Hello, everyone, and welcome to Zoom's Second Quarter Fiscal Year 2022 Earnings Release. I'd like to remind everyone that this call is being recorded. At this time, I'd like to hand it over to Tom McCallum, Head of Investor Relations.
Thank you, Matt. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q2 of fiscal 2022. 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 at investors. Zoom.com.
Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that along with our earnings release we'll include a reconciliation of GAAP to non GAAP financial results. During this call, we will make forward looking statements, including statements regarding our financial outlook for the Q3 and full fiscal year 2022, Zoom's expectations regarding financial and business Zoom's growth strategy and business aspirations to drive evolution on multiple fronts as organizations and people reimagine work, communication and collaboration and Zoom being well positioned to be successful as a platform. 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 we will be conducting a few key financial results, which we discuss in detail and in our filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. Zoom assumes no obligation to update any forward looking statements we may make on today's webinar.
In addition, as you all know, we announced our intent to acquire Five9 in July. Clearly, we're excited about joining forces with Five9. Please note that we will not be discussing or addressing questions regarding the pending transaction at this time as we are in the process of regulatory review. And with that, let me turn the discussion over to Eric.
Thank you, Tom, and thank you all, and welcome to everyone joining us on today's webinar, I want to start by thanking our customers and partners for their trust and loyalty, which led to our continued strong revenue growth alongside remarkable profitability and free cash flow. We also want to thank our hardworking employees for their dedication to delivering happiness to our customers and partners. I have been humbled by the stories of how finance professionals have leveraged Zoom to reimagine the way they work. Specifically, I'd like to thank Charlie Munger of Berkshire Hathaway for his remarks about how Zoom has added so much convenience took his life. We are so delighted to come to Charlie as a happy user, and I nominate myself to be Charlie's personal Zoom tech support, if he ever needs it.
In Q2, we also achieved several milestones, setting the foundation for us to thrive as a platform. In July, we launched Zoom Apps, we experience over 50 apps right into the Zoom meeting experience, and this is just the beginning. The beauty of our platform is it allows our ecosystem of developers to add even more functionality by building apps where workflows are integrated with meeting interactions. This is a win win because better integrations we will boost our customers' productivity and afford our developers' exposure for our large user base. The Zoom Apps Fund, which has already invested in over a dozen startups in our Zoom Apps and SDK ecosystem further aligns us with the developers enabling them to focus more on innovation.
We are also excited to have launched the Zoom Events in July. Zoom Events it is an easy yet powerful solution to produce and host the company and public events. It acts as a layer above our existing Zoom Video Webinars and Zoom Meetings products. Zoomtopia we'll be with you on streaming events in only 2 weeks and we hope to see all of you there. In Q2, we saw several large customers' upsells.
We were very happy to Span is a leading tech firm who increased their meetings licenses over 6 fold to 95,000 and with a global financial services customer, we added over 63,000 Zumu phone licenses, making Zoom our new largest customer. Both wins were displacement of legacy solutions that Zoom beat in terms of reliability, simplicity and integration, and let me recognize a few very big wins for the quarter. I want to welcome NEC Corporation to the Zoom family. Based out of Japan, NEC is a leader in the integration of IT and network technologies we had their slogan, orchestrating a brighter world. In order to enhance the productivity, collaboration and happiness of their global workforce, NEC deployed approximately 110,000 Zoom meetings I also want to welcome Seagate Technology to the Xunhua family.
Stigit is a global mass data storage infrastructure leader, innovating world class precision engineered data storage management solutions with a focus on sustainable partnerships. Seagate recently decided to modernize and integrate their global communications infrastructure with over 14,000 Zoom meeting licenses and over 17,000 Zoom phone licenses. Next is a Zoom Phone upsell. In Q2 of last year, we welcomed ExxonMobil, we develop and apply next generation technologies to help safely and responsibly meet the world's growing need we will continue to support our we enable their teams to collaborate globally. We are very grateful to have seen our partnership evolve over the past year I'm excited that ExxonMobil has recently decided at Zoom Phone to further enhance the user experience for their global workforce, leveraging a communications platform that is very easy to deploy and manage.
In addition to these greater customer wins, we also closed another strategic channel partnership with Telkomstel, the largest cellular operator in Indonesia, which is the world's 4th largest country by population, Telkomsel understands and wants to support their 170,000,000 subscribers need for seamless and reliable virtual meetings could thrive in the digital workplace area. We will be leveraging the power of Zoom's developer platform and ISP positive program to deliver a fully integrated solution we have their ClavX offerings for the enterprise segment and Zoom native apps for the consumer segment. The collaboration between Telkomsel and Zoom will bring communication to the next level by combining Zoom's strong capabilities an efficient platform with Telkomsel's best quality network and localized interface, together creating a powerful tool to improve customer productivity and collaboration. Thank you, AYNC, Stavit, ExxonMobil I'm here, Constell. I love you all.
Enterprises are on a digital platform let's combine meetings, phone, events, office technology and developer solutions in a way that is simple, reliable and frictionless. This fundamental truth underpins our leadership position in video conferencing and will help to drive further growth in Zoom Phone and as soon as we expand our platform and addressable market in the hybrid world. Today, we're very fortunate to be a leading global brand with over 500,000 customers having more than 10 employees, our internal innovation engine is very strong and boosted by our growing Zoom apps developer ecosystem and acquisitions such as CACs, that will strengthen our position in AI transmission and translation. As organizations and people reimagine work, communications and collaboration, we are faced with a once in a lifetime opportunity to drive this evolution on multiple fronts. Thanks again for the hard work of our over 5,700 employees and the trust of our loyal customers, we are positioned very well to be successful as a platform embracing and enabling hybrid world.
I'm very excited about the future. The journey has only begun. And with that, let me pass it over to Tammy. Thank you.
Thank you, Eric, and hello, everyone. We had an eventful Q2 with several highlights. The first of which was the strength in the enterprise. We were able to grow the number of enterprise customers Spending more than $1,000,000 in ARR by 77% year over year. And the second highlight is the acceleration we are seeing with Zoom phones.
We grew the number of customers spending more than $100,000 in ARR on Zoom phones by 2 41% year over year. In August, we will reach actually, in fact, right before this call, we reached 2,000,000 Zoom Phone seats, only 8 months after reaching our first 1,000,000. We added 8 Zoom Phone customers with more than 10,000 seats in the first half of FY 'twenty two, bringing us to a total of 26. And in Q2, we broke our record for the largest Zoom phone deal to date twice in the same day. It is important to note that as we've just lapped our 1st full quarter year over year compare since the start of the pandemic, we have seen customers return to more thoughtful, measured buying patterns.
While revenue, profitability and cash flow were strong in the 2nd quarter and the first Other metrics have begun to normalize, especially when compared to the unprecedented year over year costs. In Q2, total revenue grew 54% year over year to $1,020,000,000 marking our first $1,000,000,000 plus quarter, only 5 quarters after reaching $1,000,000,000 annual run rate. The top line result is Seated at the high end of our guidance of $990,000,000 We saw strength in our direct and channel businesses, which grew at twice the rate of our online business. Zoom Phone, Zoom Rooms and Asia Pac growth also accelerated in the quarter. The year over year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, new customers accounted for approximately 74% of the incremental revenue and existing customers accounted for 26% of the let's take a look at the key customer metrics for the quarter.
We saw 131% year over year growth in the upmarket as we ended the quarter with 2,278 customers generating more than $100,000 in trailing 12 months revenue. We exited the quarter with approximately 504,900 customers with more than 10 employees, up 36% year over year and representing 64% of revenue. In Q2, customers with 10 or fewer employees represented approximately 36% of revenue, in line with Q2 of last year, but down from its high of 38% in Q3 of last year. As we discussed previously, this cohort, which comprises SMB and consumers we typically purchase online is more volatile, and we expect it to continue to decline as a percentage of revenue as customers adjust to the evolving environment. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 13th consecutive quarter, as existing customers increased their spend with Zoom and upsells on Zoom Phone and Zoom Rooms picked up pace.
Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 50% year over year. Our combined APAC and EMEA revenue grew 62% year over year to be approximately 33% of revenue, up from 31% a year ago. In recent quarters, we have made significant investments in our international teams. In Asia Pacific, our direct sales team drove several strong wins in the Enterprise segment.
However, in EMEA, we saw some headwinds, which were predominantly driven by declines in the online segment. Now turning to profitability, which is strong from both GAAP and non GAAP perspective. I will focus on our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, charitable donation of common stock, acquisition related expenses, net litigation expenses and gains or losses on strategic investments. Non GAAP gross margin in Q2 was 76.2% compared to 72.3% in Q2 of last year and 73.9% in Q1 of this year. The sequential improvement in gross margin is mainly due to new data center capacity coming online and lower usage during the summer months, particularly with schools.
We now expect gross margin outlook to be higher than previously discussed at approximately 75% for the remainder of the fiscal year, even while we continue to support free K-twelve education. Research and development Expense grew by 89% year over year to approximately $54,000,000 As a percentage of total revenue, R and D was approximately 5.3%, an increase from Q2 of last year, demonstrating our ongoing commitment to building out our engineering teams globally I'm maintaining best in class product and innovation. Sales and marketing expense grew by 72% year over year $211,000,000 Sales and marketing expense was approximately 20.7% of total revenue, an increase in Q2 of last year, mainly due to investments in hiring to drive sustainable future growth. We plan to increase investment in global sales capacity as well as digital marketing and events to drive additional leads for our sales teams across meetings, phone, rooms and events. G and A expense in the quarter grew by 73% to $89,000,000 as we continue to scale these functions and invest in systems, automation and compliance to meet our new scale.
G and A expense was approximately 8.7% of total revenue, a slight increase from Q2 of last year. Revenue upside in the quarter carried through to the bottom line with non GAAP operating income of $425,000,000 exceeding our guidance. This translates to a 41.6 percent non GAAP operating margin for Q2, steady with both Q2 last year and Q1 of this year. Non GAAP diluted earnings per share in Q2 was $1.36 we have approximately 306,000,000 non GAAP weighted average shares outstanding. This result is $0.21 above the high end of our guidance and $0.44 above Q2 of last year.
Turning to the balance sheet. Deferred revenue at the end of the period was $1,200,000,000 up 59% year over year from $743,000,000 Looking at both our billed and unbilled contracts, our RPO totaled approximately $2,300,000,000 up 66% year over year from $1,400,000,000 We expect to recognize approximately 69% of the total RPO as revenue over the next 12 months as compared to 72% in Q2 of last year, reflecting the shift back to longer term plans. It is important to remember that because over 40% of our business is billed monthly and typically bought online, deferred revenue and RPO trends are not reliable predictors of future revenue growth. As I mentioned last quarter, the timing of our renewals has increasingly shifted to the beginning of the fiscal year, with Q1 now representing our largest renewal quarter. This shift in seasonality is a result of the significant growth we experienced in the first half of FY 'twenty one.
We expect this front weighted seasonality will persist and potentially become even more pronounced given the scale of our base and practice of upselling coterminously with the existing contracts. As such, we would expect total deferred revenue and RPO to be modestly down from Q2 to Q3. We ended the quarter with approximately $5,100,000,000 in cash, cash equivalents and marketable securities, excluding restricted cash. We had strong operating cash flow in the quarter $468,000,000 up from $401,000,000 in Q2 of last year. Free cash flow was $455,000,000 up from $373,000,000 in Q2 of last year.
The increase is primarily attributable to the top line growth and disciplined spending. Looking at the remainder of the fiscal year, we expect to increase our we will continue to expect capital expenditures related to ongoing data center expansion to support our growth outlook. Now turning to guidance. Please note that the ever changing nature of the global pandemic continues to impact our segments and regions in different our outlook is based on our current assessment of the business environment. Specifically, our outlook assumes that our direct and Panel business will continue to experience robust growth, while our online business will be a headwind in the coming quarters as smaller customers and consumers adjust for the evolving environment.
For the Q3 of FY 'twenty two, we expect revenue to be in the range of 1.01 we expect non GAAP operating income to be in the range of $340,000,000 to $345,000,000 Our outlook for non GAAP earnings per share is $1.07 to $1.08 based on approximately 309,000,000 shares outstanding. For the full year of FY 'twenty two, we expect revenue to be in the range of $4,005,000,000 to $4,015,000,000 which would represent approximately 51% year over we expect non GAAP operating income to be in the range of approximately $1,500,000,000 to $1,510,000,000 we should represent approximately 53% to 54% year over year growth. Our outlook for the non GAAP earnings per share is $4.75 to $4.79 based on approximately 308,000,000 shares outstanding. Before concluding, I'd like to welcome everyone to join us in 2 weeks at Zootopia, our 2 day immersive experience that is we will be happy to take our next question and answer session. And on day 1 of Zoomtopia, please join us for our financial analyst briefing, where we will be providing you with greater detail on Zoom phones, the platform, our channel partnerships and much more.
And as always, Zoom is grateful to be a driving force enabling connection and collaboration worldwide with our high quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community and our investors. If you have not yet enabled your video, please do so now through the interactive portion of this meeting. Matt, please queue up our first question.
Our first question is from Itay Kidron with Oppenheimer.
Hey, guys. Thanks. Don't forget to unmute yourself. Great quarter again, guys.
Kelly, I want to focus kind of on
this position. Clearly, you're doing extremely well with phones. It's phenomenal, the growth that you're seeing over there. But can you give me a little bit more insights as to what is the growth in meetings right here, right now? My math suggests a very significant deceleration in your expansion rate and I would suspect that that's tied specifically to meetings decelerating.
Help me think about the contribution of growth of those two elements and perhaps how would that change over the next 12 months?
So I think in terms of The expansion rate, you're talking about the implied expansion rate that you calculated?
Yes.
Yes. And I just want to remind you, first of all, that when you calculate that, it includes all of our we are seeing headwinds in the online segment of our business for sure. So that's that I would say that while we don't break out revenue, we see strength continued strength in the upmarket and enterprise in both meetings and phones. And where you're seeing that challenge in the implied metric is really coming from the online segment of our business.
So I'd interpret that To me, the churn is now finally rising in that category. Is that the right way to think about this going forward now that the economy is slowly opening, some businesses, I guess, Scaling back on the usage here?
Yes. So remember, the online business is primarily, not exclusively, but primarily small businesses and individuals. And I think what we've seen is, while the future of Delta is still unknown, we do see individuals, especially moving around the world and feeling comfortable, like I think we were talking about, most of us are probably socializing in personnel doing fewer things like Zoom happy hours, and that's where we're starting to see some of the challenges. So the net dollar expansion in the online segment
our next question is from Steve Enders with KeyBanc.
Okay, great. Thanks for taking my question here. I guess I just want to dig in a little bit more on kind of the trends you're seeing In the second half, it looks like you're now guiding down a little bit with the on trend. I think before, we're talking about an uptrend. So just want to get a better sense of what's the biggest incremental change that you're seeing there in the outlook and what's changed in the past 3 months specifically?
Yes. So again, we continue to see strength in our upmarket. We're excited about what we're seeing in the enterprise, in phone and international, we all saw growth accelerate in Q2. When we look out though, what we have seen is a slowdown in the online segment of the business, which, again, even though the pandemic seems to be far from over, we are happy that people are feeling more We're comfortable being out traveling and that's really where we're seeing the slowdown. And we had if you back all the way up to when we gave guidance at the beginning of the year, we had expected That's towards the end of the year, but it's just happened a little bit more quickly than we expected.
And we, of course, we feel good that people are out moving around the world, it's certainly creating some headwinds, as we said, in the online segment of our business.
Okay, great. And is that creating any opportunities then as companies do you think about going back to the office for Zoom Rooms and incremental activity
Absolutely. So we saw Zoom Rooms start to accelerate again in Q2, which was very exciting as our customers are planning and thinking about the attach rates more than doubled quarter over quarter from Q1 to Q2. So excellent companies are preparing and planning for welcoming their employees back to the office.
Okay, perfect. Thanks for taking my questions.
Yes. Thank you, Zvi.
Our next question is from Taz Koujaljian with Guggenheim.
Natas, you're on mute. Can you just hear me now?
Yes. Hi, Kashy.
Hi, Kashy
on Zoom Phone. So if you look
at the numbers reported tonight,
you had about 500,000,000 seats, I think, in the last 4 months. Prior to that, you're adding about part of the case seats every quarter. It looks like a bit of a slowdown in the number of seats you're adding this quarter. Is that a fair comment?
It's almost exactly the same time frame because I think we had announced in December that we hit 1,000,000 And then we announced $1,500,000 on our call in April and then $2,000,000 on this call. So it's almost exactly at the same pace.
Got it. And then just one follow-up. You said weakness in the online segment. Is that coming from Just increased churn? Or are you seeing a slowdown in the new customer acquisition in that line item?
It's a little bit of both. So as we mentioned, we specifically saw some challenges in certain regions like EMEA, where the world, at least for a period of time, it was a little more open again and people are moving around. And that's where we see people taking advantage of being out in the world and seeing some slower top line bookings as well as accelerated churn.
Thank you.
Our next question is from Meta Marshall with Morgan Stanley.
Great. Thanks. Kelly, just wanted to dig into your kind of commentary on more measured spending patterns that you're seeing. And taking away from kind of the smaller business commentary that you've been giving and focusing that on enterprise. And so just trying to get a sense, does that mean normalizing the amount of seats that they're adding or that they're rationalizing kind of the seats that they've had, that they're rationalizing number of video solutions that they're having in house, just what does that kind of commentary around more measured patterns around the enterprise business mean?
Thanks.
Yes. Thanks, Anita. We saw this start a little bit in Q1 and now continue into Q2 where I think it's not necessarily measured in terms of How much they're buying, but more measured and thoughtful in how they are buying, in that they want to take their time. They're doing More complete like proof of concepts, for example, versus if you think about a year ago, they were in this sort of stage of trying to keep the lights on almost And buying very quickly and now they're taking the time to really be thoughtful and it's just It's back to kind of the way they used to buy pre pandemic, which has just been much more normal buying pattern. So I think that we're back to more normal and the sort of 4 quarters issue you saw last year was really the blip and now we're back to a more normal measured approach that customer, thank you.
And is part of that just because it's a couple decision with phone now or just anything having to do with that?
I think that certainly the phone is a different buying cycle, but usually by the time they get to phone, they already know Zu. So it's not that, that is necessarily slowing us down. It's just that they're taking their time to think about these decisions that they're making.
Okay, great. Thanks.
Our next question is from Matthew VanVleet with BTIG.
Yes. Hi. Thanks for taking the question. I guess on the continued success on Zoom Phone here, Called out a number of very large deals. Curious on how often you're being brought in, where they're also contemplating a contact center upgrade, where have you stood?
Obviously, the partnership with Five9 has been in place for a while. But just more generally speaking, how often is upgrading to Zoom Phone a part of a broader modernization across that could potentially include contact center?
Hi, Matt. I actually don't know exactly off the top of my head the specifics around that. We obviously having an integrated phone and contact center solution is really important to many Which is why we're excited about the deal that we're working on with Five9. And as you say, we've been partnering with them. We also have other There's nothing different about that, that has changed.
I'd have to go back and look. I don't know exactly what typical tax rates are between those 2, though. Eric, if you have a perspective on that, go for it.
Sure. So Matt, if you look at our installer base, by now, I think we really wanted to migrate from on prem PPS system for the cloud, that's where the huge opportunities comes from. Also, since the pandemic, I think we do see some of the enterprise customers, we also started asking about, hey, what's your club context understanding strategy? Because we started planning now, right? That's why we think that this is kind of for the new opportunity for us, not only for the brand new revenue stream for Contact Center, but also it might have further grow our phone business as well because like 1 year ago, right, where a few a lot of EMEA customers we really want to migrate our on-site contact center service.
Now given the digital transformation for almost every enterprise customers, we do see more and more customers that are very interested. That's why it's coming by. It's perfect for us to double down on the 5 business contact center goals.
Great. And then following up quickly on the education front, as schools get back into session, whether or not they're going to be in person or not is sort of up to debate here, but I guess what's the potential of monetizing more of that installed base, is it still going to be a relatively free solution? Or how has that strategy evolved? Thanks.
So Matt, before I answer to that question, as you know, our company values care. The number one thing is really about community, Right, for to support the K-twelve schools, I would say that's a no brainer for us to support that at a no cost, right? We feel very proud. We never thought about how to monetize our service for those technical schools, right. Now, they all go back to Right.
With that, we have more benefits, resources, right, to think about how to monetize other I give them some like free users. Last year, we were extremely busy to have the world we'll have the people stay connected. We even did not have a bandwidth to think about how to monetize monetize those figures, right? I mean, how to embrace the consumer, right? We never thought about that before.
Now it's very high, right? How to think about embracing the consumer strategy, how to monetize those free users is something very we are very excited. We do not want to monetize those K-twelve schools. It's our responsibility to help them as always.
Our next question is from Pat Walravens with JMP securities.
Great. Thank you. Hi, guys. I mean, I don't think there's ever been a company that has grown so fast and realistically pulled
a lot of demand forward,
right, because everyone needed to get their video conferencing solutions in place very quickly. And now as I look at 54% this quarter, Kelly, your guidance suggests 30%, 31% in Q3 and 15% in Q4. So all that is just a lead up for Eric. What is your top 1 or 2 priorities in the next 12 months as you go from this hyper growth to a much more reasonable growth period. If you could just sort of contrast those for us, I think that would be really helpful.
Sure, sure. So I would say, Patrick, that's a great question. First of all, you look at it prior to pandemic, look at our growth always focus on enterprise costs, right? With the 1st service video conferencing, we introduced the 2nd revenue stream, Zoom Phone, both of them are doing well how to introduce the 3rd one, a 4th one, how to double down on that. This is always our thought part, right?
I know if we do not realize this is a pandemic crisis, otherwise several years ago probably we should have planned a third of forced services beforehand. Now actually, now this is indeed our strategy, right? How to introduce more and more revenue stream, new services to support our enterprise customers, that's always top priority for us. Essentially, this is part of our overall pipeline strategy, right? I've decided that also there's a new opportunity ahead of us.
As I mentioned earlier, right, we never realized there's so many consumers, right, and who are so loyal to our the platform, right, the usage is still pretty healthy. How to embrace the consumer strategy is also something on top of our mindset as well, right? We never thought about it before. It's right time, I do those 2 things, enterprise platform and also consumer. Those 2 things will drive our future growth.
That's great. Thank you.
Thank you, Patrick.
Our next question is from Shelly Sarrafi with FBN Securities.
Yes. Thank you very much. So looking at your implied guide for Q4, it seems like you're guiding it to decel to around 12% or so, plus or minus, from 30% or so in Q4 in Q3 with a similar compare, I would argue. It seems like it will actually be down potentially sequentially from Q3. So can you elaborate on why that might be the case?
You talked about the online issues, how long do they last, for example? And if we go to like 10% to 12% growth in Q4, should we accelerate afterwards after the compares get easier? How should we think about next year?
Yes. So in terms of what you're seeing in Q4, it is continued uncertainty around headwinds in the we need to give FY 'twenty three guidance today, unfortunately. So we'll be prepared to do that when we get on the Q4 earnings call. And Of course, we'll have a lot more learnings at that point to share with you, but that is what exactly what continues to drive that in Q4.
Is there any reason why the online issues would be bigger in EMEA than in the Americas and Asia?
Well, that is like the pandemic question, right? Because it's really what we've seen is this varies depending by region and by segment, depending on where each of those countries or markets is in their pandemic lifecycle, And we've seen it ebb and flow over the last 18 months by market. And so it's We that's the challenge, even I think that all business we're having right now and thinking about the future with uncertainty so much uncertainty around the pandemic right now, it's just difficult to forecast exactly.
Yes. To add on to Vodaceli's side, look at our user base in EMEA, seasonality also is a factor, right, in particular in summertime, not to mention the COVID situation and the user there might have a little bit longer vacation, right? This seasonality for sure is a key factor And that's another big difference compared to our user base here.
Our next question is from Ryan Coats with Needham.
Hi, thanks for the question. Great to hear the progress in the enterprise clicking along there and sounds like some real strength in APAC. Wonder if you could share with us any additional color on particular market verticals or applications you're seeing that are kind of key to penetrating and getting big large Global 2000 type wins. Thank you.
Yes, Ryan, I would say, first of all, the top of the market is education and healthcare is pretty strong and also will bring us more opportunities when we expand into the international market like APAC. And also like those telco, telecom sales, right, those kind of a telco partnership will further help us for us to penetrate into each of those in terms of new opportunities, recently we've launched Zoom Apps and also like some of the Carden has rebuilt a new solution upon our platform like a class technologies, right? I think a lot of the new opportunities, right, we do not need to build it by ourselves, and those third party customers, they can leverage our either API or SDK or Zoom app to build all kinds of new solutions to focus on all those vertical markets or even the department as well, right, that's where the opportunities are coming from.
So you've seen some opportunities to upsell into
the CPaaS type applications in the enterprise?
Yes, both actually. Yes, because those 3rd party partners, we do our warehouse business also bring the Zoom to the installer base and also by establishing the charts, right, we also can upsell in more stock, right. Essentially, it's a very healthy channel, not only for their own business doing Verabell, but also as a greater channel for us.
The next question is from Citi Panagrahi with Mizuho.
Hey, guys. Thanks for taking my question. I just wanted to dig into the enterprise segment. Q1, Q2, those are 2 big renewal quarters, and now that's behind now. What sort of changes you are doing on your go to market strategy, mainly increasing quota and sales or any changes that you are doing for this normalized environment, and phone used to be one of the big cross sell opportunity how should we think about the phone as you get into more normalized renewal environment?
So we are absolutely continuing to invest in our sales capacity. We are focused on certain regions, especially where we see lots of opportunity like Asia Pac, we recently hired a new leader there and are really excited about the progress we're already seeing with his leadership. And then we are continuing to invest in marketing, so as we've moved post pandemic era a little bit in terms of not post pandemic, but sort of some what we saw from last year with the lift in brand awareness, we're continuing now to think about how do we invest more in specific product marketing around Zoom phones, around Zoom rooms as well as digital marketing campaigns. So helping the community drive additional leads for all of our teams on a global basis. And then also the channel continues to be a really important aspects of our go to market.
So the channel was responsible for approximately 27% of our Zoom phone sales in Q2. We added 6 additional master agents partners during Q2, so really excited about continuing to invest in the channel on a global basis.
Thanks, Terry.
Our next question is from Alex Zukin with Wolfe Research.
Hey, guys. Thanks for taking
my questions. So I think
I'm going to I'll probably touch on
a topic that's been mentioned here before, because I think a lot of people they are investing in the company at this point. They really are investing in the non online story of the company, right, the enterprise story, the large business. There's a lot of metrics, there's a lot of kind of pollution and noise in these metrics. How do we think about the growth of the important part of the business Investors, meaning the over 10 employee customer base, either from an incremental bookings perspective, from an incremental revenue perspective And when does the headwind or anchor on the business from the pandemic, from the once in a generation SMB buying pattern, when does that trough? And so when do we see a normalized kind of normalized growth rate for the company?
Yes. So thank you, Alex. First of all, we agree with you that you really we want everyone focused on the long term potential of the upmarket. As a reminder, in Q2, that segment of the business grew at twice the rate of the online business. So that gives you some indication of how those two segments are diverging a little bit.
And then as we look forward, I guess the best way to help you think about it is you want to look at the net dollar the implied net dollar expansion rate that we were talking about earlier, right, you could think about what's happening there is the net dollar expansion rate for the online segment is under 1, right? That gives you some idea of what's happening, again, how to think about those 2 different segments of our business. In terms of where is there a trough, I think that it's back to kind of trying to predict the pandemic, which is thing for obviously anybody in the world to do right now. And as much as we're excited about vaccines being more widely distributed, Unfortunately, as we see Delta continuing to grow in certain parts of the world, we have even in the last few weeks, like we're seeing certain pockets of strength. So I think that that's going to depend on really what we continue to see in terms of this credit variance around the world.
Got it. And I guess maybe for Eric, you mentioned the seasonality, the vacations in Europe. Is there a way Kind of get a sense for the delta, part of the plan about just EMEA SMB versus U. S. SMB, just so we can Get some sense of that magnitude change?
I think overall, I think our upper market are doing well, Especially, look at the North America business, right? In the area, I think a mass market, online, SMB, I think it's not as well last quarter seasonality, COVID situation for sure made things a little bit worse because they are longer vacation and so on and so forth. Here, look at our North American market, I think the upsell phone and also the Zoom rooms because every company, I think they started coming back to the office, the new Our comments are also doing very well. That's why I say even if a little bit of China on SMB, by and large, we do not see the big drop and because offset by the hybrid work opportunities, right. I think you look at APAC, APAC, we did not see that at all, Right.
In the last quarter, it's doing very well. I think overall, as you mentioned earlier, we got to go back To our enterprise, right, because the last year, I think the online business used to be just a marketing channel, right. However, not only the marketing channel, but also contribute a lot to our revenue from a percentage perspective. Now given that percentage is going to down, but on that in the long run, it's very healthy for our base, right? With that, we can focus on our core enterprise customer.
And plus, given that we've become a householder name, it will bring a new opportunity to monetize. Usually, the monetization for online low end user, just the online subscription. I would say that it may not be the sustainable strategy, right, for the online users monetization, we've got to have other ways, right, monetize this online, the that's why we are very excited about the future.
Our next question is from James Fish with Piper Sandler.
Hey, guys. Thanks for the question. On the win with Seagate as an example here, how often are you seeing if that phone is leading to a greater number of seats at existing customers or really how can we think about that potential uplift within just your installed base today of selling phone with meetings it creates a greater number of seats at current accounts, not just meeting seats, but overall employees that you can actually cell phone into. Is it a two times opportunity that we just don't have as many meeting seats because you can have more you can have less host than you do employees.
James, that's a great observation. I think you're so right. I think 1 year ago, we really did not see that, right? Normally, we buy more meeting licenses And is there probably a little bit of upsell for phone and also for the existing installer base, we upsell phone. For the brand new customers, Because the customer look at one platform for both video and voice, right?
They understand video and voice are converging into one platform. Plus, our phone business is very mature now, right? Every quarter doing very well. Customer like it is already. It's not like, oh, this is something brand new.
We do not want to take any risk is very mature, plus the integrated experience, both video and voice are doing very well. Essentially, from now on, I would say probably, I do not know, but I guess probably more and more customers, they are not going to view are going to deploy video for us and then deploy Very likely on device, we will deploy both. Given the dynamics of each business, sometimes probably they want to deploy more phone seats than the midline
Got it. Thanks.
Thank you, Jeff.
Next question is from Will Power with Baird.
Great. Thanks for taking the question. I guess, question probably for you, Kelly, as we think about that, the 10 plus employee cohort, kind of your upmarket segment, how do we think about, 1, customer growth from here? And 2, as you think about that net expansion, you've been above 130%. What's the sustainability of that, right?
Because you've got number of growth drivers that you've got at the Loblaw, the number is kind of working against you. How do we think about the outlook on that front?
Yes. In terms of net dollar expansion, we expect it to stay above 30, Certainly for Q3 and then in terms of Q4, we expect it to be in at least in that range, not it's a quarter out. We don't know exactly, but we're predicting it to be right in that same range still for Q4. And then in terms The customer growth, I think that what you're going to continue to see is ongoing growth driven by large deals. So the customer count may slow, but that you're going to continue to see growth driven by these big deals as we see opportunities to continue to cross sell with Zoom Phone.
As you heard, right, we beat our 2 largest deals record in the same day this quarter. So really seeing opportunities there. And then as people are planning to go back to the office, also opportunities for Zoom rooms and then think about Zoom events. So we're going to start to see opportunities for larger and larger, bigger customer wins. And I think the other thing to note, we talked about in the quarter, but I just want to make sure everybody understands Yes, we had a deal this quarter that now became our new largest sorry, our new largest customer.
So not our new customer, an existing customer, but now with their upsell, right, they became the largest customer. So we're continuing to see these really significant large wins, and that I Thanks, continue. Great. Thank you.
Our next question is from Matthew Niknam with Deutsche Bank.
Hey, thanks for taking the question. You talked a little bit about the more measured behavior from customers in terms of buying patterns. I'm just wondering, can talk a little bit about the competitive backdrop, whether you've seen peers maybe getting more aggressive, especially as larger enterprise customers really take their time to reevaluate the future of work post COVID. Thanks.
Eric, you want to talk about some kind of new?
Sure, sure. I think, Matt, you look at the trend, right, the future work, hybrid work, for sure, that would be the mainstream, right? And however, and because of embracing hybrid work, a lot of employees, right, students work from home or maybe work in the remote locations and not unlike and prior to pandemic crisis, right, Quite often, and you might have to grow a solution. This is good enough, right? And given employees now to support hybrid work, the best way to service will do very well, right?
All of it because you look at employees, they do not have IT support sitting next to them, right? And plus, you really worry about the productivity if you do not give the best tools. That's why in a good enough solution, we'll not do well. Every businesses, we would like to deploy the best of the service, but always give the employees a much better tools, right, to improve their productivity, to have employees because to support hybrid work is not that straightforward, right? And I'll give an example like a conference version.
We introduced the Somali gallery feature. Otherwise, customers do not dare to have a meeting. Some are sitting in the comp room, some are joining remotely. That experience it's not as good as this, the revenue on this, right? That's why I think the hybrid world, certainly we I have a Zoom, right?
Even some of sometimes our competitors, the minor leverage applies. I think the good news is the customer really want to have very reliable Swixit was quite helpful, very easy to use. I think that's the reason why I think Zoom is positioned much better than any of our competitors.
Thanks, Eric.
Thank you, Mike.
Our next question is from Bo Young Kim with Citi.
Hi. I'm going to start with Tyler Radke. Earlier in the Q and A, you shared some progress around the major master agent program and also had I did some really large international phone deals. So I wanted to hear about what you're seeing in terms of the productivity of the channel partners
and international markets relative to what you're
seeing from channel market relative to what you're seeing from channel partners in the U. S. And to what extent is that impacted by the nascent stage of the master agent
So I think we're seeing strength in our channel partners globally. So but as you say, it's a much newer program and a much smaller internationally, so excited to really this is one of the main focuses for our Channel team, which is expanding outside of the U. S, is focused for the rest of the year. In terms of productivity, I don't think that it really varies. I mean, we were really excited about the Telkomsel deal, which is one of our largest channel partner deals, ISE deals to date.
So that's Really exciting, but we've had significant wins in the U. S. As well. So we're not seeing dramatic differences in productivity on a global basis at this point.
Our next question is going to be from Matt Sottler with William Blair.
Yes. Hey, guys. Thanks for taking the question. I think just one from me. Obviously, as you guys have spoken to so far, the enterprise opportunity here is really kind of the what's really exciting and compelling going forward.
But given the commentary around finding other ways to monetize the base, whether that's consumer or otherwise, I would love to maybe get an update or whatever color you can provide on the level of premium usage that you're seeing today, right? And outside of the seasonality with education, just the level of premium usage on the platform, how that's changed over the past 4 or 5 quarters, Thoughts on the back half there? And then any commentary on what conversion you've seen there? Or you expect you could see if you decided to really try and monetize that?
Yes. Yes.
Go ahead, Akshay. You go ahead.
So we still see free users Yolanda is a large they've really grown over the last 18 months, and they're about 30% of our minutes usage today As compared to like 10% pre pandemic. So that gives you an idea of the number of we don't talk about the number of users, but that at least it gives you a relative understanding of how they grow over time. And like we always say, as Eric mentioned about our core value of care, we really care about all those free users, especially to keep people connected during these more difficult times. And there's always a hope that they continue to convert or that they have the opportunity to continue to expose more new users to the power of
Got it. Thank you.
Our next question is from Chaim Siegel with LSR Advisors.
Hi, Kelly and Alex. How are you?
Hey,
good to see you.
I had a couple of questions if you have time. But since obviously the focus is on enterprise, I just wanted to know how fast the sales force is growing and when efficiency for that sales force starts to kick in. I guess that's one. And also just related to that on operating expenses. So I'm not sure how long you expect flatter sequential growth, but on the operating expense, it seems like maybe it'll start we're faster than revenues.
And I'm just wondering with relation to focusing on getting the enterprise business going, how fast expenses will grow versus revenues?
Yes. So As we've been saying for the last several quarters, there are areas that we were not able to hire and invest As quickly as revenue grew last year, and so what we've been doing on the last couple of quarters is focusing on reaccelerating the investment, especially in the areas of R and D as well as Forticare and pets, and we are absolutely continuing to do that. We still are underinvested in R and D a little over 5% of revenue, and the long term target is 8% 10%, so we're continuing to hire as quickly as we can. And then similarly, in terms of quota carrying ahead, we're being very thoughtful about the segments and the regions in which we're hiring. But there remember, like stepping back from it, there is a huge we have a huge opportunity out there, and we want to continue to add quota carrying heads and sales capacity into our system we'll take advantage of that.
So as long as we continue to see opportunity for growth, we will continue investing in quota carrying heads. We are also, as I mentioned earlier, accelerating our spend in marketing as we were able to pull back a little bit on that last year, but we think now is the right time to continue reinvesting there. And then the two areas that we always look to be as efficient as we can are our G and A And COGS and G and A is kind of right in the range of where we would want it to be for the long term. Over time, we do expect COGS to decrease as we continue to move more and more of our services out of the public cloud into the data center, our own data centers. I mean, we're always going to have a hybrid But also eventually at some point, right, when K-twelve schools are more free to go back to campuses, we do expect to we will absolutely continue to support those students and schools as long as we think it's needed.
Is there a general timing of efficiency where you expect that to kick in for the enterprise for the salespeople in the enterprise? I know you've been growing it, and I know it takes time, I'm just wondering if there's like a timing where a big tranche is going to start really performing for you.
No, I mean, well, I just this is what I would say is we are continuing to hire quota carrying heads quickly, and we'll continue to do so. So that means there's a constant state of having ramping reps in the system, and since we have no plans to stop hiring quota carrying heads in the near future, I can't say when all of a sudden, they're going to necessarily be more efficient.
Thank you very much.
My next question is from Rishi Jaluria with RBC.
All right. Hey, Eric, Kelly, Tom, thanks so much for taking my questions. Good to see you all. I wanted to just ask about Zoom events. So I know initially when you've talked about the product, it was kind of pitched as a little bit of a monetization vector for the prosumer segment, right, helping fitness instructors, yoga instructors run class online.
But clearly, it seems like there's much grander The fact that you're going to run Zoomtopia on that, I think tells us there's maybe a bigger enterprise opportunity. And even as companies are looking at doing in person conferences, again, they all want to have a strong virtual and hybrid component to it. Can you maybe talk a little bit about what you see as a longer term vision with Zoom event, especially in the enterprise and maybe let's go on that? Thanks.
Yes, Rishi, that's a great question. So remember last year, last October, right, at Zoomtopia, we introduced the Zoom events. We started from on Zoom at that time, and we thought about how to have those and the people working from home still can get a I like to fit in this online classes, join all those classes. That's the reason why we started building the Zoom events. However, again, we have we always listen to our customers, in particular, our enterprise customers, right?
And they all told us, Hey, there's even more opportunities around the corporate events. The corporate public is They all told us, hey, we've added and needed that. We've added and needed that. We already have a revenue platform. We want to ask to standard that, right, how to expand in bigger, the annual user content like Zoomtopia.
That's why we sort of pivoted our strategy, right, And a double down of corporate word on Zoom, which is rebranded as Zoom Events, right, we do see a huge opportunity. I mean, side of that, the consumer word is not called Zoom events anymore. This is more like on Zoom website. We still are beginning to aggregate all those consumer driven events, right, like online fit into the class and so on and so forth. But for now, If you look at the short term opportunities, Zoom events will do well because many of our existing customer products may need a platform like that because the tasks are already built, right?
They do not want to go to any other platform. They are very patient with the wait. That's the reason why we shifted our strategy a little bit since last Zoom call. All right. Wonderful.
Thank you. Thank you.
Okay. Well, thank you to all of our analysts. That's all the time for questions that we have for today.
And that's
all for Tom.
Thank you, Tom.
Great. Thank you, everybody, and we hope to speak to you more in the rest of the quarter and see you at Zoomtopia. Anything else, Eric?
Thank you all for your time today. Hope you all will join next month's Zoomtopia, September 13 14. I really appreciate for your great support, as always. Thank you.
Bye, everybody. Thank you.
Thank you.