Good morning, everybody, and thank you for coming to the Barclays TMT Global Tech Conference. Happy to be here today. My name is Peter Newton. Obviously, I'm not Ryan McWilliams. Ryan just gave birth, or his wife just gave birth to their, their first son.
So if you see him, tell him congrats. If you see him on Bloomberg or something, just hang in, let him know if you're happy for him. So with that, we're here with Zoom Video Communications and their CFO, Kelly Steckelberg.
Good morning. Yep.
Before we begin and dive into questions, there's a lot considering recent news. I do have to say, the first time I met Kelly in person was about two months ago at the Zoomtopia event.
Mm-hmm.
You know how checking into these conferences goes. You walk around, you get your badge, your name tag, people carrying around food, snacks, drinks, things like that. I saw a plate of bacon. I was like, "Wow, looks really good!" So I walked over there, got a little piece of bacon. Looked up, Kelly's holding the platter. So the first time I met Kelly, I didn't bring bacon today, so I'm sorry.
I'm sorry. Yeah. Well, I should have brought you bacon.
No, I need to return this favor. So, with that, I'm glad you have a few minutes to talk.
Yeah.
Thank you for coming.
Thank you. Thanks for having us.
Let's just start with the elephant in the room. We saw the news headlines, but we'd love to hear your thoughts regarding the space and market speculation around the recent M&A rumors.
Yes. Yes. So, lots of news the last few days. And somebody asked me, you know, this morning, why are we rekindling our romance with Five9? And I'm here to say we are not rekindling our romance. We highly respect them. They are an amazing company. We have high regard for them, but we are really focused on building the main contact solution of our own.
And there was other news this morning about our new tier pricing approach that we are putting in place, which just highlights our commitment to building a true enterprise-grade contact center. So the product. There's also another thing, because we are so focused on this, actually, Eric himself is now managing the contact center team. So we've done a slight reorg within the organization and pulled that in, and it's really exciting to see, and I think will just help continue the focus, commitment, and exploration of this product.
But it's doing well. We announced on our call, if you recall, that we're over 700 customers, and there are some great features and functionality that, you know, already exist today and some that are coming. They're either in beta or will be released later this year. And what we announced is kind of a pretty standard in the industry tiered pricing in terms of how you move up, depending on your needs for the product and price and entry.
Okay, that's very helpful. So just kind of double-clicking on that, you mentioned the 700 customers, which is, I believe, up from 550.
Yep.
Solid add.
Yep.
How should we think about the makeup and composition of an ideal Zoom Contact Center customer?
So, we have one that we talked a little bit about, I think, on the call or some of the responses, where an ideal customer is one that already is likely Meetings, Phone customer, because they're familiar with the product. We saw this with our customers that recently, in the last year, they doubled their Zoom Phone commitment.
They also doubled their contact center commitment, and then in addition Workforce Management and Quality Management. we're building components around the core desktop as well. Seeing a customer really like that go all in is really amazing, exciting to see.
Okay. That's helpful to picture. I do want to just touch on the M&A point before we completely put it to rest.
Sure.
How do you think about acquisitions with regards to entering new markets?
Yeah.
-versus with regards to something within the existing Zoom Video Communications?
So we obviously have a significant amount of cash sitting on our balance sheet, $6.5 billion, to be specific. And we really see that as an opportunity. It gives us flexibility to focus on areas of potential investment. And what we are focused on is driving top-line growth.
We, we can talk about this more in terms of the overall financial profile, but we really have gone through some transition this year that are focused on reaccelerating growth for the company in the long term.
And M&A is a potential way to do that. So we want to maintain the flexibility, and we look at it in terms of areas that we currently compete, you know, UCC as potential opportunities, and it could be what historically is buying smaller tech and talent tuck-ins and accelerating the development there.
Or it could be, you know, a larger, more transformative M&A opportunity that brings you other areas, not only product and customer, but areas of expertise.
But beyond that, we also look at things that could sit adjacent to where our platform exists today. So that could be productivity. It could be expanding our verticalization. Think about healthcare and education, which are really important for us today. Even sales could be another opportunity to start to think about more department specialization as well. So, that's to say that, Sanjay, who runs my corp dev team, is amazing.
They look at all of these opportunities on a daily basis. We think about M&A, there's kind of three lens that we look through. First of it is like, that's really about the technology. We're very proud of our modern architecture that we have today, right? The ease of use, the reliability. We never would want our customers to have to sacrifice around that. We look at culture, as culture we believe is a good indicator of potential success of the integration with us. And then, we also look at valuation, and valuation certainly has become easier over the last year.
Mm-hmm.
But we are a very thoughtful, and you might even say, fruitful company, and so really want to be careful about how we step in. And where we've, you know, had challenges in the past has either been a matter of technology or valuation, but we will eventually find the right match.
... That's a very helpful color. Thank you. Just broadly, just thinking about your cash position right now, and I know in the past, you've done other share buybacks kind of on an annual basis.
Yep.
How should investors think about the timing of an M&A transaction, as well as at what point would Zoom potentially pause that strategy and look more towards the payment pool and do buybacks or something like that?
Yeah. So we've done one buyback, okay? We did that in FY 2023, and it was, I think, very successfully executed to offset more than the dilution in that year. And we have a discussion every quarter with, you know, with our team and our board, and it...
Again, it's about maintaining, currently maintaining the flexibility if we were to see something that was really attractive to us in terms of M&A.
Historically, we have been very reluctant to take on debt, and also given where the stock price is today, I would rather use cash for an acquisition than issue stock in a transaction like that.
Yeah.
It doesn't mean that we won't do another buyback at some point, and it's just a matter of evaluating the opportunities that we see in the market and balancing that with potentially returning cash to shareholders.
Well, I think we've kind of beat the M&A topic.
Thank you.
I think we're good to move on.
Okay, good.
Just looking at FY 25, how should investors be thinking about growth prospects moving forward the next...?
Yeah. So the growth drivers of the company for the future, certainly Zoom Phone continues to be a very important growth driver for us. As a reminder, we announced we've crossed over the 7 million seat mark, so really excited about the ongoing momentum there. It will be Contact Center and for all the reasons that we've spoken about earlier. Certainly, AI plays a very important role in our overall growth strategy in terms of not only improving retention, but also being a really competitive differentiator for us, especially against Microsoft.
The fact that our AI Companion comes included for our paying customers at no additional cost. And our CTO recently did a blog that highlights how our AI Companion competes against Microsoft in terms of product responsiveness, in terms of accuracy, at very a fraction of the cost. The fact that they're charging $30 a month and ours is included, I think is a really important differentiator.
Then the other opportunity areas for growth is really around international. International has really been a headwind for us for the last couple of years. That's a combination of FX rates, but the economy we've seen, the impact in the Ukraine and Russia. So starting to see those markets eventually return to stabilization would really be a help for us, as well as we are investing in growing our sales teams and our channels in those markets.
Okay. It sounds like phone and contact center are key drivers. So just kind of touching on the contact center, you said Eric Yuan spearheading that division, the group.
Yep.
What's the strategy looking like for targeting customers? Is there any change to Eric's attitude towards how he wants to run the contact center business?
Yeah. So first of all, it's really focused on adding new features and functionality that we need to get to that true enterprise level, you know, ability to compete at the enterprise level. And so today, the product natively integrates with voice, with video, and with SMS. We need social, which is in beta right now with Facebook Messenger and WhatsApp. We need things like email integration as well, outbound dialing, and then PCI compliance, which is the standards for which you can take a credit card in a safe manner.
Mm-hmm.
All of those are coming, I would say, within the next month. So when we get to that level, then we'll really... I think I'd say, so within the next year-ish, we'll really be able to compete at those levels. The other thing that we are working on is establishing our relationships. That's really an important, you know, component of selling as well. We have some of those in place, but some of them are still very nascent, especially when you look outside the U.S.
Mm-hmm. Okay. No, that, that definitely makes sense. I think from, like, an AI purchasing perspective within the contact center, what are customer conversations looking like for demand within, for AI within the contact center now?
Yeah. So there's a couple different components of it. So there's the Zoom Virtual Agent, which is actually a standalone SKU that we sell, that leverages AI to respond to customers without the assistance of a human.
Mm-hmm.
That we've seen great success with. We deployed it internally for the contact center. We've deployed it also internally to handle some billing questions, especially around tax IDs, et cetera, and we've seen great success internally. On the online contact center, it's managed to handle and collect 85% of the inbound calls. So that's, it's really been successful. Yeah. So, you know, there's been a lot of discussion around contact centers in terms of, like, what's AI going to do to the contact center?
And we honestly are agnostic when we talk to our customers about: Do you want to deploy a human agent to address this, or do you want to use a virtual agent? And we have a solution for both. So we're really excited about the future there. Then, as part of the announcement this morning, there's also a feature called AI Assist, which helps the agent prompt them. Some of the customers start coming is like, "Well, what's the next obvious step?" Or not maybe obvious, "So what's the next recommended step to take with this customer based on the discussion that you're having right now?
Mm-hmm.
So this is where AI, I think, is gonna really help, not only organizations be more efficient by leveraging, potentially Zoom Virtual Agents, but also having agents themselves be more efficient by prompting them, potentially more productive, if they're able to upsell, depending on, you know, the conversation that they're having. So I think those are all the things that are coming with AI in general around contact centers.
Okay. And I think, so six months ago, there was a big concern on contact center companies because-
Yeah.
people thought AI is just going to drive efficiencies to a point where we could automate and remove contact center agents. Seat-based model
Yeah.
You can see how that can be a clear headwind. So what have you seen with-
Yeah
With regard to AI essentially replacing agents?
I think that they will be able to really make agents more efficient, is how I think about it. And they can take away the majority of the repetitive type transactions. So, like, what we've seen internally is password reset. Like I said, the, on the billing side, adding things like enabling the customers to input their tax ID without having to talk to an agent, right? So those are non-value add actions that a virtual agent can, or, you know, AI can, accelerate. Where the agents then can get elevated up to, is really the value add.
Mm-hmm.
Whether it's solving a more difficult product, you know, customer problems with a customer, potentially talking to them about an additional product they could be upsold to.
Mm-hmm.
That's where I think you're going to start to see AI really drive more value into the contact center.
Okay. So it's making the tier one interactions kind of automated.
Automated.
The tier two is much more value add.
Absolutely.
Okay. Well, I can see that.
Yeah.
Moving over to the AI and the non-contact center side, AI Companion, which is, like you said, baked into the existing product offerings and pricing plan. We love this approach, by the way.
Yeah, great.
Back then, Companion, given its launch.
So customers love it. The feedback has been great so far. Eric was even retelling a story about having dinner recently with the CIO, and I thought this was so interesting. So we often see that our customers are leveraging the convenience of Zoom and convenience of Microsoft, and we built our product to seamlessly think about this from the customer's perspective.
This specific customer was leveraging some meetings and Zoom Phone, but using Microsoft Teams for chat. And what the CIO said to Eric there was talking to him about AI Companion and how amazing it is, and all the functionality that you get, especially as you start to use it across the platform. The CIO said, "You know what? That now is a compelling reason for me to really look at Zoom Chat, because I can leverage the AI capabilities-
Mm-hmm.
-across the entire platform. Oh, and by the way, I don't pay an additional $30 a month to get that. And so I think this is where you're going to start to see the product really be the, Zoom AI Companion, be a differentiator for us.
Mm.
Not only drive retention, but even potentially drive attraction to the platform.
Yeah.
Because it is as good as anything out there, probably better than anything out there, because of our federated approach.
Mm.
The ability to really provide a great product at no additional cost to our paying customers.
So it sounds like Zoom AI Companion can almost help Zoom serve as a consolidator across other point solutions.
Exactly. In general, we believe... You know, if we look at the—I mean, there's some poor products in our platform that we rarely even talk about. We have an amazing whiteboard product. We have a scheduling product that is, you know, complete with Calendly. We have Zoom Clips, which is our asynchronous video-
Mm.
When you look at the total cost of ownership benefits that our customers get, whether you take each of those products individually or you do them as a bundle under a Zoom One bundle, the opportunity to consolidate onto our platform, have an amazing experience from both reliability and ease of use, native integration, where all of these are cloud-based, modern architecture products.
Mm-hmm
... at a very competitive price, I think it's a really compelling proposition.
Okay. Well, I definitely agree. So it kind of sounds like there's ways to indirectly monetize Zoom AI Companion. Have you thought about potentially down the line, other ways to directly monetize Zoom AI Companion?
Yes. So there are SKUs that leverage AI that are monetized, as I mentioned, like Zoom Virtual Agent, for example.
Mm.
We have Revenue Accelerator, which is a sales analytics tool. We have things like Reservations, which are all separate SKUs that are separately priced. But specifically to AI Companion itself, there are a couple avenues that potentially in the future could lead to monetization.
Mm.
Right now, you know, SaaS products, by definition, are multi-tenant, right? AI and the data around AI, it starts to lead to an interesting consideration, which is we've said very explicitly, we don't use our customer data to train our models. Some customers, though, have come to us, and they want to leverage their data-
Mm.
for their own models, right?
Mm-hmm.
And so what you could start to see develop over time is a single-tenant relationship with those customers, whereby you're building an environment that segments their data or segregates their data only for their benefit, and that could be potentially, you know, a premium offering.
Mm.
-that we could charge for. There are also, today, the things that we're including in AI Companion, which are like Meeting Summary or Catch Me Up, which allows you to join a meeting late and ask, like, "What did I miss?
Mm-hmm.
I stepped out of a meeting yesterday, and while I was gone, somebody did for me, like, "Here, this is what you missed." It was a really great summary of what happened during the meeting while I was gone. Things like Chat Compose, Email Compose. We believe those are all table stakes and are going to be included, but there could be premium offerings that go over and above that at some point in the future.
Well, I could really use that,
Catch me up?
Oh, yeah. I can't give you the number of times I missed something on a call and got a look from Ryan. Now just diving more into, like, the quarter performance and kind of questions around that. You called out a recent pipe between business and business plus plans.
Yep.
Can you just go over the details on that?
Yeah. So, as a reminder, earlier this year, for our online segment, the lowest bundle is Pro, and we had a price increase for monthly Pro users earlier this year. It was $1 on top of the $14.99 price. Biz and Biz Plus are the next two levels of bundles for our online, and in November, we announced a price increase there of $2 per month for Biz and Biz Plus, both monthly and annual customers.
And then earlier this week, we announced a price increase for back to Pro, the annual version of Pro, which we didn't do last year. So basically, all of the online bundles have gotten a price increase over the last couple of months now.
Okay. And is that Pro annual price increase $1 as well, monthly, or is it?
I think I can't remember. I think it's the way it's probably $10 total, because I think we give them two months for free.
Okay.
I think it's how the math actually works out.
Okay.
But yeah.
Helpful. And then just on the Biz and Business Plus side, how large are you to that customer base?
So we don't disclose the actual number of our customer base. What we have said, though, about our online customer base is the majority of them are on the Pro plan.
Okay.
So the majority of them have gone through it, but there's obviously still an opportunity, and the price increase for Business Plus is $2, so it's a little bit higher. There's more value there, so it's a little bit higher.
I understand this takes effect December eighth, Friday.
Yes.
Is this baked into or factored into the Q4 guidance at all, or, and how can it look for upside for FY 2025?
Yeah. So, we did know this was coming. Obviously, over time, we did guidance. But yes, we remember, some of those customers are monthly, so they'll get an email notification. Some of them are annual, so the full effect of it, we did it very specifically in December to enable us to have the full impact in FY 25. That's really where... There's minimal impact in Q4. It really starts to the best.
Okay, good to know. Then just from a macro perspective, have you seen any changes in macro since the quarter end? You can elaborate on how that, how macro is currently impacting different parts of the business.
Yeah. So I think in general, macro environment, we've been talking about this for a few quarters now. Certainly continue to see deal scrutiny, elongated sales cycles, second quarters. We saw that in Q3. We expect to see it again in Q4. And then the other impact we've seen is right pricing by our customers due to their own reductions in their employee base.
And an example of this would be a customer comes to us and says: "You know, I, I have 100 employees. They had 100 meeting licenses, but I laid off 20% of my employee base, so now I only need 80." Our team has done a really, really good job of saying: "Great, let's look at you right size, but let's talk about now moving you from Meetings to Zoom One," which is a bundle.
Mm-hmm.
And we announced on the call that our Zoom One customers grew 330% year-over-year. And that's really important because what it does is, first of all, you know, it serves the customer. It preserves generally the spend, because as we're moving them to a higher base SKU, we're able to say, okay, now you're buying, you know, 80 at a higher dollar, so maybe it's the same dollar amount.
And what it does over time is, first of all, it's on a bundle, and we know that customers with more than one product are more retentive, and that's great. It also gets them better situated in terms of a higher dollar SKU, so that eventually, the economy improves and they start to grow again. Now they're growing at a higher level SKU. So by looking at the data, that the majority of our customers had a renewal opportunity in FY 24. The majority of them hopefully have worked through this.
However, and unfortunately, I don't think we're completely done with the right sizing. You know, we are gonna have customers that are gonna renew in FY 25 that didn't have a renewal period in FY 24. And as you've seen over the headlines in the last few days, we've seen announcements from, you know, Twilio and Spotify, and some of those are our customers.
So we will obviously continue to work with them through these, but I feel like we have probably another year or so of this right-sizing transition period that we're working through, which is, you know, it's a transition phase, which is a little bit difficult, but I think on the other side, coming out of it, we're better positioned as we're able to move them to these, these bundles, which really, for the long run, bring them a lot of beneficial total cost of ownership, but for us also, only SKUs, which we really prefer them to be on for all the reasons I mentioned.
Absolutely. So on the linearity perspective of those kind of SKU optimizations and, like, contract renewal sizes getting a little smaller, have you seen any improvement or trend in 3Q versus 2Q versus 1Q in FY 2024?
You know, what we did see this year, which was interesting. As a reminder, we did a pretty significant reorganization and restructuring of our own in Q1 of this year. The sales team, especially, some of that lingered into Q2, partly due to international labor laws. They had some structural changes, a new leader. What we did see, which is very interesting, is historically, if you remember, Q2 and Q4 have been our highest business quarters.
Mm-hmm.
As we have reps that are on six-month plans, and then Q1 and Q3 are seasonally down. We actually saw bookings in Q3 equal to those of Q2, which was an interesting phenomenon. I think it's a good example or a good indicator that we've kind of worked through that transition period. Q2 was probably a little bit impacted still by the reorganization.
And it's always a disruption when you go through something like that, and it tells me that, like, Q3 is like, okay, it's kind of back, they're focused, they're in. So I think it's a good indicator for what's coming in Q4.
Sure. That sounds like sales effect Q4.
Yes.
... now just taking a look at the puts and takes of the deferred revenue guide for next quarter, like down 68% year-over-year. Can you just explain what's happening there? Just because from an optics perspective, what keeps a stronger quarter, and you think that moving more towards enterprise deals with phone and-
Yeah.
Contact Center should support as well. So any commentary?
Yeah. So it's a really interesting phenomenon that's happening, which is, if you look at the total RPO, it's up year-over-year, which indicates as we've... Going through these, you know, kind of right-sizing discussions with our customers, we are able to get them to commit to longer-term contracts, and that's what's showing up in RPO. However, customers are taking advantage of the higher interest rate environment and are reluctant to give us their cash up front, right?
What they wanna do is they, they're willing to commit to a longer-term contract, and they typically get a discount in response to that, but they prefer to pay on shorter term cycles, and have done historically. So if they were paying annually for it, now they want to pay monthly. That allows them to preserve...
I mean, I can tell you, if they can earn 5% in the market, we don't give them a 5% discount to pay upfront. So they're, they're making that trade-off, which makes sense. But that's why you're seeing RPO extend while deferred revenue is coming down.
Okay. Okay, that's helpful. Shifting a little bit over then to Zoom Phone, you called out 7 million users, which is just rapid adoption, I would say. We're very impressed with this number. What, what are you seeing in Zoom Phone? Is it, is that performance above, below expectations, and, and what's next for Phone?
Yeah. So we are really pleased with Zoom Phone and the momentum that we're seeing there. What's next is focused on international expansion, building out the organization, as well as channel relationships there. That's a really important area for us. We, some of you may remember, were mainly a direct-led organization.
When we had this meeting, we were 95% direct-led, and so we're continuing to focus on building that out. You know, we recently got our license to sell Phone in India, which is a huge accomplishment. It's a very time-consuming and elaborate process to achieve that, so we're really excited there. And that really is kind of the last, I would say, check box for our large multinationals.
They want to be able to natively communicate, use natively to communicate with their employees in India, which is what you get once we have the ability to sell there directly.
Okay. Oh, I like it. The Zoom Phone traction has been very impressive, so thanks for doing that.
Thank you. Thank you.
Just on the SBC side, I think that's an important piece of the Zoom story-
Yeah.
to touch on. Any commentary regarding the supplemental grant program, or-
Yeah.
What that could look like in FY 25?
Yeah. Yes, thank you for the opportunity to talk about that. So as a reminder, we had a supplemental grant program that we sunset in February of this year, and so we're working through kind of the last phase of any of those grants. And if you look at FY 2024, approximately a third of our stock-based comp is directly tied to grants under that supplemental program.
And those grants, they're tied to the underlying vesting of those, those grants, so that's the stock. So those, when- whenever the grant was given, there were either two or three years left of vesting on that grant. That's how the design of the program. So the simplest way to think about this is a third of our stock-based comp in FY 2024 will no longer exist three years from now. It will not be a, you know, it'll come down kind of step by step by step-
Mm-hmm.
over the next three years.
Okay.
And then that base is kind of what's left in terms of, based on the size of our organization today, that you should expect is sort of a recurring stock base on a normalized stock-based comp level.
Okay, so then a third is on a dollar basis, not a % of sales?
Yeah, a dollar base.
Okay.
Yeah.
Helpful. And I think just before our time runs out, just loving to dive into the operating margin profiles of online versus enterprise.
Mm-hmm.
Is it reasonable to think that online business margin could be double enterprise business margin, or is that about right?
I think the easiest way to think about it is the online business model margins have no sales expenses. Not no, but very minimal-
Mm.
is what I should say. There's a small team that supports them. We do allocate marketing because they benefit, or even though most of our marketing is targeted toward enterprise, there's obviously benefits that carry over into online, but the majority of it, you can almost completely take out the sales.
Very helpful. And before we wrap up, I'd love to give you the floor. Anything that investors should keep in mind heading into quarter two or FY 25 perspective?
I think that we're really excited about the future. We think we are very well positioned with not only the extensive nature of our platform, but the ongoing expansion of contact center, AI Companion, I think, is really gonna be a key differentiator. And then, of course, as the economy itself eventually starts to improve, which we're not giving FY 2025 guidance, so we are not commenting on that for FY 2025, but over time, as it does, we'll be very well positioned.
Okay. Thanks so much, everyone, for coming, and thanks, Kelly, for being here.
Thanks, everybody.