Hello, everyone. Welcome to Zoom's Third Quarter Fiscal Year 2020 Earnings Release. I'd like to remind everyone that this conference is being recorded. At this time, I'd like to turn the floor over to Tom McCallum, Head of Investor Relations.
Thank you, Matt. Hello, everyone, and welcome to Zoom's earnings webinar for the Q3 of fiscal 2020. Joining me today will be Zoom's Founder and CEO, Erki Wang and Zoom's CFO, Kelly Steckelberg, who's actually joining us remotely from Los Angeles demonstrating another capability of using Zoom video webinar for an earnings announcement. 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 press release include a reconciliation of GAAP to non GAAP financial results.
During the call, we may make forward looking statements about our future financial performance and other future events or trends, including guidance. 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 can affect our performance and financial results and which we discuss in detail in our filings with the SEC, including today's press release and our latest 10 Q. Zoom assumes no obligation to update any forward looking statements we make on today's webinar. And with that, let me turn it over to Eric.
Thank you, Tom. Thank you. Welcome and thank you all for joining us on today's Zoom video webinar. I'm very pleased to report that we had another strong quarter as evidenced by a combination of higher revenue growth of 85% with increased profitability and free cash flow of $54,700,000 We continue to have success with customers of all sizes and one metric that has continued to impress is customers with more than 100,000 dollars of trailing 12 months revenue. This metric grew 97% from Q3 last year.
Our execution so far this year has put us in a position to finish the year strong and we are raising our revenue and profitability outlook for the Q4 as well as full fiscal year. As Kelly will discuss in a moment, our strong Q3 results were driven by 2 factors: first, our ability to attract new customers and second, our commitment to customer happiness which creates trust and enable us to significantly grow commitments with our existing customers. Let me discuss some of the largest deals we closed this quarter with 2 happy customers. Both expanded their footprint of our unified communications platform. I'm excited that the U.
S. Postal Service is starting to deploy Zoom meetings more broadly across the organization. After an extensive proof of concept. The USPS is our 1st major agency major agency win since we received federal approval in May. They chose Zoom for our high quality video and audio.
Thank you, USPS. I love you. We are also grateful to have National Australia Bank as part of the Zoom family. NAB is undertaking a large technology transformation and is looking to Zoom to support its enterprise telephone and read conference services in order to keep connect its workforce of more than 30,000 employees. AB is Australia's largest business bank and one of our largest financial service customers in the region.
Since selecting Zoom in 2018 to help seamlessly connect its workforce across any device and internationally, they have continued to grow and adopt Zoom services throughout their business. In Q3, the bank selected Zoom to support the telephone systems for a new Sydney based major office building development. Zoom Phone was selected to support a unified communications approach as the bank adopts a wireless working environment, as well as delivering projected cost savings and enhanced features and functionality. They will begin rolling out Zoom software phones to over 6,500 users next year. Focusing on tenants of the new building as well as continuing to expand their Zoom Rooms footprint, We are excited to continue delivering improved experiences for the bank through our full end to end communications platform, which helps better connect their workforce.
Thank you, National Australia Bank. Now, let me discuss a couple of business highlights from Q3. First, analysts from Gartner named Zoom a leader for the 4th consecutive time in their Magic Quadrant of Meeting Solutions. We are grateful that Gartner has recognized Zoom for our completeness of vision and our ability to execute once again. And second, we held our premier custom event Zoomtopia, my favorite event of the year.
It is only our 3rd Zoomtopia and we had record registrations of 2,600, up over 80% from last year. Due to the event, customers like AB InBev, Autodesk, Electronic Arts, Uber and Walmart shared their stories. Many of these customers spoke to how frictionless Zoom experiences are driving productivity and delivering happiness with the internal and external stakeholders. It's truly amazing and humbling to hear from so many hybrid customers from around the world. Also at Zootopia, we were proud to announce expansions to our platform including our new Zoom Rooms Appliance Program, expanding Zoom Phone Service and capabilities and the growth of our app marketplace.
Our customers tell us that Zoom just works. And with these new innovations, we empower teams to do even more with video communications. In closing, I'd like to thank the over 2,400 Zoom employees for their hard work and focus on our customers. Their commitment to customer happiness and execution and skill will enable us to finish the year strong and position us for future growth. With that, let me turn things over to Kari.
Got it. I'm here. Thank you, Eric, and welcome to everyone joining us. Let me start by first reviewing the financial results for Q3 and then I will discuss our outlook for Q4 and the full year. Overall, we delivered another amazing quarter and demand for Zoom's unified communication platform remains strong across our major geographies and offerings.
Total revenue grew 85% year over year in the 3rd quarter to $167,000,000 This top line result exceeded the high end of our guidance range. Key drivers of our revenue performance included both our acquisition of new customers and expansion of Zoom's footprint within existing customers. Specifically, new customers accounted for approximately 61% of our year over year growth in subscription revenue, while the remaining 39% was due to additional purchases from existing customers. Now let me share some of the key customer metrics for Q3. Our 2 pronged strategy of land and expand continued to drive growth.
1st, we added 7,800 customers with more than 10 employees in the period and exited Q3 with over 74,100 customers, up 67% year over year. Our continued expansion in the upmarket resulted in 546 customers with more than $100,000 in trailing 12 month revenue, up 97% year over year. This is an increase of 80 customers and a record number of ads in a quarter. Our ability to expand with existing customers was evident in our net dollar expansion rate that was over 130% for the 6th consecutive quarter. Our net dollar expansion rate remains the top tier of our industry and reflects the high level of satisfaction and trust that customers have in Zoom.
This is further evidenced by our net promoter score, which remained above 70 in Q3. Eric discussed two examples of how this strategy contributed to our Q3 results and let me give you a third one. During the quarter, we had an expanded commitment from Quinnipiac University, a nationally ranked private university in Connecticut with over 10,000 students. The university originally moved to Zoom meetings based on the ease of use and reliability of the technology as well as a way to consolidate into one platform for the diverse community of users. Looking to drive further adoption of an innovative communications platform, the university has also selected Zoom Phone to modernize their phone system.
The university has been a great partner and applauded Zoom's willingness to work with the university to enhance the feature sets of our technology on their journey toward a unified communications platform. Next, as we discussed at our recent Analyst Day, international expansion is a key multiyear growth initiative for Zoom. In Q3, our APAC and EMEA revenue combined grew 98% year over year and represented approximately 20% of revenue. Revenue from the Americas was up 82% year over year and represented approximately 80% of revenue. We see significant opportunity ahead for international expansion.
Now turning to profitability. Our sales execution in Q3 also helped drive strong growth in our profitability and free cash flow. We were net income profitable from both a GAAP and a non GAAP perspective, but today I will focus on our non GAAP results, which exclude stock based compensation expense and related share based equity taxes. Non GAAP gross margin in the 3rd quarter was 82.9% compared to 81.7% in Q3 last year and 82.2% last quarter. For the full year, we expect non GAAP gross margin to be at the top end of our long term target of 80% to 82%.
R and D expense in Q3 was approximately $14,000,000 up 64% on a year over year basis. As Eric discussed, we announced several expansions to our platform in Zoomtopia. We continue to invest in innovating our platform with our highly efficient R and D model. Given our hiring plans over the next several quarters, we expect R and D to return to the top end of the range of 10% to 12%, which is consistent with our long term view. Sales and marketing expense for Q3 was $82,000,000 This reflects an increase of 58 percent or $30,000,000 over last year with investments and initiatives to drive further growth.
As a percent of total revenue, sales and marketing was 49%, lower than Q3 last year but up from Q2 due to Zoomtopia. We expect to generate a great return on investment in this area and we expect to increase hiring for our international upmarket growth initiatives in Q4 and into FY 'twenty one. G and A expense in Q3 was $21,000,000 and represented 12% of total revenue. This compares to last quarter and last year, which both were 12% of total Non GAAP operating income was $21,000,000 translating to a 13% non GA non GAAP operating margin for the quarter. This was an increase of approximately $19,000,000 as compared to Q3 last year's result of $2,000,000 The main driver of this result was the higher revenue while spending was mostly in line with our expectations.
Non GAAP earnings per share in Q3 was $0.09 on approximately $293,000,000 of non GAAP weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.06 higher than our guidance and $0.08 higher than Q3 of last year. Turning to the balance sheet. We ended Q3 with approximately $811,000,000 in cash, cash equivalents, and marketable securities, excluding restricted Deferred revenue at the end of the quarter was $202,000,000 up 89% year over year. Looking at both our billed and unbilled contracts, our remaining performance obligations or RPO totaled approximately $517,000,000 up 102% from $256,000,000 last year.
We expect to recognize approximately 64% or $330,000,000 of the total RPO as revenue in the next 12 months as compared to 65 percent or $166,000,000 in Q3 last year. Current RPO was up 99% year over year, the same growth rate as Q2's current RPO. Non current RPO was up 108% year over year. Our execution led to strong cash flow growth. Operating cash flow was $62,000,000 in Q3, up from $18,000,000 or 2 40 percent year over year.
In Q3, free cash flow was $55,000,000 up from $10,000,000 or 4 40% year over year growth. As we discussed on last quarter's webinar, the benefit received over the last two quarters from the employee stock purchase plan will become a use of cash in Q4 when the first purchase will be made. The quarter over quarter outflow in cash related to ESPP will be approximately $20,000,000 in Q4. Starting in FY 'twenty one, we expect the cadence of benefits from contributions to the ESPP to occur in Q1 and Q3 and net outflows from purchases to occur in Q2 and Q4. Now turning to guidance.
We are pleased to be increasing our outlook for the full year based on our view of the current business environment, our ability to gain market share and the momentum we have achieved so far this year. For the Q4, we expect revenue to be in the range of $175,000,000 to $176,000,000 We expect non GAAP operating income to be in the range $17,000,000 to $18,000,000 Our outlook for non GAAP earnings per share is 0 point up from our prior guidance of $587,000,000 to $610,000,000 up from our prior guidance of $587,000,000 to $590,000,000 This would be approximately 85% year over year growth. For the full year, non GAAP operating income is expected to be in the range of $67,000,000 to $68,000,000 an increase of approximately 50% from the top end of our prior guidance of $42,000,000 to $45,000,000 With this meaningful increase in profitability, we now expect to deliver non GAAP earnings per share of $0.27 for the full year fiscal 'twenty based on approximately 293,000,000 shares outstanding. In closing, we are pleased with our progress this year and our unique ability to deliver high growth at scale combined with profitability and free cash flow growth. I would also like to thank the entire Zoom team for their hard work in Q3.
We are well positioned to end the year strong as we stay focused on delivering happiness to our customers every day. With that, let's open it up for questions. Matt, please queue up our first question.
Our first question is from Brad from Credit Suisse. Hey, Brad, you're unmuted now.
Hi, can you guys hear me?
Yes. Hey, Brad.
Hi, Brad.
Fantastic. It's great to see everybody, especially Eric and Tom on the beach enjoying themselves after such great results. You deserve it.
They wouldn't take me.
Fantastic. Well, Eric, it's great to see the traction that you're having with Zoom Phone, particularly the National Australia Bank deal that you highlighted. How has the pipeline trended since the focus on Zoom phone and Zoom rooms at Zoomtopia? And when should we start to see you sign more of these phone and rooms deals?
So first of all, I can tell you we are very excited about the Zoom Phone opportunity. And during the Zoomtopia, we shared our vision for spacing video conferencing and cloud with PBX. Those 2 will be converged into one service, this cloud is to be to PBX. Customer really like this story. With that, we have one consistent upfront and experienced the same back end architecture.
I think a lot of our customers, I mean, existing customer, existing installed base for us to have an upsell opportunity, that's huge. And a feedback from our existing installer base is very, very positive, especially after they go through the POC. Their feedback is, wow, that's amazing. I think we have high confidence about the future opportunities.
And Kelly, just in follow-up, your operating and free cash flow profitability was very strong yet again. How has the company been executing against its sales and marketing productivity goals? And why not take some of the outperformance and invest it back into driving more customer adds? Or would you be at a point of diminishing returns at that point?
We certainly are committed to investing as much as possible in terms of continuing to drive growth in the top line. And we expect to see hiring to actually accelerate in Q4. So you should see our headcount numbers for the end of the year to finish really strong as well as Janine has seen a lot of progress in terms of efficiency and marketing. So we continue to look for opportunistic ways to add but ensuring that we continue to produce a high ROI on any of our marketing spend. Great.
Thanks, Brad.
Okay, great. Thank you.
Thank you, Brad.
Matt, can
we have the next question, please? Matt, you're on mute unfortunately.
Sorry, our next question is from Sterling from JPMorgan. And Sterling, you are unmuted
now. All
right, great. Thanks guys. Given that you're sitting on the beach, I thought you'd bring you a little virtual snow for a little white Christmas.
Yes.
All right. So actually questions start with Kelly. The growth in current RPO especially outpaced what you saw in revenue. Is that kind of telling us something in terms of what the linearity looked like in the quarter? And what should we be thinking that tells us in terms of the growth contribution here into the Q4?
Thank you, Sterling. Hi. So you got it exactly right. What we're seeing is a couple of things is that a lot of our seasonality is for renewals is lining up to be July January due to the nature of our 6 month quarters for our teams as well as, as we continue to move more and more upmarket, we are seeing a shift for those customers, the deals with those customers to shift more and more not only to the back end of the year, but also to the back end of the quarter, which is exactly what's driving that.
All right, great. And then one follow-up question for you, Eric. I think the big news in the quarter was the deal that RingCentral signed with Avaya. Can you give us a sense of what you think of that partnership? And is that something that would be interested to Zoom?
Is there a partnership similar to that that we might look for you to sign in the future?
So, first of all, I think Vlad, has already shared their view about the partnership with Avaya. I'm not going to repeat what he said before. But from our perspective, I think first of all, RingCentral is still our customer, partner and reseller, right? We still maintain a good partnership. And also this market is very big.
And when we look at the cloud with the PBX system, I think it's different than any other vendors because we should believe video and voice is the 1 60. That's why we'll focus on our existing installed base for upsell. Essentially, customer whoever wants to deploy the traditional phone solution, I think it's still my go with other vendors. That's okay. However, for those customers, they would like to look at the video first, unified the community experience.
I think that's our opportunity. I think occasionally we might have a little bit of overlap, but overall the market opportunity is huge and I think we're assuming a good partnership. And Avaya and the RingCentral, I think one is on prem legacy vendor, another one is a cloud DBX and probably it's good for both of them. And we really focus on our existing installed base and deliver our conversion solution to our installed base.
Great. All right. Fantastic. Thank you.
Thank you, Sterling. Next question please.
Our next question comes from Kash from Bank of America Merrill Lynch. Kash, you are unmuted.
I think he's still muted. Great. Yes.
Am I audible now?
Yes. Yes, Kash.
Am
I looking happy?
Am I
looking happy?
Yes. Very happy. Very happy.
Excellent. Okay. So I don't have your backdrop, but I'll be there hopefully in a couple of weeks. I wanted to just ask you a little bit about the upmarket traction. You talked about the HSBC win last quarter.
This time it's the USPS. When you look at the pipeline coming up next fiscal year, what kind of enterprise deals are you seeing in that pipeline? And do you feel like you need to add more salespeople that come from the enterprise background where you might need to invest a little bit more upfront, but payoffs can be certainly huge? And what does that mean for retention rates ultimately for the business model? Thank you so much and congratulations.
Yes. Kesh, that's a wonderful question. So if you look at our growth potential, international and also enterprise, we already had a loss of enterprise rep over the past 12 to 18 months. Also want to focus on the quality rather than just quantity. From a leads perspective, it's very healthy like HSBC, like USPS and also government, public sector as well.
And especially for a lot of enterprise customers, they would like to go through the POC to make sure the solution they are going to deploy for the next several years. That's why architecture plays a very important role. That's why we are winning especially when customer they are going to go through the POC, they want their employee involved to test the solution run just 1 person, 2 person make a decision to obligate from the other legacy solutions to the new cloud solution. I mean, side of that, I think our pipeline is pretty healthy and we're really doubling down our enterprise expansion.
Great. And Kelly, if I could follow-up with you on the free cash flow side, there are certain other items in the crude. I cannot believe I'm actually asking you a cash flow or balance sheet question, but there was a certain big number that boosted the free cash flow. I think it was prepaid or accrued liabilities or something that looked a little big and contributed to that jump in. Otherwise, what would have been still a great free cash flow quarter?
Just curious what that onetime item seemed to be.
In the let me just pull up the balance
sheet. It was yes, we can follow-up offline if needed, but it was a fairly large item that stood up in the cash flow statement.
When we have our callback later, Kash, let's talk about it then.
Wonderful. It's accrued expense and other liability. It's a big chunk there. Well, we can talk about it later.
Okay.
Thank you.
Thank you. Thanks.
Next question please, Matt.
Our next question is from Meta Marshall from Morgan Stanley. Meta, you are unmuted.
Great. Thanks. Just wanted to ask if, I know that Zoom Voice has kind of initially been targeted at customers as kind of an add on once they are already on board, but if you're seeing more interest upfront from customers wanting video and voice at the same time. And then maybe just as a follow-up question for Kelly, just a little bit more rationale for the gross margin outperformance and just some of the factors there? Thanks.
Eric, do you want to take the question about
Yes, go ahead.
Okay. So in terms of the gross margin, Meta, what we saw is obviously outperformance on the top line without additional expansion needs in this quarter in the data center as well as we saw outperformance or sorry, improvements in both our 3rd party audio costs as well as our professional services margins. What you will expect is in Q4, remember, as a reminder, because we run our own servers in these total paying facilities, whenever we add servers, there's kind of a step function into the expense. So that's why we're guiding for that to be in line, but you'll see a slight tick in terms of Q4 from a gross margin perspective as we're going to make some further investments in service. And then Eric, do you want to talk about the strategy about continuing to focus on Zoom Phone for our existing customers?
Yes, for sure. Because over the past several years, lots of our existing installed base, they told us they are still using the traditional legacy PBX solution. They would like to move to the unified solution. That's why as they still have a top priority to focus on our existing installed base, because those customers already understand the video conferencing, already we already built a trust relationship. I think that's low hanging fruits.
That's our top part. And beside of that, for sure, down the road, we are going to open up the Zumo food service to the greenfield as well. And that's next growth opportunity for us in the FY 2021 and future as well.
Great. Thank you, Meta.
Our next question is from Tom from Stifel. Tom, you are unmuted now.
Thank you for taking my questions. Greetings from Chicago. It's awfully nice out there. Good work. Eric, I was hoping you could talk a little bit more about the international opportunity.
It's obviously a huge
kind of wall to wall on Zoom as you look at the international prospects?
I think kind of wall to wall on Zoom as you look at the international prospects? And then can you talk a little bit more about go to market? How easy it is it to hire sales reps? How do you want to build those territories out? Just an update on what you're seeing Europe and APAC.
Thanks.
Yes, sure. Absolutely. So if we got a revenue wise, you're right, it's still the 20%, but our growth rate is much higher, 97% last quarter. And we are already doubling down our expansion in Amsterdam, and which is our headquarter for the EMEA. We hire a lot of people over there.
I think you look at the opportunity, especially for the video conferencing, I think in the market already, we just need to hire more people who have enough leads. And whoever, you look at the phone service, for sure, we are going to add more and more international coverage. And I think that's another opportunity. But probably we are going to play a different game. Here, we focus on the video for us and the upsell phone.
For international video and voice at the same time. I think probably we'll see accelerated growth for customers Japan, Australia, I think the 2 greater countries where we see the huge opportunity.
Outstanding. Thank you.
Thank you. I like your over to the background. Yes. Beautiful. We should have go there.
Next question please, Matt.
Our next question is from Ryan from Stephens. Ryan, you are unmuted.
Hey, guys. Thanks for taking the question. So Eric, you briefly mentioned about any updates to improving the global service coverage for Zoom Phone? And have you seen enterprises waiting to expand Zoom Phone licenses until in country service coverage becomes available?
That's a good question. Actually, we are in the process to support more and more countries because we shared our roadmap about which country we are going to support with customer transparently. We really like that. We already support U. S, Canada, Australia, New Zealand and Ireland and those countries end of this calendar year, early January, we're going to support a bunch of other countries, specifically in Europe.
And also in Q1 next year, we're going to support a lot of countries in APAC. I think we are going to rule out the service to for more and more countries, I think, in the next several months. And the customer, they are not going to say, hey, I want to wait for this country, that country. As long as we show their roadmap, I think the customer, they feel very confident.
And many UCaaS providers struggle to achieve local service coverage in China and India. Is this something to be possible for Zoom over the next few years?
Not the next few years, it's the next several months actually. We are making very, very good progress. I can think that multinational customers whose office probably in China, we already can support to like the support of the China local food network. India was making good progress and so assume we should support both India and China. If we wait for several years, we are going to have problems.
So we feel very comfortable for both India and China
Brazil. Great.
Thank you.
Thank you. Matt, next question please.
Our next question is from Alex from RBC. Alex, you are unmuted.
Yes, thanks for taking my question. Can you hear me?
Yes. Go right ahead, Alex.
Perfect. So maybe first one for Kelly. If I look and this is kind of going on Sterling's question. If I look at the current RPO growth the current RPO bookings growth, they're both sequentially and year over year much stronger than the billings growth rate. So I'm just curious, were there any kind of one time impacts?
I saw the long term deferred fell off a little bit more this quarter. So are there any impacts that's causing that disparity? And which one of those is a much is a better metric for your forward revenue?
Yes. So as a quick reminder, unlike many other SaaS companies, unfortunately, neither RPO or billings is a great metric for us as we still have a large percentage of our customer base that both bill and contract on a monthly basis. So this makes it very difficult to use a metric that's comparative to other SaaS businesses. What you're seeing is that because of this high there's a lot of well, there's a lot of month to month because we don't incent either our customers or our sales reps to move to annual because we still have such a high retention rate that is but we are seeing slowly as we continue to move upmarket, some of those customers move more and more to annual. But again, it's just really not a great metric for us, unfortunately.
Okay. Understood. And then maybe just on the topic of your new your recently maybe not so recent anymore, Ryan Azis. Maybe Eric, what are the changes that you're seeing kind of make to go to market organization? Are you kind of there with your hiring plans as you look into the Q4 to exit the year from sales rep perspective?
And maybe what are
you just had 2 or 3 most important priorities?
Sure. So yes, we hired it several months ago because we know it ran well and he's a great friend and we really feel very excited to work together again. In terms of sales changes actually he's working on and 1st of all and more enterprise international the Zoom phone expansion and plus next year probably we also want to leverage our in channel program more, right. Looking at today's business by and large primarily driven by our direct sales force. As we expand our base to international for the phone, I think especially for the nuclear phone business probably in the hardware as well.
I think to support a much better channel program so that it can help us and his team, they are working on that.
Perfect. Thank you, guys.
Thank you, Alex. Thank you.
Next question please, Matt.
Our next question is from Zane from Bernstein. Zane, you are unmuted. Zane, are you there?
Yeah, I see him on mute still.
Okay. Sorry about that.
No worries, Zane.
Good to see you guys. Congrats on a great quarter. Thanks for fitting me in. So I wanted to dig into kind of the expansion profile of the large customers maybe. I know you guys talk about the net expansion rate of being over 130 percent for 6 consecutive quarters.
But on an individual customer level looking over a long term time horizon, what can we kind of expect that growth in participants using Zoom or growth in hosts using Zoom to look like? Because I looked at the Walmart example where they switched from WebEx to to Zoom. It looks like within about a 1 year period of making that transition, there were 50% more people participating in video conferences. What does that look like over a 2 or 3 or 4 year timeframe?
So first of all, if you look at the typical lot of investment customer, very likely, this started from a small footprint, right, to grow video conferencing. And because it just works, we see in the next several quarters after they deploy the video conferencing, we see more and more host license. At the same time, we are going to upsell the Zuinfoong as well. And ultimately, the goal is to do a deal like HSBC, the entire workforce that can standardize on some platform. That's why today you look at a Fortune 100 companies.
You look at all those companies, so many companies, they are our customer, however, not for the entire company, right. That's why a huge opportunity to upsell both video conference license as well as a phone license. That's our growth strategy for enterprise, not like on the web. Hey, you got to deploy Zoom across the entire organization. We like to get a small footprint and grow our business over there.
That's how growth is rated for a lot of investors.
That makes sense. And is there an example you can point to where a customer has continued growing 40%, 50% annually for multiple years? What can we kind of expect that increase in the TAM to look like due to higher quality and self-service?
I think NAB is one of the good example recent, right? They started for video conferencing and more video license and also deployed the Zoom phone as well. This is a great example.
More Zoom rooms too.
Yes, most yes, you're right. More Zoom rooms as well.
Yes. I reference our parent company AB all the time. So it was for more examples there. But yes, we've loved it. So it's been great.
Thank you, guys.
Thank you. Thank you. Thank you. Hey, Matt. Next question, please.
Our next question is from Alex from KeyBanc. Alex, you are unmuted.
I think your mute is on Slack there.
Alex is still muted.
Can you
hear me now?
Yes, we can.
Is that better? Great. Sorry about that. So Eric, when you think about your top 50 phone deals in the pipeline looking into Q4 and into the first half of next year, How dependent are those top deals on the international regulatory approval that you talked about at Zoomtopia? Then I have a question for Kelly.
I think you look at our pipeline, the top the Zoom Phone customers, I think it's still like a primarily driven by the multinational companies with headquarter here in the U. S. Or Canada. However, as they deploy Zoom Phone for the entire organization, probably this start of normally they have multiple traditional legacy, the PBX systems, right? They probably started replacing one of them.
That's why as long as we share with our rutumab about our international coverage, we feel very confident because we already support multiple countries over the very short period of time. And I think for the customer like NAB is one example in APAC, we do see a lot of opportunity in APAC. They want to deploy video and a phone at the same time. But look at our top deals still like our existing installed base because look at most of our big enterprise customer are based in the U. S.
So I think that's the opportunity.
So the initial big phone deployments, they'll start in the U. S. And then go into international markets as you guys get approval?
Yes, that's right. Step by step. Yes.
And then Kelly, just assumptions on the Zoom phone impact on gross margin, it doesn't seem like it's happening much yet, but as we look into Q4 in the first part of next year, how should we be thinking about that?
Yes. So when we model Zoom Phone on a stand alone basis, it does have a gross margin that's 3 to 4 full points lower than the Zoom meetings. As you said, right now, given the overall contribution, it's not having any impact on the gross margin. And what we're really focused on is continuously improving those gross margins so that by the time it does become And so
we'll be
giving further outlook
on that in the Q4 call. Okay. But I think we're right in the middle of doing FY
'twenty one planning right now. And so we'll be giving further outlook on that in the Q4 call.
Okay.
So just to add on to what the Kelly side, you look at the gross margin because we did not have built a Zoom phone system from going up because we shared most of the back end architecture when we built a video conferencing system. That's why we share the same server, same back end. I think from a cost perspective, we can really leverage existing infrastructure.
Okay. Thank you.
Our next question is from Bhavan from William Blair. Bhavan, you should be unmuted
now. Can you
hear me okay? Yes, I can. I'm doing the phone, computer thing and I don't have Tom's background in Chicago. I have the cold, ugly, dark winter of Chicago. I guess I had a first a fairly broader sort of strategic question here for Eric.
So we all know collaboration is converging and obviously video, voice, text, email, that whole idea of this convergence of how you communicate internally with customers, the real time nature of channels, you're partnered with some of these players. As you think about 10 years from now, not next quarter, not next year, but 10 years from now, where do you think you are in that collaboration space? It can't just be voice and video. So how do you think about that picture long term?
That's good question. By the way, I can't read your whiteboard now very well. So and even if you do not have much background, so.
It's not that exciting. It's not low code, no code, not that exciting at all.
I try to find an answer on the wider board. I cannot manage that. So anyway, so you look at the 10 years, I think first of all, we look at it based on IDC estimates, you look at it by 2021, the unified communication market already $43,000,000,000 right, that's a huge market. I think for us, especially we've started from video conferencing, we do the new voice. Next several years, I think 3 or 4 or 5 years, that's still our top priority as we happen to be the number of market leader on many fronts, right.
And the 10 years out, you're right. So that's two trends. One trend is the best of breed of service like today, I still think that's a trend. Best of breed of service providers will do very well like a video voice, Zoom and like Slack and Ocadot, they will do very well. Another trend is a customer, they might want to deploy 1 unified solution from 1 company, but I do not think that model is sustainable because quite often you have a problem for 1 service, you're stuck.
That's why I think in the future, as we focus on the video and voice, we might have spent more time on technology side, AI or real time language translation, I shake hands with you, you can feel like that as well and plus more integration with other service providers, other best for your service. I think together, I think if we can grow the business together, I do not think any single vendor kind of grew their business by adding all those point of solutions by themselves. I do not think that's sustainable plus customer, they do not like that either.
Yes, fair enough. And then on the Zoom app marketplace, you said that that could obviously be a place to highlight opportunities you may not necessarily have thought of in terms of how to expand the offering and things like that. Just an update on the traction in the marketplace, what type of early opportunities you've been able to identify there? Would love to get some color on how that's trending and how it's going visavis new use cases. Atlassian Jira service desk came from Jira's marketplace.
We'd love to see how you think about that. Thank you.
Yes. So as of last month, we had over 150 applications built up on our platform. Like some of the Gong and the course, right, they focus on the sales analytics and the build integration upon our platform. We see a lot of new applications like from healthcare as well, online education and I think next several quarters we probably will see some accelerated growth for our marketplace. Forget it the first of 100 applications really far, but now we already have 150.
I think we will see more and more very cool applications built upon our platform.
Thank you. Sorry, go ahead.
Yes, sorry, I forgot to mention my saying is at Zoomtopia, our existing investors like Sequoia, Emerging Capital and as they all establish a fund, right, try to help us to kind of invest into those third party companies to build a service upon our platform.
I'm hoping they're thinking of a nice exit too, aren't they? Anyway, thank you for answering my questions and congratulations. Thank you. Thank you.
Next question please, Matt.
Our next question is from Will from Baird. Will, you're unmuted. Yes.
Great. Thanks. Yes, so I just a question, two questions here. So first on the Quinnipiac win, which looked like a nice additional win for phone. I think you referenced in the prepared remarks needed to enhance some of the features.
Maybe just provide a little more color as to what you need to do there? What are some other key pieces of feedback that you're getting from phone customers in terms of needed enhancements? And what do you expect to kind of be full throttle, I guess, on the phone feature set front?
Yes. So, first of all, after the customer, they tested our full service, I can tell you they all like our service. But only 2 things, I think probably if you have a look through today, we will have us a conservative growth, but we are going to get a reversal. While we already mentioned a brief and touch on that, it's just the international coverage and it's just more like it takes some time. There's no technology challenge, but I just need to go through sometimes local regulation like India, China and also more tests, right.
That's one area. Another area is just like some of the features and I think most of time people not use this feature. But for customers who sign a contract, we still need to make sure adding those feature. Give 2 example, like SMS. I think it's not that critical, but unfortunately some customers say we probably still need that.
We are going to support that very soon. Like another feature probably and never use that feature called a park, right. And some of the customers still want to have that feature regardless if they use it or not, right? All those Icing the corner features, we are going to add very soon. It's not very hard.
It just takes some time. Okay. Yes, I guess the
other question kind of along those lines, probably more than just a feature. At Zoomtopia, you talked about some additional contact center partnerships. Maybe update us as to how that's going? And as you start to have more Zoom phone wins, how often is contact center coming up in conversation? How important is that to have alongside you?
Yeah, yeah. So our strategy is, we also shared at Zoomtopia as well, we would like to partner with other clients with contact center solutions, like Five9. This is a great example, right? Robin really understand the collaboration market, have a wonderful partnership, and quite often customer share their vision about the phone and the contact center. We bring our team and also 5 nan team as well.
And having said that, we also because we have an open platform also integrated with other contact center solutions as well because some of the customers, they already deploy other cloud solutions like inContact, right, or maybe Target Desk or maybe Twilio solution. So, that's why we also need to integrate as well. Okay. Thank you. Thank you.
Our next question is from Vinod from Oppenheimer. Vinod, you are unmuted now.
Hi. Thanks for taking my question. I want to touch on your FedRAMP opportunity. I believe you said that USPS was your first agency win. How's your pipeline looking there?
And when do you think that could really become meaningful for you guys?
Yes. For us to win big in the public sector, 2 things. One thing is for sure we didn't have a federal approval, right, which was done early this year in May. Another thing is make sure our banking side, we have a special infrastructure and we call it the Zoom Government Cloud, right. And over the past several months, we also made a very good progress.
USPS is first customer, I mean, a bigger customer provision for the Zoom Government Cloud, because our infrastructure also very ready. And so downloaded for every feature, not only do we support enterprise commercial cloud, but also by default we also support the government cloud. We will say, you see look at the pipeline is pretty strong. I think we are finally, I think we're ready now. Great.
Okay, great. Thanks. And, just one question on the expansion rate. I believe I calculated to be about 133% this quarter versus about 137% last quarter. How should we think about expansion rate trends going forward given your ability to upsell phones and upsell rooms into some of your larger customers?
Yes.
Kelly? Yes.
Okay. Here I am. Thanks, Vinod. So really, it's as a reminder, as we're continuing to move more and more upmarket, we see a great opportunity for the expansion rate to stay strong and or continue to improve. It might vary quarter to quarter, which is why what we give is at 130 because it can vary depending on timing of deals and we can't really manage that.
We don't manage to it. And so I don't want there to be noise around this number as it moves up and down a few points from quarter to quarter, but we feel really great about a really strong retention rate.
Okay, great. Thank you. Yes.
Hey, Matt. Do we have any more questions?
That was actually our last question from our analysts today.
I did see Pat Walravens out there. Did he drop off unfortunately?
No, I do see him, but I don't see his audio connected. So I can't actually have him talk and ask the question yet. Okay.
Next time. Sorry, Pat. We'll get you on there
next time. Oh, Pat, I see Pat. He's just on a different number up above. Do you see?
Oh, does it end in 111?
I see him on an audio right right above his. Okay. We can grab them in the after calls. Yes.
Sorry about that, Pat.
Hold on.
One more time, if it's connect audio now. Pat, are you on?
There, yes.
Yes, I'm on. Forgetting the background noise, which you can't see from the virtual background is me boarding my flight. Hey, Eric, what's going to be the hardest part for you to scale this in terms of keeping customers happy as you scale, what's the hardest part?
I think to keep existing customer happy is really important, really hard because we are requesting more and more features. And we try to do we also try to grow our business to have new customers. But for now, our top priority is to focus on existing customers to make sure they are very happy. This is pretty hard actually.
Okay. And then another thing that seemed really important at the Zoomtopia was the appliances. Can you tell us why everyone was so excited about that?
So we listen to our customers. Customer, they would like to do not for every customer. We have a lot of customers. They already deploy our existing Zoom Rooms based on the Mac or Windows, really like that experience. Over some of the customers, they may not have enough IT resources.
They would like to have a simplified deployment model where they get it applies, turn the power and hook up network ever since we work. They wanted to get it in service from a well window see from Zoom, right. That's why we partnered with those Poly, Need and Logitech and the DTL and other Crestron. And essentially, we offer the appliance to customer to simplify the deployment. Some of the customers really like that model.
Thank you.
Thank you, Pat.
Great. Thanks a lot. Okay. Bye bye. Thank you.
Hey, Matt, I think I see Brian Kuntz raised his hand. I don't know if you can reach out to him.
Certainly. Ryan, let me go ahead and just unmute your mic. Ryan, you're unmuted.
Great. Thanks for the question.
If you could drill
down a little on Zoom Rooms
a little bit, please. And where do you expect early adoption there? How important is that for enterprise penetration? And how is that going to roll out to sales in terms of sales and partner enablement? If you could
talk about that, please. Thanks.
Yes, sure. So Zoom Rooms is, I would say, very important, very strategic to our growth because customer for sure they enjoy using Zoom for laptop, desktop and mobile. Quite often they have important meetings, they might be held in the room. But today, lots of enterprise customers, very likely they still deploy old legacy traditional video conferencing solutions in a very hard to maintain. That's why customers on the one hand we do support those traditional hardware devices very well, we can interpret it very well.
On the other hand, those enterprise customers, they like a cloud based solution, meaning just a video endpoint and all the software, everything should be connected back to the cloud. We see almost every enterprise customer, they are very interested. They do not want to maintain a very complex video infrastructure. And because of that, we just touch on that, Zoom Rooms appliance group try to simplify that experience. We offer the appliance to customer very easy to deploy, plus the customer also want to have simplified the invoice as well, like hardware as a service.
Overall, I think the customer really like Zoom Rooms. We want to make sure to simplify the deployment, simplify the billing as well. So that's our focus in the next several quarters.
Got it. Thank you. Helpful. All right. Thank you.
Anyone else? This is a lot of fun to do.
It should have been our last question from our analysts today actually. Yes. All right, you want to end the call then?
In closing, first of all, thank you for time. I really appreciate it. Thank you all the Zu employees. Thank you for your hard work and see you next quarter. Thank you.
Thank you, everybody.