Zoom Communications, Inc.

Well, hello, everyone, and welcome to Zoom's Q3 FY25 earnings release webinar. As a reminder, today's webinar is being recorded. And now I will hand things over to Charles F. Schlage, head of investor relations. Charles, over to you.

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the third quarter of fiscal year 2025. I'm joined today by Zoom's Thondrin CEO, Eric Yuan, and Zoom's CFO, Michelle Chang. Our earnings release was issued today after the market closed and may be downloaded from the investor relations page at investors.zoom.us. Also, on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full fiscal year 2025, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, stock repurchase program, opportunities, go-to-market initiatives, growth strategy, and business aspirations. and product initiatives, including feature product and feature releases, 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 our 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.

Thank you, Charles. Thank you, everyone, for joining us today. In early October, we hosted Zoomtopia, our annual customer and innovation event, and it was an amazing opportunity to showcase all that we have been working on for our customers. We had record-breaking virtual attendance and unveiled our new vision, AI-first work platform for human connection. This update marks an exciting milestone as we extend our strengths as a unified communication and collaboration platform into becoming an AI-first work platform. Our goal is to empower customers to navigate today's work challenges, streamline information, prioritizing tasks, and making smart use of time. At Zoomtopia, we took meaningful steps towards data vision with the release of AI company 2.0, further showcasing all the things that customers have come to expect from Zoom. A breakneck pace of innovation, customer obsession, and reliable, easy-to-use products. This release builds upon the awesome quality of Zoom AI Companion 1.0 across features like meeting summary, meeting query, and smart compose, and brings it together in a way that evolves beyond task-specific AI towards agentic AI. This major update allows the AI Companion to see a broader window of context. synthesize information from internal and external sources, and orchestrate action across the platform. AI company 2.0 raises the bar for AI and demonstrates to customers that they understand their needs. They want AI to enhance their existing workflows, not disrupt them. They want AI to deliver exceptional results for their entire teams, and they want to experience the value firsthand before incurring additional spend. We highlighted many customers at Zoomtopia. Pranity Laquara, CIO of Zscaler, provided a great example of how Zoom AI company helped democratize AI and enhance productivity across the organization. without sacrificing security and privacy. And it wasn't just this scale. The RealReal, HSBC, ExxonMobil, and Lake Flatto architects shared similar stories about Zoom's secure, easy-to-use solutions, helping them thrive in the age of AI and flexible work. Building on our vision for democratizing AI, we introduced a roadmap of time-expanding AI products that create additional business value through customization, personalization, and alignment to specific industries or use cases. Customer AI Companion add-on, which will be released in the first half of next year, aims to meet our customers where they are in their AI journey by plugging into knowledge bases, integrating with third-party apps, and personalizing experiences like customer AI avatars and AI coaching. Additionally, we announced that we also have customer AI company paid add-ons for healthcare and education available as early as the first quarter of next year. These AI-first industry tailored solutions will build upon the remarkable traction and customer love we have in these industries and allow us to deliver AI solutions that meet their customers' unique needs from the lecture hall to the doctor's office. We also announced Zoom Workplace for Frontline Workers, available in the first half of 2025, with the goal of extending our success in Zoom Workplace further into the extremely large but underserved frontline worker market. We will first target frontline rich industries where we have a strong install bits, and have gained substantial learnings such as retail, healthcare, and manufacturing. This mobile-centric solution will address the unique work style of frontline workers with features like data companion generated, shift summaries, on-shift communications, work management, insights, and more. Contact Center and Workvivo are key pillars of our strategy to extend from our core strengths into natural adjacencies. And I'm very pleased to share that both had amazing orders. We secured our largest ever Contact Center customer at over 20,000 seats. demonstrating our ability to compete at the high end, expand further into the email market, and win with the channel. In fact, our top four Cardiac Center deals in the quarter came from the channel, which speaks to our progress leveraging this amazing resource to extend our success across geographies and industries. We also saw incredible traction with Workvivo as we landed three net new Workvivo customers with over $1 million in ARR, including the largest deal to date with a Fortune 10 company. We are very happy to see that both Contact Center and Workvivo benefit as a natural upsell to our massive base of Zoom Workplace customers. And we are encouraged to see these products bringing brand new customers to Zoom and become beachheads for Zoom workplace to expand. The success of this bi-directional land and expand motion demonstrates our better together platform vision is resonating well with customers looking for a full AI-first work platform, bridging the worlds of customers and employee experience. Now, let me recognize some of our amazing customers. Thank you Agencia Tributaria, Spain's national revenue service, for their extraordinary expansion in Q3. Over two years ago, Agencia, like many other customers, became convinced of the constraints of their on-prem phone system and deployed 30,000 Zoom phone sets. After Zoom Phone rapidly delivered value at scale to enhance efficiency and service quality during a demanding tax season in 2022, they moved to consider our total experience. Omni-channel solutions to further elevate their taxpayer services. This resulted in an incredible record-setting Zoom Accounting Center deal with over 20,000 seats. in conjunction with Zoom Workplace delivering a complete Zoom experience for both employees and taxpayers. Thank you, Agencia, for your trust and partnership. Thank you for ServiceNow, the AI platform for business transformation for expanding its relationship with Zoom. Already a power user of Zoom Workplace, in Q3, ServiceNow adopted Workvivo and expanded its Zoom phone footprint. As announced at Zoomtopia, we are deepening the integration of ServiceNow's Now Assist with Zoom AI Company to boost our generative AI product offerings and deliver advanced workflow synergies for our customers. It was an honor having Chairman and CEO Bill McDermott, who is also a member of Zoom's Board of Directors, Join us at Zoomtopia. Thanks Bill. We look forward to continuing our strong partnership. Let me also thank Redpin, a leading international fintech and property tech company, for choosing Zoom. They keep to us as a brand new customer through a trusted channel partner and identified Zoom as the best solution to transform the way we engage customers with their innovative property payments software and services. Reliving opportunity for the Zoom total experience, including Zoom Congress Center Elite, Zoom Revenue Accelerator, and Zoom Workplace Business Plus in order to enhance customer experience, elevate agent productivity and happiness, and realize major cost efficiencies from streaming line operations. Finally, let me thank Athena Health a leading provider of network-enabled software and services for medical practice and health systems, for integrating Zoom's meeting SDK into their Athena 1 electronic health record. By leveling Zoom's cutting-edge video technology, Athena Health is empowering its network of over 160,000 providers to deliver seamless virtual care through telehealth. We're so pleased to see more customers adopting our Zumba workplace and business services products in order to reap the benefits of our modern natively integrated AI powered technologies. Before handing it off to Michelle, I'm very excited to share that earlier today we announced our new corporate name, Zoom Communications Inc. This change reflects our evolution into an AI-first work platform for human connection and our vision for long-term growth. Now, over to our new CFO, Michel Chang. Thank you.

Thank you, Eric, and hello, everyone. It was great to meet any of you at Zoomtopia. I'm excited to be taking you through earnings for the first time, and I look forward to partnering with you all going forward. To kick us off, I'm pleased to announce that we beat our top line and profitability guidance in Q3. In line with our previous statements, year-over-year revenue growth troughed in Q2 and showed improvement in Q3, driven by positive trends in both enterprise and online. Here are a few highlights from our quarter. We saw progress towards our AI-first vision with Zoom AI Companion monthly active users growing 59% quarter-over-quarter. And as Eric mentioned, we saw great traction expanding into adjacent markets with growth in WorkVivo and Contact Center. The number of WorkVivo customers grew 72% year-over-year, driven in part by the strength of our meta-partnership. And the number of Zoom Contact Center customers surpassed 1,250, up more than 82% year-over-year. Now, let's dive into the financial results. In Q3, total revenue grew approximately 4% year-over-year to $1.178 billion. This result was $13 million above the high end of our guidance. Our enterprise revenues grew approximately 6% year-over-year, reflecting a continued shift to enterprise, which now makes up 59% of our total revenue, up one point year-over-year. We're pleased with this continued stabilization in online amidst ongoing macro conditions. In Q3, we saw improvement in average monthly churn, which decreased to 2.7%, down 30 basis points year over year. This is our lowest ever reported churn. In our enterprise business, we saw 7% year-over-year customer growth in the upmarket as we ended the quarter with just shy of 4,000 customers contributing more than $100,000 in trailing 12-month revenue. These customers now make up 31% of our revenue, up two points year-over-year. Our trailing 12-month net dollar expansion rate for enterprise customers in Q3 came in at 98%. The number of enterprise customers at the end of Q3 was approximately 192,400. As we've mentioned in prior quarters, the number of enterprise customers distinguishes between our two go-to-market motions and will fluctuate with shifts in our focus, and as such has become a less valuable measurement of company performance over time. pivoting to our growth internationally. Our America's revenue grew 4% year-over-year, EMEA grew 5%, and APAC was flat. On a constant currency basis, EMEA grew 3%, and APAC grew 2% year-over-year. Moving to our non-GAAP results, which, as a reminder, exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains on strategic investments, net litigation settlements, and associated tax effects. Non-GAAP gross margin in Q3 was 78.9%, as compared to 79.7% in Q3 of last year. The year-over-year reduction was primarily due to investment in AI. For the full year of FY25, we continue to expect our gross margin will be approximately 79%. Non-GAAP income from operations came in at $458 million, exceeding the high end of our guidance of $443 million as we continue to make progress managing expenses while investing in AI, our platform, and emerging products. This translates to 38.9% non-GAAP operating margin for Q3 as compared to 39.3% in Q3 of last year. Non-GAAP diluted net income per share in Q3 was $1.38 on approximately 314 million non-GAAP diluted weighted average shares outstanding. This result was $0.07 above the high end of our guidance and $0.09 higher than Q3 of last year. Turning to the balance sheet, deferred revenue at the end of the period grew 5% year-over-year to $1.38 billion, driven by the continued refinement of discounting practices as well as lengthening billing terms. In Q4, we expect deferred revenue to be up 5% to 6% year-over-year. Looking at both our billed and unbilled contracts, our RPO increased 5% year-over-year to approximately $3.74 billion. We expect to recognize 61% of the total RPO as revenue over the next 12 months, up from 58% in Q3 of last year. Operating cash flow in the quarter decreased 2% year-over-year to $483 million. Free cash flow grew 1% year-over-year to $458 million. Operating cash flow and free cash flow margins in the quarter were 41% and 38.9% respectively. We ended the quarter with approximately $7.7 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Under the pre-existing $1.5 billion share buyback plan, in Q3, we purchased 4.4 million shares for $302 million, increasing our repurchases quarter over quarter by $14 million. And at the end of Q3, we repurchased 11.6 million shares for $739 million. Turning to guidance. In Q4, we expect revenue to be in the range of $1.175 to $1.18 billion, which at the midpoint represents approximately 2.7% year-over-year growth. We expect non-GAAP operating income to be in the range of $443 to $448 million, representing an operating margin of 37.8% at the midpoint, as we continue to prioritize efficiencies across our operations. Our outlook for non-GAAP earnings per share is $1.29 to $1.30, based on approximately 315 million shares outstanding. We are also 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 $4.656 to $4.661 billion, which at the midpoint represents approximately 2.9% year-over-year growth. Our total revenue guidance assumes a continuation of mixed macroeconomic environments. We expect our non-GAAP operating income to be in the range of $1.813 to $1.818 billion, representing an operating margin of 39% at the midpoint. Our outlook for non-GAAP earnings per share for FY25 is $5.41 to $5.43, based on approximately 315 million shares outstanding. With the free cash flow results in Q3 and the increased outlook for operating income in FY25, we now expect free cash flow to be towards the high end of our previously provided range of $1.58 to $1.62 billion for the full year. As indicated in the earnings press release today, we are also excited to announce our board has authorized an incremental $1.2 billion share repurchase. This reinforces our board and management team's confidence in Zoom and enables us to further leverage our strong cash flow and balance sheet to drive shareholder returns. The incremental authorization brings our total unexecuted buyback to approximately $2 billion, which we expect to execute by the end of fiscal 26. In conclusion, we believe our results and our guidance underscore the progress that we've made driving top-line growth, strong financial management, and shareholder returns. We're excited about our differentiated AI platform vision to deliver value for our customers and incredibly grateful for the trust and support of the entire Zoom team, our customers, and our investors. Kelsey, please cue the first question.

Thank you so much, Michelle. And as Michelle mentioned, we will now move into the Q&A session. So when I call your name, please turn on your video and unmute yourselves. And as a reminder, in an effort to hear from everyone, we please ask that you limit yourself to one question. And our first question will come from Meeta Marshall with Morgan Stanley.

Great. Thanks so much. Congrats on the corner. And maybe for you, Eric, I just wanted to get a sense coming out of Zoomtopia, you know, what you were hearing from customers just about where their strongest interest is on AI and kind of where they're looking for you to kind of take the roadmap to address kind of some of their needs today.

Yeah, so Mita, this is a great question. That's the theme of Zoomotopia this year, really about AI. You know, we launched an AI company in 1.0 last year, and with more and more customers, they enabled AI. And also at Zoomotopia, we mentioned there are over 4 million accounts who are already enabled AI company. given the quality, ease of use, and no additional cost, customers really like Zoom AI Companion. However, after one year later, they also wanted to understand, what's the direction? Are there any new things from us? And the feedback from our customers at Zoomtopia about Zoom AI Companion 2.0 were extremely positive. Because, you know, first of all, they look at our innovation, you know, the speed, right? And, you know, a lot of features built into the AI company in 2008. Again, at no additional cost, right? At the same time, enterprise customers also want to have some flexibility. That's why we also introduced a customized AI company and also AI company studio. And that'll be available first half of next year. And also we can monetize. Overall, the customers really trust Zoom, right? As we continue improving the AI quality, like meeting summary, compared to Zoom meeting summary quality versus any other competitors. I have a high confidence customers like our solution, like our quality, and also a lot of new innovative features, and customers really enjoy AI Companion 2.0. And by the way, you look at the last three months, look at our AI, look at our monthly active users, it's already up almost 60%. Right. And so that's very, very, very, you know, the positive side. So overall, the customer really like Zoom AI companion. And also they really appreciate us. We see we are not going to charge a customer for AI companion at a new additional cost. So that's very good news for us.

Great. Thanks.

Thank you.

We will now hear from Cash Rangan with Goldman Sachs.

Thank you very much. I'll echo the congratulations and congrats to you, Michelle, on your first earnings conference call with Zoom. Eric, we had the pleasure of attending Zoomtopia as well. I'm curious, where are the budgets for AI coming from? Is it from a separate pool from your customers or are they taking budgets out of budgets or AI money out of budgets that were designed for Zoom? And also a follow up question on the macro, a tone of customer conversations post the elections. Do you sense that there is slightly higher animal spirits, better appetite to spend in tech on tech and on Zoom's products in particular? Thank you so much.

Thank you. Looks like you're driving. So I think, look at AI, the cost, right? So every company, I think now they're all thinking about where they should allocate, you know, the budget, right? Where should they get more money? money or fund to support AI. I think every company is different and some interview customers and they have a new budget, some customers they consolidated into the field vendors and some customers they just want to say, hey, maybe actually save the money from other areas and to shift the budget towards embracing AI. And given our strengths on the quality plus at no additional cost, Zoom is a much better position. In particular, customers look at all the vendors when they try to consult and look at, again, AI cost is not small, right? You look at some of the competitors, you know, per user per month, $30, right? And look at Zoom. better quality at a new additional cost. You know, that's the reason why it comes to total cost of ownership. Customer look at Zoom, I think much better position. You're so right. Otherwise, customers say if they are good, again, almost every business is, they subscribe to multiple software services. If each software service vendors, they are going to charge the customer with the AI. Guess what? Every businesses, they have to spend more. That's the reason why they charge Zoom and I think we are much better position. And back to the second question, I think it's too early to tell. And every company, they look at the macroeconomic, I think, as we all know, is getting better. And also in terms of regulation for AI, and also it's a bit too early to tell. But overall, I think every company, they are very optimistic. about doubling down, embracing AI. They look at the vendors who they trust with a better quality, also with a better total cost of ownership. I think that's the reason why I truly believe Zoom is in a much better position.

And maybe if I can add in, Cash, maybe unasked, but an important note is our forecast sort of assumes like macro conditions and like spending conditions relative to what we saw in Q3. Yep.

All right, we'll go ahead and move on to Arjun Bhatia with William Blair.

Perfect. Thank you and congrats on the re-acceleration here. Eric, maybe if we can switch gears a little bit to contact center. You had that 20,000 seat deal with the Spanish Revenue Service, I believe, this quarter. That's a very large deal, very impressive. Can you just maybe elaborate a little bit on what were some of the major factors that drove Zoom to win a deal like that? What was the process like? How competitive was it? And what were some of the maybe differentiating factors that you saw in that that you can maybe replicate in other contact center deals?

Yeah, yeah. Great question. So given that, I still wear the head of Zoom Contact Center General Manager. I really like your question. I think a few things. First of all, they are already of a customer. They deploy, I think, if I recall correctly, more than 30,000 Zoom phone seats before. In a very busy tech season, Zoom delivers a great performance. They really trust Zoom. And when they look at Zoom Contact Center, they know actually our backend architecture is very scalable. And also they look at all the features there. As I mentioned over the past few quarters, we supported PCI, FEDERAP, and the workforce management, quality management, and also social channel. They know our pace of innovation is amazing. And because of architecture, because of trust, because of the features, and also look at our scalability, and we have no problem from the very beginning, can support very large content center agent deployment. Because again, we built an architecture from day one, not like other vendors. They had to have a surgery to support up to 10,000 or 20,000. From day one, our architecture already very scalable. That's the reason why the customers, they are very, very happy to deploy the Zoom accounting center. Again, from an outside perspective, you feel like, wow, that's a large deal, 20,000 agents. But you're talking with our product engineer team and say, hey, we already support that deal from an architecture perspective on day one. Right. So, you know, given more and more customers recognize the potential of Zoom and, you know, look at our piece of innovation, I think especially the AI, I think we are very well positioned to win more deals like that. All right. Thank you. Thank you.

Our next question is going to come from Patrick Walravens with JMP Securities.

Patrick, you're muted.

Hopefully I'm unmuted now. Can you hear me? Yes. Okay, great. Congratulations. Michelle, I think I'm going to focus on you, if that's all right. So can you just tell us again why you – I asked you this question at the analyst table. I think a bigger venue would be helpful. Why you took this job, what you found so far, And then maybe you obviously haven't guided for next year yet and you're early in your tenure, but maybe any points that you would share with us in terms of how to think about next year.

Yeah, great. Thanks, Pat, for the question. Let me kind of go back and just remind people, I came to Zoom, I think in part at the beginning because of the iconic brand and the established leadership in meetings. But as Eric and I began our conversations over the interview process, I got more and more excited about where I saw Zoom going to an AI-first platform company. and could see a lot of the seeds, if you will, of growth being planted and starting to come to fruition. So got very excited about that. And maybe my learning sense has been delightful, honestly, to see the customer love and the pace of innovation. I think you'd heard about it before, but to be amongst it, I think has been a delight. And so You know, my focus as a CFO is really going to be on top line, as you noted, getting the top line revenue growth further accelerating, certainly continuing to manage margins and expenses as Kelly has. And then maybe the last part I'd say that I think you saw is re-up here today is capital allocation with our buyback strategy. And in terms of how to guide for FY26, look, we will officially guide as we always have in the next guidance period. So I'll save my comments until then.

Okay, great. Thank you.

Yeah. James Fish with Piper Sandler has the next question.

Hey guys, thanks for the question. Maybe Eric, for you on the AI side, you guys are talking about AI investments, obviously impacting the gross margins. You talked about that last quarter, but is this, where do we think about the AI investments actually going into? Is it sort of the backend infrastructure or thinking about it more on companion side and more modules? How are you feeling about the AI portfolio for contact center generally? And then just Michelle for you on the, you talked about lengthening billing terms. We're starting to see though, a difference between on, RPO and billings for sure. But a big divergence really on the current and non-current RPO trends this quarter. Can you just kind of walk us through what happened there despite the comment on lengthening billing terms? Thanks.

Yeah, James, great question. I can address your first one. So look at AI, right? So we have to invest more, right? And, you know, I think a few areas, right? You know, one is look at our Zoom workplace platform, right? You know, we have to invest more talents, you know, deploy more GPUs. and also use more of the cloud-based GPUs as well as we keep improving the AI quality and innovating on AI features. That's for workplace. And at the same time, we are going to introduce the customized AI company. also AI Studio. And next year, not only do we offer the free service for AI companion, but those enterprise customization certainly can help us in terms of monetization. At the same time, we leverage the technology we build for the workplace, apply that to the contact center, you know, like Zoom virtual agent, right? And also some other, you know, the contact center features. We can share the same AI infrastructure and also a lot of technology components and also can be shared at Zoom contact center where the AI company is not free. the content center is different, right? We also can monetize. Essentially, we build the same common AI infrastructure architecture and workplace customized AI company, we can monetize. Content center also can monetize. I think more and more, you know, not like today, right? You see, you keep investing more and more and soon we can also monetize more as well. That's why I think we do not worry about the cost in the long run at all. I mean, the AI investment because with the monetization coming in certainly can help us more. So far, we feel very comfortable.

And James, maybe to answer your question on RPO and specifically why we see the current piece go up, we are seeing, just to confirm in lengthening billing terms, so we're encouraged by that of an indicator both in online and enterprise of our customers' dedication. to Zoom. In particular, current, as you know, went up 10%. And the way that I would have you think about that is when we have coterminous contracts, we tend to see as we sell outside of that expiry cycle, that current volume go up temporarily before it goes to long term. So net net, a positive thing is to expanding portfolio with our customers.

And we will now hear from Alex Zukin with Wolf Research.

Hey guys, congratulations on a solid quarter. Maybe just, I'll say one and a half questions. On the monetization side, Eric, as you're starting to see AI companion additions and interactions start to scale, as you think about the ultimate monetization opportunity of AI in terms of the broader portfolio, How, when, where should we see it? Is it through selling contact center that's more AI native into the overall base? Is it the verticalization of the AI companion 2.0? Is it a better AI companion 2.0? expanding. Just give us a flavor for the how and the when. And Michelle, if I look at from a kind of forward KPIs, I see enterprise billings growing double digits again. I see CRPO growing double digits again. I see churn for the online business basically getting lower every quarter by 20 to 30 basis points. Why shouldn't we kind of extrapolate that as the online business stable flat, enterprise business accelerating from here?

Yeah. Eric, do you want to go on the monetization? I'm happy to tag in too on the AI front.

You can address the second one because it's just asking this. Then I can address the first one later on.

Yeah, so to answer your question, and Alex, obviously, we're not going to guide to 26 until February. But I would say we feel good about the beat to forecast. We feel good about the implied raise to Q4. And we feel good about the overall acceleration. If you look at our H2 growth, it's above H1. So net-net, in terms of what we've said and what we've guided, it's delivering on what we said. And then you kind of go to the underlying KPIs and you look at it, and I think there's a lot of strong fundamentals. So look, I'm not going to confirm the numbers that you gave, but I think maybe one way to think about the models for revenue is we've given a Q4 revenue growth guide. I believe the midpoint of that growth rate probably represents a reasonable proxy for how to think about revenue growth into FY26.

Yeah. Alex, by the way, you know, we will share more in detail in Q4 or in call if we see the FI26. By the way, you mentioned online. Remember, you know, two years ago, FI, you know, 23, right? Look at the online business. It declined by 80%. A year ago, the 4%. Now this year, you know, flat, right? You see the trend is very positive. So back to your question of AI monetization, we already monetize AI today, but not for the workplace product, for our services, like a contact center. Like Zoom Revenue Accelerator, right? And like, you know, the newly coming services like Zoom Workplace for frontline workers, for educators, for healthcare, those, you know, the product tailored for vertical industries. At the same time, we also focus on enterprise. know i think it's some you know maybe a you know second half next year and you know for the because the the customer the ai company and ai company studio will not be available in the first half of next canada year right i think a lot of you know modern monetization opportunities but also at the same time you know not only do we monetize ai company but also we leverage ai company to further build a relationship with the customer. You know, like a customer look at it today, the Zoom platform, you know, on the one hand, ease of use, stable, secure, but plus AI, you know, a greater performance quality at a new additional cost, right? I think more and more, we do see that some customer last two quarters, you know, they switch to Zoom platform. I'll give one example. Why in Q3, we were a very large insurance company. And if I recall correctly, around 20,000 seats. They switch to Zoom workplace platform. You know, for sure, there's some big competitors there, you know, so-called for free. But when they analyze their employee like of a Zoom service, they analyze the total cost. Zoom Air company also added no additional cost. That's one of the key reasons why, you know, they selected Zoom as their collaboration platform. So that's a very big win in Q3. Yeah. Perfect. Thank you, guys. Thank you, Alex.

And then back, sorry to your question. In online, kind of the way that I would think about the Q4 is sort of flat to slightly down. And then certainly, because I get this question a lot, the ambition for online is growth. Just want to make sure I answered your online questions.

Thanks again, Alex. And we will move on to Sidi Panagrahi with Mizuho.

Great. Thank you. Michelle, congrats on your first earnings call. And you talk about your focus to reaccelerate top line growth. Can you guys hear me? Yeah. Okay. So it's good to see the platform, mostly your NRS stabilizing. And now you talk about multiple products like phone, contact center, work vivo, customer companion, a lot of different products you're talking about that will layer in growth. So as you look forward to next year, which products you are more excited about and how do you rank out of these products when it comes to layering the growth to the core platform?

Yeah, it's such a great question. I guess I would start with just sort of the foundation of Zoom, and then I'll kind of build out in my answer. So look, the foundation of Zoom was obviously the meetings. We're working very hard to move that to platform. And, you know, we're excited by, you know, the deceleration of seat down cells that we're seeing. We're excited by the competitive wins that we're seeing. We're excited by the online churn rate. So kind of In our foundation, as we bring in AI, as Eric has said many times, at no additional cost, or we build out the portfolio of workplace, we're excited at sort of what that could mean to the foundation of our business. And then certainly as we think about growth factors from there, part of that workplace platform is a shift to phone, which has been a significant growth driver to us. That will certainly continue. And then I would say the products that we're seeing the momentum in, Today, we call them, or I call them our emerging products in Contact Center and Workvivo. You know, I think we'll continue to be durable elements for product growth going forward. And then over time, I think you'll see more of that AI monetization and some of the things that we announced at Zoomtopia, but like any products, those will come in with time. And you asked a lot about product growth, but I guess I would also call out that I think there's a lot of growth vectors that we still can grow from in terms of our international growth or our channel expansion or continuing to go upmarket. There's a lot of really great proof points of when we get customers in on the workplace, it decreases churn. you know, that accelerates revenue growth with our land and expand. So I think there's a lot of, you know, beyond sort of the traditional product levers of growth, a lot more we can do.

Thank you. Thanks for that caller.

Alan Burkowski with Scotiabank has the next question.

Hey, guys, thanks for taking the questions here, and I'll echo the congrats on a strong quarter. Michelle, it looks like the deferred revenue growth in the quarter came in right as you guys were expecting, which is a slight change of pace from the beats we've seen there. You know, there are a number of large deals you highlighted in the quarter, like the contact center deal with over 20,000 seats. Can you just walk us through the puts and takes there in the quarter and perhaps give us a refresh about the level of conservatism you're embedding in your Q4 guide of deferred revenue growth being five to six percent?

Yeah. So first of all, I would say, you know, we, we guided that it'll be five to, or that it grew 5% in Q3 and we guided to five to 6%. So just to reorient everyone, the dynamics of what's driving that are tightening of discounting and lengthening of billing terms. And we expect those to obviously continue into Q4. So again, You know, in terms of what may be, you know, how to think about it in terms of our guidance philosophy, I would say it is very much the same. So I've continued a guidance philosophy similar to what has been had historically. Okay.

Thanks, guys.

The other thing that I would mention, nothing different to what Zoom has said historically is that revenue is ultimately the better measure and indicator for our business, you know, given some fluctuations that you'll see from quarter to quarter in deferred revenue. So that's really what I would point people to.

And Bank of America's Michael Funk has the next question.

Yeah, great. Thank you all for the time. One for you, Eric. So, you know, you really created an iconic brand with Zoom Video, you know, owned that point solution space and have now expanded into other areas. The new name, Zoom Communications, not captures at all. You know, you have phone now, you have contact center, adding AI on top, arguably even edging into work management with some of the products that you're rolling out. So, You know, the delineation is less clear now between yourself and competitors and other areas. So how do you think about attacking the market? Is it purely based on product or how important is price as you try to win new business?

Yeah, so it's a great question. I think, you know, our philosophy from day one, always a better product, a better price and a better service, right? You know, first of all, you know, our core strengths read about a product experience and make sure, you know, the customer like us, you know, look at a recently gotten a peer peer insight report. Right. The Zoom is the only one in the leader section. You know, that's the reason why the customer like us and because they truly like our product. Because of that, you know, we introduced a lot of other new product, essentially give a customer suite. And we call that, you know, workplace, you know, the AI first work platform. At the same time, you look at the price. A year ago, if I recall correctly, maybe more than 90 now, we increased price for online, and we did not see any issues. And the users really like our product. Now, actually, it used to be customers, they bought our partner solutions, like many years ago, meetings and a phone, and also the invite board, and lots of other partner products. Now, they prefer our platform approach. Right. And you could entire platform, you know, they, you know, they can leverage more services from Zoom. And at the same time, and with the AI at no additional cost, the customer tries to have Zoom brand and more sticky and download with the customer AI company or other innovations for sure. And, you know, we can monetize more. Essentially, we do not want to do something similar to You know, there's some competitors, right? They kind of stuck with your competitors. They call that for free. And then every year, they increase price, increase price. We don't want to do that. We want to build a long-term trust. Given some time, the customer realized Zoom not only very stable, ease of use, And also, we introduce more and more services that would like to consolidate into the Zoom platform. From that perspective, I think more opportunities for us to monetize as a platform player and not to mention AI as well. So that's our strategy. Great. Thank you, Eric. Thank you, Michael. Appreciate it.

We will now hear from Samad Samana with Jefferies.

Hi, good evening, and I'll echo the congrats on the next quarter. Maybe on Workvivo, I know Meta announced that it would be sunsetting the Meta workplace product, and it would be in stages over 25 and 26, and it'd steer customers toward Workvivo. Can you help us think about how you're thinking about that ramp? You've had good momentum there. Customers grew 72% year over year. Can you quantify maybe how much of the growth is coming from Meta and how we should think about that momentum going forward?

Yeah, great question. So, Michelle, feel free to chime in. I think, you know, we acquired WorkVivo, I think, two years ago. And because, you know, look at the employee engagement, that's very important to be part of a Zoom work platform. I think that a company, that a team is much better positioned. They have very scalable, very cool, you know, the product. That's the reason why I acquired them. And also, a few quarters ago, Meta screwed, focused on the AI, a lot of other things. They decided to retire Workplace product. For sure, there's some other vendors out there as well, but based on the customer feedback, because the product maturity, they decided to go with Zoom as a partnership. Meaning, Workable is an exclusive partner. They also built migration tools to help customers who deployed Workplace, the product for Meta, and replace that with Workable. You look at our top deals, I think almost all of those deals are because of meta migration. And also, I think we have also very strong pipeline as well. Again, that's not a small company. We do not focus on SMB. There's a very large enterprise customer. Some of the Zoom workplace customer already, some even not a Zoom workplace customer, but they also deployed Zoom work available. I think the pipeline is very strong and very promising. And also, we also want to innovate more on work available. Double down on that, I think give us more opportunity and to further grow that business. I think you look at the growth rate and a quarter or a quarter year over year is pretty exciting. And I think that business can contribute more to our business down the road.

Maybe just to add in from my standpoint, yes, the meta partnership is driving the growth. We're not going to quantify it or speak to it. But I think if you look at a lot of the underlying metrics that we said in our prepared remark, they tell a more holistic story. for Work Vivo Growth and a lot of the things that we've been focused on, you know, from geo-expansion to partner dynamics to, you know, getting those large customers as well as breadth. And they build up a lot of the natural things that Zoom has strength in certain industries like retail as well as frontline. I think, yes, the meta partnership is part of that, and there are some durable dynamics to underscore a lot of the things that Eric talked about.

Great. Thank you both so much for the time.

Thank you.

The next question will come from Tyler Radke with Citi.

Thank you. Hey, Eric. Hey, Michelle. I wanted to direct my question to Michelle. Congrats again on the first earnings call here as CFO of Zoom. I wanted to ask how you think about margins. So if we look at Q3, the operating margins were down very slightly year over year. I think Q4, they're guided to be down about one point year over year, if you round up. How should we think about the path to long-term operating margins? I think you're still a couple points above the high end of that long-term guide that you put out at Analyst Day. Should we expect to get back to that long-term operating margins next year? Just give us a sense for the path there. And then maybe just if you could give your own philosophy, too, around how you evaluate expenses. What are some of the things that you look for just in terms of ROI in case your framework is maybe different than how things were done at Zoom before? Thank you.

Perfect. Great question, and thank you very much, Tyler. So I would say, I think it's important just to re-emphasize what we're investing in. We're investing in AI, we're investing in our emerging growth businesses, and we're investing in the platform. As I think it sort of sets up, you know, the frame that I'll have. I don't think it's that different than maybe, you know, the frame that Kelly and Eric had before, which is we're going to invest for top line growth and we're going to invest for our strategy going forward. And so, look, our guidance approach remains the same. I said that before. We gave, as you noted, long-term guidance that had that operating margin lower than where we are today because of those investments. I just want to emphasize that is a long-term approach. margin scenario. And so not something that you should take for FY26. And again, we'll come back in FY26 and, or we'll come back in February and give FY26 guidance. But in terms of my philosophy, I think it's going to be, you know, a lot of where Eric and I are going to spend our time is how do we really make sure that every dollar that Zoom is spending is is going towards those things that I mentioned and going towards top line growth. And so look, we'll employ other ways of capital allocation, but in terms of, you know, internal capital allocation, I think it's going through each thing, questioning the return, questioning the alignment to strategic value and making sure that as a culture, you know, we have a disciplined approach of really looking at our expenses and having a culture of driving savings to offset the investments that we know we're going to need to make.

Yeah, just to quickly add on to what Michelle said, Tyler, I think you look at our company, the track record, especially as, you know, the way for us to manage the cost is a very disciplined approach. You know, even one or two quarters, you see like more investment, you know, on, let's say, on COVID side. You know, I'm very, very, you know, proud of our world-class DevOps team, led by our president of Product of China. You know, here in this team, they always know how to automate, further optimize, you know, a lot of cost savings. You know, that's one area I normally I do not spend any time because I have high confidence that a team, they can always come up with some ways and to further reduce the cost, right? And even for AI. and they know where to open my eyes. I think I have a very high confidence, you know, even one or two quarters more investment, something like that. I personally feel like a team can, you know, come up with some better ideas, you know, further reduce the cost. So. Thank you. Thank you, Tyler.

Michelle and Eric, we have time for one additional question. It's going to come from Mark Murphy with JP Morgan.

Thank you so much. Great to see you. Eric, I was, Wondering if you can perhaps speak to the customer interest that you're seeing to integrate data from their own internal repositories into AI Companion, because I believe that triggers the $12 per user per month monetization, or it's one of the important triggers. I would think that that is also going to drive some real product stickiness and value that would ratchet higher. So I'm just curious how many customers are showing that interest, what kind of scenarios they can design and therefore maybe how to think through the monetization potential at that price point.

Yeah, so Mark, it's a great, great question. So that's the reason why we introduced the, you know, customized AI companion or AI companion studio, because, you know, a few quarters ago, and, you know, we talked to many enterprise customers, they share with us feedback, right? So they like AI companion. Also, they want to make sure, hey, you know, some customers, they already built their own, you know, AI large language model. you know, how to federate that into our federated AI approach. And some customers, they have very large content, you know, like a knowledge base, you know, how to connect with that. You know, some customers, they have what's, you know, with, you know, other application systems, right? You know, like ServiceNow, Atlassian, and Workday, a lot of bugs and HubSpot, like how to connect with those data sources, right? And also even from employee perspective, right? You know, they won't have, you know, a customized avatar, leverage AI as a personal culture as well. Meaning those customers, they have customized requirements. To support those customized requirements, we need to make sure we have AI infrastructure and technology ready. That's the reason why we introduced the AI company, a customized AI company. The goal is really working together with enterprise customers to tailor the for each enterprise customer. That's the reason why it's not free. I think the feedback from Zoomotopia is very positive because, again, those features are not built by our several product managers, engineers to think about, let's build that. We already solicited feedback from other enterprise customers before. Those features that I think can truly satisfy their needs.

And maybe Mark, if I could add in, I think that Zoom has some really powerful differentials here in terms of our approach, the democratization of AI and kind of the core SKUs and letting people kind of try it and get to experience it, I think will provide an important on-ramp. And then I would say our open platform approach. When you start looking at bringing in custom things or connecting with other data sources, I think that in addition to a price point, which is more reachable, if you will, for customers are going to be important competitive differentiators for us going forward.

Excellent. Thank you so much.

So Kelsey, is this the last question?

That was the last question, Eric. I'll turn it back to you for closing, if you'd like.

I think, first of all, thank you all for your time. This is the first earning call, Michelle's first earning call. I think it's very similar in the transition from Kelly and to Michelle. And I feel, Michelle, this feels like it's not your first earning call. Feels like you already joined a Zoom earning call for many times before, right? So thank you for Kelly's great work over the past many years. Michelle, thank you. And again, thank you for all the investors. I really appreciate your time. See you all at the next earning call in February. Thank you.

Thanks, Eric and Michelle. And again, everyone, that concludes today's earnings release. We always thank you all for your participation. And again, from our family to yours, may you and yours have a safe and happy holiday season. Take care until next quarter.