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 third quarter of fiscal 2020. Joining me today will be Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Steckelberg, who's actually joining us remotely from Los Angeles and 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. 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. 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 a free cash flow of $54.7 million. We continue to have success with customers of all sizes. By metric that has continued to impress is customers with more than $100,000 of trailing 12-month 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. We're raising our revenue and profitability outlook for the fourth quarter, as well as full fiscal year. As Kelly will discuss in a moment, our strong third quarter results were driven by two factors. First, our ability to attract new customers.
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 two 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. USPS is our first major agency win since we received FedRAMP 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 video conference services in order to keep connect its workforce of more than 30,000 employees.
NAB 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 wide 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 a 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 fourth consecutive time in their Magic Quadrant for meeting solutions. We are grateful that Gartner has recognized Zoom for our completeness of vision and our ability to execute once again. Second, we held our premier customer event, Zoomtopia, my favorite event of the year. It is only our third Zoomtopia, and we had record registrations of 2,600, up over 80% from last year. During 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 internal and external stakeholders. It's truly amazing and humbling to hear from so many happy customers from around the world.
Also, at Zoomtopia, we were proud to announce expansions to our platform including our new Zoom Rooms Appliance program, expanded Zoom Phone service and capabilities, and the growth of our App Marketplace. Our customers tell us that Zoom just works. 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 Kelly.
She's on mute. Hey, Matt, she's on mute.
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 fiscal 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 third quarter to $167 million. 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 two-pronged strategy of land and expand continued to drive growth. First, 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 adds in a quarter. Our ability to expand with existing customers was evident in our net dollar expansion rate that was over 130% for the sixth consecutive quarter. Our net dollar expansion rate remains at 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 three 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 their 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 multi-year 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. 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. 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 third 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%-82%. R&D expense in Q3 was approximately $14 million, up 64% on a year-over-year basis. As Eric discussed, we announced several expansions to our platform at Zoomtopia. We continue to invest in innovating our platform with our highly efficient R&D model. Given our hiring plans over the next several quarters, we expect R&D to return to the top end of the range of 10%-12%, which is consistent with our long-term view. Sales and marketing expense for Q3 was $82 million. This reflects an increase of 58%, or $30 million over last year, with investments and initiatives to drive further growth. As a % 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 2021. G&A expense in Q3 was $21 million and represented 12% of total revenue. This compares to last quarter and last year, which both were 12% of total revenue. Non-GAAP operating income was $21 million, translating to a 13% non-GAAP operating margin for the quarter. This was an increase of approximately $19 million as compared to Q3 last year's result of $2 million. 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 million 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 million in cash equivalents, and marketable securities, excluding restricted cash. Deferred revenue at the end of the quarter was $202 million, up 89% year-over-year. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $517 million, up 102% from $256 million last year. We expect to recognize approximately 64%, or $330 million, of the total RPO as revenue in the next 12 months, as compared to 65%, or $166 million, 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 million in Q3, up from $18 million or 240% year-over-year. In Q3, free cash flow was $55 million, up from $10 million or 440% 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 million in Q4. Starting in FY 2021, we expect the cadence of benefits from contributions to the ESPP to occur in Q1 and Q3, outflows from purchases to occur in Q2 and Q4. 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 fourth quarter, we expect revenue to be in the range of $175 million-$176 million. We expect non-GAAP operating income to be in the range of $17 million-$18 million. Our outlook for non-GAAP earnings per share is $0.07 based on approximately 296 million shares outstanding. For the full year of fiscal 2020, we now expect revenue to be in the range of $609 million-$610 million, up from our prior guidance of $587 million-$590 million. 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 million-$68 million, an increase of approximately 50% from the top end of our prior guidance of $42 million-$45 million. With this meaningful increase in profitability, I now expect to deliver non-GAAP earnings per share of $0.27 for the full year fiscal 2020, based on approximately 293 million 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.
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.
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.
We are on vacation now.
They wouldn't take me.
Kelly is working.
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's 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?
First of all, I can tell you we are very excited about the Zoom Phone opportunity. During Zoomtopia, we shared our vision because we think video conferencing and a cloud with PBX, those two will be converged into one service. As cloud is to be the PBX, customers really like that story. With that, we can have one consistent front-end experience, the same back-end architecture. I think a lot of our customers, existing customer, existing installer base, for us to have upsell opportunity, that's huge. The feedback from our existing installer base is very positive, especially after they go through the POC. Their feedback is, "Wow, that's amazing." I think we have a high confidence about the future opportunities.
Okay, great. Thank you. 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? Why not take some of the outperformance and invest it back into driving more customer adds? 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. We expect to see hiring to actually accelerate in Q4. 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 in marketing. 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? It's on mute. Matt, you're on mute, unfortunately. Sorry. Our next question is from Sterling from JPMorgan. 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. Actually, question to 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 fourth quarter?
Thank you, Sterling. Hi. 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 and January due to the nature of our six-month quarters for our teams. As well as we continue to move more and more up market, we're 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. 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 interesting to Zoom? Is there a partnership similar to that that we might look for you to sign in the future?
First of all, I think Vlad, he already shared their view about the partnership with Avaya. I am not going to repeat what he said before. From our perspective, I think first of all, RingCentral is still our customer, partner, and a reseller. We still maintain a good partnership. Also, this market is very big. When we look at the cloud as a PBX system, I think it is different than any other vendors, because we truly believe video and voice is one system. That is why we focus on our existing installer base for upsell. Essentially, customer, whoever wants to deploy the traditional phone solution, I think they still might go with other vendors. That is okay. However, for those customers, they would like to look at the video-first unified communications experience . I think that is our opportunity.
I think occasionally we might have a little bit of overlap, but overall, the market opportunity is huge, and I think we still maintain a good partnership. Avaya and RingCentral, I think, one is on-prem legacy vendor, another one is a cloud PBX, and probably is good for both of them. We really focus on our existing installer base and deliver a converged solution to our installer base.
Great. All right, fantastic. Thank you.
Thank you, Sterling. Matt, next question, please. Our next question comes from Kash from Bank of America Merrill Lynch. Kash, you are unmuted. Looks like he's still muted.
Great.
There is Kash.
Yeah, am I audible now?
Yes. Yes, Kash. Hello.
Am I looking happy? Am I looking happy?
Yes, very happy.
Very happy. Excellent. Okay. 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. Talk about the HSBC win last quarter, this time it's the USPS. When you look at the pipeline coming up for next fiscal year, what kind of enterprise deals are you seeing in that pipeline? 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 the payoff can be certainly huge. What does that mean for retention rates, ultimately, for the business model? Thank you so much, and congratulations.
Yeah. Kash, that's a wonderful question. If you look at our growth potential, international and also enterprise, we already hired a lot of enterprise reps over the past 12, 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, rather than just the one person, two person making decision to upgrade from the other legacy solutions to the new cloud solution.
Aside of that, I think our pipeline is pretty healthy, and we really are doubling down our enterprise expansion.
Great. Kelly, if I could follow up with you on the free cash flow side, there were certain other items in accrued. I cannot believe I'm actually asking you a cash flow or balance sheet question, but.
It's okay.
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 one-time item seemed to be.
Let me just pull up the balance sheet.
It was, yeah, we can follow up offline if need be.
Okay.
It was a fairly large item that stood up in the cash flow statement.
When we have our call back later, Kash, let's talk about it then.
Yeah. Wonderful. It's accrued expense and other liabilities, a big jump there. We can talk about it later.
Okay.
Thank you.
Thank you.
Thank you, Kash.
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 up front from customers wanting video and voice at the same time. 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-
Yeah, go ahead. Yeah.
Okay. 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 improvements in both our third-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 co-located facilities, whenever we add servers, there's kind of a step function into the expense. That's why we're guiding for that to be in line. 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 servers.
Great.
Eric, do you want to talk about the strategy about continuing to focus on Zoom Phone for existing customers?
Yeah, for sure. 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 one unified solution. That's why that's still our top priority, to focus on our existing installed base. Those customers already understand the video conferencing, we already built a trust relationship. I think that's low-hanging fruits. That's our top priority. Aside of that, for sure, down the road, we are going to open up the Zoom Phone service to the greenfield as well. That's next growth opportunity for us in 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. The beach looks 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 opportunity, and it's still pretty small relative to the overall size of your business. On that topic, how ready is the market to really expand kind of wall to wall on Zoom as you look at the international prospects? Can you talk a little bit more about go-to-market? How easy 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 in APAC. Thanks.
Yeah, sure. Absolutely. If you look at it revenue-wise, you're right, it's still at 20%, but our growth rate is much higher, at 97%, last quarter. We're already doubling down our expansion in Amsterdam, which is our headquarter for the EMEA. We hire a lot of people over there. I think look at the opportunity, especially for the video conferencing, I think the market is ready. We just need to hire more people, have enough leads. Wherever you look at the phone service, for sure, we are going to add more and more international coverage. I think that's another opportunity. 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 to deploy both video and voice at the same time, not only for the EMEA but also APAC as well. Like Japan, Australia, I think the two great countries where we see the huge opportunity.
Outstanding. Thank you.
Thank you. I like your virtual background. Yes. Beautiful. We should go there.
Yeah. Next question, please, Matt.
Our next question is from Ryan from Stephens. Ryan, you are unmuted.
Hey, guys. Thanks for taking the question. Eric, you briefly mentioned about any updates to improving the global service coverage for Zoom Phone. 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. They 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. In Q1 next year, we're going to support a lot of countries in APAC. I think we are going to roll out the services for more and more countries, I think in the next several months. Customer, they are not going to say, "Hey, I want to wait for that country." As long as we show the roadmap, I think the customers feel very confident.
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?
Oh, not the next few years. It's the next several months, actually. We are making very, very good progress. I can think of huge multinational customers whose office probably in China, we already can support to the support of the China local phone number. India, we're also making good progress. Soon we should support both India and China. If we wait for several years, we are going to have problems. We feel very comfortable to support both India and China very soon.
Great.
Thank you.
Thank you.
Hey, Matt, next question, please.
Our next question is from Alex from RBC. Alex, you are unmuted.
Hey, guys. Thanks for taking my question. Can you hear me?
Yes. Go right ahead, Alex.
Perfect. 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 and the current RPO bookings growth, they're both sequentially in year-over-year much stronger than the billings growth rate. 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. Are there any impacts that's causing that disparity? Which one of those is a better metric for your forward revenue?
Yeah. As a quick reminder, unlike many other SaaS companies, unfortunately, neither RPO nor 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. This makes it very difficult to use a metric that's comparative to other SaaS businesses. What you're seeing is that because of the type, 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 it. We are seeing slowly as we continue to move up market, some of those customers move more and more to annual. Again, it's just really not a great metric for us, unfortunately.
Okay, understood. Maybe just on the topic of your recently, maybe not so recent anymore, Ryan Azus. Maybe Eric, what are the changes that you're seeing him make to go-to-market organization? Are you there with your hiring plans as you look into the fourth quarter to exit the year from a sales rep perspective? Maybe what are his two or three most important priorities?
Yeah, sure. Yeah, we hired Ryan several months ago because we know Ryan well, and he's a great friend. We feel very excited to work together again. In terms of sales changes, actually, he's working on, first of all, more enterprise international, the Zoom Phone expansion. 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 phone business, probably in the hardware as well. I think to support a much better channel program so that it can help us, and Ryan and his team, they're 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. Hey, Zane, are you there?
Yeah, I see him on mute still.
Okay, there. Sorry about that.
No worries, Zane.
Good to see you guys. Congrats on a great quarter. Thanks for fitting me in. I wanted to dig into the expansion profile of the large customers, maybe. I know you guys talk about the net expansion rate of being over 130% for six consecutive quarters, but on an individual customer level, looking over a long-term time horizon, what can we expect that growth in participants using Zoom or growth in hosts using Zoom to look like? I looked at the Walmart example where they switched from Webex to Zoom. It looks like within about a one-year period of making that transition, there were 50% more people participating in video conferences. What does that look like over a two- or three- or four-year timeframe?
First of all, you look at the typical large enterprise customer, very likely, they started from a small footprint, deploy video conferencing, and because it just works, we see in the next following 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 Zoom Phone as well. Ultimately, the goal is to do the deal like HSBC, the entire workforce, they have been standardized on Zoom platform. That's why today you look at 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 phone license.
That's our growth strategy for enterprise, not like on day one, "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 our growth strategy for large enterprise customers.
That makes sense. 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 the higher quality and effectiveness of self-service?
I think NAB is one of the good example recently, 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.
Yeah, you're right. More Zoom Rooms as well. Yeah.
Yeah. I reference our parent company, AB, all the time. I was hoping for more examples there. Yeah, we've loved it. It's been great. Thank you, guys.
Great.
Thank you.
Thank you.
Thank you.
Hey, Matt, next question please.
Our next question is from Alex from KeyBanc. Alex, you are unmuted.
Nope. Yeah, I think your mute's on still, Alex, there.
Alex, still muted.
Can you hear me now?
Yes, we can.
Yes.
Is that better? Great. Sorry about that. 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? I have a question for Kelly.
I think you look at our pipeline, look at top, the Zoom Phone customers, I think it's still primarily driven by the multinational companies, with headquarters here.
Right
U.S. or Canada. However, as they deploy Zoom Phone for the entire organization, they probably just start off, 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 their roadmap about our international coverage, they feel very confident because we already support multiple countries, over the very short period of time. I think, for the customer like, NAB is one example in APAC, we do see a lot of opportunity impact in APAC. They want to deploy video and phone at the same time. Look at the top deals still like our existing installer base, because look at most of our big enterprise customer are based in the U.S. So I think there's opportunity.
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.
Okay.
Yeah.
Kelly, just assumptions on the Zoom Phone impact on gross margin, doesn't seem like it's happening much yet, but as we look into Q4, into first part of next year, how should we be thinking about that?
Yeah. When we model Zoom Phone on a standalone basis, it does have a gross margin that's 3-4 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 a more material part of our results, that ideally we'll have improved the gross margin so that it's very close to equal.
Okay.
We're right in the middle of doing FY 2021 planning right now, and so we'll be giving further outlook on that in the Q4 call.
Okay.
Alex
I think-
Yeah, sorry. Just to add on to what Kelly said, you look at the gross margin, because we did not build a Zoom Phone system from ground up, because we shared most of the backend architecture, when we built the video conferencing system. That's why we share the same server, same backend. I think from a cost perspective, we can really leverage the existing infrastructure.
Okay. Thank you.
Thank you.
Thank you, Alex.
Next question please, Matt.
Our next question is from Bhavin from William Blair. Bhavin, you should be unmuted now.
Can you hear me okay?
Yes, we 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 fairly broader sort of strategic question here for Eric. 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 all 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. How do you think about that picture long term?
I screwed the question. By the way, I can read your whiteboard now very well. Even if you do not have virtual background.
It's not that exciting. It's about low code, no code. Not that exciting at all.
I tried to find an answer on the whiteboard. I cannot find it there. 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 cloud communication market already $43 billion. That's a huge market. I think for us, especially we started from video conferencing, we did the new voice. Next several years, I think three or four or five years, that's still our top priority, because we have to be the market leader on many fronts, right? The 10 years out, you are right. There are two trends. One trend is best-of-breed service. Like today, I still think that's a trend. Best-of-breed service providers will do very well, like video voice, Zoom, and like Slack, and Okta, they will do very well.
Another trend is the customer, they might want to deploy one unified solution from one company, but I do not think that model is sustainable. Because quite often you have a problem for one service, you are stuck. That's why I think, in the future, as we focus on the video and voice, we might spend more time on technology side, AI or real-time language translation. I shake hands with you can feel like that as well. Plus, more integration with other service providers, other best-of-breed service. I think together, I think we can grow the business together. I do not think any single vendor can grow their business by adding all those point solutions by themselves. I do not think that's sustainable. Plus, customer, they do not like that either.
Yeah. Fair enough. On the Zoom App Marketplace, you've 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 of 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 vis-a-vis new use cases. Atlassian, Jira Service Desk came from Jira's Marketplace. Would love to see how you think about that. Thank you.
Yeah. As of last month, we had over 150 applications built upon our platform. Like some of the Gong and the Chorus, they focus on the sales analytics and they build the integration upon our platform. We see a lot of new applications like from healthcare as well, online education. I think next several quarters, we probably will see some accelerated growth for our marketplace. To get the first 100 applications, really hard.
Yeah.
Now we already have 150, I think we'll see more and more very cool applications built upon our platform.
Awesome. Thank you.
Yeah.
Sorry, go ahead.
Yeah, sorry, I forgot to mention one thing is at Zoomtopia, our existing investors like Sequoia, Emergence Capital, and they all established a fund. Try to help us to kind of invest into those third-party companies to build a service upon our platform.
Well, 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. Yeah. Just two questions here. First on the Quinnipiac win, which looked like a nice additional win for Phone. I think you referenced in the prepared remarks needing to enhance some of the features. Maybe just provide a little more color as to what you need to do there. What are some of the other key pieces of feedback that you're getting from Phone customers in terms of needed enhancements, and when do you expect to kind of be full throttle, I guess, on everything you want on the Phone feature set front?
Yeah. First of all, half of the customer, they tested our phone service. I can tell you they all like our service. Only two things I think, probably, if you have a look through today, will help us accelerate our growth, but we are going to get there very soon. One, we already mentioned briefly touched on that, it's just the international coverage, and it's just more like it takes some time. There's no technology challenge. Just we need to go through sometimes local regulation like India, China, and also more tests. That's one area. Another area is just like in some of the features, and I think most of time you do not use this feature, but for customers to sign a contract, we still need to make sure adding those features. I give you two example. Like SMS.
I think it's not that critical, but unfortunately, some customers say we probably still needed that. We are going to support that very soon. Like another feature, probably I never use that feature called Call Park. Some of the customers, they still want to have that feature regardless they use that or not. All those, I think corner features, we are going to add very soon. It's not very hard. It just takes some time.
Yeah. Okay. Yeah, 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. 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 Zoom?
Yeah. So our strategy is, we also shared at Zoomtopia as well, we would like to partner with other cloud-based contact center solutions. Like Five9 is a great example. Rowan, who really understand the collaboration market, we have a wonderful partnership, and quite often customer, they share their vision about the phone and the contact center. We bring our team and also Five9 team as well. Having said that, we also, because we have open platform, also integrate with other contact center solution as well. Because some of the customers, they already deploy other cloud-based solutions like NICE inContact or maybe Talkdesk or maybe a Twilio solution. 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?
For us to win big in the public sector, two things. One thing is, for sure, we can have a FedRAMP approval, right? Which was done early this year in May. Another thing is make sure our backend side, we have a special infrastructure, we call it the Zoom Government Cloud, right? 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. Our infrastructure also very ready, as we downloaded for every feature, not only do this for the enterprise commercial cloud, but also by default, we also support the government cloud. You see, look at the pipeline, it's pretty strong. I think finally, I think we're ready now.
Great. Okay, great. Thanks. 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 those and upsell Rooms into some of your larger customers?
Yeah. Kelly? Yeah. Muted. Yeah.
Yes.
Okay. Here I am. Thanks, Vinod. Really, 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. We feel really great about a really strong retention rate.
Okay, great. Thank you.
Yep.
Hey, Matt, do we have any more questions?
That was actually our last question from our analysts today.
All right. 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, I see Pat, he's just on a different number. Up above. Do you see?
Oh, does it end in one one one?
I see him on an audio right above his. Yep. No. Okay. We can grab him in the after calls.
Yeah. Sorry about that, Pat.
Hold on.
Would you like me to-
One more time if he's connect audio or not. Pat, are you on?
There, yeah.
I'm making joiner, yeah.
Oh, yeah, I'm on. Forgive the background noise, which you can't see from the virtual background of me boarding my flight.
Oh.
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 an existing customer happy is really important and really hard because they request more and more features, and we also try to grow our business to have new customers. For now, our top priority is to focus on existing customers to make sure they are very happy. This is pretty hard, actually.
Okay. Another thing that seemed really important at the Zoomtopia was the appliances. Can you tell us why everyone was so excited about that?
We listen to our customers. 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. For some of the customers, they may not have enough IT resources. They would like to have a simplified deployment model, where they get the appliance, turn on the power, and hook up network, everything should work. They want to get their service from one window, say, from Zoom, right? That's why we partner with those Poly, Neat, and Logitech, and the DTEN, and other, Crestron. Essentially, we offer the appliance to customer to simplify the deployment. Some of the customers really like that model.
Okay, thank you.
Thank you.
Thank you, Pat.
Great. Thanks a lot. Okay, bye-bye.
Hey, Matt. Thank you. Hey, Matt, I think I see Ryan Kunz's 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 letting me in. If we 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? How is that going to roll out to sales in terms of sales and partner enablement? If you could talk about that, please. Thanks.
Yeah, sure. 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 conference room. Today, lots of enterprise customers, very likely, they still deploy old legacy traditional video conference solutions, and very hard to maintain. That's why customers, on the one hand, we do support those traditional hardware devices very well. We can incorporate 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.
Because of that, we just touch on that, Zoom Rooms Appliance group try to simplify that experience. We offer the appliance to the customer, very easy to deploy. The customer also want to have simplified the invoice as well, like a hardware as a service. I think the customer really like the Zoom Rooms, we want to make sure simplify the deployment, simplify the billing as well. That's our focus in the next several quarters.
Got it. Thank you. Helpful.
All right. Thank you.
Anyone else? It's a lot of fun to be with you.
That should have been our last question from our analysts today, actually.
Yeah. All right, do you want to end the call then?
In closing, first of all, thank you for your time. I really appreciate, and thank you all the Zoom employees. Thank you for your hard work, and see you next quarter. Thank you.
Thank you, everybody.
Bye.
Bye. Thank you.
Cheers.