All right. Well, thanks for joining us, everyone. I'm Parker Lane, Software Analyst here at Stifel, and with me this session is Tom McCallum, Head of IR at Zoom. Tom, thanks for joining us.
Thanks for having me.
Really appreciate it. Everyone knows Zoom. Everyone uses Zoom in some capacity or has in the past. So we're gonna talk a lot about contact center and phone, but I wanna start with the core meetings business-
Okay.
the video business. Is there still an opportunity for a company like Zoom and video, especially post-pandemic, or is most of the growth from the meeting solution largely had already?
It's a much more mature product because of the amount of adoption that happened. There's still opportunity to take share. I think we're kind of down to sort of a big three. It's like ourselves, Microsoft, and Cisco still has a pretty good install base. The last couple of quarters, we've seen some pretty good large deals come over, 'cause Cisco's up in that enterprise space. We won a big tech company last quarter. Quarter before that, one was a international airline. So there's definitely some enterprise share shift that could take place. There's still a little bit out there of some of the smaller guys, but they're just not as relevant, so I'm not sure, you know, it's much of a needle mover.
If the economy were to improve and there were more knowledge workers created, say, we had an IPO, wealthy IPO market, and people were hiring, that would be helpful for us, but we're not gonna wait for that.
Yeah.
So what we're really focused on is expanding beyond just the video conferencing product. It is very, you know, very well known. It's given us great brand. We've got a lot of customers, but it has matured just because of the adoption from the pandemic.
Yeah. You mentioned Microsoft. You mentioned Cisco-
Yeah
... yourselves. When it comes to the video offering itself, like, how do you maintain that category leadership out there in a world where Microsoft can bundle it with other things as well?
Yeah. Microsoft, you know, is kind of known for bundling. It's kind of known for really good distribution.
Mm-hmm.
I think for us, we try to out-innovate them, stay ahead of them. They are a fast follower, so you can't sort of sit on your laurels. You have to be out there doing things. For instance, we in September launched our AI product, our AI Companion, and it basically comes free with the Zoom paid subscription.
Mm-hmm.
So you can have, you know, AI generated summaries of things. You can use AI to generate chats, so... And we've done other things, like we've added more to our chat product, which also comes free with the Zoom video subscription. And so, and then, you know, other products we're cross-selling within. So a lot of innovation is probably the biggest thing. We're also very focused on customer happiness-
Mm-hmm
... as we always have been, going all the way back from our IPO. And so we, we do a lot of things to, you know, add innovations that our customers specifically want, so.
Yeah. I feel like we've been talking about this going back to the pandemic, but the online business-
Mm-hmm
... it was a major headwind. It's become less of a headwind.
Yeah.
Seems to be stabilizing in real time. Can you just talk about that dynamic a little bit? When you look beyond the stabilization point, is there an opportunity for that to be a growth driver of the business at some point?
Yeah. So I would say, just so everybody knows, we have two businesses. We have an enterprise business, which is really enterprise, just sort of down to the SMB space, and then we have an online business, which is self-service, small, anyone from a sort of SMB to kind of a prosumer, maybe even a few consumers. It's a very profitable business. It has really great cash flow. It's basically credit cards. You collect, you get the cash. So, it was about 20% of our business before the pandemic and had gotten to the majority of our business. As our enterprise business grows faster than the online business, it is shrinking, and I think it will continue to do that as a percent of the total business.
I don't know if it gets back to, you know, maybe starts to get closer to 30% this year, next year, and then, you know, maybe gets back to the 20% level. It has been stabilizing over the last bit. First, we got the churn to stabilize. It's at historic lows. It's been kind of historic lows the last few quarters. And we focused on free to pay, try to drive new customers. We did a lot of things to make the website easier to use, added different kinds of currencies, different payment methodologies, local languages, and then we've also done some price increases.
We started raising prices a year ago, March, and in December, we raised prices on all the other SKUs for that. You know, some of those will continue on into the rest of this year as people renew. But, you know, largely, I think the pricing increases are kind of behind us, but it's helped us, and it's part of our forecast to get it stable. It's, you know, a very good business, like I said, because it's very profitable. I think to get it sort of that next phase, we need to have something else to sell in there-
Mm-hmm
... broadly, and that could drive future growth. But I would say, you know, getting it to stable at this point would be a big win for us. And that's how we're forecasting it for the end of the year. It has been kind of, you know, kind of in this range now, like $470 million-$480 million, and, you know, we can get it by the end of the year to stop being a headwind, that would be great.
Yeah. That's great.
Yeah.
I want to shift gears to your second act as a company, which was Zoom Phone. It's been a tremendous success story of scaling there.
Mm-hmm.
In 2024, where we sit right now, is that becoming more of a hook into the platform versus, you know, the, the meeting side of things, or is it more of a cross-sell motion still today with Zoom Phone?
Yeah. You know, we actually met with an investor earlier today. They were an all-Microsoft Teams shop, and they were saying that they were looking at Microsoft and decided to go with Zoom instead. Just some of the features, functionality that Zoom Phone had versus- So they're gonna be running Zoom Phone next to Teams. So it definitely, we're in a world, I think, where people are looking to move off the old PBX systems to more of a cloud PBX system. And it looks, again, just like video conference, it's sort of us and Microsoft are kind of the faster-growing companies in that space of size.
You know, clearly, shares coming from Avaya, it's coming from Cisco, it's coming from Mitel, and to some extent, you know, the RingCentrals and the 8x8s of the world, people have kind of shifted over to us. So it is still a lead. It's a nice lead for contact center.
Mm-hmm.
So you think about it, when you're on a Zoom meeting, yeah, that audio on there is, is a voice over IP. It's basically the building block for a Zoom Phone. We just had to extend out to the phone number. And once you have a phone system in somewhere at a company, and they have a contact center, they like everybody to be on the same phone system a lot of times. So it becomes something where we can then bring in the contact center. So, there's a lot of affinity between the contact center and Zoom Phone.
Is there a certain profile of customer that's most attracted to Zoom Phone, or is it something that has broad appeal across your base?
It has broad appeal across the base. It's a little bit more challenging with the smaller customers. I said, you know, if we had. You know, it you can provision it for small customers, but if there's any, you know, as you're provisioning it, if there's any people involved in it, that can really eat into your profitability. So you really need something that's a little bit more lightweight and easier to easy to deploy, not easier, but easy to deploy, would be the way to think of it. We're focusing more and more on larger enterprise. We have. Last quarter, we won a large bank, big bulge bracket bank for over 100,000 seats, and that brings us up to five customers with over 100,000 seats.
Mm.
So, definitely doing really well with the large enterprises, but it can go down pretty easily, all the way to smaller. Just when you start getting into that 1, 2, 5, 10 kind of range, where those really small customers are, that's probably more of an opportunity for us than something we're executing strongly to today.
Got it. Wanted to move over to contact center, because that's a really intriguing growth driver for this business-
Mm-hmm.
Big opportunity. You know, when you think about the push you guys made there, what's been the biggest surprise to the positive and to the negative of entering the contact center market? And can you just discuss the reason it made more sense to organically develop that versus acquire your way into that space?
Yeah. I don't think there was any negative, except our attempt to acquire Five9 two years ago. Really great people, have a lot of respect for them. Unfortunately, the arbs got a hold of the deal and demanded billions more than we were willing to pay, and so we decided to walk on that. Since then, we've built out our own product. I think we're on really good pace, kind of like we were with Zoom Phone, to keep moving that up. We have 90 customers with over $100,000 in ARR. We're approaching 1,000 customers in general. And it's moved from being basically an on-prem or not on-prem, sorry, in-house IT or HR helpdesk to an externally facing one.
I think our largest customer is well over $1 million ARR, and it has over, like, 3,000 seats. We'd like to see it get up to five or 10.
Mm.
So I don't know if it's a disappointment or as much as a, you know, this is our ambition over the next bit, is to, is to get to much, much bigger customers. But there hasn't really been, you know, anything I can think of that's been a surprise. I think it's been just really a great to see the level of innovation coming in the door. Outside of the fact that, like I said, we really wanted to make that acquisition 2 years ago, and it would've probably gotten us in a little bit faster, but we would've had 2 code bases-
Mm-hmm
... to try to combine up, 'cause we really did want to build that next generation of, of contact center. As far as the market goes, it's really interesting 'cause, you know, two years ago, everybody's talking AI, right? We, you know, we all have AI, but generative AI really just came out of nowhere in some senses, and really, it's, it's put us all back to day one. And the nice thing about, I think, where we are, is because we have a new code base and it is modern, it's cloud, SaaS, that we're able to pull in more services very easily into our, contact center. So, but it does put us all back to day one.
You know, when it comes to, are people gonna buy agents or are they gonna buy, you know, bots? We have both. We have an AI, you know, intelligent bot that people can buy. We use it internally. It covers, like, 90-plus% of our queries coming in, which are hundreds of thousands a month. But we also have an agent pricing as well. So agents will still be with us. They're just gonna have to be more productive, I think.
Mm-hmm.
You'll just have fewer in general.
Yeah.
So.
You know, I think Eric said on the last earnings call that Zoom Contact Center is ready for prime time.
Yes.
When he talks about it being ready for prime time, what does that mean to you?
Yeah. So, you know, there were some features and functionality we needed to add into it over the last sort of six months. If you go back to last summer, we were, like, fully out omni-channel, but we didn't have all of the major social flow players. We didn't have all of the major email players, all that. So all of those things are now in, in the product. We've also added things like our ability to take credit cards, which is a key thing for contact center. You know, they can upsell, so they can, you know, bring in a, a payment through a credit card. So those things are now in there.
We also launched multiple tiers that include quality management, workflow management, and we're seeing those things starting to get some pickup in the last two quarters. Really, that was a great surprise. I mean, it's still small, but the fact that, you know, our ASP is actually going up for contact center because people like these higher-level SKUs. You know, it basically doubles the SKU. The SKUs are higher. They could go from, like, $70- $150.
Mm-hmm. Got it. Zoom AI Companion, this is a newer part of the story. You referenced it earlier.
Yeah.
What do you guys view that as? Is that a driver of revenue growth? Is it a customer success-
Yeah
story going forward? And maybe you could just touch on what exactly AI Companion does for a customer.
Yeah. Let me just take a quick step back and talk a little bit about Zoom's approach to AI. So we are taking what's called a federated approach, so we're not beholden to one AI company. We work with OpenAI, we work with Anthropic, we work with Llama 2. We also build our own large language models, and we have a gateway that's able to figure out what the best answer is at the best price. And so, it's a really kind of unique model. We also are not using people's data, your data, to train our models. We're either using internal data, so Cole, who's here with me today, just joined the IR team. If he and I are on a Zoom meeting, you know, I can let you know Zoom use that data.
But if I'm talking to Parker here, since he's external, it won't use that data. So we're very much in, you know, keeping an eye on people's privacy and data and not using it to train our models. So we do that, or we buy public data. So overall, you know, I think we have a really unique AI strategy. And then, when you look at AI Companion, two things we wanted to do: one is we wanted to drive the adoption of AI. And when you look at AI Companion, it's kind of the table stakes level of services, things like, you know, AI-generated summaries. And, you know, if you think back years ago, you used to pay for transcripts. You don't pay for transcripts anymore. It just comes with it, right?
And so eventually, I think that would have commoditized as well. And so by giving people AI Companion as part of their paid subscription, we're enabling them to deploy it, to use it, to get used to it, understand how AI works, how they can use it in their everyday life, and then eventually, we'll come back with a next gen of AI products that might be more consultative or more customizable to who you are, and upsell you on that. So our goal is to drive AI adoption, but at the same time, hopefully, we'll see some additional retention increase.
Mm-hmm.
You know, if people... What we found is, if people buy and use more than one product, the retention goes up significantly. But it's—you've got to get people to use it. They can't just, you know, deploy it. They have to actually get in and start using those products. So I think AI is one of those things. If you haven't used a Zoom AI summary, it's really great, I mean, you don't have to take notes anymore. So-
That's, that's good. Excuse me. When you look at the legacy players that you compete with-
Mm-hmm
They have their own issues from a technical standpoint. How would you assess their ability to deliver some of those AI features that you're talking about, in a way that Zoom is?
Yeah, so, again, I think we have an advantage because our code base is so new-
Mm-hmm
... and it's modern. You know, you look at some of our folks that we compete against, and their code base is 20 or 25 years old. You know, it's a lot tougher for them to do it. They can add things onto it, but it's not gonna have that same level of integration that you could have with a more modern code base. So, you know, Zoom's already been known kind of as being an innovator, and you know, we really pride ourselves on adding things really quickly. You know, our Zoom Contact Center has gone from product launch to prime time, as you said, in 2 years. You know, that's-
Mm-hmm
... that's amazing. If you—I think if you talk to some of the other folks in the contact center space, how long it took them to build out a full-fledged contact center with omni-channel and workflow management. Some of them don't even have workflow management. They rely on third parties, so-
Yeah
... so.
So when you look at the contact center opportunity and the phone opportunity, how would you say you guys are doing in, in the channel itself? You know, it's usually-
Yeah
... a pretty critical component when it comes to the communication space.
Mm-hmm.
Are you very far along in the development of that channel? Is there still room to grow that over time?
Mm-hmm.
How important is that to driving business in the enterprise?
Yeah, so just in general, if you go back to, like, the early days of Zoom and Zoom Meetings, it was so easy to deploy. It was so simple. Anybody could do it. You just download it off the internet, and you're up and running, and the same thing you had at the enterprise experience as well. There wasn't a lot of value add for a systems integrator or a VAR. And so most of our channel partners early on were hardware partners, like a Logitech, or we'd have ISVs as partners. Since then, we have been building out our channel, started with phone. We hired Ryan Azus, who came over from RingCentral. He was the head of sales.
He became our CRO, and he had built out their channel for them on the master agent, and then eventually the telco. So we've been building out that piece. And if you look at Zoom Phone, close to a third of their transactions, their sales are coming from the channel now, which is pretty impressive. When you get to the contact center, we've been working with the channel, and you get more sort of systems integrators. So you think about it, any company today, and there might be some greenfield out there, but most companies of any size have some kind of contact center. And the larger you get, there's probably more homegrown software integrations that are built in.
And so they're gonna need a systems integrator to kind of help them move from their legacy, mostly probably on-prem, to a more of a cloud-based one. And so we're building out that part of our channel. It's still early. We've got some really good relationships. If we found a 10,000-seat deal, I'm sure we could bring in one of the partners. Eventually, though, you- what you like to see them do is what they call build out a practice, so that they have people who are, you know, they know Zoom really well. They've been trained on Zoom. They can, you know, basically eat, live, and breathe Zoom Contact Center. That's what you eventually like to get to, so-
Yeah.
I think as we scale the business, that, that's when you'll start to see them have a higher level of interest, so.
Mm-hmm. So the platform's undoubtedly evolved from, you know, the post or pre-pandemic times.
Yeah.
You're a much bigger company today. You've got a lot more to offer customers. How has the go-to-market around these different products evolved in response to the platform expansion?
Yeah, I mean, it's been interesting 'cause, you know, channel is definitely something that we just talked about, that, that has expanded and gotten more sophisticated, I would say. The, you know, the, the regular go-to-market, you know, we, we split off the online business. We brought in Wendy Bergh, who's, you know, professional, you know, internet person, internet site person, and she really took something that had been kind of shared between marketing and sales and really put, like, a GM focus on it.
Mm-hmm.
So that part of the business really... You know, she's been out, you know, building relationships. You know, you can buy Zoom through, you know, credit cards and through, you know, the Walmarts of the world, and, and, you know, you can go to the Apple Store. So she's been really, really, you know, building it out from a go-to-market, as well as, as, as a lot of other features and functionality. Our sales organization, you know, we were kind of a one-product organization, especially going into the pandemic, and we really have had to switch people over to a multi-product group, and we've done that by, with Zoom Phone. Starting with Zoom Phone, we brought in an overlay sales team. And, so for the first few years, they were not quota-carrying.
Anybody who had a Zoom Phone deal that needed help, they would help them because it is a different nomenclature from the meetings product. If you talk to phone deals, it's just completely different, the way they talk. And not only do they do a different channel than most people, but they also have a different nomenclature. So, that was really helpful. Last year, we took those folks, and we moved them from non-quota-carrying to quota-carrying. Took a few quarters for them to kind of get themselves back up to speed and build out their own, their own, you know, leads, and then start moving those through the funnel. But so we've kind of shifted that.
We are now bringing in or have started bringing in people on the contact center side who are contact center experts to help the contact center folks. Because there, you're not only talking to IT, but now you're talking to the CXO, the Chief Experience Officer, and so you need to be able to speak that nomenclature as well. So, so we've kind of taken this same model and kind of repeated it. Workvivo has a lot of their own sort of experts because they're talking a lot to HR folks. And it was an acquisition.
We've purposely kind of left them alone in helping them build out their own business, but anybody at Zoom in the sales organization can bring in a Workvivo deal, but we also have very specific Workvivo folks as well.
Got it. I want to see if anyone in the audience here has any questions before I continue.
Yeah, I wanted to get an update on your international business.
Mm-hmm.
It seemed like America was a little bit better performing last quarter.
Yeah.
Any updates on where you're sitting?
Yeah. So Europe, it was kind of flat the last couple of quarters, which is... You know, it had been down, some of that being FX, some of that being the macro. And so that does seem to be stabilizing a little bit. In general, international was hit a little bit harder when we did our sales reorg last year. Part of it was just the fact that you need to go through, in some countries, a labor board before you can tell people they're laid off. So we announced the layoffs. People know somebody's being laid off in the room. They just don't know who it is. "Is it me? Is it you?" And it takes...
You know, took a couple of quarters to get all that put in place, and then we hired new leadership as well, and it's taken them... So I think it's starting to come back. Of all the sort of things, I think the international will be the latter one that comes back into play for us. Not Asia, but APAC has been hit with a little bit of currency impact in Japan, specifically. Japan's one of our largest countries outside the U.S., and you know, the yen has weakened a bit. I think you're pretty close to flattish if you don't have the FX impact.
But, you know, hopefully, that has the same kind of trajectory as the leadership, the new leadership gets up to speed. We've gone from, you know, a global model with a global head of sales for international to more of a regional one, where we put a head of APAC and a head of EMEA in place, as well as one in North America or the Americas. Anything else?
No, charge ahead. Margins. So Zoom has pretty robust margins-
Yeah
Multiple times, you know, in your public company life, you've talked about, you know, maybe investing more in R&D or investing more in sales and marketing. Can you walk through the puts and takes of your margin structure today, the AI investments, what impact they're having there?
Yeah.
If growth was to get back to the double- digits, would margins be sacrificed in order to achieve that?
Yeah. So, a couple things, just going back to the guidance we gave, just a couple of weeks ago on our earnings call. One thing that you should expect is you're actually gonna see our gross margins dip a little bit, this particular quarter. And what we're doing is we're enhancing our backbone, and we're, you know, we're gonna have to run redundancy for the quarter. And once that redundancy and the backbone's in, when the backbone's in place, the redundancy goes away, and margins will rebound pretty nicely. So as you're modeling, you know, just look at Q2. It's not any new pricing or anything like that. It's completely to do with the operations of the backbone of the company. And what you'll get is an enhanced service, which is really cool.
We are still looking at, like, our long-term target there of, like, 80%. So we should be sort of headed back that way as soon as Q2 is done. We are hiring, and you might have seen, we've hired a number of people from Microsoft on the AI side in the last, you know, 6-12 months. We're gonna continue to hire. They're leaders. They have decades of experience, and now we're hiring people to work with them. So you will see R&D go up, continue to go up a bit. Our long-term target's between 10%-12%. I wouldn't be surprised if we're kind of closer to the 12% this year, as we build that out.
We're investing in some sales capacity around the channel, around contact center, but we're also being more focused on marketing investments. So they sort of offset each other a bit. And then there's always opportunity in G&A. I mean, we're a pretty efficient G&A company. But and so last quarter, our Non-GAAP gross margins were, I mean, operating margins were up 40%. So I think that puts us into the top of the class for SaaS companies of some size and smaller. So, as far as, like, sacrificing margin for growth, you know, we are. And I'm sure you have an inorganic question about M&A, but we are looking, you know, broadly. We have been for a while, just seeing if there's something out there that makes sense.
It would be really hard to find anybody who's got, you know, 40% operating margins or even close to it. So, it's not so much a sacrifice, but, you know, if you think about it, you know, there are some things that we could do to help companies, too, if we bought something. You know, I looked at, you know, Five9, and, you know, their gross margins are okay, but I bet we could have helped them out on the gross margin side, just running through our data centers. We're just so efficient at doing it.
So, yeah, there could be something in the short run, I would think, but, you know, in the longer run, we'll probably look for ways to, to, you know, get back to, you know, so it's not impacting the business. There is some mix in there, you know, if, if, you know, theoretically, if the enterprise were to take off, you'd have more sales expense. This is probably the only thing that would... Yeah, I wouldn't call that a sacrifice. That's just the math of it all, right?
Mm-hmm.
There's more selling expense on the enterprise side than there is on the online side.
Got it. Yeah. Well, you kind of took us there, but let's move to the balance sheet.
Yeah.
You guys sit on a mountain of cash. You talked about wanting to potentially buy something.
Mm-hmm.
You're out there looking for the right fit. You've also done some share repurchases. I mean, what is the capital allocation strategy today?
Yeah. So in Q4, we put in a $1.5 billion share repurchase program. It's our second. We had a $1 billion a couple of years before, and we were active in Q1. We're gonna be active in Q2. There was some pushback from some people that we didn't buy enough shares. You know, you always want to buy at the low, as you all like to. It had nothing to do with that. It was just, you know, it just takes a while to get these programs up and running. And so I think you'll continue to see us active in the share repurchase program. But yeah, we are looking at acquisitions. We have been for a while. We're being really thoughtful.
I would say, you know, apologize for creating uncertainty for you all, because you all want to know what the- what we're doing, but we're really trying to be thoughtful. I think we do have a bias for build versus buy. And, you know, but, you know, if there's something out there that, you know, is modern technology that, you know, fit in well with our culture, we don't want to disrupt the company, and then at the right value, we would, we would do it. So, so we are continuing to look, but nothing has come out. I mean, most of the stuff we've done is either been sort of pre-revenue companies like Workvivo or acqui-hires.
Mm-hmm.
I think those are still very fair game.
Yeah.
You know, I mean, if we found a company that had a bunch of engineers in the AI space, I bet we'd buy it. You know, if we... Yeah. I think that's something where we'd like to invest more in.
Yeah.
Yeah.
Well, I think that's probably a good place to stop, considering time. So please join me in thanking Tom and Zoom.