Welcome, everyone, and thank you for joining today's earnings call. Today is Zoom's Q4 fiscal year 2021 earnings release. This call is being recorded. At this time, I'd like to hand things over to Tom McCallum, Head
of Investor conference. Thank you, Matt. Let me jump right into the presentation here. This is my favorite cool Zoom meeting feature, slides as a virtual background. Let me just center myself here, so I don't cover up the wording.
And so hello, everyone. Welcome to Zoom's earnings video webinar for the Q4 of fiscal 'twenty one. Joining me today will be Zoom's Founder and CEO, Eric Yuan Zoom's CFO, Kelly Sekelberg. Earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors. Zoom.com.
Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that along with our earnings release include a reconciliation of GAAP to non GAAP financial results. During this call, we will make forward looking statements, including statements regarding our financial outlook for the Q1 of fiscal year 2022 and full fiscal year 2022. Estimated or projected costs, margins, expenditures and investments, our future results of operations and trends regarding the same. Our growth strategy and business aspirations for our video first unified communication platform, our product strategy, our market position and opportunity and the continued impact of the COVID-nineteen pandemic on our business. These statements are only predictions that are based on what we believe today.
The actual results may differ materially. These forward looking statements are subject to the risks and other factors that could affect our performance and financial results, which we disclose in detail in our filings with the SEC, including our latest quarterly report on Form 10Q as well as the current report on Form 8 ks we filed with the SEC on January 13, 2021. Zoom assumes no obligation to update any forward looking statements we may make on today's webinar. And with that, let me turn it over to Eric.
Thank you, Tom. First of all, I'm not a cat. I'm alive here. So Thank you all and welcome everyone joining us on today's Zoom video webinar. Fiscal year 2021 was truly a pivotal year for Zoom, characterized by achieving unprecedented success and overcoming tremendous challenges.
My heartfelt appreciation goes out to our approximately 4,400 employees for their incredible energy, perseverance and dedication. Their focus on delivering happiness and building trust enabled us to become a household name and one of the most popular apps of the year. We are so grateful to our customers, partners, investors and the entire community for helping us During these tough times, I am humbled to see workers, students and families plug to our platform and use it in increasingly innovative ways to connect, contribute and collaborate. The future is here. With the rise of remote and work from anywhere trends, we recognize this new reality and are helping to empower our own employees and those of our customers to work and thrive in a distributed manner.
Extensive and growing portfolio of offerings and product features. For example, Zoom Rooms Enhancement connected seamlessly with Zoom meetings, enabling features like virtual reception, smart gallery and more, provide a secure, inclusive and empowering work from anywhere experience. Our evolution from a leading video communications app into a video communications platform will strengthen our position in the new normal by providing customers with a growing set of innovative and integrated collaboration and productivity tools. We are very energized to help lead the evolution to a high good future of work that allows greater flexibility for both in person and virtual connections, a future that we believe will be better for the climate, productivity and employee happiness. Next, as part of Zoom Phone's 2nd anniversary, I'd like to highlight some exciting deals where we harness the power of the channel to secure large enterprise rollouts of the Groupe phone.
We are optimistic about the growth in our channel partners, including master agents who work as a liaison, beating customers and the telecommunication's world. These channel partners are force multipliers and have proven to be strong advocates for us. So let me share a few happy customers' stories.
First,
we are
grateful AVID-nineteen University of Southern California as a long standing Zoom meeting and a new Zoom phone customer. Our commitment to USC and broad higher education was rewarded when the university and their master agent shortlisted us extensive vendor review to modernize their phone systems. After a 6 months evaluation of the many UCaaS vendors, USC chose to deploy 21,000 Zoom Phone C fits. We are so thankful that USC put their trust in Zoom to deliver an increasingly comprehensive and integrated set of communications services. Another highlight this quarter was the expansion with Equinix, world digital and dropship company, enabling digital leaders to harness each part of the platform to bring it together and interconnect the foundational infrastructure that empowers their success.
Ethernet has been a Zoom customer for several years and uses Zoom Meetings and Zoom Rooms for its global employees to communicate and collaborate. Zoom's. They took Zoom for our global footprint, our ability to serve Acuni's data centers with a zero touch provisioning and our advanced features over other UCaaS offerings. Let me also welcome a direct to sales win. We are very happy to announce that Universal Music Group, the world's leading music company is adopting Zoom phones for its global workforce.
UMD was looking to replace and a consolidated legacy on prem technologies with Flexible Cloud PDF solution. As an existing Zoom meetings and Zoom's customer, UMD was drawn to the integrated nature of the Zoom phone product. We will be using Zoom in IT, which will provide their global users with a one touch experience of video, chat and voice. Thank you, UMG. These stories are not exceptions.
It implies customers Should Zoom replace their legacy phone system because of their positive experiences with our other high quality products lead are very easy to use and well integrated. The value of our rapid innovation circles and ability to scale for RaaS and global deployments. They also look to us to partner with Zoom to deliver a unified communication solution Lattice, their users happy and productive. Thank you, Equinix, U. S.
A, UMD and our supportive channel partners, I love you all. With that, let me hand things over to Kelly.
Thank you, Eric, and hello, everybody. As Eric mentioned, FY 'twenty one was a pivotal year for us. While the pandemic stress tested our operations, it also accelerated our growth opportunities. According to Okta's 2021 Business at Work report, which relies upon data from Okta's customers, Zoom was by far the preferred enterprise video conferencing app ranked among most popular workplace apps overall and was a top app by number of customers and active unique users. In addition, analyst firm Frost and Sullivan recently recognized Zoom with its 2020 Company of the Year Award.
Honoring Zoom's dedication to providing customers with innovative solutions that drive growth and deliver new capabilities. Thank you to our amazing customers who made these accolades possible. Bolkering the growth of our product portfolio is Zoom Phone, which has grown incredibly and turned to last quarter. We believe the opportunity ahead is significant as the TAMRA telephony is forecasted to grow to $23,000,000,000 by 2024. We have seen wins from legacy on prem providers as well as other cloud PBX vendors.
Here are a few milestones to mark the anniversary. Illustrating the ability of Zoom Phone to meet the needs for large scale enterprise rollouts, Zoom Phone finished FY 'twenty one with 18 customers, each with over 10,000 paid seats. We closed FY 2021 with approximately 10,700 Zoom Phone customers with more than 10 employees, up 2 69% year over year. We continue to drive broad adoption across industries and customer sizes 7,000 customers with more than 10 employees and our growing channel presence, Zoom Phone is in a strong position as customers look to modernize their phone systems to an integrated communications platform. Now getting into the results.
Call. Let me start with a few of the financial highlights. And then for the full year, I'll review our financial results for Q4 and finally, our outlook Q1 and the full year of FY 2022. Revenue grew 326 percent $2,700,000,000 as we exited the fiscal year at an annualized run rate of $3,500,000,000 We grew non GAAP operating margin to 37.1%, up from 14.2% in FY 2020. Free cash flow grew by over 12x to $1,400,000,000 for the full year.
In Q4, total revenue grew 3 69% year over year to $882,000,000 This top line result exceeded the high end of our guidance range of $811,000,000 due to strong sales and marketing execution in online, direct and channel businesses as well as lower than expected churn. The demand was widespread across products, industry verticals, geographies, new logos and customer cohorts. The year over year growth in revenue for the quarter was mainly driven by the sharp increase in new customers this year, which accounted for approximately 80% of the incremental revenue, up from 59% in Q4 of last year. We continue to add customers of all size and across industries that we anticipate will provide future upsell opportunities. Let's take a look at the key customer metrics for the quarter.
We continue to see expansion in the upmarket as we ended the quarter with 1644 customers generating more than $100,000 in trailing 12 months revenue, up 156% year over year and 28% quarter over quarter. This is an increase of 355 customers sequentially, the highest number of quarterly net adds for this segment. We made great progress in the upmarket and still see a lot of opportunity ahead. For example, we grew the number of Global 2,000 customers generating at least $100,000 of ARR by more than 100% this year, but that still accounts for only 14% of the total population. We exited the quarter with approximately 467,000 customers with more than 10 employees, adding approximately 33,000 customers during the quarter and 385,000 customers during the year.
In Q4, customers with more than 10 employees represented approximately 63% of revenue. We also continue to benefit from significant growth in our segment customers with 10 or fewer employees. In Q4, customers with 10 or fewer employees represented approximately 37% of revenue, up from 20% in Q4 last year and down modestly from 38% in Q3. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 11th consecutive quarter As existing customers acquired more Zoom meeting licenses, rooms, webinars and Zoom Phone products, We value their trust in us to build their unified communications on Zoom. Both domestic and international markets had strong growth during the quarter.
Our Americas revenue grew over 2 92% year over year. Our combined APAC and EMEA revenue grew 6 87% year over year to be 33% of revenue, up from 20% a year ago. In FY 2022, we intend to make additional investments in international resources to further capitalize on the global opportunity. Now turning to profitability. The increase in demand and strong execution drove net income profitability from both GAAP and non GAAP perspectives.
I will focus on our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, charitable donation of common stock and acquisition related expenses. Non GAAP gross margin in the 4th quarter was 71.3% compared to 84.2% in Q4 last year and 68.2% in Q3. The year over year decline in our gross margin is partially due to the dramatic increase in free usage related to the pandemic, Including our ongoing commitment to support approximately 125,000 K-twelve domains as well as the higher utilization of public cloud services. The sequential improvement mainly relates to seasonal audio usage, which decreases during the holiday season. We would expect gross margins to remain around 70% as long as we continue to support free K-twelve education.
Research and development expense grew by 91% year over year to approximately $31,000,000 As a percentage of total revenue, R and D expense was approximately 3.5%, which was lower than in Q4 of FY 2020 mainly due to the strong top line growth. Though we made strides in expanding our team, we remain committed to prioritizing R and D hiring and continuing to grow in order to drive further innovation, expansion and security on our platform. Sales and marketing expense grew by 90% year over year $159,000,000 This reflects an additional $75,000,000 over last year, primarily due to investments in hiring to drive future growth. Sales and marketing expense was approximately 18.1 percent of total revenue, a decrease from Q4 of FY 2020 mainly due to strong top line growth. We plan to continue to invest in adding sales capacity and product marketing programs over the next several quarters focused on capturing market share.
G and A expense in the quarter grew by 2 91 percent to $78,000,000 As we continue to scale our G and A functions and invest heavily in security and compliance headcount and professional services. G and A expense was approximately 8.8 percent of total revenue, a decrease from Q4 of FY 2020. The revenue upside in the quarter carried through to the bottom line with non GAAP operating income of $361,000,000 exceeding our guidance. This translates to a 40.9% non GAAP operating margin for the 4th quarter, a large improvement from 20.4% in Q4 last year And steady improvement from 37.4 percent in Q3. Non GAAP earnings per share in Q4 was $1.22 on approximately 301,000,000 non GAAP weighted average shares outstanding and adjusting for undistributed earnings.
This result is $0.43 above the high end of our guidance and $1.07 higher than Q4 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $883,000,000 up 2.83% year over year from $231,000,000 Also, please note, We have seen a shift in the mix of invoicing to approximately 50% of business being billed monthly, up from approximately 40% in the previous year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1,800,000,000 up 190% year over year from $604,000,000 The increase in RPO is consistent with the strong demand and execution in the quarter. We expect to recognize approximately 70% or $1,200,000,000 of the total RPO as revenue over the next 12 months as compared to 62 percent or $375,000,000 in Q4 of FY 2020.
We ended the quarter with approximately $4,200,000,000 in cash, cash equivalents and marketable securities excluding restricted cash. This balance includes approximately $2,000,000,000 from our follow on public offering in January. We had exceptional operating cash flow in the quarter of $399,000,000 up from $37,000,000 in Q4 last year. Free cash flow was $378,000,000 up from $27,000,000 in Q4 last year. The increase is primarily attributable infrastructure to support our growth outlook and drive additional efficiencies.
Now turning to guidance. We are pleased to announce our outlook for FY 'twenty two for both revenue and non GAAP profitability. Although we remain optimistic on Zoom's outlook, please note The impact and extent of the COVID-nineteen pandemic and people returning to in person contact still remains largely unknown. Outlook is based on our current assessment of the business environment. For the Q1 of FY 'twenty two, We expect revenue to be in the range of $900,000,000 to $905,000,000 We expect non GAAP operating income to be in the range $295,000,000 to $300,000,000 Our outlook for non GAAP earnings per share is $0.95 to $0.97 based on approximately 307,000,000 shares outstanding.
Both Q1 and full year share count include the additional shares issued in our follow on public offering. For the full year of FY 'twenty two, we expect revenue to be in the range of 3.76 to $3,780,000,000 which would represent approximately 42% to 43% year over year growth. We expect non GAAP operating income to be in the range of $1,130,000,000 to $1,150,000,000 which would represent approximately 14% to 16% year over year growth. Our outlook for the non GAAP earnings per share is $3.59 to $3.65 based on approximately 311,000,000 shares outstanding. Before concluding, I'm happy to highlight that today we announced the first group of grant recipients from our Ed Innovation Awards Program.
This is part of our Zoom Cares philanthropic program under our ESG umbrella. We are excited to support their work, which includes promoting diversity And providing access to science based approaches to reading education. We are proud to sponsor these critical and innovative education efforts around the world forum. Thank you to the entire Zoom team, our customers, our community and our investors.
First question is from Alex Kurtz with KeyBanc.
Yes, thanks for the question and hope everyone at Zoom is doing well.
So could you frame
how much Zoom Phone versus new customers versus the expansion opportunity is driving the fiscal 'twenty two growth outlook? And as part of that, what churn rates are you assuming as return to office ramps later in the year? Thank you.
So Alex, we are really excited about the opportunity of Zoom Phone ahead. As you heard, they performed very well this year. They were the Zoom Phone was the fastest growing product line quarter over quarter in Q4 and we expect to see strong growth as we look towards FY 2022. As you remember, our strategy is to sell into our existing installed base. So based on the customers that we have today, we see tremendous opportunity for further upsells with Zoom Phone.
And then high level, in terms of the churn rates, We have seen churn rates stabilize in the back half of FY 'twenty one. And We do though they are certainly elevated from pre pandemic period and we have assumed that to continue as we move through FY 2022 and the uncertainty around
our next question is from Will Power with Baird.
Great. Thanks for taking the question. Yes, I wanted To touch on Zoom Phone as well, terrific to see the strong results. I wonder if you could help us understand where you are in the evolution of rolling out channel partners. It sounds like that was a key contributor to some of the bigger customer additions.
How much more is there to go? How much more of an acceleration could we expect there? And I guess Tied to that, as you look at these bigger wins, these 10,000 seat paid customers, what's really helping differentiate you versus the other cloud providers out there?
Yes. So that's a great question. First of all, if you look at it why our customers, They chose Zoom over other cloud based PDX solutions. First of all, look at our existing customers, we already got a chop. They really enjoyed other very high quality product.
Because of that, they would like to test Zoom. After they test Zoom, realize Zoom phone. After they test that, realized it's feature rich, very reliable, very easy to use modern architecture, integrated very well with our meetings, Zoom Rooms and other product lines, right? As I said from product perspective, we have high confidence. From a distribution executive.
Not only did we drive direct growth from our services team, as you see like the USA.com, right, driven by master agent. I think we're doubly done on that channel partners, especially if you look at the history of the phone cloud's direct growth, primarily driven by the channel partners. I think our strategy to focus on building a greater partnership with the channel partners such as Mass Agent really paid it off. I think we're all going to double down on that.
Congratulations. Good luck.
Thank you. Thank you, Will.
Our next question is from Matt Hedberg with RBC.
Oh, Thanks for taking my questions, guys, and congrats really on a stellar year. Momentum with the G2K customers over $100,000 in ARR. It was certainly impressive, but it still remains just vastly underpenetrated relative to your overall population. Can you talk about incremental steps you're looking at in fiscal 2022 to drive even faster G2K or further G2K adoption? And then maybe just as a follow-up for Kelly, $4,200,000,000 in cash exiting the year.
Just thoughts on deploying that, just sort of obviously, there's some CapEx expenditures, but just broader CapEx or cash expenditures.
Yes, maybe Matt, I can address the first part of your question. You are too right, it's only 14% global 2 ks customers. So the reason why is, you look at our history, the way for us to grow our revenue, our user base is from a bottom From 1 user to user, event department and multiple department and then we talk to CIO, right? And we are doing something similar. That's why the huge opportunity ahead of us Before the last year, I think if you've talked with the enterprise customers, if you don't have a very strong brand, normally they even don't want to office, right?
Because of last year, I think Zoom has become a household brand, I think we have more and more opportunities in the pipeline And we can we provide a talk with us now, not only from bottom up, but also from top down as well. Having said that, I think The rest of the Global 2 ks customer, if you look at international and the growth opportunity, I think the future is bright as long as we keep voting on execution.
In terms of what we're going to do with that $4,200,000,000 so We as you said, we are certainly investing in building out more data center infrastructure and we are constantly looking for opportunities for other interesting companies, potentially M and A activity that could add either to our talent or our technology. It's just as I'm sure All of you know, Eric has a very high bar for both. And so we just haven't quite found the right match yet, but we keep looking. Colin Borne leads our corp dev team. And his team are just constantly looking and seeing what's out there that looks interesting.
So we'll see. We're certainly open to it. It's just finding the right match for us.
Thanks. Well done, guys.
By the way, Matt, if any of you have any great advice in the hospital,
We don't figure out
all the others. No, we love all those advice. Thank you.
Thank you.
Our next question is from Sterling Auty with JP Morgan.
Yeah, thanks. Hi, guys. So were you successful in rolling out all of the countries that you wanted to for Zoom Phone During calendar 2020, what's the plan for 2021 and can you eliminate the need for the bring your own carrier program that you launched with?
Yes. So, first of all, if you look at our international penetration by this part of 42 countries, you look at our Zoom phone and the service. I think look at our home the growth side, 40% are from the upmarket, 50% up on SMB market. If you talk about it up market, I think more and more opportunities will come from international The reason why we started by we laid the focus on North America market since last calendar year, as we started rolling out For more and more international customers, I think the international penetration, I think will be the catalyst for our future Zoom Phone growth.
Got it. Thank you.
Our next question is from Meta Marshall with Morgan Stanley.
Great. Thanks. As you think about leveraging your platform. Digital events is something you talked about as Zootopia with on Zoom as another kind of natural adjacency. Any traction here to call out on Zoom or just how do you think about kind of finding other use cases or platforms for video usage?
Yes. Yes. Talia, feel free to chime in. Actually, in terms of on Zoom, we launched on Zoom, ARPA announced that last October at Zoom Annual User Conference. For now, this is in the beta stage now, right?
So And based on our talk with those early adopters and also based on the progress, we think is Zoom is not only designed for the not only workers, but I'm not a consumer, right, to learn the yoga class. And also another part of on Zoom is about the overall business enterprise customer online virtual event. Like this year, Zoom Poppy, we will hold that event, complete it on Zoom platform. Essentially, on Zoom has 2 consumer driven on Zoom to allow the Nordic workers to make a living, to sell yoga class, teaching anything online over Zoom platform. And also we are beginning to expand our webinar platform to be our end to end corporate virtual event platform.
That market also has huge growth opportunity.
Great. Thanks, guys.
Thank you.
Our next question is from Philip Winslow with Wells Fargo.
Hey, guys. Thanks for taking my question. I also just wanted to dig On Zoom phone, one of the things that jumped out at me was the 18 customers with more than 10,000 seats. I was wondering, is there any sort of, I guess cohort, so to speak, what you're seeing here. Are these larger customers from a particular industry?
Is their workforce more distributed than others? I mean, anything that you comment on and sort of how sort of what the type of customer profile is for Zoom Phone, especially with those bigger transactions and how you think about that going forward?
I think the great news, Phil, is that it's actually spread across all industries. You saw those names that we talked about, right? We had a university, we had an entertainment organization and a technology company. And that's been I I think the success of Zoom Phone from the very beginning is it's really appealed well to small and large enterprises alike and across all industries. And the reason that we win, right, is based on, as Eric mentioned, the trust that they already have in us as well as The usability and the total cost of ownership, which plays well across all industries.
Got it.
And then just a follow-up on that, theoretically, as companies are ramping up to return to office, how do
you think about opting for
Zoom phone and also additional penetration Zoom rooms is sort of with people not being there, it's easy to take away my phone at my desk. But nobody using it in a conference room, it's maybe easier to upgrade And to a Zoom room, how do you think about sort of the first half there in particular as people prep for potentially return to office?
Yes, Phil, yes, first of all, we all want to go back to office, right? The second half for such a long time, so painful. But actually, even we all go back to the office, I think that in the product, video conferencing is one aspect, right, for the growth. But most importantly, if customer, we would like to consolidate. Now, phone and video, the same thing, the video renewals.
Why do they need to have another system? Why do they deploy the hardware dexable phone, right? Essentially, Zoom phone already give you everything. I think plus also Zoom Phone is very well integrated with Zoom Meetings and Zoom Rooms, right? A lot of companies are talking about how to ring their office, especially focused on the conference room system.
Recently, our innovations like a virtual reception, like a smart gallery view, Those 2 can really help us give a customer unify a collaboration and communication experience. That's why we are very excited.
Thanks very much. Appreciate it. Congrats on great Q4.
Why do you feel you have a best of what you back on?
Thank you, Eric. We try. I'll always be branded.
Thank you.
Our next question is from Tyler Radke with Citi.
The regular room behind me. There we go. Can you hear me okay?
Yes. Welcome aboard, Tyler.
All right. Thanks a lot. Good to see everybody again. I'm curious how you're thinking about investing and compensating in the direct sales force this year. Obviously, you're talking about increased channel leverage, particularly with Zoom Phone.
And I imagine renewals are going to be a pretty important topic as well for you in FY 'twenty two. So maybe just help me understand How fast do you expect to grow your direct sales force and if you're changing kind of the way that you're compensating them in terms of the mix of new versus renewals? Thank you.
So the two areas of significance that we're really focused on for FY 2022 are exactly as you highlighted, it's quota carrying reps in our sales organization and its engineers. And in both areas, when we looked at the FY 'twenty two plan, we looked at in terms of what's available in terms of capacity in the organization to absorb that as well as markets that are available. So You can just expect continued significant growth in the AEs, in the sales organization. And then in terms of compensation, We didn't have significant change to our comp plan, but you did pick on key on one of the key points, which is renewals and retention. And historically, we have not compensated for that.
So we did add a bonus component to the plan for this year to help align the reps' interest along with Zoom's as well.
Thanks so much.
Next question is from Rishi Jaluria with D. A. Davidson.
Hey, Eric, Kelly, Tom, thanks so much for taking my questions. Great to see continued strong momentum and heading into next year. Wanted to ask about maybe potential areas for expansion. You've obviously had some really great success with Zoom Phone and appreciate the disclosures here. As you think about becoming a broader enterprise collaboration communication platform, where are some other adjacencies that you think you can get into?
I know you've hinted at these in past. And philosophically, how do you think about the build versus buy, especially just given the amount of capital you have available on the balance sheet? Thanks.
Yes. So, Rishi, that's a great question. So when we started, we were laser focusing on one thing, just video conferencing app, Right. But however, over the past several years, look at it today, I think because of popularity of the video conferencing, a lot of people that are using Zoom Look at Zoom phone, look at Zoom rooms, look at viewing chat and you look at also webinar, I think a huge opportunity. Almost Each area item we should double down.
Also look at the brand new opportunities, you look at on Zoom, I mentioned earlier. Plus, another thing is about our Zoom apps ecosystem. Essentially, Rishi, Donald Jolli, you and I, we are going to talk over Zoom, not because we have a business communication discussion, But also more like you and I can play games. We're affiliated with that entire ecosystem. That's the reason why we talk about how to transform our business Makayla app company or platform company.
With that in mind, I think a lot of opportunity, UC platform, remote work platform And also the consumer, consumer platform, I think for sure, we cannot build everything, right? We've got to be very careful, right? What we should build by the self, what kind of product, new categories we should partner or maybe go through the acquisition. That's why I like any advice. But overall, I think to become a platform company will open up a greater opportunity for us.
We're not only a video conferencing company
Anymore. Okay. Thank you.
Thank you.
Our next question is from Zane Crane with Bernstein.
Hi, congrats on another great quarter, It seems like a really great way to improve the conversion rate of kind of prosumers and knowledge workers at the lower end of the market. Can you give us a sense of how much that's improving the paid conversion rate for free users to paid maybe among consumers or independent contractors, freelancers, things like that. Is it 10% increase? Is it double? And then secondly, on the gross margin for Zoom Phone, I know it's still subscale, but how should we think about this, the non GAAP gross margin for that relative to video conferencing kind of in a steady state long term.
I know it's a lot less compute intensive, so I'm curious if that could potentially have higher margins. Thank you.
Yes. Then I can address the first part, Kelly will address the second part of your question. And I hope I have a good answer for your first question. Unfortunately, I don't Because it's too early to tell, we're still in the beta, right? We just have to make sure the product experience really solid before we announce the GA.
And now the SKU beta, right? You still can Google on Zoom to register class, to learn the cooking class, learn something, That those kind of basic features are already available. But again, I think it's not fully ready yet. I think we are very optimistic download. Not only do we have a new revenue stream, not only do we have our customer more, but also look at our free users or paid online subscribers, right?
We have one more opportunity, either learn something or host on Zoom event, more like Uber, right? I have a car at the time, I've become a Uber driver. That's our strategy. But again, if the software is poorly to tell, I do not have very solid answer about that yet.
Got it. That's helpful. And we're very optimistic. So thanks for the update.
Thank you.
And Zane, sorry, did you ask about the gross margins
Zoom phone, a separate question a little bit. I'm curious since it's less compute intensive, if that could maybe have higher margins, especially since you don't have a free offer Like the video conferencing.
Yes. Pre pandemic where when we looked at this, Zoom phones margins were actually slightly under the gross margin for meetings due to the cost for the carriers on either end. So the goal though is as we continue to grow is to have leverage and be able to invest and of course to see efficiencies across the overall platform that eventually those gross margins converge and that's what we're expecting to see right now given the gross margin being impacted on meetings by the free usage, Zoom phone gross margin is probably actually even higher than meetings right now.
Great, very helpful. Thank you. Congrats, Dean.
Thank you, Zvi.
The next question is from Brad Zelnick with Credit Suisse.
Great. Thank you so much and it's so nice to see everybody. Eric and Kelly and Tom, wonderful. Great Q4, great year. We're all grateful.
Kelly, my question is for you just around the seasonality of the business. Last year was so unusual. How are you thinking about modeling this year from a new business perspective, thinking about seasonality, and I know you carry out it in your guidance relative to the uncertainty of COVID. But what's the embedded assumption, even though I totally appreciate that economies reopening doesn't mean that people stop using Zoom?
Yes. I think, first of all, you have to think about our business in terms of online and direct as they both have become very significant businesses and there's a little bit of behavior to the 2 of them. In the direct business, we expect to move back to a more normalized seasonality, if you will, as you growing through the year, especially with enterprise buyers to be a little more back end loaded in each of the quarters as well as back end loaded in terms of the year, especially as we're continuing to add capacity in our sales organization and having those reps ramp throughout the year as well. From online perspective, that is the one that is, I think, a little more uncertain dependent upon the timing of people potentially returning to work as well as this integration with OnZoom. And what we have modeled is we believe to be conservative in terms of an acceleration in churn rates.
We're doing everything we can though, of course, to retain those consumers and help them see the value in Zoom so that we don't see that as we move through year.
Great. Thank you so much for taking the question.
And Brad, thank you very much for wearing a Zoom top of your head. I truly appreciate that.
And proudly, proudly. Thank you.
Thank you.
Next question is from Bhavan Suri with William Blair.
Hey, everyone. Thanks and let me echo my congrats, really great job. I want to chat a little bit about one specific competitor, the friends at Microsoft. And I'd love to understand in a little more depth how that's playing out, not today, because obviously the results speak for themselves, But they're ostensibly giving away for free and we know E5 is not free. We know upgrading to E5 costs, But they have a lot of power in the mid market and the enterprise.
And I guess how do you feel about what they're doing? Is there a sense that at some point, maybe when you get back to work, it's good enough? Like how are you and the sales team sort of working around this issue of teams ostensibly giving away for free? That's kind of what I'm getting at. Specific to them given sort of their scale and their power and their platform and they bundle it, etcetera.
Thank you.
Yes. So I can start, Kelly, feel free to chime in. I think, first of all, that's a really question. For Eero, I'd like to take a step back. I think we'd share, I think, the journey of Microsoft themselves because I think today's Microsoft is very different.
Since Satya took over the CEO job several years ago, I think on Microsoft, I think They are open minded, right? Satya is the greatest CEO in the world, I read on the market. But quite often, we have integration up to the ads, we would like to working together with us. So we're waiting to collaborate, right? That's very important thing.
Like 10 years or so, If something like this, I think we are very nervous or concerned. Today, that's not the case from MaxSold perspective, right? I gave the CEO In fact, CEO studied a great credit, that's why. If you look at it from end user perspective, especially look at the digital workforce, Almost over 1 third are millennials. Guess what?
They would like to use the best bridge service. If a CIO gives us something they do not like, they say, no, I'd like to pay with my own credit card. So the best way to service will win for call. And also if you look at it even from a CIO or IT perspective, they would like to bet on 2 vendors, right? If you're stuck with one window for everything, guess what, what if there's outage?
What if in the future innovation speed Zebo's. That's why talking with the enterprise customers, they would like to deploy the best breed of service like Zoom, it's video and voice is much better, That's why the coexist strategy very well. Last but not least, if you look at the OIBDA report, probably that's the most important report for any IT professionals, right? You look at the alternate report, Zoom is for sure a number on video conferencing app, right? And in terms of position in terms of based on number of the customers, Zoom app runs number 5.
However, there's one metric that's very interesting. If you look at the office, Microsoft Office 365 deployment of the customers, 40% also deployed in Zoom as well. That proves one thing, customer We'd like to bet on 2 solutions because we can coexist very well. Again, this market size is much bigger than anyone can emerge. That's why I think that coexisting strategy works very well and we look at everything from a customer perspective.
Sorry, that's a long answer. I'm not sure it's the answer to your question well, but that's based on our vision, yes.
That's a great answer. I appreciate the color and the candor. Thank you all. Thank you.
Our next question is from Richard Valera with Needham.
Thank you. And let me add my congratulations to a really great year and Q4. So question on the education vertical, which Just gotten a lot of sort of attention. And your thoughts on the trajectory of that business for you, you could maybe argue that There's a headwind, it may be decreased usage as folks go back to in person school, but you guys have, I think it's 125,000 ks-twelve customers that are free now, but presumably at some point will be paying. And so just wanted to check about how you're thinking about that revenue trajectory and the potential to monetize them.
And if the July 31st date on your website is sort of the date that you're going to turn off free or is that sort of just a placeholder for now?
I In terms of the future and the opportunity ahead for education, as you noted, we have 125,000 K-twelve domains that are using the product And have really become believers in Zoom. And what we expect is that as we look forward to students being able to return To campuses in person that there is even a hybrid approach in education. We always joke, right, that students are going to hate us because there is no such thing as a snow day any longer. And imagine the benefit that has the parents have also received from being able to attend PTA meetings from home, to To be able to do parent teacher conferences. So there are many, many use cases that extend beyond just the students being in the classroom that we foresee These domains wanting to continue to work with us on.
And in terms of the date that's on the website, As always, I believe that Zoom will do whatever the right thing is as we continue to assess how the pandemic progresses. The goal of that was really to minimize the disruption in learning and we remain committed to that.
Great. Thanks very much, Kelly.
Our next question is from Ryan McWilliams with Stephens.
Thanks for taking the question. Can you talk about enterprise Zoom meeting purchasing that you saw in the quarter? Like did enterprise customers increasingly go wall to wall And consolidate pockets of Zoom usage and business silos. And then separately, with the improving Zoom film momentum that you're seeing, do you see attach
In terms of you saw the significant growth in the customers with greater than 100 Okay. Of trailing 12 months revenue and that I think is an indicator of all of those enterprise customers that we've seen purchase this year continuing to roll out and expand. In terms of wall to wall, we continue to see customers that are adding in terms of number of seats as well as buying broader. So I think it's a combination of both. And then in terms of contact center with Zoom Phone.
Eric, do you want to talk about that?
Yes, sure, sure. Yes. I think in terms of a contact center and I think for now, I think our strategy to work together with other contact center solutions like 59, Genesys, Incontact, Talkatex and others, I think working very well because customer, they talk about how do you seamlessly integrate with others. Take Finan for example, And we're a great partner. Rob and I, we share the same vision, how to further improve their product experience, awesome love that.
I think we'll have a much better seamless integration that the right approach and truly data of happiness to our mutual customers.
Our next question is from James Fish with Piper Sandler.
Hey, guys. Congrats on an awesome end of the year. Really appreciate what you've done. It was an impressive enterprise additions this quarter. Just Trying to understand how much of the additions came from moving commercial customers up from phone or That cross selling phone within that commercial meeting and call base.
1st, new customer wins versus other items. Thanks.
Yes. So hi, James. It's really a combination of all of the above. So we continue to see customers that bought earlier this year deploying and rolling out and adding to their services. You heard some of the great wins that we talked about specifically on the call as well as continued upsells in terms of just expansion in terms of meetings And continuing to make sure that their employees are being as efficient as possible.
So it's not something specifically that we break out. I can tell you that it's a combination of all of the above.
Got it. Understood. Thank you.
Yes.
The next question is from Matthew VanVleet with BTIG.
Yes. Hi, thanks for taking the question. I guess wanted to dig a little deeper, not just on the contact center side, but as customer experience really becomes a greater focus for larger enterprises, just what the opportunity is to embed Zoom from a partnership perspective, either in other software platforms or just kind of in company websites, things of that nature to help facilitate a more interactive approach with customers and sort of how you can better monetize that in the long run.
Yes, Meta, that's a great question. That's overall our platform play. So today, in addition to having the APIs and SDKs to give the 3rd party companies and partners computer vertical apps like online education, telematics apps via our platform SDK. We also introduced the Zoom apps. I think that's the future because the reason why Zoom is not only built for the business condition, but also offer a people centric interface.
You and I can't use Zoom and also how Window, right, you and I play games together. You approve my experience report of integration with ServiceNow, Workday with Salesforce and all kinds of applications, not only for business apps, but also for consumer assets as well. Today, look at our marketplace, We already have over 1,000 apps, right, published in marketplace. So we are going to double down on our Zoom apps ecosystem. Essentially, that's the future of our platform play.
And the download, let's say, you have a loss of new applications existing integrations. You have many ways to monetize the download. The goal is to offer a people centric Zoom interface for other applications to be integrated into Zoom.
Great. Thank you.
Thank you, Mac.
Next question is from Taz Koujalvi with Guggenheim. End. Looks like we have Taz on audio only.
Hey, guys. Can you hear me?
Yes. Hi.
Hi. Thanks for taking my question. I have a question Eric or Kelly, on Zoom phone attached versus Zoom meetings. So let's say a customer has both Zoom mix and Zoom phone. I'm assuming that every user would have a Zoom phone license versus Zoom meetings because only the host needs Zoom meetings.
Is there like a rule of thumb or what you're seeing in the customer base at now in terms of What the ratio of Zoom meeting licenses to Zoom phones is and what that potentially could be going forward?
Generally, what we see is that your point is that not everybody needs a Zoom meeting, like Only the host needs it. But what we see from most organizations is they actually buy Zoom meeting licenses for all of their employees as they want them to be as efficient as possible. And then they buy a corresponding number of Zoom phone seats as well. So typically, when a company is doing our customer is doing a full deployment, It's a one to one ratio of Zoom meetings to Zoom phone.
Are there cases where customers And they're buying more or less? Like, is it different by different vertical or customer size or is it typically is it usually 1 to 1?
Well, it depends on the stage of where a company is in terms of its rollout and its deployment. Sometimes they often start with meetings and then add Zoom Phone and they may take some time to roll it out depending on its market, geographic location. The case, for example, that I do remember where there were more Zoom phone licenses bought than Zoom Meeting, it was the case of a retailer that had Zoom Meetings and Zoom Phone in their corporate headquarters. But for example, they wanted to deploy Zoom Phone into their retail locations in the malls. And so there wasn't really a need for Zoom meetings in the mall, but Zoom Phone was a really great fit for them.
So That's really the only case that I remember specifically where there were more Zoom phone lines seats sold than Zoom meeting licenses.
Got it. Very, very helpful color.
Thank you
very much, Kevin.
Thank you, guys.
Our next question is from Citi Panaghi with Mizuho.
Thanks for taking my question. Eric, I just wanted to ask on the product side. Last year, I think more focus you had on security. And are you looking at this year and your product team? What are you more excited about?
What you are more focused on? I think, first of all, security and privacy is always very important. Last year, I think, Zoom has become much stronger company because We embrace a lot of consumers, right? To serve consumers in terms of private security is very different compared to what we did before. We did learn a lot.
We really shifted on our team size, a lot of the convergent and third party companies. And I think today, look at Zoom privacy and security policy and the practice is totally different now, right? We have high confidence, However, we are not looking to say, hey, it's done. No, this is ongoing effort. Private security is a part of our company being enough.
I mean, side of that, we also need to do continued innovating, right? That's why how to transform our business to become platform company. At the same time, any new service, new feature, everything, new process, mix of privacy security always there, not only for business or government customers, but also what's more important in that consumers as well, right? That's I think that's why the future is bright because not only do we have new opportunities, but also the privacy and security story is much better than before. Okay.
Thank you. Thank you.
We have time for one more question. And our last question will be from Tom Roderick with Stifel.
Great. Well, hi, Eric. Hi, Kelly. Hi, Tom. Great to see you all.
Congratulations on a fantastic finish to what was a crazy year, but a fantastic one for you all. As we're going on almost a year now sitting in our home offices and our bosses are telling us in a variety of ways that we're probably not going back to the old normal, whether it's this year or next year or at all. I'm curious for your thoughts on how you think about the way the world has changed and the way that you run Zoom, whether that's more remote offices, R and D specialists in different parts of the world. Is the cost structure sort of permanently changed for your vision of the world? Because it seems like for the rest of us, it is changing in that way.
I would love to hear your thoughts on that.
Yes. Kelly, please.
Sure. So I think the amazing thing that's happened during this pandemic is it's opened us up To be able to hire talent wherever. We've really taken advantage of the opportunity, engineers, for example, which are highly competitive that we are now looking to hire the best talent from anywhere in the globe almost, really focused on especially in the U. S. Diversifying outside of San Jose, which has been a great a win for us.
In terms of long term growth sorry, expense impact, we have not modeled in this year, at least FY 2022 expenses associated with return to work as we continue to evaluate when it feels safe To support our employees in moving back into the office and coming back together in person. And once we have more clarity around that, of course, we will assess how that impacts our operating margins.
That's great. I'll turn it back to you. Thank you.
All right. Well, thank you so much for joining us today. We really appreciate it. Look forward to FY