Hello, everyone, and welcome to Xoom's First Quarter Fiscal Year 2021 Earnings Release. As a reminder, this call is being recorded. At this time, I'd like to turn the floor over to Tom McCallum, Head of Investor Relations.
Thank you, Matt, and hello, everyone. Welcome to Zoom's earnings video webinar for the Q1 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 will 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 our market size, growth strategy, our estimated and projected costs, margins, revenue, expenditures, investments and growth rates, our future financial performance and other future events or trends, including the guidance for the Q2 of 2021 and full fiscal year guidance for 2021 our plans and objectives for future operations, growth initiatives or strategies and the impact of Zoom's 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 and 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 statements we may make on today's webinar. And with that, let me turn it over to Eric.
I think Eric is not here, yes.
Thank you, Tom. First of all, thank you all for your time today. I still remember the first time when we had an earning call last year, it was around less than 1,000 participants. Today, we have over 3,000 participants. Thank you all for your time.
And I hope you are doing as well as is possible in this unique moment around the globe. To the frontline workers, we thank you for your courage and the tremendous sacrifices you are making to keep us healthy and our community running in this pandemic. Everyone at Zoom appreciates all your incredible work. COVID has brought a pin for many, in particular, vulnerable communities. The Black community in the United States has also recently experienced shocking and senseless loss.
To our communities and customers, especially those in the Black community, Zoom is standing with you, not only today, but also into the future. Nearly 10 years ago, we created Zoom to build a better, simpler and more efficient video communications platform. Today, I am proud to see that our platform is serving a critical role beyond our original vision in enabling communication and collaboration for businesses, schools, consumers and the global community to stay connected and operational during the COVID-nineteen pandemic. Navigating this process has been a humbling learning experience, giving us a newfound appreciation for what it means to be a video communications technology provider in times of need. And work from home and social distance initiatives have meaningfully accelerated adoption and traffic on the Zoom video communications platform.
We have seen many use cases not only from enterprises to maintain work productivity as part of the business continuity plans, but also from first time consumer users for personal and social use to connect with friends and families when physical gathering is not possible. Let me share some metrics that illustrate the demand we experienced in this past quarter. Customers with more than 10 employees grew 3 54% year over year as we deployed millions of licenses for new customers in the quarter. 1 new banking customer deployed approximately 175,000 new Zoom enterprise licenses in the quarter. Usage by customers in the Global 2,000 grew over 200% substantially.
We peaked at over 300 1,000,000 daily meeting participants free and paid joining Zoom meetings in April 2020, up from 10,000,000 in December 2019. Currently, we continue to see elevated levels of participants even as governments around the globe have begun to see stay in place restrictions. We had an approximately 24 increase in our metric of annualized mid minute run rate, which jumped from RMB100 1,000,000,000 at the end of January 2020 to over $2,000,000,000,000,000 based on April 2020 run rate. Segment capacity to meet this incredible increase in traffic and use cases while providing uninterrupted, reliable and high quality services for our customers have been a tremendous undertaking for our team, and we could not have done without relying on our partners. When the pandemic crisis started, our own data centers could not scale fast enough to handle the unprecedented traffic.
Fortunately, some of the top public cloud providers were there to help. Immediately during the crisis, our long time partner, AWS and its CEO, Andy Jesse, enabled us to meet this rapidly increasing demand. As our demand increased and we had limited visibility into the growth, AWS was able to respond quickly by provisioning the majority of the new servers we needed. So sometimes adding several 1,000 a day or several days in a row. In April, our customer Oracle also showed great support to help us.
Not only did Larry Ellison record a great video to encourage our team to do the right things for the world, but also offer Oracle Cloud support. We also provisioned a number of servers in the Oracle Cloud as the demand for Zoom continues to increase. We are so grateful for their partnership and their responsiveness to provide capacity during this time. While the COVID-nineteen pandemic has expanded our market opportunities, it also brought us many challenges. Prior to the pandemic, Zoom was primarily built for and used by large enterprises and institutions.
During the crisis with good intentions, we opened our platform to unprecedented numbers of first time users without fully considering the challenges it would bring into those who did not have full IT support or established protocols for security and privacy like our enterprise customers. As a result, we have experienced negative threats related to meeting disruption, security and privacy issues. Since these issues emerged, we have transparently and quickly addressed specific security and privacy issues, including enacted a NPD plan initiative on security and privacy with a weekly webinar for customers to ask me anything. Acquire Keybase team to add engineering expertise to build an end to end encrypted meeting mode. Also released Zoom 5.0 client with new security features and enhancement to give customers unparalleled control over their meetings and data.
The new release also includes the support for AES 256 bit GCM encryption and ability to report platform misuse to Zoom's trust and safety team. During this period of unprecedented usage growth and negative PR As a CEO of Zoom, I was also facing tremendous pressure, and I reached out to the high-tech community and received greater support from valued CGOs, and many of them are my mentors, and I can't thank them enough for their advice. I'm also deeply grateful to see the strong support from our valued in price customers, such as CEOs from Atlassian, Equinix, HubSpot, Oquipar, Patriot Duty, Poli, SurveyMonkey and many others, both through public statements and video testimonials. With that, our users trust us to deliver the best and the most secure video first communications platform. I believe our result will continue to make us a stronger company for our customers and the global community.
Now let me discuss a few of our happy customers. We are thrilled to welcome ARM Technology to the Zoom family. Arm Technology is at the heart of our computing and data revolution that is transforming the way people live and businesses operate. In Q1, Arm chose to deploy approximately 8,000 Zoom meeting license, 800 Zoom Rooms and 9,000 Zoom Phones to deliver a one touch experience to their growth globally. We're also very happy to welcome Big McKenzie, one of Big McKinsey's distinguished strength is their use of cutting edge technologies to help clients overcome the challenges of computing in this economic world.
We feel privileged to be the video communication platform of choice for the number one law firm brand in the world. Thank you, Arm and Baker McKenzie. On a final note, we welcome Lieutenant General H. R. McMaster to serve as an independent director on Zoom's Board of Directors.
Belteshiomi Santolin as President of Engineering and Product and Damien Hofer Campbell as Chief Diversity Officer. Bringing their activities to Zoom will be instrumental as we navigate rapid growth, transformation and scale. I want to commend and thank our 2,854 employees for what we have accomplished together and for working tirelessly over the past quarter to support millions of participants around the globe. With that, let me turn things over to Kelly. By the way, I forgot to mention that today is also our CFO Kelly's birthday.
So happy birthday, Kelly.
Thank you, Eric. And this is the best birthday present I could ever have. Hello, everybody. Q1 was an exceptional and pivotal quarter for Zoom. We are grateful for the incredible increase in demand as millions of doctors and patients, teachers and students, businesses and consumers chose Zoom to deliver critical communication and connection in a time of need.
It speaks greatly of their trust and the quality and ease of use of our technology platform. We are also proud of our efforts to support our customers, employees and the global community during the COVID-nineteen pandemic. In addition to opening up our platform to deliver free services to over 100,000 ks-twelve schools in 25 countries and millions of people around the world, especially those in areas highly impacted by the crisis, we have also donated $1,400,000 to COVID-nineteen focused charities and funded another $1,000,000 of stock to launch our charitable fund, Zoom Cares. The key long term focus at Zoom Cares includes education, social equity and climate change. Internally, we provided a one time bonus equivalent to 2 weeks of pay for all Zoom non commissioned employees to offset costs associated with any disruption caused by the crisis.
Not only has the world changed since we last reported results in early March, but so has been market opportunities and growth trajectory. Let me start by reviewing our financial results for Q1 and discussing our outlook for Q2 and the full year of FY 'twenty one that has been recalibrated to adjust for the new trends and sales of our business. Total revenue grew 169 percent year over year to $328,000,000 in Q1. The top line results significantly exceeded the high end of our guidance range of $201,000,000 due to the increased demand and strong sales execution in the quarter. For the quarter, the growth in revenue was primarily due to construction provided to new customers, which accounted for approximately 71% of the increase, while subscription provided to existing customers accounted for approximately 29% 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 Q1. We continue to see expansion in the upmarket as we ended Q1 at 7.69 customers with greater than $100,000 in trailing 12 months revenue, up 90% year over year. This is an increase of 128 customers over Q4, a record number of ads in the quarter. Further demonstrating the strength in the upmarket was the addition of over 500 customers with greater than $100,000 in annual recurring revenue in Q1.
This is a one time metric that we are sharing to provide more insights to our Q1 results. For customers with more than 10 employees, we added over 183,000 in Q1, exiting with a total of approximately 200 and 5,000 customers in this segment. Year over year, we added over 206,000 customers, growing 354%. While this is remarkable growth, our customer segment with 10 or fewer employees also expanded during the quarter as individuals adopted Zoom for many personal and social uses. As a result, we had experienced a mix shift of customer cohorts, where customers with 10 or fewer employees represented 30% of revenue in Q1, up significantly from 20% in Q4.
In addition, the increase in customers with 10 or fewer employees also shifted our billing mix as these customers generally pay monthly rather than annually like most enterprise customers. Our net dollar expansion was over 130% for the 8th 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 150% year over year. However, our combined APAC and EMEA revenue grew even faster at 2 46% year over year and represented approximately 25% of revenue.
International expansion is a key growth initiative for Zoom. Our global brand awareness has spread more quickly and we have expanded into more countries than we had originally planned for FY 2021. Now turning to profitability. The increase in demand and execution drove net income profitability from both GAAP and non GAAP perspectives. For my following comments, I will focus on our non GAAP results, which exclude the charitable donation of common stock, stock based compensation expense and related share based equity taxes.
Non GAAP gross margin for the Q1 was 69.4% compared to 80.9% in Q1 last year and 84.2% last quarter. Although in early March, we originally guided lower based on an increase in usage of our platform, our gross margin was further impacted by the elevated demand, especially higher levels of free meeting minutes, including those from K-twelve pools in March April. Higher incremental costs also resulted from leveraging the public cloud providers, which was critical to our ability to meet the sudden exponential growth in usage as the crisis spread and government instituted stay in flight policies around the world. Moving forward, as we build additional capacity in our own data centers, we expect to gain some efficiencies, bringing gross margin back to the mid-70s in the next several quarters ahead. R and D expense in Q1 was approximately $21,000,000 up 66% year over year.
As a percentage of total revenue, R and D was 6%, which was lower than Q1 last year, mainly due to the strong top line growth. In FY 'twenty one, we plan to continue investing in R and D to drive innovation and security functionality, including leveraging the expertise and resources from top security firms. Also, we recently announced the addition of 2 engineering centers of excellence where we expect to add up to 500 software engineers in the next few years. The new R and D centers in Greater Phoenix, Arizona and Pittsburgh, Pennsylvania will both be located near top engineering universities. Sales and marketing expense for Q1 was $104,000,000 This reflects an increase of 69 percent or $42,000,000 over last year with investments to drive future growth.
As a percentage of total revenue, sales and marketing was 32%, a decrease from Q1 last year mainly due to strong top line growth. Overall, the increase in expense is attributable to record sales hiring and higher sales commissions due to strong execution, while we saw efficiencies in marketing. We are expanding our hiring plan for the rest of the year to meet the opportunities presented in this new environment. G and A expense in Q1 was $49,000,000 up196 percent on a year over year basis. It represented 15% of total revenue, up from Q1 last year due to higher accrual for telco taxes from higher billings, a one time license payment and external professional services.
Non GAAP operating income was $55,000,000 translating to a 16.6% non GAAP operating margin for the Q1. This compares to Q1 last year's result of $8,000,000 6.7 percent margin. Again, the higher revenue plus strong execution across all areas were the main drivers of this additional profit. Non GAAP earnings per share in Q1 was $0.20 on approximately 295,000,000 of non GAAP weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.10 higher than our guidance and $0.17 higher than Q1 of last year.
Turning to the balance sheet. Deferred revenue at the end of the quarter was $552,000,000 up 2 70% year over year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1,100,000,000 up 184 percent from $377,000,000 year over year. The increase in RPO is consistent with the increasing demand and strong execution in the quarter. We expect to recognize approximately 72 percent or $772,000,000 of total RPO as revenue over the next 12 months as compared to 64 percent or $240,000,000 in Q1 of last year.
We ended Q1 with approximately $1,100,000,000 in cash, cash equivalents and marketable securities excluding restricted cash. In Q1, we had exceptional operating cash flow of $259,000,000 up from $22,000,000 year over year. Free cash flow sorry, can you go back? Thanks. Free cash flow was $252,000,000 up from $15,000,000 year over year.
The increase is attributable to strong collections from top line growth, higher percentage of monthly contracts as well as billings started early in the quarter. Looking ahead, we expect to increase capital expenditures for additional data center infrastructure. And as a reminder, we will see the semiannual cadence of net cash outflows from ESPP purchases to occur in Q2. Now turning to guidance. As I had mentioned earlier, the current environment has expanded new market opportunities and outlook as the increase in demand propelled us to a higher growth trajectory than originally planned for this year.
This requires us to recalibrate our original FY 'twenty one plan for the new scale of our business. The COVID-nineteen pandemic added unprecedented new variables to our business model where historical knowledge may no longer apply. Today, as we present our current best estimate of future quarters based on new assumptions of the dramatic shift in our business, we caution that the impact and extent of the crisis and its associated economic concerns remain largely unknown. Significant variations from our assumptions could cause us to modify our guidance. With that, we provide a higher outlook for FY 'twenty one based on our view of the current business environment.
For the Q2, we expect revenues to be in the range of $495,000,000 to $500,000,000 We expect non GAAP operating income to be in the range of $130,000,000 to $135,000,000 Our outlook for non GAAP earnings per share is $0.44 to $0.46 based on approximately 299,000,000 shares outstanding. For the full year of FY 'twenty one, we expect revenues to be in the range of 1.775 dollars to $1,800,000,000 which would be approximately 185% to 189% year over year growth. Let me now provide a bit more context on the assumptions behind our guidance. As I discussed earlier, we have a far higher portion of revenue attributable to new customers with 10 or fewer employees who opted for monthly contracts. Historically, monthly subscribers have a higher churn rate compared to our annual or multiyear subscribers.
In addition, as government starts ease shelter in place restrictions, we may see a moderation of demand for our services. Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2. For the full year of FY 'twenty one, non GAAP operating income is expected to be in the range of $355,000,000 to $380,000,000 We expect to deliver non GAAP earnings per share of $1.21 to $1.29 for the full year FY 'twenty one based on approximately 300,000,000 shares outstanding. In closing, we executed well in Q1 and are proud of how our team dedicated themselves to support our customers and global community. Thank you to the entire Voom team.
And everyone, please stay healthy and safe. With that, let's open it up for questions. If you have not yet enabled your video, please do so now for the interactive portion of this meeting. Matt, please queue up our first question. Before our first question, actually, Eric has asked me to open mic for him.
Yes.
Our first question is from Alex Zukin with RBC.
Hey, Eric. Thanks for taking my question and thanks for everything you do. You just delivered 1 of, if not the greatest all time quarter in enterprise software history. I think you've been given an amazing opportunity with Zoom becoming not just a verb, but really the poster child for enabling remote work. But with that opportunity also comes a question, which is where does Zoom go from here?
How do we think about the percentage of your TAM that's been penetrated in the current environment? What are the most exciting incremental growth drivers? And what do you have an update for us in terms of the long term vision of your company? Because it seems like the prior long term vision, we're there. And then I've got a quick follow-up.
Arthur, great question. And if we have the time, probably spend more time also want to get a lot of advice and what's the future. Anyway, I truly believe video is a new voice. Video is going to change everything about the communication. The way for us to work, live and play is completely changed.
From that perspective, a huge opportunity, a lot of opportunities ahead of us. However, for now, our top priority is to how to make sure we always keep our service up because so many people are counting on Zoom to stay connected. Our top priority is to make sure keep the service up, double down, triple down on the privacy, security issues and also down the road, we are doing figure out where we are going to double down on the new growth areas. But for now, I think the one thing we know for sure is the TAM is bigger than we thought before, right? And so how to capture value of the new TAM, I think that's something very important.
Also a lot of other new opportunities, our team, we are working together, right, together there step by step. But now, number one thing is focus on the current product and the user experience, make sure during this pandemic crisis, hopefully it can end very soon, they can leverage Zoom to stay connected.
Next question please, Matt. Our next question is from Sterling Auty with JPMorgan. Yes. Thanks. Hi, guys.
So Eric, maybe a technology question for you. You did your 90 day program and end to end encryption really became a big focal point of discussion around security and privacy. You made the acquisition. Can you update us on when you plan to deploy end to end encryption? How will it be deployed?
And is there an opportunity to monetize it perhaps as an upsell?
Yes, Stu, and that's a good question. Before I answer to that question, I'd like you to take a step back to share with you what's the industry standard for now, like Zoom or other competitors because I mean this we have high version industry for a long, long time. I think for now, I think the most of vendors, we all use AES 256 bit either GCM or CBC, that's a standard. The reason why if you enable any inclusion, guess what, you cannot use the phone to dial in. You cannot support a traditional or the legacy hardware H323 and SIP devices.
And perhaps the cloud recording also is not available with some limitations. That's why for now most of the industry, currency vendors do not support this feature. However, we believe we no matter what, we needed to support that as one advanced feature to give our customers see, your meeting is extremely sensitive. You don't want to Zoom know the SMT. Yes, you can enable this feature with the limited functionality, you cannot let the phone to dial in.
And inside of that, we think this feature should be part of our offering. We do not want to charge with based on the picture, we charge the customer more. That's not like that. So we want to give to at least the enterprise customer or bring in customer Free users for sure, we don't want to give that, right? Because we also want to work it together, see this FBI, the local law enforcement, it gives some people to be using the better purpose.
I think we also published a white paper, I think a week ago, and publishing the GitHub, we got a lot of feedback and our team are now working on execution now. So, I think soon we are going to already stay. For now, we are seeing the review of our white paper. So, we have confidence this will be a very good feature for our enterprise customers. Thank you.
Thank you, Stuart. Yes, you can join us as a beta tester.
Great. Next question please, Matt. The next question is from Nikolay Beliov with Bank of America Merrill Lynch.
Hi. Can you guys hear me? Yes. Hi, Carey, Kevin Bourde. I look forward to chatting with you on Thursday at our conference.
My question is, I would like for you guys to provide us with a little bit more context on the guidance. I was wondering what trend you saw in the business during the month of May. And what gives you confidence that those consumers, the increase in the mix from 20% to 30%
are going to stay for the rest of the year? Just trying to get more color
around guidance.
So in the guidance, what we have considered, especially around those pro service, as you call them, the monthly users, we assume that there is an escalated that the churn will be escalated in terms of historical. So we've assumed a multiple of what the historical churn rates have been. And also, we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment. With that said, I want to make sure you understand that while we did see an increased growth of monthly, there's about half of our sales in the quarter came from the subscribers. When you look at the sales from our direct sales organization, the percentage of monthly subscribers was consistent with historical.
So we didn't see an increase in monthly subscribers in the market. We saw the same percentage that we have historically. And those typically, the churn in that segment when they're annual or multiyear is a fraction of what the monthly subscribers
are. And Kelly, in this context, if I may ask a follow-up, billings grew 3 50% and CRP grew around 2 20%. Why does it discrepancy here? And what does it mean to revenues? And how revenue flow through from CRPO and billings?
So thank you. About the question about billings and RPO, as you know, we don't provide specific guidance around billings or RPO. Given the fact that it's actually been exacerbated with the growth in the subscribers, They are just very difficult for metrics. They don't apply because of the high rate of monthly billings and subscribers. They're just not good metrics for us.
Got it. Thank you.
Next question please, Matt. Our next question is from Alex Kurtz with KeyBanc.
Yes, thanks. Just in earlier question about growth opportunities, kind of a once in a lifetime opportunity to reimagine investments in new products, new sales coverage. And I mean, just look at your operating income this quarter or next quarter, right, you couldn't have imagined that at the time of the IPO. So as the team and the Board look at the next 12 months, is there something that you guys are really laser focused on that you could take all this extra cash flow and reinvest back into the business?
Yes. Alex, again, that's a good question. So even before this pandemic crisis, we not only do we offer the video conference and service, but also we have Zoom phone system. Don't forget about that, but it's also a huge opportunity. In particular, we believe video and voice, those 2 are being the key words into one service.
That's still a huge opportunity. This pandemic crisis, obviously, on
the one
hand, accelerated the video adoption. On the other hand, it was brand recognition plus a lot of consumers, right, a lot of new use cases like online education, telemedicine, telehealth, for sure, we would like to double down on that. But in terms of specific opportunity on one new service, we're working on that in the next several months. And as I mentioned earlier, by now, we needed to make sure still keep having people stay connected. Another thing also we know for sure is the way for us to work in the future is totally different and how to make sure focus on the whole experience, right, to make sure that you have very consistent experience when you work in the office and work in the home.
A lot of innovations will be upon that as well. I truly believe a lot of opportunities, but we've got to be very careful. You're so right, where we should double down, where we may not lead to our the partners, right, to develop those applications or leverage those opportunities upon our platform.
Thanks. And then a quick question for Kelly. In the areas where they've been lifting the quarantine, the shelter in places, Have you seen any kind of change in churn in those regions, whether it's in the U. S, Europe or Asia?
It's really too early to tell, Alex. We've taken, again, a conservative approach to that, but it's too early to tell as most places where they're starting to ease, shelter in place, people are taking their time to go back to work.
Makes sense. Thank you.
Next question please, Matt.
Yes. Our next question is
from Phil Winslow with Wells Fargo.
Great. Thanks for taking
my question. Two questions. First for Kelly, then one for Eric. Kelly, when you think about retention, that's something that's come up a on this call. What programs do you have in place to make sure that all these users that you've added stick to the platform?
Wondering if you could talk us through the programs you've had in place? And then also, Eric, when you think about Zoom Phone in particular, not just retention, but also upsell Zoom Phone, Similar thing, what is going to be the messaging to customers? How do you think about the potential a year from now, 6 months from now, etcetera, attaching a full unified communications suite to that video customer?
Yes. So in terms of retention, first of all, for all of our customers, new and existing, we have a great customer success team that is focused on ensuring training usage adoption happen in all of our customers, as well as we are looking for opportunities with our monthly subscribers to put forward offers to them to see if they would like to equate to an annual contract that will be helping them evaluate the needs as well.
So first, back to your second question. So as I mentioned earlier, we believe the video and voice, those 2 are doing the conversion to the brand series. Our team, we share our vision to our existing installed base. Take Q1 for example, one of the very last global pharmaceutical companies, they were our happy Zoom video conferencing customer. In Q1, we deployed Zoom Phone, which is our largest phone bill, around 18,000 from licenses, right?
Because we like the one consistent experience, more and more opportunity like that, right? So you can call your phone number, one more click and have updated video and the same experience. I think there's huge opportunity. Not to mention a lot of enterprise customers For now, they're still deployed on prem and PBX solution. I think this pandemic crisis, we help them to accelerate their migration from on prem to enterprise for the boost the cloud with the PBX adoption.
So we think that's a huge opportunity ahead of us.
Great. Thanks, guys. And I do appreciate you enabling my kids to still go to school.
Thank you. By the way, I like your what's your background?
Thank you. Thank you. Branding, marketing.
Yes.
Next question please, Matt. The next question is from Pat Walravens with JMP.
Great. Thank you. And happy birthday, Kelly. Thanks. So Eric, you started as an enterprise company, but now so many individuals are using Zoom to connect with their friends and their families and their classmates.
When I go to say good night to my daughter at night, I get a lot of, Daddy, I'm talking to my friends, come back later. So how is that changing your strategy going forward? What's your consumer strategy?
I think that's a good question. My key is also with Zoom as well for the online classes. I believe even back to the voice, right, the voice, no matter where you are using a voice, like a phone call, my kids and myself are in the office, on the way, in the home, that's the same experience. Used to be, we build a Zoom, when we enable knowledge workers for business communication and collaboration. And now given that video conferencing is going to become a mainstream service.
The boundaries between the consumers, the consumers or enterprise customers is not very clear anymore. We've got to have maintain a very consistent experience. So that's why a lot of features we build for enterprise customers can be easily and seamlessly used by consumers. However, we got to make sure, right, for enterprise customers, we already have all those security features to be in, how to easily let consumers to enable that. This is the challenge we are facing.
In terms of opportunity, I do not think we needed to have a specific consumer strategy. Our strategy is offer 1 service, no matter where you are, no matter what you do, no matter which device, it's just to help you to stay connected. This is more like an infrastructure service now, more like an Internet service provider. You can always say, hey, you're using Internet for what, for business collaboration or for consumer. It's the same thing now.
That's huge.
And then, Kelly, if I can ask Kelly a quick question, and thank you, Eric. I know sometimes when you are replacing a competitor and they have an existing contract, you sign up the customer, but then you let them have however many months are left on the competitor's contract for free.
Yes. When you do that, how
do you account for that? Does that count as one of your new customers? And does that have any impact on billings or RPO?
So we do count them as a new customer. And under the new revenue standard for 606, the entire revenue gets amortized over the full period, including the free period.
Okay. And so would you that would go into billings too then?
Yes. We do bill them upfront.
And you better have It depends
on what the period is, but yes, a part of
it. Next question please, Matt.
Great. Thanks. Just wanted to ask a question on, as you go forward with hiring salespeople, has with the influx of new customers, do you change from looking for more gatherers versus hunters? And just as you look to layer on ZYN phone, is the channel strategy still as important or is an overlay sales team kind of more important going forward? Thanks.
Yes. So on the one hand, for sure, we already doubled down our sales hiring by starting late last year. I think that we made a very good progress in Q1, not only for Hunter, BDI, SDR, account executive, which was quota carrying reps, but also for the phone, right? So it used to be look at our video conferencing service primarily driven by our direct sales team, but the phone base is very different. That's why we really shift our focus, not only for direct sales, but also we embrace our partner program like the master agent and really helped us a lot during the Q1.
I think about even more and more on partner deals, on channel sales program, on our phone business. I think the team is working very hard on that.
Got it. Thank you. Congratulations.
Thank you. Thank you. Next question, please.
Our next question is from Heather Bellini with Goldman Sachs.
Henrietta, can you unmute?
Sorry about that. Look, I just wanted to say, first of all, thank you for the company and with your steering acting the way it did over the last few months, which has been just such a trying time for so many. But not only obviously did you enable all of us to stay in touch and working, but just being able to still connect with family and friends. So thank you, I think, on behalf of everybody. My question has to do with your view and you've been asked a little bit about the Zoom cross Zoom phone cross sell opportunity here, and I know you touched on it a little bit already.
But I'm interested in, again, a little bit about your vision on how you can expand your offerings given how much broader your customer base is now. So I guess the two parts are, what are you seeing in terms of uptake of Zoom Phone? Is there anything you could share with us about penetration rates or the seat count that you're at now or maybe just how you might have seen adoption and flex in the quarter? So anything around that just so we could see how that's starting to take off given how many more new customers you've added. But also when you look at this evolving collaboration market, what's next for you all?
Because you have phones, you obviously have video. What is should we expect to chat service at some point just so we can close the loop on the entire messaging experience? So any thoughts you have there? Thank you so much.
Thank you, Heather. Maybe Kelly, you can address to the phone questions as an answer to the second part of your question.
So the primary demand and focus of our new customers and expanding customers in Q1 was really in terms of continuity and so they were focusing mostly on the video communications platform. But as our focus for Zoom Phone is to sell into our existing Solvay, it now creates a huge opportunity for more sales in Q2 and the rest of this year. So we're really looking forward to that team having an expanded
customer base to sell to. So to answer to our second question, you look at the video collaboration business. As I mentioned earlier, TAM is bigger. The phone add up to the phone, together, I think it's a huge market. Not automation, we also have online business.
Online business used to be a small portion of our total net MRR growth. For now, given the popularity of the video conferencing, a lot of our consumers and consumers, we all use Zoom Zoom for like, online, the hyper hour, online learning, teaching class, it can be used, it's much more broad. For sure, we can monetize that. Once and for sure, we know we are not looking to support advertising kind of advertisement model, but we are not going to support that. We never want to sell customer data.
So that's something we know for sure we do not do it. However, in terms of how to embrace all kinds of consumer driven use cases, I think there's a lot of ways to monetize because online subscription, this you obviously see the number as long as we keep the service up, keep the innovation, I think we're doing more and more online buyers as well. So regarding the new services, I think the video voice, that's our company's DNA. In terms of a chat and message, we also have a video chat, but also we really look at everything from a customer perspective. If you brought a Slack, it's great.
We have wonderful integration with Slack. It's a great service. And the customer deployed massive teams and we also interoperate integrated with massive teams very well. And from some customers, they want to stand like on Zoom platform, okay, too. Video wise, what's our chat with me, right?
So from that perspective, we're taking a very open, flexible approach and look at everything from a customer perspective. But overall, we are being laser focused on video and voice, invite the business and consumer as well. Thank you, Heather. Thank you, Heather. Next question, please.
Yes. Next question is from Walter Pritchard with Citi.
Thanks. Question for Kelly. Wondering if you could you can hear me? Okay. Wondering if you could help us understand on the churn side, obviously, unprecedented demand for those under 10 employees monthly type customers.
Any order of magnitude you can put around the sort of churn versus what it's been historically that you're thinking about in the forecast? And then I have one follow-up.
Yes. All I would say is that we're taking a very conservative approach assuming that the historic norms don't necessarily apply to this new cohort, both from the magnitude as well as the potential around economic uncertainty. So we've the way we're forecasting it is using multiples of the historic turn rates.
And then maybe if you get into the obviously next quarter is going to be just sort of more of what you have this quarter in terms of the full quarter of all the business. But as you think about the quarters beyond that, how do you think about just a sustainable level of new customer adds? I mean, do you feel like what's happened here has pulled forward multiple years of demand? Or do you think it has opened up awareness so much to what you do that you could actually see higher levels of new customer adds as we get past this big bump up that we've seen with COVID?
Yes. I mean, we certainly have seen a lot of pipeline creation in the quarter in both Q1 and in early Q2. So that's been positive to see. And remember that our selling strategy around Zoom Phone as well as in room is to sell into our existing customer base. So this just creates a whole new opportunity around those future products as selling this product in the future as well.
Okay. Thank you. Thank you, Walter. Next question please, Matt.
Next question is from Zane Grange with Bernstein.
Hi, thank you guys. Eric, Tom, Kelly and everybody at the Zane team. I just want to say thank you for your corporate leadership and the real corporate assistantship that we all needed during time, especially in the things you guys you guys done in the educational space. I'm wondering how do you think about balancing the data security and privacy concern versus ease of use? It seems like that's always a balancing act where if you lean too far one way or the other, you're going to offset one type of customer.
And that becomes even more complex now that you're heavily moving into the consumer space. How do you balance that kind of from a technological and user interface perspective? And then I have one follow-up to that.
Yes. Thank you. This is a great question. So our service was built for serving enterprise customers, and we have all kinds of security features built in. Normally, we work together with Inovaya IT team, right?
We evaluate our service from a security perspective and they are going to enable or disable those security features and have official onboarding process. We really understand how that process works. And however, during this pandemic crisis, we have lost our first time leaders. As a CEO, I think I should have done better job. The reason why not only do we offer our service, but also we should play a role of IT for those first time users.
In terms of enabling password and waiting room or this was a lot of which is this is the mistake I made. So we learned a hard lesson. And that's why when we look at enterprise customers and consumers, we believe we're different with our philosophy. For any of our customers just to keep any other security features. However, for consumers, it's different.
Sometimes you're so right, whenever there's a trigger of conflict, that's why we doubled on our security team. We want to leverage this opportunity to completely transform our business to be the most secure solution. However, if there is a conflict between the privacy security versus the visibility, I think privacy security is more important than visibility. Like the 3 clicks, yes, customer not like it, they want to 2 clicks, but if there's a privacy issue, yes, we still want to have 3 clicks. So that's why, however, we do have a team.
We review every use case, every feature. We want to make sure focus on the privacy security at the same time, do all we can, don't lose the use of use. That's also critical. So that's why we hired a lot of security researchers, engineers to make sure on the one hand, we are very secure, safe to use, on the other hand also how to balance. This is ongoing effort.
We are committed.
And just a quick follow-up to what Heather was asking. She mentioned chat. I've been thinking, is there opportunity for embedding more cloud based storage or file sharing to enable more real time collaboration and file sharing or editing while on a Zoom call? Is that something you guys have considered? Or like I know you have a partnership with Dropbox.
Is it something that would maybe make sense to build out yourself or even acquire some visibility along the line?
Yes, good question. So yes, we already announced the partnership with Dropbox before, recently also partnership with the Box as well with the seamless integration, we also support Microsoft Drive, in the Google Drive as well. Essentially, within the meeting interface, we want to share the files from those cloud providers. I think the overall we focus on the customer experience. As I mentioned earlier, video and voice is still very critical for our videos in the future.
So for now, we just want to integrate Infraver with other best integrated service providers.
Excellent. Thank you, guys. Congrats.
Thank you. Thanks, Dane. Thank you. Your question will be back.
Our next question is from Bhavan Suri with William Blair. Hey, guys. Thanks for taking my question. I just have one. It's really around competition, right?
In the last few months, given your success and given COVID, we've seen BlueJeans being acquired, Pexip IPO, RingCentral announced their own video solution. I'd love to understand none of these actually imply anything immediately material in a competitive environment. But obviously, investments are playing out in that environment. I'd love to think about how do you think about navigating through this and differentiating? Obviously, the scale you have is a differentiator.
But how do you think about the competitive technology differentiation in the space? Love to get your thoughts around that. Thank you.
Yes. So sorry, I lost the post ever affecting prices on budget and that's the nature of that. Sorry. I know, maybe I did too, but
do you hear it? Or it's around competitive environment, around RingCentral, introducing video. It's around, that's like how you think about the competitive environment? Has it changed? How you navigate it?
Yes. So if you look at our competitive landscape, I think this pandemic crisis, we're not achieving anything and we still need our phone and video and also we have a phone service. The market opportunity is much bigger than before now, right. You take RingCentral for an example, we were focusing on the phone service, we focus on video, We added a cloud into PDS. We added a video conferencing.
We were good partner before, but now the market is bigger. I would say any competition is always good for consumers, right? And there's no competitor, there's not a good end user. So we are okay. So we do everything from an end user perspective.
Great. Thank you. Fair enough. Thank you.
Thank you.
Our next question is from Ryan McWilliams with Stephens.
Hey, thanks for taking the questions. So I attended a Zoom wedding last month and it went great. And my own wedding in September might be over Zoom. So I just wanted to say thank you for providing a backup plan there. Really a standout quarter and congrats on the execution.
For Kelly, from Q2, would you expect new recurring revenue added in the Q2 to be above the recurring revenue added in the Q4 of last year?
I just have one follow-up.
New recurring revenue in Q2 to be greater than Q4? Yes. Based on the outlook, I think that it will increase the historical revenue. It is an increase over what it would be as compared to Q4, yes.
Perfect. Yes. I mean, I can't really compare to the last quarter. And then Eric, just on and drafting off the Vam's last question. You mentioned in your comments that enterprise communications continue to be a fragmented market, low overall cloud penetration rate.
But with both competitors and customers now trending towards one platform for cloud video and voice, over the next few years, do you see this market consolidating around maybe 1 to 2 competitors for enterprise
communications? Yes. It's too early to tell. But overall, I truly believe the best of breed of service provider with Vybe and Vybe. Because customer, when it comes to video and voice, you've got to make it work anytime, everywhere, right, any device.
It's not that easy. Otherwise, the reason why in this pandemic crisis, customer trusted Zoom to use Zoom because it just works and the quality and a lot of innovations. And that's why I think video voice is not that easy. If you can do the basic service with all the basic features, okay, But to make it work in 7x24, no any outages and also for some innovation, it's not that straightforward. And that's why I think as long as we keep working harder, really leasing our customers to be the 1st vendor and understand their pain point, understand their use case, to be the 1st vendor to come up with a solution.
Even if there are so many competitors, I think we are okay because again it's a huge market opportunity, right. So we may not kind of serve every customer, but as long as we keep listening to our customers, keep the innovation, I think we should be okay.
Thanks.
Thank you. Thank you, Ryan. Congratulations.
Can we have the next question please, Matt? Our next question is from James Fish with Piper.
Hey, thanks for the question. Kelly, happy birthday. I'd agree that June 2 is the best day of the year in my humble list of opinions. You guys talk about churn in the second half of the year. I think you can look at sort of some vertical like education or some of the consumer additions that you guys had in the quarter as potentially not sustainable during that $300,000,000 insert.
How should that $300,000,000 EBITDA number in terms of what's added in education, for example?
Sorry, James. Can you just repeat the last part? How should we think about the 300,000,000 user number in what?
Just curious where you think that 300,000,000 user count is actually what number is actually sustainable within the current customer base?
So I just want to clarify that $300,000,000 is daily participants, both free and paid. So that was the peak that we saw in April. It has come down a little bit in May on average, but we still continue to see a high level of usage of both free and paid users. So I think certainly over the long term, we expect it to go beyond that $300,000,000 number.
Got it, James. Those $300,000,000 meeting participant is that's just a meeting participant. It's not that number is not unique. If you join 5 times a day will become 5, right? And from the free users or paying users, yes.
Yes. So totally understand. And then just a quick follow-up. It's the 8 quarter in a row of +130 percent net renewal rate. But could we get more color there as to how much stronger this quarter was from an upsell rate compared to the past few quarters?
Yes. We've committed to providing the metric of being greater than 130 just because it bounces around for this period, and we don't want you to read too much into that. So that's the guidance that we're going to provide
today. Got it. Thanks and congrats again.
Thank you. Thank
you. Next question please.
The next question is from Itay Tidjane with Oppenheimer.
Hello. Great quarter and happy birthday, Kelly. Fantastic. I had a couple
of questions. First on Global 2,000, you talked about how it grew 200% quarter over quarter. Those are generally very sophisticated organizations with a lot of IT dollars and they move very quickly. I guess my question is, is the penetration rate with meetings at that point, at this point, pretty much at 80% to 90% with that customer base? Have we fully explored with the ones that have purchased with you?
Or are they already where they need to be given how fast we
can usually move? And then the second question relates to phones.
Kelly, you mentioned that your thought regarding our previous question on phones that a lot
of the focus has been on video right now, but
you see there's an upcoming expansion opportunity going forward. I guess the question is considering the environment, is the environment helpful in accelerating phone adoption or perhaps the other way around? In fact, your organizations are looking to cut in spend. We already have an established phone system and everybody is using their cell phones from home, I guess, at this point. Is phones something that can get a boost from COVID as well, given that it's not walking into a vacuum?
Every company has a phone system, whereas very few have very broad adoption of video.
Okay. So in terms of your first question around penetration of the Global 2 ks, that isn't a metric that we specifically disclosed. But the good news is, is that it's not as high as you throughout there. So we still have lots of opportunity to grow in that segment today even with the significant growth that we saw quarter over quarter. And then in terms of the phone, I think given the land and expand strategy and the significant increase we saw in new customers this quarter, we think that there is a lot of opportunity ahead.
And that phone we talked about this probably before, but phone seems to really be the last area of IT that has been taken to the cloud. And as people have adopted more at Zoom and they come to trust and rely on ease of use and the reliability of the platform, phone is just the next natural step for them to take. So we're really excited about that opportunity and don't believe that the COVID pandemic should be an inhibitor to that.
So, yes, Kelly, right on. So Ethan, to add on to what Kelly said, if you look at the phone as a separate service you're so right, especially during this pandemic, I have a cell phone number, why do I need to deploy another service, it doesn't make any sense. However, if you think the phone is a part of video, the phone and video is the same thing, the same service, you will know that and the growth will follow as well. This is our vision. We think the full video voice is the same thing, The same product, the same service, the same back end, the same experience, that's why we see the huge opportunity.
If you want to sell our phone service as a separated service, it's not as a video not a part of video conference service, you are so right. There's no reason for us to deploy a separate service, just the same phone number, what's the point, right? That's why I think we have a huge opportunity because our architecture, because of the phone and the Zuub video, the same service. That's a very different way to do it. Thank you.
Thanks, Ittai. Matt, next question please.
Next question comes from Will Power with Baird.
Great. Thanks for taking the question. I wondered if we could drill down a bit into the education segment either in terms of revenue or paid users, something to give us some context and how you're thinking about education in the second half of the year as we get back to school, obviously, still a lot of uncertainties around that. And I guess the other part to that is, are there any learnings from some of these countries where they've gone back to school in terms of usage, whether South Korea or elsewhere?
So we don't break out the specific revenue by vertical, but what I can tell you is that from a growth perspective, education was the highest vertical with growth on a quarter over quarter basis. So we saw a very strong execution and demand there. And looking forward, as a reminder, many universities and schools have announced that they are potentially hopefully all other classes in the fall So we expect that demand to be strong even if we see certain easing the restrictions of shelter in place.
Yes. And by the way, we offer free service to more than 100,000 K-twelve schools around the globe. And I think you're so right, after the summer, are they going to keep using Zoom for online classes or what are we should do? I think that's yes, we are going to work on that. For now, we just have those K-twelve schools and because our primarily, we focus on hire as before.
And now, we have more and more K-twelve schools. It's a very different game.
Great. Thank you, Will. Hey, Matt, we have time for probably one more question, please.
All right. Well, our final question then will be from Tom Roderick with Stifel.
Yes. Here we go. We'll get the mute off. Hi, everybody. Thanks for taking my question.
I appreciate it.
So I guess the question a lot has been a
lot of questions have been asked on the top line. But you had to scale up massively in a way that 90 days ago, we couldn't possibly have expected this. You started to see a little bit of this in China and perhaps even at the time of the last call, Europe. So you had some awareness. But Kelly, even at that time, you were talking about gross margins in the 80% range.
Can you just talk a little bit more about what you did and how you managed to scale that business up so quickly? And then would love to hear just about the elasticity of that going forward to the extent that some of the monthly users do churn. Do you have the ability and this may actually interact with the Oracle partnership that was announced in late April. Would love to just hear a little bit more about that, the ability to scale up and scale down and how quickly you can do that?
So first of all, I mean, huge thanks and credit to the entire employee base of Zoom. Many of them worked extended hours and lots of weekends to support our customers and this increased demand. Also, we think, as Eric mentioned, to many of our partners as well who helped us scale up as we saw this unprecedented and it was difficult to forecast the expansion in our capacity that was needed. In terms of the ability to scale up, what we're focused on, of course, is we were like in gross margin focusing on adding the public cloud. And over time, we'll start to add more capacity in our polos start to moderate that gross margin impact a little bit as well as in other areas of the business, we scaled up with 3rd party resources to help us.
And over time, we looked at that for those with direct employees, which is more cost effective, but help us get through this unprecedented increase in the balance.
And also, Tom, during this pandemic crisis, our top priority is to show our corporate social responsibility. Essentially, we do all we can have people connected at no cost. We even now look at, hey, if you had several thousands of servers, what's the cost? Look like it's no, don't worry about that. This is time to help people stay connected.
But down the road after the pandemic crisis, it's sort of ended soon. I think for sure, we are going to go back to our gross margin focus.
Thank you all. It's been a unique Navy there, so looking forward to next Navy. Appreciate it.
Anytime.
Eric, do you have any final closing remarks before we turn off the webinar?
Yes. I want to say thank you all. Thank you, every Zoom employee. Thank you, all the users, customers. Thank you for your trust.
Thank you for our shareholders. And we will do all we can to truly deliver happiness to you. We will not let you down. Thank you for your support and truly appreciate.