Afternoon, everybody. My name is Tyler Radke. I co-head the software sector here at Citi. Welcome to day one of our tech conference, and we have Tom McCallum from Zoom here, and excited to have a great conversation. So, Tom, I think it would be great, actually, just with the news this week, I think, you know, some pretty interesting updates on the new product side. Just kind of if you could recap just quickly the announcements this week. It's been a busy week with Labor Day, a bunch of conferences and analyst days. So just level set with us kind of what was announced this week would be a great way to start.
Sure. Thank you for having me, first of all.
Yeah.
Thank you, everybody, for coming. I know it's late in the day, and I appreciate your time. I don't think we can start a conversation without talking about AI in this day and age.
Yeah.
So, yes, we had a nice AI announcement. We have a new AI Companion. You'll be able to do things like catch up in meetings. If you're late for a meeting, there's a way to do that. There's summaries, there's an ability to write chats, have the AI write chats for you, and then change, say, like, the mood. If it's not upbeat enough or you wanted something more professional, you can change the moods on it. So we announced the product. We've been working on a lot of those technologies we might have talked about in the past, like some of these things that-
Yeah
We wanted to put together, and we really look at this as an opportunity to establish a host, to have a paid host, to have a set of AI tools that will make them more productive. And this is sort of our first foray, and we wanted it to be compelling as well from a technology perspective and a price perspective. So we decided we would offer it for free as part of your paid subscription. And really, what we're trying to do is drive, you know, greater retention and eventually sell you more product. So, that's one of the-
Mm-hmm
One of the things we announced. The other was we announced a new rebranding of our Zoom IQ for Sales. You know, we had some feedback from our CAB. They felt that it was more of a revenue generator, and we should, we should you know really get out there and talk that up. So those were the sort of the two big announcements, but the Zoom Companion is, is probably the big, big one.
Okay, great! Well, thanks for the quick update on that. So, I think to kick off, I mean, Zoom is obviously a product we're all too familiar with during-
Yeah
During the pandemic. You know, a terrific, you know, software product. Could you just maybe remind investors where we are in terms of the growth journey? What are kind of the key drivers of growth?
Mm-hmm
As you look forward over the next 12 months, for Zoom?
Yeah. I mean, you know, Zoom, just a few years ago, I think when you picked us up-
Yeah
We were just a very small company. We've expanded rapidly with the pandemic. You know, as people adopted more video conferencing, it was already a fast-growing company. You know, video conferencing was becoming better and more utilized. I remember years ago, I wouldn't even touch video conferencing with investors because it would inevitably fail, and it was too distracting and too disruptive. I joined Zoom pre-IPO, fell in love with the technology. Actually, didn't know the financials of the company. I had no idea that they were profitable or growing fast. I said, "Yeah, this is just a really good product." You know, so we've become known as a video conferencing company, but when Eric Yuan, our founder, designed the product, he designed it as a platform, so you could add more technologies in there.
So we really have a full CCaaS or UCaaS and CCaaS suite now. We have video, clearly, we have chat. We call it Team Chat. It's not the chat you find in a meeting. It's actually a separate chat. You can create chat channels, you can, you know, have emojis, you can attach files. So it's a very robust chat, and it comes free with your license, and then we have Zoom Phone. And if you think about the spectrum of technologies for communication, we started with the really hardest thing, which is video conferencing, right? You know, getting the video and the voice to line up. And you know, we continue to evolve that product. But now we've added other technologies to that mix. Then we would also have now a contact center product.
It's still evolving a bit. We still have a little bit of ways to go, but to get to those, you know, really big enterprise wins. But we're starting to see more and more. We're up to 500 customers, and more and more of them are becoming externally focused, the contact center. And then we've also put in a number of productivity tools. I talked about the, you know, productivity tool for sales. Basically, you know, in the old days, your sales manager would sit beside you, like Tyler's with me, and he'd watch while I talk to a customer. I'm making eye contact. Am I, you know, using verbal fillers? Am I positioning the product properly? Now, the AI can do all that for the manager and the employee, and give them reports on it.
We also have added even more... another departmental app, we call those. Another one is in the HR department. It's not an HR app. It just sits and resides and managed by the HR team, but it's really for the entire company. It's kind of a social network. That's our Workvivo acquisition we did. And we just had a really large win last quarter with Dollar General, and they're gonna deploy it across their, you know, thousands or tens of thousands of employees. So-
Yeah. Great.
So really, you know, building out this portfolio of technologies. We're also doing more on the ecosystem side, as well, to build out Zoom Apps and, and as well as APIs to, to build out more apps as well.
Got it. Got it. So, just kind of translating that into what, you know, investors are seeing in the numbers, you know, I think your most recent quarter, you definitely had strong results, beat the high end of your guidance, but the outlook was a bit more cautious on the macro side. Can you just kind of expand on what you're seeing on the macro? And, you know, it sounds like there are a lot of new products out there, whether it's phone, contact center, a lot of these add-ons, you know, between chat and some of the AI capabilities. But how much is this macro impacting your ability to grow?
You know, as we get through this macro period, is there kind of a medium-term growth rate you're kind of thinking about?
Yeah
With these new products?
Yeah. So, a couple things. I'll talk about the macro in a minute, but I think investors, if you haven't been following Zoom lately, you know, we started reporting out into two segments basically. One is an online segment. It's basically credit cards, people purchasing online, self-serve. It's very high margin, very little sales attached to it. It does have higher churn, but that churn has stabilized recently. And it, you know, it's really just a kind of a different customer, sort of a really small, medium-sized business all the way down to a consumer. Prosumer is in there as well. And then we have our enterprise business, which is really enterprise all the way to the sort of the SMB space.
And, you know, the difference there is it is, you know, more sales and marketing oriented. There's more product being sold into it. The nice thing is the lifetime value of the customer is greater 'cause the churn is much, much lower, and the deal sizes tend to be much, much larger. So as you're looking at Zoom, that—I think that's the best way to look at it, 'cause it really is two different kinds of customers that buy differently.
Yeah.
We can talk a little bit about, you know, some of the things we're seeing on each one of those. But as far as the macro goes, you know, I've talked to the salespeople last quarter when we were going into earnings. What the head of sales and a number of the regional salespeople told me is that, you know, it's gotten better than it was six months ago when people were just focused on cutting costs at all expense. You know, just, you know, lay people off and, you know, that kind of thing. And it's gone back to more sort of last summer, which is still a challenging macro. You know, deal cycles are still long, lots of sign-offs, but it's not as sort of dire as it was sort of six months ago.
So I think that's better. I mean, it's still a very challenging macro, and yeah, you see it in our business more, I think, on the online side and the international part of our business. International crosses both of those segments, but you know, it shows up in the international numbers, which international used to be a good growth driver for us. It was one of our fastest-growing outside of the U.S., was faster-growing than the U.S. But it has come back quite a bit, starting in Europe, probably again last summer is where we started seeing it, and it has spread a little bit to Asia. Not nearly as much, but definitely seeing it in both of those.
We really need to get international kind of moving as well.
Got it. Okay. So in terms of the factors that impacted, negatively impacted the outlook, it was kind of the weakness internationally in the enterprise, would you say?
online.
And online.
Yeah.
Kind of broad-based. Yeah.
International across the board. Online is more, international-
Yeah
In nature, It has a lot to do with the pandemic, and when people joined Zoom, a lot of customers came in on our online. You know, it's-- you know, demand was vertical, and you know, we couldn't even handle. So we opened up the aperture online so that more people could buy online, and they've stayed online, and a lot of them are-
Mm-hmm
Are international.
Yeah, yeah. Got it. Okay. As you think about the enterprise side of your business, I mean, how do you kind of frame how far Zoom is in terms of penetration, both, I guess, on the core video side?
Yeah
But then, you know, as you think about the broad portfolio of products?
Yeah. And so we talked a little bit about the video conferencing. Kind of in that video conferencing bucket, there's Zoom Meetings, which I think we all know, and then we actually have what are called webinars and Zoom Events. Those are really large meetings, all the way to, you know, a more formal event that has a virtual lobby. And so we have those products, and then we also have Zoom Rooms.
Mm-hmm.
Zoom Rooms, as people get back into the office, they're finding that the, you know, Polycom sitting on a table isn't good enough. They're used to being able to share content and whiteboard and things like that. So you're seeing, you know, more Zoom Rooms. It started probably about two summers ago when people started coming back to the office. It wasn't the first thing that people did, but it's been a pretty consistent move towards more conference rooms shifting over to video conferencing rooms. So even there, though, the penetration rates, I think the last time we reported it out, was probably like 12% of our enterprise customers were using those technologies. When it comes to Zoom Phone, it's probably more like 15%. So we're very still.
Again, this is probably a year-old data, unfortunately, but we're still very under-penetrated, we feel like, in a lot of these new technologies. Things like contact center, you know, Zoom IQ for Sales, those things are very, very, very fresh.
Yeah.
Yeah.
Yeah. One of the packages you announced, I think, it was last year, was Zoom One, kind of being able to do-
Yeah
Phone plus video. How are you just kind of seeing the adoption of that track relative to your expectations? Is-
Mm
You know, is that something you're primarily seeing at the upper end of the market? If you could just kind of comment on that.
Yeah. So we, we offer it across the entire market. You see it, you know, both at the high end and, and you know, at the smaller customer end. Interestingly, if you go to our website now, it, it's been so successful as kind of a brand name for our platform, that we've actually kind of renamed the entire set of SKUs that you can buy online that are that are more sort of platform oriented as Zoom One. So it has caused a little confusion-
Yeah, yeah
With investors. When we talk to investors, we're talking about basically the Zoom meeting and phone product together.
Mm-hmm.
You used to buy them separately. We bundled them together with some other products, and that's what we talk about. But it's done so well that the marketing team has decided to make the whole, you know, sort of SKU set, you know, more platform-oriented and not, you know, "Oh, here, here's the Zoom Meetings product," and you get a couple of other things. It's like, "No, this is Zoom One, you know, Pro, this is Zoom One Business, this is Zoom One Business Plus." But when we talk to investors, we're talking about the sort of Zoom One Business Plus, which again, has done well at both, you know, in the SMB space as well as the enterprise space.
I don't have a good split, but I would say it's, it's doing well on both.
Yeah.
So.
Yeah. Okay. And then on the online side, you did recently raise price, so-
Yep
Earlier this year on that. How did the, I guess, the, you know, the subsequent churn trend relative to your expectations? I think you commented that churn had was better than you expected-
Yep
This past quarter, so maybe that was better. But how does that kind of inform your ability to raise price going forward if, you know, you're not losing as many customers?
Sure, sure. So, you know, we raised our monthly price on the meetings product, and we went from $14.99- $15.99. When you raise price, you get a reaction when you announce the price increase. You get a reaction when you actually charge the customer.
Mm.
Since it's credit cards, typically one-two quarters out, you see, you know, more reaction, would-
Right
Would be churn if people don't like what it is that you're offering. We didn't see a lot of churn on any of those, and so this was back in, you know, February, March. So we're, we're kind of through that, that period. And really, the one thing that surprised us was how price sensitive folks are. So we, we increased the price on the, on the monthly, but we left the price on the annual subscription the same, and we saw a lot of people move from monthly to annual-
Mm
Which actually helps your churn over time.
Right.
So it's actually, you know, like, you know, price increases are never sort of really great for customers, but I would say it was well received.
Mm-hmm.
You know, I think they understood and understood the value they get. So that went in, you know, in Q1. We did a little bit more in certain geos where we hadn't rolled it out for, you know, language reasons or whatever-
Mm-hmm
On the website. But now it's gone pretty much across the, you know, the website. So-
Yeah.
You know, we've done more recently, which is kind of interesting. We are also looking at free to paid in there, and we've now taken it so that, instead of having back-to-back unlimited free Zoom meetings every 40 minutes, just restarting your meeting, we now force a break in between.
Mm.
That hopefully drives a behavioral change that people are like, you know, that friction is enough-
Mm
To nudge them over to start to pay. We'll see. We just put it in recently, and it's not like a price increase. Price increase, there's not a lot of negotiating room or, you know, alternatives. You just kind of have to accept it or not. This is sort of like, "Well, am I going to change my behavior and take a coffee break every 20 minutes, or am I just going to buy Zoom?
Yeah.
You know?
You make them watch an annoying ad or something.
No, we looked at that. Not that we were going to put up annoying ads, but we looked at putting ads up, and it just didn't get us the yield we wanted. So-
Yeah
So we've been doing other things to kind of nudge people over. And the folks we're nudging are small businesses that are-
Mm
Using Zoom to really generate, their own value, and so they need to, to share some of that, and a lot of them have been using Zoom for years.
Yeah.
And so I think the nice thing, and we saw this last year when we did a little free to paid, you again see people's, you know, renew more rapidly than you would have seen them-
Mm
If they were really truly new customers. Our highest churn is with new customers.
Mm-hmm.
It dissipates over time, and so by the time you get to, like, 16 months, the churn is really low. So when you look at the base of customers we have now on the online, so I think it's like somewhere around 73% are been with us for over 16 months.
Yeah.
And so that really reduces your, your churn, and that's why we, we feel comfortable about it. It's almost, you know, it's almost mathematical.
Mm-hmm.
I don't want to take it for granted. I mean, there are environmental macro changes that can impact it, but it's been relatively predictable, and it has been on a downward trend. You do see some seasonality. So if you compare Q1 to Q2, Q2 was slightly higher than Q1, but that was expected. But if you look at it year-over-year, it was down about 40 basis points, and if you annualize that, you know, you're like at 100 basis points. So that's pretty-
Mm
Pretty good, you know, reduction in churn.
Yeah.
So it's been... You know, it's gotten back to sort of what we would've said pre-pandemic was sort of a normal historic churn-
Right
With some seasonality baked in.
Yeah.
So.
Okay. I guess so is it fair to say that maybe you saw more conversions to annual from monthly as a result of the price increase? And-
I think so.
Yeah.
I think it's fair to say.
Yeah.
It's incremental.
Yeah.
There's no silver bullet here.
Right.
You know, it's really... You know, and if you look, our overall, even though, and, and we go back and talk a little about the, the enterprise, but on the enterprise side, what we're seeing from a billings perspective is, you know, kind of shorter deals-
Mm
People not willing-
Mm
To pay upfront. But if you look at our overall, you know, customer deal length, it's actually increasing, and that's really coming from the monthly moving to annual.
Right.
So annual is holding in quite nicely, monthly is moving to annual, but you do have some, you know, macro effect at the larger deal, multi-year side.
Yeah. Okay, got it. So, the online business, we talked about the churn rate, you know, kind of stabilizing, which, you know, understanding it is an SMB, you know, business or consumer business, right? But, you know, 3% monthly churn is still pretty significant-
Yeah.
On an annualized basis. So how do you think about the ability for that to continue to move down over time? Or is that kind of a cap just based on the nature of the type of customers that you're serving?
Yeah, you know, I'd love to say that it, it—we expect it to go down. I'm kind of hoping it will over time. Like I said, we've kind of gotten back to historic churn. And so, you know, we will keep trying to nudge people to annual deals, lower churn. I think the next sort of thing that's, you know, out on the horizon that will get us lower churn is if we sell more products to this group. So a lot of them are just Zoom Meeting only customers. If we could sell them Zoom Phone, then that would make them much stickier.
So, if we can sell more products into that group, and we do have some initiatives set up for next year, where we're going to, you know, try to sell more into that group. And that, that could be helpful, both from a churn and, and from a top-of-the-funnel clearing-
Yeah
Basis, which is where we're having more of the challenge right now, is that top-of-the-funnel. So even though churn has kind of stabilized, you know, our expectations for the back half of the year, we had to temper them because we weren't seeing the funnel that we wanted.
Right.
Some of that's macro, and some of it's just, you know, how quickly people are adopting some of these initiatives that we put in place.
Yeah. It so is the vast majority of online revenue just the, the Meetings product, or kind of what does that split look like between Meetings versus Phones or-
Yeah. It's mostly Zoom Meetings. There are people who buy, like, Zoom Rooms.
Yeah.
You know, you might have a small lawyer's office-
Right
That buys a Room. You will see occasionally a webinar. Webinars tend to be kind of one-time in nature.
Transactional.
Yeah, people run events and things.
Yeah.
So, you know, but the vast, vast majority of the revenue is coming from, from the Meetings product alone.
Right. Right.
There's some Phone in there, but I think we could do a lot better.
Yeah.
Our penetration, you know, rate is really low on the Phone side, and you know, from a dollar perspective, it's probably kind of single digit kind of range-
Yeah
Of Phone, so.
Yeah. So you talked about maybe some focus next year on... I mean, obviously, with a higher churn rate business, you're more reliant on new customer acquisition. So I guess what are... Or new products, you know-
Mm-hmm
Addition coming on. Like, what are some of the things that you're looking to do next year, understanding that it's still very much a kind of product-led growth-
Yeah
Promotion? You're not, you're not going to put an enterprise account rep to go to sell, you know, to a one-person company.
Yeah. I kind of put them in three buckets. One is we have the free-to-paid bucket that we were discussing.
Mm-hmm.
We've got a-
Mm-hmm
A large base of people who use free Zoom, that are making value off of it, and we want to kind of nudge them over. We have a lot going on around the website, and we've started putting it in place, and it's been really good. Everything from, you know, local currencies, local language, you know, just making things easier to buy, different payment methodologies. And easier buy is what we call buy flow. It's like, how many times do you have to click to get to actually purchase a product? And, you know, if it takes five clicks, well, you're going to lose a lot of customers. But if you can get people to buy in two clicks, then you're going to get more. So I know that sounds pretty basic, but it, you know-
Yeah.
Making things simpler is something that Zoom does really well. That's why Zoom Meetings is really simple, but it's really hard to replicate, and there's a lot of engineering time that goes into those. So those are some of the things we're going to continue to do, around, you know, making things easier to purchase, make it more local. And then I think the third thing is the new product. So Zoom Phone, you know, get that going faster in there. And then we have some other products like, you know, scheduling, Zoom Scheduler, that we can also sell into that group. So
Okay
So I think you'll see us focusing more on new product initiatives-
Mm-hmm
Next year to kind of help drive that business.
Yeah.
You know, until you get a lot of traction, I think, on the new product side, I think it's gonna - it's not gonna be, you know, a big grower-
Mm-hmm.
But it will be very profitable.
Okay.
Yeah.
Do you think it's a growth business, though?
It could be. It could be.
Mm.
But it's going to take those.
Mm-hmm
Product initiatives to take off.
Okay.
You know?
Okay.
I think stabilizing it is, you know, achievable-
Mm-hmm
B ut you know, to get it to be a grower, you really need to make sure those new products are moving in that space.
Right.
So.
Yep. Yep, makes sense. Okay. So let's talk a little bit about the cash on the balance sheet.
Yeah.
Over $5 billion sitting there, in-
Six.
Yeah, six.
Mm-hmm.
Yeah, there you go. So, you know, clearly, a huge amount of cash, especially relative to the market cap. You know, stock's not trading-
No
At a very high valuation. I guess, why not be more aggressive on the buyback?
Yeah. So, we did have a buyback, and I just want to... For those who don't know Zoom, we've-
Yeah, for sure.
We've been very profitable for a very long time, going back pre-IPO on a non-GAAP basis, as well as free cash flow positive. Most of our CapEx is going into data centers. We have our own private data center, so right now we're spending a bit more on GPUs.
Mm-hmm.
You know, we have a small footprint for facilities, but it's very small.
Mm.
So most of the CapEx is going into building out more AI servers. But you know, the rest of the cash, we're very efficient. Like I said, the online business, mostly credit cards, so that becomes almost instantaneous cash. And then, you know, we've got really good collections on the enterprise side. And so we are, you know, generating a lot of cash, which is good. And we did have a billion-dollar share repurchase. We went through it rather quickly. It'd be finished off by the end of last fiscal year. We reduced the shares outstanding pretty significantly, and to offset some of the dilution we're seeing from a true-up program we had.
But the cash is gonna continue to do quite well, I think. Why weren't we gonna do more buyback? Right now, we are looking at reinvigorating the business and reaccelerating it, and so we are looking at both organic and inorganic ways of doing it. And so we believe that valuations out there are actually attractive, and it's worth sort of taking a pause here and looking at what's out there. Clearly, you know, we haven't found anything yet. We've done some smaller acquisitions, Workvivo. Before that, we did a small company called Solvvy. But there are, you know, some interesting things out there that we're looking at, but nothing-
Yeah.
Nothing, nothing imminent-
Right
Go that way.
Okay. Yeah, I was gonna say, to, to your point, the most recent acquisitions have been more, more of the tuck-in size, right?
Yeah.
But I guess what like... Obviously, you're not gonna tell us what you're going to acquire, but what categories are-
Yeah
Are attractive to do something transformative? Because clearly, you know, there was the thought that you would, CCaaS was that category.
Yeah.
Then, you know, decided to go the organic route. But yeah, what out there is kind of makes the more sense in the-
Yeah
Transformative category?
You know, I don't think CCaaS is off the table.
Yeah.
I think it's more, you know, is it something that can help us accelerate that part of the business?
Mm-hmm.
We have 500 customers. We're starting to get more externally focused, you know, cases.
Mm.
But, you know, we're still relatively small. There's, you know, some things we could probably do to help accelerate that business. I'd say anything in the AI space is fair game, whether it's an acqui-hire or there's an actual product that seems to fit in. You know, and apps like departmental apps like Workvivo.
Mm-hmm.
That would be another sort of fair game. Productivity apps as well-
Mm-hmm
You know, so, I mean, so it's a broad... We're not-
Yeah
I guess, looking to get beyond sort of the communication and collaboration space.
Yeah.
Really just looking to try to accelerate what we have today and leverage that.
Yeah. But obviously, a high technical bar to pass with-
Yeah, yeah
-Eric reviewing everything-
Yeah
In detail.
Folks who don't know Eric, Eric's a great guy. He, brilliant. He was one of the original coders. I think he does machine code for Webex, and he has a very high bar for technology. So technology fit and valuation would be-
Mm
Would be the big three things. And, you know, for those who know us, you know, know we, we did try to acquire a company. It didn't work out. We weren't willing to, you know, increase the bid. And, you know, we held our own, you know, as far as, being disciplined and not trying to overpay for something. And, you know, we'll continue to be like that as well.
Yeah.
So.
Okay. And in terms of M&As, you know, how important is managing the dilution in the context of all those other parameters?
Yeah, I mean, you know, you know, we did a good job last year to reduce it.
Mm.
But we haven't, you know, set a policy or anything to say-
Yeah
"Okay, we're gonna just manage the dilution going forward." We do talk with the board every quarter about capital allocation. They would like to see the management team, you know, find things that, again, would reaccelerate at a reasonable price. But we do also talk about, you know, things like share repurchases. So-
Mm-hmm.
So they're fully aware.
Yeah, yeah.
It's just a matter of the trade-off.
Okay.
So.
Just on the... Obviously, if, you know, there's a big acquisition, it's hard to say the impact that has on the financial profile, but where are we just kinda in the trajectory of margin? It sounds like a lot of really exciting new products.
Yeah.
You talked about buying GPUs. There's, you know, investments and things like chat and some of the new AI-
Yeah
AI product capabilities. But where do you kinda... How does the impact on margins net out given that the demand environment is
Yeah
You know, where it is right now?
Yeah, it's really interesting. You know, for the last couple of years, we've really focused on moving workloads from the public cloud back to our private cloud, and it's much cheaper for us to run these workloads on our own cloud.
Mm.
It's not that we're that much more efficient, I think, than, say, you know, the public cloud. We really like our partners. It's just they have a profit threshold-
Right
That they have to fill, right? So we're probably somewhere around as efficient as they are, but we get to keep the profit for ourselves and pass along to our shareholders. So, you know, as we move more and more workloads over, we've been able to take margins. At the low point during the pandemic, I think we went down to 68-69%, and now we're back right around the 80% level. We did guide down a little bit, you know, tens of basis points, not hundreds, going forward, just to be able to handle some of these, some of the training around large language models. It's just, it's very compute-intensive.
On the other side, we will continue to move workloads over, so, you know, we still feel comfortable with the long-term target of 80%. But we might be-
Mm-hmm
Slightly under that for the rest of this year. Interestingly, if some of these newer products, like, say, you know, our contact center is a list price is $70 per agent, you know, if that got wildly successful, which I hope it does, you know, that's actually a very high ASP for us.
Right.
It essentially runs on all the same infrastructure.
Yeah.
You know, that would be another thing as you look at, you know, M&A is like, can you put it on your own infrastructure? 'Cause we are highly efficient. We're already at scale-
Mm-hmm.
And we continue to be able to do that. So-
What percentage of the workloads run on your own infrastructure now or?
You know, I don't have a good split. It's still-
About 50, 50-ish or so.
Probably somewhere in that range.
Okay.
Yeah, yeah.
But the goal is to march towards 100, or?
No, no. We're always gonna be using some public cloud.
Okay.
You know, for failover, for regions that we're not in. You know, one of the nice things about having a data center in a particular region is it cuts back on latency, you know, so when the... you know, if somebody's talking-
Mm-hmm.
Their mouth doesn't move at a different pace, you know, kind of thing.
Yeah.
So, you know, I'm sure in places like the Middle East or Africa, I'm sure we'll still stay dependent on the public cloud to deliver. So they've done a phenomenal job. It just we'll optimize where we see fit.
Got it. Got it. Okay. And then on the, I guess, on the operating margin line, like, clearly, yeah, the gross margin progress has been, you know, very impressive from the early days-
Mm-hmm
Of the pandemic. Also, the online free schools, I think kind of had-
Yes
An impact there.
Yeah.
But in terms of hiring, you know, you did a reorg earlier this year. How are you thinking about reinvesting back in the business? Obviously, AI talent-
Yeah
Isn't particularly cheap, and, you know, just given that you're, you're building out all these new products.
Yeah. And just to clarify, what Tyler's talking about, during the pandemic, we gave free schooling or virtual schooling to 125,000 different school systems around the globe. This is kind of, you know, giving back from a corporate social responsibility perspective. You know, as schools got back into session, we cut that back, clearly. And you know, we were happy to be able to help out in the world at the time. But yeah, it did drive our margins down a bit. So that was part of it, was being on the public cloud and being, you know, trying to, you know, help the world at the same time. Going forward with AI, we just hired a gentleman from Microsoft, and he's a 30-year vet on the...
He's most recently was working in the AI side. His name's XD. He's gonna be doing, you know, a lot more for us, I think, going forward. You probably will see some investment on the R&D line.
Mm.
I doubt we'll get out of our range. We've put our range-
Mm
Out there, like 10%-12%. I think we're just sub-10% these days. Yeah, I think that would be a place that we would look to invest. And again, it could be an acqui-hire as well, you know.
Mm-hmm.
We could find you know a nice startup company that's got some really cool technology but doesn't have a product yet. Yeah, we've done that in the past, and it's really helped us out. We have AI translation. We bought a small company in Germany. We put end-to-end encryption on our product you know with a small company we bought with some really intelligent you know security folks. So-
Got it
Those, those would be some of the things we might look at as well.
Okay. On the contact center side, I guess, how would you kind of evaluate the performance relative to your original expectations since launch? And, you know, do you feel like it's comparable to other adoption cycles like you've seen with phone or-
Yeah
Or even video conferencing?
Yeah. I think it's gonna be like phone, you know, from a sort of a technology perspective. When we launched Zoom Phone, you know, it took the engineers; it was like a couple of dozen engineers a year to do it. The reason it was a little easier because we were already doing voice over IP. All we really did was extend out-
Mm-hmm
To the phone numbers. Contact center is a bit more complicated, but we seem to be on that same kind of trajectory, that it's gonna take a couple of years to not only build the base product but then build in those capabilities and features that customers expect. I think by the end of this year, we'll be in much better shape to go after those really large, multi-thousand type, you know, agent deals. I think right now, you know, we have the ability to be, you know, enterprise class from a scalability perspective, but there's still some things we still need to put in place. Last I looked, we were still doing beta around email, and that would finish out our omnichannel.
We released this summer our workflow management technology, and we did add some additional, you know, integrations, which are important as well. You know, we now have, I think, Salesforce, Zendesk, Microsoft, and, you know, ServiceNow-
Mm
Integrated in. Those are important. And then from a go-to-market strategy, you know, we are putting in an overlay sales team to help sell because you're not just selling to IT, you're also selling to the CXO, the chief experience officer, typically as well. And so, you know, having some people who can speak the nomenclature is gonna be important. We did the same thing with Zoom Phone. We put an overlay team in there. And then, building out the channel, which again, is something we did with Zoom Phone. There's a lot of systems integrators out there that help people put their contact centers in because there's, you know... you've got a number of apps, even homegrown apps, that you integrate into your contact center to get the data you want for your agents.
You know, that'll be the other piece that we're building out.
Yeah. The last question I just wanted to ask you, you know, Zoom, I think, was in the headlines, a month or two ago about your own return to-
Mm
To office plans. And I guess maybe for investors that weren't familiar with that, you could recap that.
Yeah.
But also just how you, how your work, how your vision of the future of work has evolved with that?
Yeah
With that change?
Yeah. So, you know, we did it for a couple of reasons. One was to kind of do a little bit more collaboration. There was a feeling that, you know, people wanted to see their peers more often. So we made it a little more formal so that people would know when their peers were actually in the office, as opposed to just, "Hey, come whenever you want," right? We said, "Okay, if you live within a commuting distance, a reasonable commuting distance, you need to come in the office when your peers, you know, your work peers are here, you know, maybe Tuesday, Thursday, or Monday, Wednesday." And you know, that would allow people to kind of get together more often. It's not really about coming to the office to work.
Mm-hmm.
You know, you can, you can do Zoom meetings clearly anywhere in the world. It's really about more the collaboration with your, your peers in the office. From a technology perspective, you know, the world is hybrid, right? And, you know, we may have been, you know, over-tilted towards remote. And what the experience we weren't really getting was, like, how are people using our technology in the office? And so it's really given us an opportunity to, to use, you know, our, our own, you know, people to really use the technology the way it's supposed to be and give us, you know, ideas and ways to improve it, by being in the office.
Yeah.
I myself have been remote for Zoom for almost 4.5 years.
Yeah.
I was one of the early remoties that joined Zoom. And, you know, it's worked out really well. I think, you know, pre-pandemic, post-pandemic, during the pandemic, you know, I found the technology really easy to work with. But so we still have probably the vast majority of the employees are still remoties at this point.
Mm-hmm.
We picked up a lot of people during the pandemic. So it's really. It only impacts the people who live within a reasonable distance, and we didn't. We actually shrank our real estate footprint-
Mm-hmm
Over the pandemic. We had a lot of WeWorks, we got out of all of those.
Mm-hmm.
So really, it's a small number of offices in places like San Jose and Denver.
Yeah
Places like that, that we have Amsterdam.
Right.
We have a larger office in London.
Awesome. Great!
Well-
Well, with that, I think we gotta wrap up.
Wonderful.
Tom, thank you for the-
Thank you
Discussion, and thanks, everyone, for listening.
Thank you, everybody.