Hello, everyone, and welcome to Xun's Second Quarter Fiscal Year 2021 Earnings Release. This call will be recorded. At this time, I'll hand it over to Tom McCallum, Head of Investor Relations.
Thank you, Matt. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q2 of fiscal 2021. Joining me today will be Zoom's Founder and CEO, Eric Yuan and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page on the zoom.com website. 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 about market size and growth strategy, our estimated and projected costs, margins, revenue, expenditures, investments, growth rates, our future financial performance and other future events or trends, including guidance for the Q3 2021 and full fiscal year 2021. Our plans and objectives for future operations, growth initiatives, strategies and the impact to our business from the COVID-nineteen pandemic. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including today's earnings press release and our latest 10 Q. Zoom assumes no obligation to update any forward looking statement we may make on today's webinar.
And with that, let me turn the discussion over to Eric.
Hey, Tom, thank you. Hello, I hope you are all doing well. I wanted to thank our customers, investors, and the community for their support of Zoom. Their care, feedback and trust of Zoom make a huge difference. And we grew our business from being a start up to a not like a public company to be a long term sustainable company.
We might be facing all kinds of challenges. But no matter how busy we are, no matter what the challenges we are facing, we are always recharged when we think about our customers' support and become even more motivated to serve them better. With the pandemic persisting, we are very committed to work hard and are humbled by our role of enabling communications worldwide during this challenging time. As remote work trends have accelerated during the pandemic, organizations have moved beyond addressing immediate business continuity needs to actively redefining and embracing new approaches to support a future of working anywhere, learning anywhere, and connecting anywhere. And we continue to see meaningful adoption of Zoom's video first unified communication platform across industries and geographies.
So let me share with you just a few key metrics that reflect this. Revenue grew 3 55% year over year in Q2. Customers with more than 10 employees grew 4 58% year over year as new customers chose Zoom to be their preferred communication and collaboration solutions. And we had over 35,000 educators, school administrators, and IT professionals from around the world join our free virtual Zoom Summer Academy. The successful 2 days Zoom event was our biggest educational event today.
Bringing together software leadership is remote learning, practical training and networking opportunities. And we remain committed to helping our education customers, including the more than 100,000 K-twelve schools who have set it up to use the platform for free during the pandemic. Moving on to a few recent business highlights, we completed our NANDDD plan on security and privacy. A comprehensive summary of accomplishments is available on our website. I am very proud of our team's swift and transparent response as well as the resulting improvements we made to our platform.
Although the 90 day initiative is over, security and privacy measures will remain an important part of Xumu's strategy and DNA moving forward as we strive to maintain our customers' and other stakeholders' trust. We also made 2 exciting hardware announcements in the quarter. 1st is the launch of the Xoom hardware as a service, which offers customers a variety of subscription opportunities for phone and mid to zoom hardware from leading hardware manufacturers. This offering makes Zoom Phone and Zoom Rooms more accessible by minimizing friction around hardware procurement. 2nd is Zoom for Home, our new innovative category of software experience and hardware device hardware chips to support remote work use cases.
We launched this program with our partner Deepen in July, and this month we announced its expansion to Amazon, Facebook and Google devices. We also achieved significant accomplishments for Zoom Phone. In mid June, Zulphong was authorized under the federal grant program enabling federal agencies to consolidate their costly legacy telephony systems onto our unified modern cloud solution. This month, we expanded the availability of Zoom Phone Service to 25 additional countries and territories. Zoom now provides local telephone service and domestic calling in more than 40 countries and territories.
On a final note, we welcome our new CISO, Jason Li, former SVP of Security Operations at the field force and our new General Counsel, Jeff Chu, former EVP and General Counsel at Palo Alto Networks. We are very excited to have them. Now let's talk about some exciting wins in the quarter. Let me start with a couple of new customers that represent some of the largest companies in their industry. First, we are thrilled to welcome ExxonMobil, one of the largest publicly traded international energy companies to the ZOOM family.
ExxonMobil develops and applies next generation technologies to help simply and responsibly meet the world's growing needs for energy and chemical products. They recently used their scale and capabilities to ramp up production to make medical grade masks, pill and hand sanitizers. We are grateful that ExxonMobil chose Zu as their unified communication platform. ExxonMobil wanted a solution that would enable them to collaborate reliably and securely with their teams, customers and partners around the world. ExxonMobil employees are now using Zoom video communication across their global business.
2nd, Activision Blizzard, a member of the Fortune 500, has chosen Zu to modernize and consolidate onto a single communication platform across their business units and gaming franchises. As a leading interactive entertainment company, connecting and engaging the world through Epic Entertainment, a division committed to a full enterprise rollout of Zoom meeting and Zoom rooms to replace their mix of legacy video conferencing products. Our ability to expand with existing customers also help drive our results this quarter. 1 of the highlights this quarter was the expansion with ServiceNow, who has been a Zoom customer since 2018, using Zoom meetings for its 11,000 global employees. Since the global pandemic, ServiceNow employees working from home have relied heavily on Zoom's easy to use interface to stay productive and connected with their customers.
As the Zoom platform has become a core piece of ServiceNow's technology ecosystem, this path to quarter the company chose to replace its legacy hardware PDF system with Zoom Phone across their organization, further elevating their teams work anywhere experience with seamless one touch communication and collaboration. Thank you ExxonMobil, Activision Blizzard, ServiceNow and all our wonderful customers for trusting you. I love you. All the employees love you. Thank you.
In summary, we continue to scale and expand our business to meet the needs of our customers and the global community. I am very proud of our achievements and thank our more than 34 100 employees for another exceptional quarter. Let's remain focused on delivering happiness to our customers and community. With that, let me turn things over to Kelly.
Thank you, Eric, and hello, everyone. Q2 was a remarkable quarter Zoom as we continued to rapidly grow and invest in our business to meet the demands of our customers and community. Let me start by reviewing our financial results for Q2, then discuss our outlook for Q3 and the increased view of our full year FY21. Total revenue grew 3 55 percent year over year to $664,000,000 in Q2. This top line result significantly exceeded the high end of our guidance range of $500,000,000 as demand remained at heightened levels combined with lower than expected churn and exceptional sales execution.
For the quarter, the year over year growth in revenue was primarily due to subscriptions provided to new customers, which accounted for approximately 81% of the increase, while subscriptions provided to existing customers accounted for approximately 19% of the increase. This demand was broad based across industry verticals, geographies and customer cohorts.
Let's take a look
at the key customer metrics for Q2. We continue to see expansion in the upmarket as we ended Q2 at 988 customers generating more than $100,000 in trailing 12 months revenue, up 112% year over year. This is an increase of 2 19 customers over Q1, the highest number of ads in a quarter. We exited the quarter with a total of approximately 370,000 customers with more than 10 employees. We added approximately 105,000 of these customers in Q2, the 2nd highest number of ads in any quarter.
Year over year, we added approximately 304,000 new customers with more than 10 employees for 4 58% growth. We have continued to benefit from significant growth in our customer segment with 10 or fewer employees as small businesses and individuals adopted and maintained their Zoom licenses for various uses during the pandemic. In Q2, customers with 10 or fewer employees represented 36% of revenue, up from 30% in Q1 and 20% in Q4 of last year. The increase in customers with 10 or fewer employees continues to shift our billing mix, as these customers generally pay monthly rather than annually, as do most enterprise customers. This shift is an important point for our outlook, which I will discuss in just a moment.
Our net dollar expansion for customers with more than 10 employees was over 130% for the 9th consecutive quarter as existing customers continue to support and trust Zoom to be their video communications platform of choice. Both domestic and international markets had strong growth during the quarter. Americas grew at a rate of 2 88% year over year. Our combined APAC and EMEA revenue accelerated to 6 29% year over year and represented approximately 31% of revenue. We will continue to invest in international expansion to capitalize on our brand awareness and the increased 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 2nd quarter was 72.3 percent compared to 82.2% in Q2 last year and 69.4% last quarter. The incremental improvement from Q1 reflects our strategy to increase our co located data center capacity while leveraging the public cloud as needed.
We expect gross margin for the rest of the year to be consistent with Q2. However, actual results may vary as gross margin is contingent upon the percentage of free users and the utilization of public cloud during the pandemic. R and D expense in Q2 was approximately $29,000,000 up 128% year over year. As a percentage of total revenue, R and D was approximately 4%, which was lower than Q2 last year, mainly due to the strong top line growth. In FY 'twenty one, we will continue to invest in R and D to drive innovation across all aspects of our platform.
We also plan to diversify our engineering talent as reflected by our expansion in the U. S. And India. Sales and marketing expense for Q2 was $123,000,000 This reflects an increase of 78% or $54,000,000 over last year with investments to drive future growth. As a percentage of total revenue, sales and marketing was approximately 19%, a decrease from Q2 last year due mainly to strong top line growth and marketing efficiencies from our increased global awareness.
Overall, we plan to add sales capacity quickly over the next several quarters. The swift ramping of our sales to further capitalize on market opportunities is a priority. G and A expense in Q2 was $51,000,000 up 189% on a year over year basis due to higher accruals for telco taxes correlated to higher billings, professional services and additional hiring to meet the functions of a public company of this scale. As a percentage of total revenue, G and A expense was approximately 8%, a decrease from Q2 last year as we gained leverage on our investments with the rapid growth in revenue. The substantial revenue upside in the quarter carried over to the bottom line with non GAAP operating income of $277,000,000 far exceeding our guidance, translating to a 41.7% non GAAP operating margin for the Q2.
This compares to Q2 last year's result of $21,000,000 14.2 percent margin. The significant margin expansion year over year is due to the steep in revenue in Q2, which outpaced the rate of investment, even as we added over 500 employees in Q2, a 20% increase from last quarter and a 50 3% growth year over year. Non GAAP earnings per share in Q2 was $0.92 on approximately 297,000,000 of non GAAP weighted average shares outstanding and adjusted for undistributed earnings. This result is $0.46 higher than the high end of our guidance and $0.84 higher than Q2 of last year. Turning to the balance sheet.
Deferred revenue at the end of the quarter was $743,000,000 up 309% year over year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1,400,000,000 up 2 0 9 percent from $458,000,000 year over year. The increase in RPO is consistent with the strong demand and execution in the quarter. We expect to recognize approximately 72 percent or $1,000,000,000 of the total RPO as revenue over the next 12 months as compared to 62 percent or $285,000,000 in Q2 last year. This indicates a shift in our renewal seasonality, which was historically weighted towards Q2 and Q4 and has now shifted to Q1 due to the strength of last quarter's performance.
As a reminder, we do not focus on calculated billings as a metric for our business. We have a diverse business that spans from enterprises to individuals. With the changing mix of our business, annual billing terms, and the growing level of monthly billing terms, such calculations have become less meaningful, especially now that we have a full quarter of monthly billings making up a bigger part of our revenue. We ended Q2 with approximately $1,500,000,000 in cash, cash equivalents and marketable securities, excluding restricted cash. Similar to Q1, we had exceptional operating cash flow in Q2 of $401,000,000 up from $31,000,000 in Q2 last year.
Free cash flow was $373,000,000 up from $17,000,000 in Q2 last year. The increase is attributable to strong collections from the large increase in top line growth and higher percentage of monthly As a reminder, we will see the semi annual cadence of net cash inflows from ESPP purchases to occur in Q3. Now turning to guidance. We are pleased to raise our outlook for FY21 for both revenue and non GAAP profitability. Although we remain optimistic on Zoom's outlook, please note that the impact and extent of the COVID-nineteen crisis its associated economic concerns remain largely unknown.
Our higher outlook for FY21 is based on our view of the current business environment. For the Q3, we expect revenue in the range of $685,000,000 to $690,000,000 We expect non GAAP operating income to be in the range of $225,000,000 to $230,000,000 Our outlook for non GAAP earnings per share is $0.73 to $0.74 based on approximately 300,000,000 shares outstanding. Before giving you the full year outlook, let me provide some context on our assumptions. While better than expected churn was one of the drivers to our Q2 Q2 outperformance, we did experience a significantly higher level of overall churn in Q2 as compared to historical rates. As customers with 10 or fewer employees have increased to 36% of our revenue, we are assuming a higher rate of churn due to this mix shift.
From an expense perspective, we continue to focus on investing for growth, targeting investments that are appropriate for our market opportunity and the size of the business that we have become. Looking ahead, we expect operating margins to decrease from the peak in Q2 over the balance of this year as our hiring and spending catch up with the much greater scale of our business. It is prudent to expect margins to normalize to lower levels over the next several quarters. For the full year of FY21, we expect revenue to be in the range of $2,370,000,000 to $2,390,000,000 which will be approximately 281 percent to 284% year over year growth. This implies that Q3 and Q4 revenue will be only modestly higher than Q2 and declining a decline in quarter over quarter growth.
For the full year of FY 'twenty one, non GAAP operating income is expected to be in the range of $730,000,000 to $750,000,000 We expect to deliver non GAAP earnings per share of $2.40 to $2.47 for the full year FY21 based on approximately 300,000,000 shares outstanding. In closing, we executed well in the first half of our fiscal year. With our commitment to delivering customer happiness, we believe we will grow to over $2,000,000,000 in total revenue this fiscal year, which would be a remarkable milestone considering our guidance was below $1,000,000,000 in revenue at the start of this fiscal year. We are proud of how our team continued to perform in support of our customers and global community. Thank you to the entire Zoom team.
Before we move to our Q and A session, let me turn it back to Eric.
Thank you, Kelly. And 15th. There are so many cool features like, video filter. We hope to see you all there at Zoomtopia. Now, let me hand it back to Tom.
Tom?
Thank you, Eric. And with that, let's open it up for questions. If you have not enabled your video, please do so now for the interactive portion of this meeting. I will ask everyone to try to keep themselves to one question and if we have time at the end, we'll do some follow ups. But please try to keep it to one question and Matt, please queue up the first question.
First question is from Alex Zukin with RBC.
Thank you. Thanks, Matt. And Eric, first, I want to say thank you from the lending analyst community and as a parent, as a husband, you've made a substantive difference in all our lives. So I guess the question I get most frequently, Eric, is most people are now staring at their Zoom screens probably more than watching any kind of content globally. So outside of starting to show commercials in between your relevant Zoom calls, talk about the biggest opportunity for continued bookings growth, whether it's Zoom phones, opening up the APIs, monetizing consumers filters that you just showed.
But can you tell us the more you the better you do this year, the harder it is for us to know and understand what's the durable growth rate? How do you comp this amazing spectacular performance? So I'll stop there. I could go on for a bit.
Yes. Alex, first of all, I should appreciate it for your continued support for many years. I think you are still right. It looks like there are so many opportunities here and there are all kinds of use cases like my kids are all through Zoom and telemedicine, telehealth. I think it's seriously for now, our top priority is to help people stay connected and make sure our service always up quickly based on the customer feedback, added some features and make sure when you have multiple meetings, you do not have a meeting fatigue, right?
I think that's our top part. So we would like you to maybe live for the future, you know, for how to further monetize. Again, that's not our top priority. We got to laser focus on one thing, how to truly make the custom happen. So, customers stick negative, especially during this pandemic time.
Perfect.
And then maybe if I could squeeze one in for Kelly. Kelly, you talked about the differences in churn that you're experiencing from the new customer cohort that you onboarded through the pandemic. And we've talked previously about what your historical churn looked like for monthly customers. And we know I think a little bit about how it looked in guidance before. Can you level set at a high level, what was the what did you experience with that cohort versus where it's been historically?
And at a high level, what are you assuming in your guidance for that churn, for that monthly cohort of new users?
So remember going all the way back to the S-one, we talked about that the monthly customers churn on average about 4% per month. Their monthly rate is about 4%. And we did see an increase against that in Q2. And we have modeled at that same level going forward as we with all the uncertainty with how long this pandemic will last and what other potential economic uncertainty there is, we've modeled at that same rate going forward.
Got
it. Thank you. Our next question is from Meta Marshall with Morgan Stanley.
All right, great. Thanks and congratulations. Just wanted to get a sense of where you think you are kind of innings or percentage wise on working with organizations that may have kind of adopted you in a department or adopted you in part of having multiple services, displacing those solutions or kind of having a more full organization discussion as well as having a follow-up discussion as well as attacking on phone or rooms or webinar type services. And do you have the sales teams in places to start having those conversations on broader organization and deployments?
Kelly, do you want to take it?
Sure. So we continue to see growth in the period from both new customers as well as existing customers and tremendous opportunity with webinars especially as well as Zoom Phone. We actually signed our largest Zoom Phone deal to date in Q2, so exciting to see that continued momentum. We also saw customers that were doubling one of them that quadrupled their existing deployment. So we are still in early stages and when we look at penetration like we look at in the Global 2,000, like there's a small percentage that have a significant spend with us.
So there's tremendous opportunity still ahead, Meta. Sorry, you went back on mute.
I'm sorry. Just whether you have the kind of sales organization in place to kind of have that gather or gather conversation?
So we as I said earlier, we are hiring very quickly to keep up with all of the demand that's thank you to our amazing Zoom team, which are really working around the clock to keep up with demand today and to support and serve our customers and the community, but we are hiring absolutely. This is one of the biggest priorities for the rest of this year.
Great. Thanks and congrats.
Our next question is from Nikolay Beliov with Bank of America.
Hi. Thanks for taking my question. Just wanted to continue on the topic from the last question. Eric and Kelly, as the business grows at unprecedented rates, can you help us understand what's happening internally? Your customer support organization, your sales organization, your ERP system, HCM system, the onboarding, you know, like hyper growth scenario, so many people and maybe putting pressure on the systems and also culturally, what's happening inside the organization?
Yeah, that's a great question. So, prior to pandemic crisis, we maintain a steady growth and make sure our internal systems process procedure, everything is doing well. And however, during this pandemic crisis, I think the business growth is just unprecedented. The good news on the one hand, we had a very solid company culture. Nobody complained.
We all worked very hard. Look at other any other hold in terms of procedure, process, And also we had a loss of employees, you know, double down on our support resources and customers to set management team and to further help because there's so many new use cases, new customers. That's why we hired a lot of employees. On the other hand, we also wanted to leverage this opportunity. I could send some of our business to next level in terms of privacy security and internal process and systems.
I think again, you know, we are very committed, like every day we are working so hard, you know, what kind of new issues like, you know, even the free user calls or online paid subscribers, you know, when they try to attend the service, we would like to respond, you know, timely manner. I'm not saying, well, you know, we are perfect, but we are very committed to really double down our execution to make sure absolutely deliver happenings to all the users.
And Eric, which use cases, new use cases are most excited about and surprise you the most? That's it for me. Thank you.
I got it. If I talk about new usage, probably I can speak for 4 or 5 minutes. I'll give you several, like you see the problem next, right, is using Zoom for the virtual property tour. Now during the last 10 weeks, they have closed over 50% of the newly launched property in Singapore over Zoom. And also the CSK, the corporate law firm in Florida, right, to have virtues filed by jury.
And also like South Coast you know, community services, which is, you know, largest and mental health service provider in California, also you do to open mental health, being in the mental health is becoming a very big problem. A lot of new users like that, so every day I feel very, very excited see so many new use cases. Not to mention, like we just announced the partnership with the United States Tennis Association by to offer the virtual experience, it's very cool.
Our next question is from Taz Koujalgi with Guggenheim.
Zoom. Does that mean that you're offering video and phone from Stratisys to ServiceNow? Have they replaced all their collaboration tools with one product, Zoom?
Yes. So, you know, first of all, ServiceNow, you know, has been a customer since 2018. They deployed Zoom to replace other, you know, video conferencing, web conferencing services with Zoom video conferencing. Over the past several years, we already established a greater trust. We also announced the partnership.
When they look at their entire UC strategy, they also, you know, deployed legacy, very costly, very complex on track TV activity. Why not consolidate those 2 into one system with a very consistent product front end experience same back end architecture. And, you know, in terms of total cost much lower, user experience are much better. So that's why they decided to replace their legacy TVX system with 1 system, standardized on Zoom unified communication solution.
I'm sorry, Helco. Just one follow-up. Kelly, I think you mentioned that you signed the largest phone deal this quarter. Was that also an upsell to an existing video customer or was that new customer who signed up with Zoom phone?
No. It was already a meetings customer as well, a video customer as
well.
Our next question is from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. So now that the 90 day feature freeze is complete, Eric, I'm kind of curious, where is the focus of R and D going forward? And you mentioned diversifying into India and the U. S, How are you structurally changing your R and D effort?
Is that in relation to any type of geopolitical pressure?
Yes. First of all, and we accomplished a lot over the past 90 days, but I can tell you that we take privacy and security extremely seriously. I'm not seeing we are going to give any of that. I would say the journey just starts, right? We are going to double down on privacy and security.
Having said that, you know, we also have a big R and D team. And our core technology, our engineer leadership team here in Sanhong said. We also have an offshore team. You know, look at a lot of new use cases, not only for in the past, but also, you know, the kids, education can do our tools and telemedicine. There's so many use cases.
I think today's R and D team, I do not think that is we can really handle that in terms of the capability. We have to find more talents in time and demand. And that's why, you know, we opened up 2 R and D offices in Phoenix and in Pittsburgh. And also, we would like this we like this onshoreoffshore R and D model. That's why India also opened up a big office.
We hired our President of Product and Engineering, right, great leader, right. With that, we really want to hire engineers and not only here, but also other side, also even including remote engineers, right? Because there are so many features and tasks, you know, that's why I want to invite you to join our Zoom with OPIA, which is our annual user conference. We'd like to share with you a very good product roadmap.
Thank you.
Thank you.
The next question is from Richard Valera with Needham.
Let me add my congratulations on another incredible quarter, team. So the question is on pipeline. Kelly, you were sort of on the record saying that you entered Q2 with a bigger pipeline than you had entering Q1. I'm wondering if you could give any similar color on how you entered Q3 from a pipeline perspective and if there's been any change in the composition of that pipeline in terms of product or geography?
So certainly coming into the quarter, our pipeline is still strong and we're continuing to see demand. But based on our guidance, you can see that the demand for the year was front end loaded and we saw that the performance in Q1, the benefit of which we saw in Q2. And that's why the guidance is highlighting that we expect revenue for the back half of the year to be effectively
you're thinking about the magnitude of phone in the balance of the year?
No. It's performing as we expected. And as I said, we're really excited to see our largest deal to date and ongoing upsell. So really still can see strong demand for Zoom Phone. We see a lot of potential there for the future.
Got it. Thank you.
Our next question is from Tom Roderick with Stifel.
Great. Thank you. Thank you, guys. Great job on another outstanding quarter. Eric, this is kind of going in conjunction with the question on Zoom phone and thinking about it as a unified communications platform, not just a communications tool for video.
I'd love to hear about some of the strategic conversations you're having in the context of digital transformation and what else these customers want you to do?
And if you
could comment in
there in conjunction with how your customers are thinking about your next year plan and that would be great. Thanks.
Yes, that's a great question. So I would say this pandemic crisis completely accelerated every enterprise, every business customers digital transformation. Because you want to support employees, you know, no matter where they are, right? But the traditional, you know, on prem system really is not forgettable anymore, right? That's why you look at all the cloud is just software, you know, service companies doing very well.
You know, with respect to Zoom, I think overall that's a part of our, you know, video conferencing offering. We truly believe video is a new voice. The new reason for any business to deploy to several sixty All the different experience. Having said that, when the customers who still deploy on prem legacy PBX system, when they migrate to cloud, they want to understand who has a better architecture. They want to consolidate into one system.
That's the reason why we position it very well. And some other SAP customers already deployed maybe some other cloud with the PBX system, they also want to consolidate into one system to further simplify their experience. So overall, we even do not see that's 2 separate market. It's a different one thing. The video conferencing and the cloud based TPVX are converged into one service.
So that's our story when we talk with customers, the customers really like that.
And Kelly, a quick one for you in terms of the conversation around security, but as you've agreed to enable end to end security for not just paying customers, but for all customers, which was a recent announcement, I think. What does that do to the cost structure? Is that meaningful? Will we even notice that? Can you just talk about that a little bit?
Yes. No, you won't see a meaningful impact. We certainly have been investing in both our security team. We're thrilled to have Jason Lee have joined us and you'll continue to see ongoing investments there, but it will really help me move back on the margins.
Our next question is from Heather Bellini with Goldman Sachs. She's joined in by phone. And Heather, press star 9 to unmute.
Great. Yes. Yes, great. Thank you. Thank you so much and congratulations.
And I think as Alex started out by saying, Eric and team, just thank you for keeping everybody connected. We're so appreciative that school started today on Zoom. So my kids were app users today. For the question I had was really just a little bit on Zoom phone and I know Kelly you've just answered a handful of questions. But Eric or Kelly, I'm just wondering if you can share with us how fast do you think you can see these kind of legacy phone systems, like how fast do you think this work from home benefit can drive displacement of legacy PBXs, which we've all been waiting for quite a long time?
And I know this is only sold to new customers, but you have so many of those or to existing customers, but you have so many of those at this point. And is there any kind of typical competition sphere that you're seeing as you're talking to customers and they're making the migration? Thank you so much.
Yes, Esther, that's a great question. So, I think prior to this pandemic crisis, you look at the enterprise, a very high percentage of customers is still deployed with traditional on prem legacy cost of the PBX systems. However, I think, you know, this pandemic crisis, I think it's sort of like a wake up call. You got to think about how to and focus on embrace digital transformation. Having said that in the cloud is PBX for sure it's one of the things we got to look into that.
I'm noticing that the top part, you know, as compared to the video conferencing, but for sure it's on a lot of enterprise customer read up screen. At the same time, I think there are a lot of other systems, not only for PBX but also a lot of other systems. We also look at the cloud business solution. I think this crisis just accelerated that migration from a traditional PBX and to the cloud with the system. And also, Zoom is a well positioned because the customer, they do not want to, oh, I migrated the cloud.
And they also want to look at a new user experience, you know, like a Zoom solution because it is the 1 system. I think, you know, next 12 to 18 months, I would say you will see a little bit of higher acceleration rate for enterprise customers to migrate to unified collaboration and communication solution as well.
Thank you very much.
Yes. Just quickly, in terms of competition, right, still the traditional legacy and system and some other cloud is the PBX, but again, Zoom is much better positioned because we have 1 unified solution. Thank you, Heather.
Thanks again.
Our next question is from Will Power with Robert W. Baird.
Great. Thank you.
I want to ask
a question on the rest of world strength. You saw a surge in activity there. Usage revenue obviously grew significantly as a percentage of the total. I wonder if you could speak to how broad based that was. Were there any particular regions or countries
that stood out? I know you talked a bit about India. And how do we think that what might that mean for the margin
impact of the business, if any? What might that mean for the margin impact of the business, if any?
Yes. So if you look yes. Go ahead, Eric. Yes. So you look at our free user or paid online subscription, right, it's coming almost everywhere.
However, you look at the number of visitors to our website, you know, the top of countries like for sure, you know, and U. S. Obviously number 1 and India number 2, Japan number 3, Canada, UK number 4, number 5. I think users are almost from every country, right, they try to use Zoom, it's very easy, it's free. And if a quarter minute is not enough, they would like to pay.
And some SMB customers, they also try our webinar service and also the enterprise customer might try the phone service. I think organic growth because of the brand awareness has seen really helped us. So for now, we just say, hey, no matter where the users come from, we would like to take a step back to see what we can do differently to serve them better in terms of having local data center like we just announced data center in Singapore. And also that we doubled on India presence and we are going to have a chip to capture the growth from international expansion. Katie, sorry, feel free to turn
No, that's okay. I was just going to say that the strength in the growth outside the world was really consistent between EMEA and APAC. So we're very pleased with that. And overall, the market the pricing is adjusted for the market. So you shouldn't see significant impact on the long term margins based on the structure that we have in place for our pricing today.
Great. Thank you.
Our next question is from Rishi Jaluria with D. A. Davidson.
Hey, everyone. Thank you so much for taking my question and I'll echo a truly outstanding quarter, I think beyond what any of us could have imagined. I wanted to follow-up a little bit on earlier question, which is some of the moves in China, right? I mean, stopped free trials, recently stopped direct sales there, at the same time, expanding R and D efforts in India and in the U. S.
As well. Just what's kind of the impetus for this move? Is this a signal of kind of distancing a little bit away from China, maybe in response to geopolitical pressure? And then for Kelly, what sort of impact would this have from a model perspective, both on the top line and margins? Thank you.
Yes. So, we don't have any current plans to move our engineering talent out of China. We are focusing on diversifying it by adding talent in the U. S. And India.
That's really the goal. And our leadership team is currently based in San Jose. So there's no change in that overall structure. For the long term, if there were something were to change, there would be no immediate impact on our service or our ability to provide services to our customers. Sorry, in the short term and the medium term, over the long term, there could be a potential impact on the margins as we would need to replace those talents somewhere else potentially.
Yes, just to add on to credit side, the revenue wise is very small, no impact. Previously, you look at almost every country, we have online subscription, We have direct sales, have our channel. When we look at China, overall revenue very small. The online subscription, you need to have a special license. We already saw that before.
So we would like to simplify our go to market, you know, because actually the support and the solution here a lot of resources, right? Why not simplify that just to leverage our 3rd party partners with a wider solution, I think that's very sustainable and good from our side.
Wonderful. Thank you, Kelly and Eric.
Thank you. Our next question is from Phil Winslow with Wells Fargo.
Hey, thanks guys for taking my question and congrats on another just phenomenal quarter. I wanted to talk about converting monthly users to annual users. Kelly, that was one of the things you talked about off the last call. I wonder if you can give us an update on just sort of what you saw from the, call that, Q1 cohort during Q2 in terms of your ability to convert those? And how should we think about any sort of the promotions, sort of initiatives changing going forward?
Thanks.
Yes, of course. So our marketing team is really focused on this, running campaigns and reaching out to these customers to provide them the opportunity to convert from monthly to annual. And we were happy with the success that we saw in Q2 and are continuing to focus on this. And we've also made some changes to our online buy flow to make this easier for
Got it. Thanks.
Our next question is from Shebly Sarefi with FBN Securities.
Yes. Thank you very much. Question is for Kelly. You're guiding revenue to be up around 3% sequentially. But if I assume that your customer count is at least flattish Q2Q, your average customer count is going to be up around 16% q to q, which implies that your ARPU is implicitly guided to be down 13% Q2Q.
And so my question is, I've never seen a double digit decline in your ARPU before. What would drive that?
Well, as we're sitting here right now looking forward, I think it's more around the uncertainty around churn and what's going to happen with the overall economy. That's really the uncertainty there and then why we're guiding flat for Q3 that Q3 and Q4 revenue will be flat, modestly up from Q2. And we've had a significant increase in our mass market customers where there just remains limited visibility in terms of the long term contribution for those customers. So, I don't think that we necessarily expect that dramatic increase in ARPU that you're pointing out. It's more around the uncertainty in churn and what does that mean for the top line growth.
Okay. Thank you.
Our next question is from Brad Zelnick with Credit Suisse.
Great. Thank you so much. And I echo my congratulations and gratitude all around. And it's nice to see everybody. My question is for Eric.
Eric, from a product perspective, how might Zoom in the future be able to go deeper into the context in which communications is happening? I'm thinking about human behavior or human intents, for example, to help make the experience even more valuable.
Yeah, that's a great question. That's why please join our Zoomtopia. I think first of all, you are so right. You know, Zoom is not a communication tool. How can it go be, right, because our mission is to develop a better service, a better online meeting conference service even better than face to face meeting.
You know, automated AI, you know, functionality, You know, like not only have you the meeting transcription, but also how to analyze that in a timely manner. Let's say if you change the topic, I give you a quick reminder, hey, please slow down, right? So detecting or something like all of the AI features. And plus, look at it in the long run, right, language translation, real time, and also how to shake hands remotely, a lot of cool features like that. And then the past, you look at the, you know, the video and the perspective, right, how to add some of the fun features like the video filter and how to make it less 3 d video, level AR.
I think a lot of technologies, right, not to mention 5 gs and in the future, I think that if you look at the future, a lot of those cool technologies can truly make the video conferencing strength much better.
Thank you so much.
Thank you. Please join us at Zoomtopia. Thank you.
I wouldn't miss it.
Thank you.
Our next question is from Ryan Coons with Rosenblatt Securities.
Great. Thanks for the question. With regards to the sales and marketing investment, it came in a little light there and obviously having really strong customer pull for the product. How are you thinking about your go to market motion and how you might change your sales strategy relative to your prolific success to date and you're looking at reseller channels or other technology platform partners to take you to market in the enterprise? Thank you.
So the decline in sales and marketing was partly due to just the strong top line performance as well as efficiencies that we're seeing in marketing. When we expect the as a percentage of revenue, sales and marketing to increase through the back half of the year is we're really focused on continuing to hire globally. We also we did if you master agent program for Zoom Phone in Q2 and are really excited about that program and expect it to go continue to contribute more significantly and as we move through the year. And on the meeting side, continuing our mostly direct model, which has been very successful for us to date.
Got it.
Thank you. Just briefly to add on to what Kelly said, if you look at the marketing efficiency, You look at our marketplace, we already have more than 700 in the third party application. You know that's another way for us to promote our brand awareness, right, more and more integrations certainly can help our marketing efficiency.
Got it. Thank you.
Thank you.
Our next question is from Bhavan Suri with William Blair.
Great. Thanks for taking my questions and congrats. I guess I want to touch on something a little more probably high level and strategic. I've obviously asked you in the past about the convergence and where does Slack and collaboration fit in. So let's turn this a little bit differently.
You're going to host Zoomtopia and this whole event planning space is a huge market and it feels like it will be an obvious fit for you and you have partners there. But the natural extension of this into events and meetings seems to make a lot of sense. How do you think about that market? And then do you think about sort of maybe using the stock as a way to buy, but you could also build? I mean, Kelly has guided to R and D coming up.
You've got a lot of points between 40.30 to spend R and D and not all of it's going to go to support the existing platform. So just some sense in the event space, how you think about it, is that a build versus buy decision or a partner decision? Thank you.
First of all, I think you have a greater question. So your observation is right. Looks like you have some great ideas actually maybe after the call. I'd like to connect you with our product managers. I think you are so right.
You look at you look at our Zoomtopia. Right, not only do we have a webinar, but also we need to look at an entire online event management experience, right. It's not a boon, it's just a real time part. Pre event and the planning and marketing and promotion and marketing content and materials, you know, operating well, right, you know, a lot of, you know, I think the content, right. I think having started that, I think we believe this service has a strategic value to help us further expand our webinar reach.
Having started that, I think in terms of sort of view that everything by ourselves or being a partner, maybe, you know, acquire somebody, I think it's fully to tell, but strategy wise, you are still right, that got to be our focus, our priority. It's low hanging fruits, right?
Thank you.
Thank you.
Our next question is from Walter Pritchard with Citi.
Hi, thanks. I'm curious this quarter just as it related to the really strong new customer adds and revenue that came from that channel. How many are you seeing an uptick in customers that are coming in through sort of displacements that had maybe not a older generation solution, but had tried something in the last 3 to 6 months and and weren't happy with it and switched over.
I don't
think that we saw as I don't think that we saw as much of that. I mean, it's definitely customers have been using something. I think that what has happened over the last 4 to 5 months is people have realized that the solution they had in place just wasn't up for up to the strength of what it needed to be in this pandemic. And so we've continued to see amazing brands move over from some other competitors as they're really looking for something to ensure that they can keep their employees really effectively while keeping them safe as well. And then, of course, we're super excited about some of the school districts that we've seen sign up.
We have the top 2 school districts in the U. S. As our customers today. So that really highlights the scalability of the platform and them wanting to ensure that they have a really reliable solution as they went back to school.
Then when do you think you can give phone customer counts? Any horizon on that?
That's one of the things we're considering, Walter, that we'll talk about. We said that for Zoom Phone, we'll give milestone updates. We'll look at it at Zoomtopia and see if that makes sense. The last update we gave was at the anniversary date of Zoom Phone. So we might wait till then.
Okay. Thank you.
Thank you.
Our next question is from Matthew VanVliet with BTIG.
Hi, guys. Thanks for taking the question. Great quarter there. You talked a little bit about channel partners, still remains a fairly low portion of your overall sales. But curious what the uptake is in total partners registering as part of the program?
Is it something that you're proactively doing? Or is just the demand for the product sort of pulling them in? And then on sort of a related note from an international market perspective, do you feel like you can hire aggressively enough from a sales headcount internationally or do you need to look at partnerships in specific markets that could be smaller growth areas, but growth areas
nonetheless? So from the hiring side, we definitely believe we can hire everything that we need internationally. We've really invested in our talent acquisition team and are doing that on a broad base around the globe to ensure that we are able to hire as quickly as possible. As you know, there's a little bit of a longer lead time for notice periods internationally, but we're hiring as quickly as we can. And then in terms of the uptick kind of partners in the channel, we don't give out those specifics, but we are continuously looking at our channel programs to ensure that they are not only competitive, but driving the results that we want.
So it's something we evaluate on a constant basis.
All right. Thank you.
Our next question is from Quentin Gabrielli with Piper Sandler.
Hey guys, thanks for taking my question and congrats on a great quarter. Really just one quick question from our end. Obviously, you guys saw some really strong enterprise traction for Q2. Just wondering if we could get some idea of the percentage of revenues from enterprise customers compared to the 23% we saw in the last quarter? Thanks.
We are sharing that the revenue we don't call out specifically customers, but we I'm sorry, enterprise customers, but that the revenue from effectively customers with fewer than 10% was 20% in Q2, which is consistent with previous quarters in that same range.
Got it. Okay. Thank you.
Our next question is from Ittai Kidron with Oppenheimer. Ittai? Okay, we'll come back. Our next question is from Alex Kurtz with KeyBanc.
Yes, thanks for taking the question. Actually, someone at Zoom did a good job because we just switched our school district from Google meeting over to Zoom for the start of the fall semester. So someone deserves a raise. So yes, thanks. So Kelly, as you think about OpEx trending into next fiscal year, I know you don't aren't going to talk explicitly to it yet, but there's a lot of churn to assume, especially in that Q1 of next year and you have a lot of investments that you're making as far as R and D and sales and marketing.
So as we're working through our models and looking into OpEx levels from Q4 to Q1, how should we be what's the framework for that?
Yes. So you should expect the operating margins to decrease incrementally each quarter going forward as we are continuing to, as you said, invest in R and D, invest more in our sales and marketing teams as well. And getting towards that longer term margin that we've talked about historically, We're going to talk in more detail around this at Analyst Day. But the last time we updated you on this, we still said that our long term margins were around 20%. So I think you should assume we're getting more in that range than near to that than to 41.7%.
Okay.
Alex, by the way, if your case school district has any questions or any feedback to Zoom, let them know. You know Zoom will see you well and can be there.
I'll send them right to you, Eric.
Thank you, Alex.
Our next question is from Ryan McWilliams with Stephens.
Thanks guys for the question. So for Zoom Phone, pretty unbelievable rate of achieving global service coverage. So congrats on the expansion there. Kelly, when you mentioned doubling or tripling the Zoom phone seats and various deployments, is that a part of this expanding global service coverage? And have you seen more enterprises trialing Zoom Phone as a result of this digital coverage?
Thanks.
So certainly international expansion, I think we've said historically that was the biggest opportunity for us. And I think a perfect example of that is the 2 largest Zoom Phone deals in Q2 were outside the U. S. So that really shows the strength and what the international coverage is bringing to Zoom Phone. And sorry, what was the other one?
Oh, enterprise customers trialing Zoom. Yes, absolutely. There are some amazing names that we can't talk about yet, but we're excited about the traction that we're seeing in the enterprise customer base as well.
Our next question is from Pat Walravens with JMP Securities.
Great. Thank you. If she comes in on time, I'm going to give you some real feedback from one of your customers. Here she is. Hello.
Okay. Gigi, what is so Gigi's school also just switched from Google to Zoom. And Gigi, what is it that you like best about Zoom?
The breakout rooms, I thought they were really convenient because my teacher we have a lot of students in our cohort our group, and it's really hard for all of us to talk at once. So she puts us in 6 breakout rooms, and I have 4 or 5 students with me, and it's really nice to talk to them, to work with them, check answers instead of having 40 kids in like 1 huge group. And you can never get to talk. That's why I love breakout rooms so much.
Thank you, D.
Great. Thanks for the feedback, Gigi.
So the, my question is, so Eric, when everyone's working from home, how do you make where you work an attractive place to work?
So first of all, your daughter gave his comments, minimum ID today. I hope you would like to drop off.
Oh, good. I'm glad. Yes.
So speaking workplace, I think for now, I think for the foreseeable future, we all need to work from home. But we've got to think about a long term plan. So meaning after the pandemic crisis over, what the new working, you know, a place look like. You know, we have with many customers, partners, we believe in terms of the working from home, this trend will stay. But I'm not seeing all of us will keep working from home.
It's very, very likely it's a hybrid. Meaning, twice a week or 3 days a week, you can send all employees back at home. And some other time, we all keep working in the office. And also you can further consolidate a lot of it tomorrow in offices, right. You do not need to have offices everywhere anymore.
You also can have high tenants almost everywhere. And plus, even for the workplace, you know, today look at a lot of companies, the very big open space. I think that may not work anymore in the future. The good news, we do have a tie, you know, for the next, you know, 10, maybe 12 months, you know, we can optimize what's the future work place look like. But again, you know, no matter what, I think the tools like this can still help.
Thank you.
Okay. And we have time for one more question. And the last question is from Jonathan Kees with Summit Insights Group.
Great. Guys, Sakmin. I add my congratulations to the quarter and thank you for getting me in here. So I guess I have my one question as well as, if I can, a clarification. But clarification first, maybe it's more for Kelly.
Kelly, you had said last quarter, you were modeling the assumption that your sales teams would start being more moderate or more normalized level of business activity. I didn't I noticed that wasn't in the guidance in the commentary this quarter. Is that still the case then, that carryover from last quarter? That's a clarification. And my real question is, can you tell me about the discounting on the pricing that you have for the enterprise RFPs?
Are you seeing a lot of that? Are you seeing a good amount of that? Thanks.
So in terms of our sales rep productivity, as you can imagine, it was an extreme high level in Q1 and also extremely elevated in Q2. As we looked forward to Q3 and Q4, we have modeled it certainly to be lower than that, but still higher than what we saw last year. So it's kind of somewhere in between what we saw for the first half of this year, but where it was exiting FY 2020. And then in terms of enterprise discounting, we don't disclose specifics around that, but we haven't really seen a significant change in the buying patterns of our enterprise customers.
Okay. That wraps up our q and a.
Great. And I think we'll turn over to Eric for any final comments, Eric.
Is the is the Itad still available? It looks like he has a question, right? No?
No, I don't think is going to be asking the question today.
Yes. So thank you all for joining us today and we truly appreciate it for your time. It has been memorable first half to our investors and analysts. We appreciate your continued support for Zoom. Thank you all.
See you next quarter. Thank you.
Bye. Thank you.
Thank you.
Thank you, everybody.