookdale Senior Living, the largest operator of senior housing in the United States. Brookdale started as a Zoom meetings customer in fiscal 2020. A year later, it began evaluating Zoom phones. And in Q2, they went all in on the cloud and upgraded to Zoom One in order to unify their communication needs and as one integrated product. Let me also thank Purdue Farms. Like many of our customers' journeys, Purdue started years ago with an initial Zoom meetings deployment. Last fall, they went all in with the Zoom One Enterprise Plus, however, The story does not end there. In Q2, Purdue added a Zoom contact center due to its native integration with the existing Zoom phone deployment and our ambitious innovation roadmap. Let me also thank Vermont Industries. Vermont came on board as a Zoom customer a little over a year ago with meetings and phone and quickly became a major platform adopter. including Zoom One and the Zoom Contact Center. And in Q2, with the goal of utilizing AI to better service their customer and also their employees, they added a Zoom virtual agent due to its accuracy of intent understanding, ability to root issues to the correct agent, ease of use, and quality of analytics. We are so delighted to see our partnership with Vermont grow so quickly, and we are committed to innovating further to support their operations. Finally, let me thank Dollar General, America's general store, for choosing Zoom's WorkVivo platform to connect employees at a digital heartbeat for the company. Dollar General will rule out WorkVivo's employee engagement platform for its roughly 190,000 employees to enhance the employee experience at the individual, group, and district levels, drive employee dialogue, and reinforce its strong culture. Again, we are very excited to welcome and expand with USPS, Brookdale, Purdue Farms, Vermont, Dollar General, and all of our customers worldwide. And with that, a positive word to Kelly. Thank you.

Thank you, Eric. And hello, everyone. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few milestones. First, operating cash flow grew 31% year over year to $336 million. Second, Zoom Phone reached roughly a half a billion dollars in annualized run rate revenue. And finally, we are excited that Zoom Contact Center has surpassed 500 customers in only six quarters. In Q2, total revenue grew 4% year over year to $1.139 billion, which includes $10 million of pressure from foreign exchange. This result was approximately $24 million above the high end of our guidance. Our enterprise business grew 10% year-over-year and represented 58% of total revenue, up from 54% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3.2% from 3.6% in Q2 of FY23. The number of enterprise customers grew 7% year-over-year to approximately 218,100. Our trailing 12-month net dollar expansion rate for enterprise customers came in Q2 at 109%. We saw 18% year-over-year growth in the up market as we ended the quarter with 3,672 customers contributing more than $100,000 in trailing 12-months revenues. These customers represent 29% of revenue, up from 26% in Q2 of FY23, and include some of the amazing names that Eric highlighted earlier. Our America's revenue grew 6% year over year, while EMEA and APAC declined by 1% and 3% respectively. Absent currency impact, both EMEA and APAC would have been approximately flat year over year. On a quarter-over-quarter basis, all regions grew 3%. Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains or losses on strategic investments, restructuring expenses, and all associated tax effects. Non-GAAP growth margin in Q2 was 80.3%, an improvement from 78.9% in Q2 of last year. We are pleased with the strength of our growth margins as we continue to optimize usage across the public cloud and our co-located data centers for both existing and emerging technologies. For the full year, we expect non-GAAP growth margin to be approximately 79.7% as we make additional investments in new AI technologies. Research and development expense grew by 6% year over year to approximately $104 million. As a percentage of total revenue, R&D expense increased 9.1% from 8.9% in Q2 of last year, reflecting our investments in expanding our product portfolio, including Zoom Contact Center, AI, and more. Looking ahead, investing in innovation will remain a top priority for Zoom. Sales and marketing expense decreased by 3% year-over-year to $276 million. This represented approximately 24.2% of total revenue, down from 26% in Q2 of last year. As a reminder, Zoomtopia will be held in Q3 of this year and will drive incremental marketing investment in the quarters. G&A expense declined by 19% to $73 million, or approximately 6.4% of total revenue, down from 8.2% in Q2 of last year, as we continue to achieve greater efficiencies and experience one-time savings in the quarter. Non-GAAP operating income grew by 17% to $462 million, exceeding the high end of our guidance of $410 million. This translates to a 40.5% non-GAAP operating margin, a meaningful improvement from 35.8% in Q2 of last year. Our effective tax rate in Q2 was 18.5%. For the remainder of the year, our tax rate is expected to approximate the blended U.S. and federal state rate. Non-GAAP diluted earnings per share in Q2 was $1.34 on approximately 306 million non-GAAP diluted weighted average shares outstanding. This result was 28 cents above the high end of our guidance and 29 cents higher than Q2 of last year. Turning to the balance sheet, deferred revenue at the end of the period was $1.37 billion down approximately 2% from Q2 of last year. This was in line with the high end of the expectations that we shared last quarter. For Q3, we expect deferred revenue to be down 4% to 5% year over year, partially driven by shorter billing frequencies on enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, our RPO increased 9% year over year to approximately $3.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 61% in Q2 of FY23, indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year. Operating cash flow in the quarter grew 31% year-over-year to $336 million. Free cash flow grew 26% year-over-year to $289 million. Both results include the approximately $60 million cash payment related to the legal settlement that we discussed last quarter. Our operating cash flow and free cash flow margins were 29.5% and 25.4%, respectively. We ended the quarter with approximately $6 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Given the strength in profitability and collections, we are increasing our cash flow outlook for FY24. We now expect free cash flow to be in the range of $1.2 to $1.23 billion. Turning to guidance. For Q3, we expect revenue to be in the range of $1.115 to $1.12 billion, which at the midpoint would represent approximately 1% year-over-year growth or 2% in constant currency. We expect non-GAAP operating income to be in the range of $400 to $405 million. Our outlook for non-GAAP earnings per share is $1.07 to $1.09 based on approximately 309 million shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY24. we now expect revenue to be in the range of $4.485 to $4.495 billion. At the midpoint, this represents approximately 2% year-over-year growth or 3% in constant currency, which we expect to be neutral in the back half of the year. Our increased total revenue guidance reflects a consistent view on enterprise with tempered expectations for online for the remainder of the year. We expect our non-GAAP operating income to be in the range of $1.685 to $1.695 billion, representing an operating margin of approximately 38%. Our outlook for non-GAAP earnings per share for FY24 is $4.63 to $4.67, based on approximately 308 million shares outstanding. Thank you to the entire Zoom team, our customers, our community, and our investors. for your trust and support. Before opening up for Q&A, we are excited about our premier user conference, Zoomtopia. It will be in person in San Jose as well as on Zoom events. We look forward to sharing more about our expanding platform, new innovations, and customer testimonials. Please join us at Zoomtopia on October 3rd and 4th. David, please queue up our first question.

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

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

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

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

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

Okay. Our next question comes from Mita Marshall with Morgan Stanley.

Mita, we can't hear you. Because I'm on mute. So one of the questions that I had was just what you were seeing in terms of the environment. You know, I know that your upside kind of came from the enterprise. Just wanted to get a sense of you know, how the environment changed during the quarter, if there were any changes during the quarter, and just whether kind of that upside came as a result of kind of better upsells or just more, you know, deals kind of getting closing in shorter order. Thanks.

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

Who's next?

David, who's next?

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

Hi, Cash.

Sorry, Cash.

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

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

Yeah, just quickly, in terms of pricing power, and most of the businesses, they still view employee experience as the number one priority, right? That's why they really want to, you know, kind of give a customer the best service, you know, like a Zoom platform. You know, otherwise, you know, probably they do not have an employee experience, and when they focus on price, that's not the case, right? And most of the customers we talked with really appreciated the value and ease of use and quality of Zoom service. Thanks so much. Thank you, Cass. Appreciate it.

You bet.

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

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

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

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

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

Okay. Thank you, Kelly.

Thank you, Eric.

Thank you.

Our next question comes from James Fish from Piper Sandler.

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

Do you want to address the first one?

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

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

Thanks, Eric. Thanks, Kelly.

Thank you.

Our next question comes from Matthew Van Vliet, BTIG.

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

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

Great, thank you.

Thank you.

Our next question comes from Ryan Kuntz with Needham.

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

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

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

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

Got it. Thank you.

Brian.

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

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

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

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

Sorry, go ahead.

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

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

Our next question comes from Rishi Geluria with RBC.

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

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

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

Appreciate it. Thank you.

Our next question comes from Alex Dukin with Wolf Research.

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

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

Okay. And then maybe, Eric, for you, obviously the evolution of Zoom from a point solution to a platform is nice to watch. You've talked about Zoom 1. You've now given us that $500 million annualized number for Zoom phone. What's the penetration today for Zoom One within the enterprise base? And what's the penetration for the phone product in the enterprise base? And where does it go from here in your mind? Like what does success look like for you?

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

Thank you, guys. Thank you, Alex. Our next question comes from Peter Weed with Bernstein.

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

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

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

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

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

Our next question comes from Taz Kujagi with Wedbush.

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

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

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

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

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

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

Got it. Thank you, guys. Thanks a lot. Thank you. Our next question comes from Matt Stadler with William Blair.

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

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

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

Our next question comes from Sterling Audie with Moffitt Nathanson.

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

Eric, do you want to go first?

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

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

Makes sense. Thank you.

Thank you, Studi. Thank you.

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

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

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

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

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

Bye, everybody.

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

Thank you.