Hello, everyone, and welcome to Zoom's earnings webinar for the second quarter of fiscal 2020. Joining me today will be Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page on the zoom.com website. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will 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 could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including today's earnings press release and our latest 10-Q. Zoom assumes no obligation to update any forward-looking statement that we may make on today's call. With that, let me turn the discussion over to Eric.
Thank you, Tom. Hey, thank you all, and welcome to everyone joining us on today's Zoom webinar. I'm very pleased to report that we had a remarkable second quarter, and it continued to deliver a unique combination of high growth with increased profitability and free cash flow. As Kelly will discuss in a moment, the first half momentum in our business has enabled us to meaningfully raise our revenue and profitability outlook for the rest of the year. Our strong second quarter results are evidence that organizations are turning to Zoom as a strategic technology partner to help them improve their communication and collaboration. While we continue to attract customers of all sizes and across several industry segments, let's discuss one of our largest wins of the quarter. I'm proud to welcome HSBC to the Zoom family.
HSBC is one of the largest financial services organizations in the world, with over 3,900 offices in 67 countries. HSBC will standardize on Zoom platform by deploying to 290,000 hosts and to 5,500 conference rooms. HSBC will consolidate onto Zoom's video-first unified communication platform for both internal and external meetings. By standardizing on Zoom, HSBC will consolidate hosts and create an enhanced frictionless experience for end users. This enterprise-wide deployment represents one of the largest customer commitments to Zoom in our history and reflects our growing momentum with global customers. HSBC, I love you. You know my wife switched to HSBC credit card, so. Let me discuss two more business highlights from Q2. First, we announced a new partnership with Verizon Business Group to offer Zoom to its global customers.
Zoom's platform is available as a cloud service, enabling Verizon Business customers to enjoy reliable and innovative video communications. This agreement with Verizon is a great example of our strategy to partner with top global service providers to extend the reach of Zoom around the world. Their systems are already trained and enabled to sell Zoom. Second, Ryan Azus joined Zoom as our Chief Revenue Officer. Ryan has nearly 20 years of selling experience and sales leadership in the communication industry. He spent the past nine years at RingCentral, where he was most recently the Executive Vice President of Sales and Services. Ryan was instrumental in building the company's field sales and channel organizations from the ground up. Prior to RingCentral, Ryan was a sales leader at Cisco Webex for over nine years.
I've had the pleasure of working with Ryan previously, and he has an incredible acumen for building and leading world-class revenue organizations. Including, I'd like to thank the 2,200 Zoom employees around the globe for their commitment to customer happiness, which sets the foundation for delivering the type of strong financial results that we are sharing for our second quarter and first half of fiscal 2020. We will continue to stay focused across the company on the happiness of customers and building trust with them. By helping our customers succeed with a frictionless communication platform, we are very well positioned to increase our market share and deliver remarkable results. With that, let me turn things over to Kelly.
Thank you, Eric, and welcome to everyone joining us today. Let me start by first reviewing financial results for Q2, and then I will discuss our outlook for Q3 and the full fiscal year. Total revenue grew 96% year-over-year in the second quarter to $146 million. This top-line result exceeded the high end of our guidance range and had a positive impact on our profitability and free cash flow.
Similar to last quarter, we executed very well in a strong demand environment for the Zoom platform. This execution was represented broadly across our major geographies and offerings. 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. Here are some key customer metrics from Q2. We exited the quarter with over 66,300 customers with more than 10 employees, up 78% year-over-year. This is a record number of new customer additions in a quarter. One of our key verticals is the financial services sector. I am pleased to share with you that we are experiencing strong success in this segment with firms like HSBC, Moody's, and Morgan Stanley becoming Zoom customers in Q2.
The combination of our land and expand strategy, along with our continued up-market focus, resulted in Q2 ending with 466 customers with more than $100,000 in revenue over the last 12 months. This is up 104% year-over-year. This also led to a net dollar expansion rate that was over 130% for the fifth consecutive quarter, as customers are deploying more Zoom products and adding more licenses within their organization. One example was a significant expansion with a large luxury brand. This customer began their relationship with Zoom last year and quickly deployed Zoom Meetings to approximately 3,800 users to replace their legacy video conferencing provider. Because of their trust in Zoom, they then invited us to provide a modern solution for the phone service in their corporate offices and stores. After a comprehensive evaluation, they selected Zoom Phone in Q2.
They cited call quality, ease of use, cost savings, and the unified Zoom platform of meetings, chat, and phone as important benefits to their organization. They have already begun the rollout of 4,700 Zoom Phone licenses within their organization. The customer also plans to roll out Zoom Phone to their 750 domestic retail stores starting in early 2020 and the rest of the world soon thereafter. This is an exciting win for us, and it demonstrates the potential to upsell technologies when you make existing customers happy and build trust. Geographic expansion is another driver of our revenue growth as we continue to deliver strong growth internationally. In Q2, our APAC and EMEA revenue combined grew 115% year-over-year and represented approximately 20% of revenue. Revenue from the Americas was up 91% year-over-year and represented approximately 80% of revenue.
This high revenue growth and strategic customer wins are evidence that our investments to expand our global footprint are succeeding. Turning to profitability. Here you can see we were profitable from both a GAAP and non-GAAP perspective, but 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 second quarter was 82.2%, compared to 82.8% in Q2 of last year and 80.9% last quarter. For the full year, we expect non-GAAP gross margin to be in the range of our long-term target of 80%-82% as we continue to scale our infrastructure to support our growth. R&D expense in Q2 was approximately $13 million, up 83% on a year-over-year basis.
We expect to continue to invest in innovating our platform and see R&D returning to the range of 10%-12% of revenue, which is consistent with our long-term view. Sales and marketing expense for Q2 was $69 million. This reflects an increase of 70%, or $28 million, over last year, with investments and initiatives to drive further growth. As a percent of total revenue, sales and marketing was 47%, lower than Q2 last year, as we have seen some efficiency gains in marketing. Looking forward, we expect to continue to invest in this area, especially to drive international and upmarket growth. G&A expense in Q2 was $18 million and represented 12% of total revenue. This result represents our continued investment to support our status as a publicly traded company. Non-GAAP operating income was $21 million, translating to a 14.2% non-GAAP operating margin for the second quarter.
This was an improvement of 812 basis points as compared to Q2 of last year. Non-GAAP earnings per share in Q2 was $0.08 on approximately 292 million of non-GAAP weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.06 higher than the high end of our guidance and $0.06 higher than Q2 of last year due to the outperformance in the quarter. Turning to the balance sheet. We ended Q2 with approximately $755 million in cash equivalents, and marketable securities. Deferred revenue at the end of the quarter was $181 million, up 102% year-over-year. Looking at both our billed and unbilled contracts. Our remaining performance obligations, or RPO, totaled approximately $458 million, up 117% from $210 million last year.
We expect to recognize approximately 62%, or $285 million of the total RPO as revenue over the next 12 months, as compared to 68%, or $143 million in Q2 of last year. This shift to a larger percentage being in non-current RPO represents longer contract lengths as we succeed with up-market customers. Operating cash flow was $31 million in Q2, up from $14 million in the same period a year ago. Free cash flow was $17 million in Q2, up from $8 million in the same period a year ago. Both of these results are due to our higher profitability, the growth in deferred revenue, and strong collections. In addition, we also had a benefit of approximately $7 million to operating cash flow related to employee contributions to our employee stock purchase plan.
We would expect these contributions to scale with headcount, and our first ESPP purchase will be made in Q4. Going forward, we expect to see benefits from contributions in Q1 and Q3, and net outflows for purchases in Q2 and Q4. Now, turning to guidance. We are pleased to be increasing our outlook for Q3 and the full year based on our view of the current economic environment, our ability to gain further market share, and the momentum we achieved in the first half of FY 2020. For the third quarter, we expect revenue to be in the range of $155 million-$156 million. We expect non-GAAP operating income to be in the range of $6 million-$7 million. This forecast includes the impact of our premier user event, Zoomtopia, which will take place in Q3.
Our outlook for non-GAAP earnings per share is $0.03 based on approximately 294 million shares outstanding. For the full fiscal year 2020, we now expect revenue to be in the range of $587 million-$590 million, up from our prior guidance of $535 million-$540 million. We expect to generate positive non-GAAP operating income in all four quarters of the fiscal year. For the full year, non-GAAP operating income is expected to be in the range of $42 million-$45 million, up from our prior guidance of breakeven to $3 million. We expect to deliver non-GAAP earnings per share in the range of $0.18-$0.19 for the full year fiscal 2020, based on approximately 293 million shares outstanding. This reflects the meaningful profitability seen in Q2, combined with the fact that we remain focused on investing aggressively in the business.
We believe we have the opportunity to expand our market share and continue delivering happiness to more customers. We are confident that our long-term business model will drive growth and profitability, which is further evidenced by our Q2 results. In closing, our focus on customers led to rapid top-line growth and increased profitability and positive free cash flow for the quarter and for the first half of FY 2020. I would like to thank the entire Zoom team for their hard work, as Q2 was another quarter of strong execution and positions us well for the full fiscal year. 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 Sterling Auty from J.P. Morgan. Sterling, you're unmuted.
All right.
Sterling.
Hi, guys, I like the background. I think it's better than last quarter. To get us started, can you just comment in terms of what are you experiencing in terms of initial deal sizes? What's the trend that you're seeing over the last couple of quarters?
We remain really focused on the strategy of land and expand. Even though we're seeing stronger growth in the up-market customer base, you saw that grew more quickly than our total customer base. We are still focusing on smaller deal sizes to start and then continue expansion, which you see in the net dollar expansion rate continuously strong at that 130%. We haven't really seen a dramatic change in our initial deal size.
All right. Makes sense. Then one follow-up in terms of Zoom Phone. What kind of attach rates are you seeing in the initial deals on Zoom Phone, or is it still too early? I think a couple of the examples you gave was really kind of upsell Zoom Phone into existing customers.
Yeah. Sterling, that's a good question. We launched the Zoom Phone service earlier this year. Our current strategy is to upsell to our existing installer base. I think it's still too early to tell, but we do see a very good sign. Our customers really want to understand what's the difference from a Zoom Phone side. They like a unified collaborating experience. As Kelly shared, one of our largest customers, and it deploys Zoom Phone in Q2, really like ease of use. I think we can replicate that success in the future quarters.
That makes sense. Thank you.
Thank you.
Thanks.
Sterling.
Yeah.
Next question, please, Matt.
Next question is from Matt Stotler from William Blair. Matt, you're unmuted.
Hey, great quarter, thanks for taking my questions. First, on the Verizon partnership, obviously you announced that back in June, with Verizon using Zoom as a solution for, I think, SMBs and maybe still reselling Webex enterprise level. Any feedback just on the initial traction that you're seeing with that partnership and thoughts about establishing similar partnerships, whether with Verizon or others, to resell Zoom in the up-market as well?
Yeah. Verizon Partnership, you're right. We signed Verizon Partnership recently. I think we are already gaining momentum. They are one of the top channel partners, and our team really enjoyed working together with Verizon team. We see the great result already. I think Verizon Partnership help us more, and this is a great partner.
Great. Okay. Just one more from me on the gross margin front. As you spoke in the prepared remarks, gross margin was strong in the quarter, a little above the high end of your long-term model. Can you just refresh us on what drove the strong performance in the quarter and what you expect to bring that number down a little bit as we look forward? Thank you.
Yeah. The increase in the quarter-over-quarter gross margin was really driven by the increased revenue, the outperformance on the top line. Going forward, we continue to add more data centers as well as building capacity for all of our customer bases around the globe. As we continue to invest in this infrastructure, we expect it to continue to be in the range of 80%-82%.
Great. Thank you very much.
Thanks, Matt. Matt, another question, please.
Our next question is from Heather Bellini from Goldman Sachs. Heather, your line is unmuted.
Great. Thank you so much for taking the question. I was wondering, Zoom Phone, I know it's a new launch, but I'm wondering how you would benchmark the ARR that you've generated to date versus your expectations at the time you launched it, and also where your wins or who you're seeing your wins coming from, if you could share with us that. Also, just this other question would be related to the cadence of the expansions you're seeing, given the value that customers start to see pretty quickly from the adoption of your solutions. Are you actually starting to see the expansions of those deals starting to happen at a faster pace? Thank you.
Yeah. Thanks, Heather. Given that we're selling Zoom Phone into our existing customer base, they already are on the Zoom platform, that has accelerated the rollout of Zoom Phone. We've seen that in Q1, we talked about Ciena, they've already continued to roll out to over 5,000 Zoom Phone users around the globe. That's super exciting. As you saw, the customer that signed in Q2 has already started to roll out their Zoom Phone licenses as well. Interesting to note, they bought more Zoom Phone licenses than they have of meetings, which we think is a trend we'll expect to see as well.
Just benchmarking the ARR.
Yes
that you've generated to date from it, how is it doing versus your initial expectations?
Yeah. It's doing well. We've seen traction in Zoom Phone across all segments of the business, which we think is really exciting. Approximately 50% of Zoom Phone is coming from customers with ARR greater than 100K or more.
To add on to what Kelly said, if you look at today's enterprise market, most of the enterprise customers are still using the on-prem phone system. Over the past several years, SMB customers might have moved to the cloud-based solution. We do see the huge opportunity for the large enterprise segment to go to the cloud-based PBX system. They want to have unified solutions.
Great. Thanks.
Yeah. By the way, we miss you on video.
Oh, yeah, I know. I'm sorry about that. Next time.
No worry. Thank you.
Thanks.
Wonderful. Thank you. Next question, please, Matt.
Our next question is from Brad Zelnick from Credit Suisse. Brad, you're unmuted.
There's Brad. Hey, Brad.
Hi, Brad.
Great. Hi, Eric. Hi, Kelly. Hey, Tom. Nice to see everybody. Congratulations on another great quarter, congrats on adding Ryan as your new Chief Revenue Officer. It's good to hear of the longstanding relationship that you have with him. What might we expect his priorities might be, what else can he do to help even drive more happiness for Zoom employees and Zoom customers? I've got a follow-up as well.
Yeah, that's a great question. By the way, is that a real background or virtual background? It looks so nice. It's better than us now. Thank you. A long story short, Ryan and I have known each other for many, many years, even before Ryan left Cisco to join RingCentral. We already talked about that, "Hey, in the future, Ryan, let's work together." We talked about that many, many years before, right? It's the right time. I think as we further expand into the large enterprise, international, and also get into the unified collaboration market, Ryan's experience can really help us. He's a very hands-on leader and really understands the communication and collaboration industry, and we have high confidence with Ryan joining Zoom, and we can keep the momentum, right? Not only do we win in the domestic market, but also international market as well.
That makes a lot of sense. If I could just ask, the scale of the success and happiness you're delivering to customers the size of HSBC is nothing short of unbelievable. How should we think about the pricing differential at the very high end of the market? Perhaps, Kelly, if you can just on a like-for-like basis, give us any kind of color commentary on what you're seeing pricing-wise, perhaps versus a year ago. Thank you.
Yeah. We haven't seen a dramatic shift in our pricing or in the need from a competitive standpoint from a year ago. Certainly, as you scale up to a customer the size of HSBC, because of the volume and the long-term nature of the contract, we do price that accordingly, as you can imagine. Remember, we also really like the opportunity to do buyouts with our customers, which we often do if they're interested. That's one way that we get them to come in early, and especially if they're with a competitor, but they love Zoom, we want them to have Zoom as quickly as possible.
Excellent. Thank you so much. Congrats again.
Thank you.
Thank you, Brad. Matt, next question, please.
Next question is from Kash Rangan from Bank of America Merrill Lynch. Kash, you're unmuted.
I got to hand it to Brad. I don't know how he managed to smile so beautifully when he was asking his questions. I'm going to have to try the same thing. How to sound nice, look nice, and smile. Looking at your operating expense in sales and marketing relative to the revenue growth, clearly, is this a sign that you have reached that step function evolution in your business model where the revenue is at a scale where you're starting to see underlying productivity improvements in different line items of the expenses, and you can sustain this level of operating margin? Were there one-time things that did not appear in your expenses that maybe will reappear in the future?
maybe you deferred some expenses, or maybe the timing of expenses didn't fall the way you would expect, because although it's terrific to see massive operating leverage in a company
Yeah
It is also unusual to see sequentially this level of operating margin expansion. I'm curious what drove this, how much of this is permanent versus timing of expenses? Congratulations on a spectacular quarter. Thank you.
Thank you, Kash. Sure. It's a great question. Just a quick reminder, our philosophy here is that we're investing for growth with discipline and thought. We are very careful about ensuring that every dollar we spend has an appropriate ROI. With that said, there were a few one-time benefits that we saw in Q2 that led to the higher operating margin. We had a higher rate of capitalized software that reduced our R&D expenses as a percentage of revenue as compared to the previous quarter. You can see the dollars were about the same, but the percentage came down. We also had a slight benefit in G&A as well, as we are now starting to not only collect telco taxes. If you remember, we've talked about telco taxes in the past.
We have now started collecting in certain jurisdictions and passing that through, which is reducing our need to accrue for it. We've got to some agreements with some jurisdictions that helped us understand that we could revert a little bit of our accrual that we had in there for things like penalties and interest. There were a few one-time items that we don't expect to see going forward, and we will really continue to invest in sales and marketing. We are seeing some efficiencies in marketing, as we discussed in the prepared remarks. As we see opportunities, we will continue to invest in that area.
Congrats. Thank you so much.
Thank you, Kash.
Thank you, Kash.
By the way, Kash, you are using the phone to join this Zoom video webinar. We can see that you have a little bit of network connectivity issues. Our technology quickly adapt to your network conditions. See, we still can hear you well.
Yeah.
Great. Awesome.
Thank you, Kash.
Thank you.
Thank you.
Next question, please, Matt. Our next question is from Alex Zukin from RBC. Alex, you're unmuted now.
Hey, Alex.
You guys-
Congratulations.
Thank you. You guys, congratulations on another great quarter as well. I've got two quick ones. One maybe first, Eric, on the federal government and the federal vertical. You guys have achieved FedRAMP certification. I'm just curious how you see that playing out for you from a pipeline perspective, from a deal perspective, how important is that vertical to your growth prospects? Then I've got a quick financial question for Kelly.
Yeah. To have a FedRAMP certificate is very important for us to expand into the public sector. Prior to that, we even don't have a team, because we do not have that certificate. Given that we have that now, I think it's too early to tell because we just established a public sector team for target of public sectors. We do have many state-level customers. I think in next several quarters, probably we'll see some contribution from our public sectors.
Perfect. Kelly, if I do the rough math on current RPO bookings, I get to around 81%, 82%. I'm curious, is that the right kind of forward-looking indicator given some of the different methods you guys have from a sales and contracting perspective? Is that an important metric for you guys, or billings the better one right now?
Billings is really not a good metric for us due to the split of our customers that pay monthly versus annually. Remember, the core base of the company, while it is shifting, it's still really based on SMB customers that pay monthly on a credit card. Billings is really not a good metric for an indicator. I would certainly say that RPO is a much better metric to use.
Great. Thank you.
Yep.
Thank you, Alex. Matt, next question, please.
Our next question is from Philip Winslow from Wells Fargo. Phil, you're unmuted.
I see the Wells Fargo.
I know. I love your marketing, Phil.
Thank you. You like that?
Yeah.
It's good. [Tom] will like it too. Yeah, no, my question is actually just going to be on just what you're seeing in terms of just the customers in terms of replacement versus net new expansion. In other words, what % of the seats that you're seeing are just replacing an existing solution versus actually that customer either coming net new or actually expanding the number of seats versus the prior provider? Thanks.
Yeah, go ahead. Yeah.
If you talk about when we're going into our new base of customers, when we're going into the upmarket, there is certainly always an incumbent that we are replacing there, and it's all the traditional providers that you would know. In SMB, it often can either be greenfield or maybe three that we are competing with or some of the more mass market vendors that you're also very familiar with. As I said earlier, our net retention expansion rate though remains really strong at 130% as we continue to start with small seeded land and expand and then growing up from there.
Great. Then just a follow-up in terms of just that land and expand. To Eric's point about Zoom being super easy to use, so it's more users actually using. What are you seeing in terms of the sort of that seat expansion, particularly when it was replacing an existing solution with your?
Well, in terms of seat expansion, you're saying in general or across specific customers?
I just said the larger customers.
Yeah. I think customers are buying in two different ways. Obviously, we saw with HSBC, one of the largest customer deal, well, it is the largest customer single deal we've ever had. Yet now our previously largest customer had another add-on in this quarter, which was over $1 million in ARR. Even in our large customers, we continue to see expansion as they add on new products like Zoom Phone. I think very few of our customers today are wall to wall with Zoom Meetings. As they continue to build trust with Zoom and with the platform, then see the value, they continue to expand that globally throughout their teams.
Great. Thanks a lot.
Yeah.
Thanks, Phil. Matt, next question, please.
Next question is from Pat Walravens from JMP. Pat, you are unmuted.
Hi, Pat.
Oh, great. Hi, guys.
Hi, Pat.
Thank you. I like the 5:30 start time, by the way.
Is this better for you guys?
Yeah. Especially on a busy day like today.
Yeah, that's how we did it.
I think this is for both Kelly and Eric. Look, what's going to be the biggest challenge in continuing to scale at this rate? I realize your guidance is not at this rate, but to continue to scale like we are here, what's going to be the biggest challenge?
I think for sure for us to further scale our business, there are many challenges. I would say the most important challenge is to maintain our company culture. We already have almost 2,300 employees. As we further expand into the international market and double our sales and the R&D team, we are going to hire more and more people, right? The top of talent. However, how to maintain our delivering happiness culture, make sure all of us always look at everything from a customer perspective, responding to customer issues in a timely manner, that's a challenge. How to train the new employees, make sure we are very humble, be paranoid, to care about a customer, that's the number one challenge. Other challenges are very manageable, like a product, maybe the sales efficiency, the cost is not the biggest challenge.
All right. I'm going to ask one more if I can, which is, as I was driving up the 101 today, I saw a billboard which said, "Zoom and Slack, see what together can do." Eric, what can together do?
I have a similar question to you. Maybe you can tell us what it will do. I'm a huge fan of Slack, right? A huge fan of Stu. I think many of our customers, they told us they like a best-of-breed service. They deploy both Zoom and Slack. They can hire talent all over the world, like a company envision. They standardize on Zoom and Slack platform. Guess what? They do not have a single physical office, right? I think the best-of-breed service can truly deliver happiness to our customers. That's why we like this partnership. We want to do more with Slack together. We want to make sure customers happy.
All right. Thank you.
Great.
Thanks, Pat.
Thank you.
Thank you.
Next question, please, Matt.
Our next question is from Alex Kurtz from KeyBanc. Alex, you are unmuted.
Hey, Alex.
Yeah, thanks. Thanks, everyone. Great quarter. I love the video interaction here. It's awesome. Just on the net expansion rate in the quarter, how much is that being driven by new seats versus the Phone? I had a clarifier on margin.
Yeah. It's being driven primarily by new seats, as while you were excited about the momentum we're seeing in Phone, it's still a very, very small contributor to revenue. Just a reminder, we launched it only in January. It did go GA in both Australia and the U.K. in Q2. It's really having a very small impact at this point.
Just on your margin assumptions in the back half of the year around the adoption of phone, is there anything that we should be thinking about as far as the variables around that and any impact there?
No. The only impact on margins in the second half of the year are around expanding data centers.
Correct.
Planning to add two to three more, but that is not necessarily having to do with Zoom Phone. It's just adding capacity in general for our users around the globe.
Okay. All right. Thank you.
Yeah. By the way, from an architecture perspective, our video conferencing and Zoom Phone, we share the same platform. As Kelly mentioned, we just need to expand our capacity. That's pretty much.
Okay. Thank you.
Thank you.
Thanks, Alex. Matt, next question, please.
Our next question is from Meta Marshall from Morgan Stanley.
Hey, Meta,
you are unmuted.
Hi, Meta.
Hey. Congrats on the quarter. I just wanted to ask a couple of questions. Maybe first and get your response to that. As you approach customers with Zoom Phone, has it changed your perspective on kind of cadence of additional features you'll need to add over time, or has it really met expectations to date, and the cadence you were planning will work?
Today our strategy is to focus on upsell, right. We already built their trust. Customer really like our video conferencing experience in terms of video quality and voice quality. We truly believe video is the new voice. Essentially, the way for customers to use the phone is more like another way to use our video conferencing service, right. Customer, even if they deploy the solution on day one, they feel very familiar with our service. Just the same experience, same unified client. I think customers really like that experience. We do not need to train customers. They feel like this is a part of the overall collaboration platform. This is a very natural experience.
Got it. Maybe on the hiring of Ryan. Traditionally, you guys have not had a large channel presence, he obviously has a lot of experience there. Does it change your perspective on how you think of the channel as a method of go-to-market, or just how does the hiring of Ryan change the go-to-market approach?
Well, that's a good question. In terms of a channel strategy, we just announced the Verizon partnership. The channel always play a very big role for our revenue growth. Even if look at the total revenue probably driven by our direct team, as we further expand into the international market with Ryan's great background, I would say the channel contribution will play an even bigger role in the future. Verizon partnership, just started, and we are going to more and more channel partners to help us expand into the international market.
Great. Thanks. Congrats, guys.
Thanks, Meta.
Thank you.
Matt, next question, please.
Our next question is from Thomas Roderick from Stifel. Tom, you are unmuted.
Matt, he's muted.
There he is. I see him. Hey, Tom.
Congratulations on another fantastic quarter. Well done. Eric, I wanted to ask my first question to you, and I want to put a finer point on the question Pat just asked about maintaining culture. You're getting to a scale that's pretty remarkable here, and I think you're up to about 2,200 employees. Can you talk a little bit about what you're doing to drive that hiring plan in place, how you're building out HR, capturing that incremental employee at a great company like Zoom is always a good problem to have, but you're getting to a scale that makes it challenging. Can you talk a little bit about just hiring and the challenge of that at scale?
As well, in terms of hiring, on the one hand, we want to hire as quickly as possible, right? Because we have great opportunities. On the other hand, also want to be very careful, right? We want to make sure hire the right employees who can fit very well to our company culture with a self-motivation, self-learning personality. Having said that, I think we have a very aggressive hiring goal. To be honest with you, every quarter we didn't miss that, right? The reason why we want to focus on company culture, and this is not a one-person company, our management team company. All of us at Zoom, we refer employees to join us. We do all we can to help the new employees to make sure they are familiar with our business process, product. We help each other, care for each other.
I think to do that right, we don't want to be too aggressive, right? That's the challenge, because sometimes I say, "Yeah, let's hire another 100 people," and then suddenly realize that it might break our company culture. That's why we have to balance every day, so.
Tom, earlier this year, we hired Lynne as our Chief People Officer, and just last week, we hired a new head of talent acquisition as well. I think both of them are really focused on doing exactly what Eric said, which is hiring the right people, hiring quickly, but not lowering the bar.
Okay
two great additions to the team. Yep.
Excellent. Kelly, just one follow-up for you on the RPO commentary. Following that current RPO number that's declining as you see more and more customers at the enterprise level signing up for multi-year deals. Should we expect that trend to continue where the current number, the percentage will shrink, just as a function of more enterprise multi-year deals out there?
Yeah, I think certainly we are continuing to see more and more of our revenue base come from up-market customers, as that's really one of our key strategic focus areas. How quickly that grows, I don't know, but absolutely it's one of the key focuses that we have for growing the company this year.
Got it. Understood. Thank you, guys.
Thank you.
Great. Thank you, Tom. Matt, next question, please.
Our next question is from Ittai Kidron from Oppenheimer. Ittai, you're unmuted. I will give Ittai another moment.
Okay.
Next question is going to be from Zane Chrane from Bernstein.
Great. Thanks so much.
Hey, Zane.
Hi, Zane.
Congratulations on a great quarter.
Thank you.
Thank you.
Solid results. I was just wondering if you could dig into the architecture and the technology a little bit, Eric. One of the pushbacks I hear from skeptics is that a good programmer could replicate something like Zoom or be accomplishing over the weekend, and it's not really differentiated point solution. That's not what I've heard from enterprise customers that have adopted Zoom. I was just wondering if you could dig into what is the secret sauce that really makes your technology and architecture unique and difficult to replicate. Thank you.
In terms of a lot of enterprise customers, for sure, when we started, we were focusing on SMB customers, right? Over the past several years, we started expanding into a lot of enterprise customers. Almost every enterprise customers, we do see a lot of users. Even for the lot enterprise customers already standardized on other platform, we see the one user, two user, one department, two department, they all use their own budget to deploy Zoom. They are not happy about any other services in terms of ease of use, the quality, like this virtual background feature, and consistency experience across the desktop, mobile, and conference room systems, right? I think the combination of technology, ease of use, security will win the customer trust, right? You look at all other solutions out there today, all of the architecture is very old. Right?
Not designed for modern video cloud, video-first architecture. That's why we are ahead of any of our competitors for several years. Otherwise, I would go back to work all the weekend, so.
Yeah, that's really interesting. One of the things I think is really fascinating is the extensibility and the APIs connecting other platforms. It seems like there's a lot of green field opportunity there for maybe tying in with vendors like Salesforce or HubSpot or other cloud providers. Could you talk about what your vision is for those partnerships and the technology integration to build that ecosystem?
That's a good question. Today, you talk with many customers, on the one hand, they all like best-in-breed services. On the other hand, quite often, you need to switch back and forth in terms of context. Say, like from Dropbox or Box to Zoom or from Salesforce to Zoom, Atlassian to Zoom, right? A customer likes to stay within the same context, right? Say, like I'm using the Jira Atlassian system, right? Within that Jira system, I can launch a Zoom call, join a Zoom meeting, schedule a meeting. I think that's what the customer told us. That's why how to seamlessly embed Zoom into any other business workflow applications, that's the direction to go. That's the reason why we announced the Zoom App Marketplace, right? Give a customer a very flexible API. Customer, even they do not know that they're onto a Zoom call.
They feel like they are going to stay within a Workday, the user interface or ServiceNow user interface. I think that's the direction.
Sounds great. Well, thanks a lot, and congratulations on a great quarter.
Thanks, Zane.
Thank you, Zane. Matt, next question, please.
Our next question is from Ryan Koontz from Rosenblatt. Ryan, you are unmuted.
Great. Thanks, guys. Congrats on a great quarter. Given your early success in the enterprise space, what if you give us some color on the market verticals you're seeing the lowest hanging fruit for competitive displacements out there?
Yeah. When we started, we were focusing on high-tech market, and later on we expanded into the high ed as well as healthcare market. Over the past two to three years, we also doubled down on financial sectors, and we are going to focus on public sector as well. Over the past two quarters, we do see a very good momentum in our financial sectors. I think we are going to see more and more the big enterprise customers from a financial sector.
Wonderful. Thank you.
Great. Thank you.
Thanks, Ryan.
Thank you. Matt, next question, please.
Next question is from Jonathan Kees from Summit Insights Group. Jonathan, you are unmuted.
Great. I want to add my congratulations to the quarter. Great results. I want to ask a couple topics. One, in regards to how I'm thinking about it, you beat your guidance, you beat estimates. When you gave guidance for this quarter you just reported, it was about a month and a few days after the quarter ended. I guess the way I'm thinking about it is a lot of the revenue, a lot of the deals were more back-end loaded. Was there anything specific that caused that? Did you have any promotions or were there deals, like the HSBC deal that were in the previous quarter that came over into this reported quarter? Just curious in terms of how that upside trended in terms of revenues and also, yeah, what caused that?
Yeah. Hi, Jonathan. We did not see a tremendous shift in our linearity for the quarter. As we move into more enterprise customers, some of them do buy towards the back part of the quarter. We have customers of all sizes, so they tend to buy pretty consistently throughout the period. I think, part of the over-performance against our guidance was, again, us giving guidance that we want to ensure that we can achieve as a public company.
Okay, great. That makes sense. Second topic, if I can here, this one's more for you, Eric. I understand that you make it a task to reach out to customers who've left and try to understand why they left or are leaving. I think a personal touch is wonderful. Just curious if you could share with us any gems, anything that you have learned in terms of why these customers have left or are thinking about leaving.
Yeah. Several years ago, I did spend a lot of time talking to those customers who left. Over the past two to three years, I did not spend too much time on that because a lot of those users who cancel their service are very low and one per users. Actually, they really do not leave the Zoom. Say that they are going to take the family vacation over the summer timeframe, and they cancel their service. After the summer, they are going to resubscribe, right? We did not see any very big a lot enterprise customers. That's why I spend less and less time on that. Really, do not focus on that anymore.
Great.
So-
Jonathan, did you get the camera we sent you?
Yes. Wonderful. I hope, can you see me?
No, we can't.
Oh.
We'll help you out in the next one. I'll follow up and we'll make sure we get you on there.
Oh. I'm using it right now. I guess, you can hear the mic.
Yep.
Yep.
Okay. Yeah, I am using it right now. Sorry about that.
All right.
I thought I was on-
No worries.
camera.
I just wanted to make sure you got it. Thank you. Hey, Matt, how many more do we have?
We have one more question.
Okay.
The last question is from Ryan MacWilliams from Stephens. Ryan, you are unmuted now.
Thank you.
Ryan.
Hi, Ryan.
In a recent interview, Eric, you mentioned that 95% of your engineers were working on voice video, but you know your focus is always on what customers are asking for. Are there any current features or capabilities customers are asking for aside from Zoom Meetings and phones?
I think, first of all, we already have a roadmap, right? At the same time, we wanted to talk with the customers, make sure our roadmap fits very well to customer need. Having said that, we have so many lot enterprise customers, quite often, if they tell us a feature or solution, it's really hard for us to prioritize that. That's why every time our product managers, our sales engineers always try to understand what's the pain point from a customer side. Quite often, they have the same pain point.
Because of that, I think if you look at our feature set roadmap, it's not that very complex, right? It's kind of we understand the pain point and want to make sure our solution can fit very well to customer need. Aside of that, I think we do not have the challenges to manage the feature request from a lot of enterprise customers. The roadmap is, we always share the roadmap with our lot enterprise customers. They all buy that.
Thanks. One last question on acquisitions. Last quarter, you mentioned that you're keeping your options open, but to this point, do you currently believe you have the infrastructure in place to handle a large acquisition?
I think, well, in terms of acquisition, I think we are working very hard on day-to-day execution and a huge opportunity ahead of us. We do not see any great opportunity, right? If you know of any opportunity, please let us know. Otherwise, we just laser focus on our execution, make sure our customer happy.
20 investment bankers are now calling you, Eric.
Yeah.
I do not have money from my credit side.
Thanks, guys.
Thank you.
Thank you. Congratulations on your new position, too. Tom, do you have any closing remarks?
I think Ittai also in the call, right? Oh, yes. Matt, is Ittai still with us?
Let's see if we can get him back. We tried him earlier. Ittai, you are unmuted again.
Itay, are you on the call?
Joining in his place?
He did have somebody join earlier, and we did confirm with him earlier they were on the phone. I'm not sure if they're listening at the moment.
Okay.
Okay. Thanks, Matt.
Thank you, Matt.
Yes. Thank you all for joining us, and we look forward to seeing many of you at Zoomtopia. Thank you.
Thank you.
Bye, everybody.
Bye.