Q2 2021 Zoom Video Communications Inc Earnings Call
Hi.
In our customers and other stakeholders.
Spots.
We also made its exciting hardware announcement in the quarter for us if the launch of assume outerwear as a service with our first customers a variety of sufficient opportunities for cone and then it's usually a hardware on leading hardware manufacturer.
Yes.
This operating net doom and gloom and as Jim rooms, more accessible by minimizing fiction a runner hardware procurement.
Second in lieu of a hole.
The new innovative category of a server experience and hardware devices haagen ships to support remove the working use cases.
We launched into the school, but with our partner dipping in July and in this month, we announced expansion.
Amazon Facebook and Google devices.
We also achieved significant accomplishment for new iPhone.
In mid June Lumason was also realize onto the fed advantage crude when.
In neighboring federal agencies to consolidate their cost billing, let's see telephony systems onto our unified modern cloud solutions.
This month, we expanded the availability of consumer phone service to quantify five additional countries and territories.
Human now for a wide local telephone service and domestic accordingly, you more than 40 countries and territories.
On a final note we welcome our new Cecil Jets, Indeed, almost SVP of a security operations added sales force.
Our new General Counsel, Jimmy Choo, former PDP and a general counsel added Palo Alto networks, we're very excited to have is up.
Now, let's talk about some exciting wins in the quarter.
Let me start with a couple of new customers that rather than some of the largest companies in their industry.
First.
Well through West hub, Exxon Mobil, one of the largest.
Publicly traded in the National energy companies, so the zoom feminine.
Exxon Mobil develops and applies next generation technologies to help simply and responsibly needed a worth who need for energy and chemical products.
They didn't they use their skills and capabilities to ramp up production to make a magical grid remarks.
Two and hand Sanitizers.
We are going to pull that Exxon Mobil chosen to do as a unified communication platform.
That's a mobile wanted a solution.
That or would it enables them to collaborate reliably and securities with our teams customers and partners around the world.
That's a mobile employees are now using zoom video communication across their global business.
Second it.
It could easily blizzard.
A member of the Fortune 500 has employed is due to modernize and the consolidated onto a single communication platform across their business units and getting franchisees.
And they leading interactive entertainment company connecting and engaging the work ethic entertainment as divisions committing to a full inquires, who are up and zoo meeting and is doomed routes to increase their mix up legacy video conferencing upward.
Yes.
Our ability to expand existing customers also helped drive our results this quarter.
Well after the highlights this quarter was the expansion within service now who hadnt being a newman customer since 2018.
Using new meeting or 11, thousands global employees.
Since the global pandemic.
So to now employs working from home hadn't relied heavily on zooms easy to use interface to see productivities and connected with our customers.
At the Blue Glatopa has become a call piece of service now technology ecosystem this past quarter.
Company chose to replace it's a legacy harbor PBX testing, which is doing.
Across their organizations.
Well the elevating their teams work anywhere experience within 30 minutes, well Cox communications and their properties.
Thank you Exxon Mobil Activision Blizzard.
So now and all our wonderful customers for cotton do.
I love it.
All employees love. Thank you.
In summary, we continue to scale and expand our business to meet the needs of our customers and the global community.
I'm very proud of our achievements and affect our more than three height. So they fall hindmost employees for another exceptional quarter.
Let me remain focused on delivering happiness, while the customers.
And that community.
With that lending intense things over to Pat.
Thank you, Eric and Hello, everyone.
You can't quite remarkable quarter for them as they continue to rapidly grow an in depth in our business needs and demands of our customers and community.
Let me start by reviewing our financial results for Q2 that discuss our outlook for Q3, an increase view of our full year EPS by 21.
Total revenue grew 355% year over year to $664 million in detail.
It's topline results significantly exceeded the high end of our guidance range at $500 million as demand remained at heightened levels combined with lower than expected churn and exceptional sales execution.
For the quarter the year over year growth in revenue was primarily due to subscription provides new customers, which accounted for approximately 81% at the increase.
Our prescription provides existing customers accounted for approximately 19% and being green.
This demand with broad based across industry verticals geographies and customer cohort.
Let's take a look at the key customer metric for Q2.
We continue to see expansion in the up market as we ended Q2 at 988 customers generating more than $100000 in trailing 12 months revenue up 112% year over year.
This increase at 219 customers over Q1, the highest number of adds an importer.
We exited the quarter with a total of approximately 370000 customers with more than 10 employing.
We added approximately 105000 to be customers in Q2.
Second highest number of ads in any quarter.
Year over year, we added approximately 304000, new customers with more than 10 employees for 458% growth.
We have continued to benefit from significant growth in our customer segment with 10 or fewer employees as small businesses and individuals adopted and maintain his new licenses or various uses during the pandemic.
In Q2 customers with 10 or fewer employees represented 36% revenue up from 30% in Q1 and 20% in Q4 of last year.
The increase in customers with 10 or fewer employees continue to shift our billing Nick as except for is generally pay monthly rather than annually as you know to enterprise customer.
This shift is an important point for our outlook, which I will discuss in just a moment.
Our net dollar expansion for customers with more than 10 employees with over 130% for the ninth consecutive quarter as existing customers continue to support and tries to beat our video communication platform of choice.
Open ethic and international market had strong growth during the quarter Americas grew at a rate at 288% year over year.
Our combined APAC and EMEA revenue accelerated to 629% year over year and represented approximately 31% of revenue.
We will continue to invest in international expansion to capitalize on our brand awareness and increased global opportunity.
Now turning to profitability.
The increase in demand and strong execution drove net income profitability 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 and acquisition related expenses.
Non-GAAP gross margin in the second quarter was 72.3% compared to 82.2 in Q2 last year and 69.4 last quarter.
The incremental improvement from Q1 reflects our strategy to increase our co located data center capacity, while leveraging the public cloud as needed.
We expect gross margin for the rest of the year to be consistent with Q2.
However, actual results may vary as gross margin is contingent upon the percentage of free users and utilization of public cloud during the pandemic.
R&D expense in Q2 was approximately $29 million up 128% year over year.
As a percentage of total revenue R&D was approximately 4%, which is lower than Q2 last year, mainly due to the strong topline growth.
And that's why 21, we will continue to invest in R&D to drive innovation across all aspects of our platform.
We also plan to diversify our engineering talent as reflected by our expansion in the U.S. and India.
Sales and marketing expense for Q2 was $123 million.
This reflects an increase of 78% or $54 million over last year with investments to drive future growth.
As a percentage of total revenue sales and marketing with approximately 19% a decrease in Q2 last year due mainly to strong topline growth and marketing efficiencies from our increased global awareness.
Overall, we plan to add sales capacity quickly over the next several quarters.
As Swift wrapping up our sales organization to further capitalize on market opportunity is a priority.
DNA expense in Q2 was $51 million up 189% on a year over year basis due to higher accrual for telco taxes correlated to higher billing professional services and additional hiring to meet the functions on a public company of the scale.
As a percentage of total revenue Gina expenses, approximately 8% a decrease in Q2 last year as we gain leverage on our investments with a rapid growth in revenue.
The substantial revenue upside in the quarter carried over to the bottom line with non-GAAP operating income of $277 million are exceeding our guidance translating to a 41.7 non-GAAP operating margin for the second quarter.
This compares to Q2 last year as result of $21 million and 14.2% margin.
The significant margin expansion year over year, if you get a steep increase in revenue in Q2, which outpaced the rate of investment even as we added over 500 employees in Q2, a 20% increase in last quarter, and a 53% growth year over year.
Non-GAAP earnings per share in Q2 with 92 cents on approximately 297 million of non cap weighted average shares outstanding and adjusted for Undistributed earnings.
This result is 46 cents higher than the high end of our guidance and 84 cents higher than Q2 of last year.
Turning to the balance sheet.
Deferred revenue at the ended the quarter with $743 million up 309% year over year.
Looking at bolt are billed and Unbilled contract, our archeo totaled approximately $1.4 billion up 209% from $458 million year over year.
The increase in Archeo is consistent with the strong demand and execution in the quarter.
We expect to recognize approximately 72% or $1 billion or the total RPL as revenue over the next 12 months as compared to 62% or $285 million in Q2 last year.
This indicates a shifts in our renewal seasonality, which has historically weighted towards Q2 in Q4 and has now shifted to Q1 due to the strength of last quarter's performance.
As a reminder, we do not focused on calculated billings as a metric for our business.
We had if we had a diverse business it spans from enterprise to individual with a changing mix of our business annual billing terms and the growing level of monthly billing terms that calculation have become less meaningful, especially now that we have a full quarter of monthly billing, making a bigger part of our revenue.
We ended Q2 with approximately $1.5 billion in cash cash equivalents in marketable securities excluding restricted cash.
Similar to Q1, we had excel.
Okay.
Using similar to Q1, we had exceptional operating cash flow in Q2, a $401 million up from $31 million in Q2 last year.
Free cash flow with $373 million up from $17 million in Q2 last year.
The increase is attributable to strong collections from the large increase in topline growth and higher percentage of lumpy contracts throughout the quarter.
For the second half of the fiscal year, we expect to increased capital expenditures for additional datacenter infrastructure.
As a reminder, we will see the semi annual cadence of net cash inflows from SPP purchases to occur in Q3.
Now turning to guidance.
I'm pleased to raise our outlook for F. Why 21 for both revenue and non-GAAP profitability.
Although we remain optimistic on demand outlook. Please note that the impact and extent at the colder 19 pricing and its associated economic concerns remain largely unknown.
Our higher outlook for F. Why 21 is based on our view of the current business environment.
For the third quarter, we expect revenue in the range of $685 million to $690 million.
We expect non-GAAP operating income to be in the range, a $225 million to $230 million.
Our outlook for non-GAAP earnings per share is 70 374 cents based on approximately 300 million shares outstanding.
Before getting you to full year outlook, let me provide some context on our assumption.
Well better than expected churn with one of the driver to our Q2 outperformance we did experience in a significantly higher level of overall turned in Q2 as compared to historical rate.
As customers with 10 or fewer employees have increased to 36% of our revenue we are assuming a higher rate of churn due to this mix shift.
From an expense perspective, we continue to focus on investing for growth targeting investments that are appropriate for our market opportunity in the size of the business that we have become.
Looking ahead, we expect operating margins to decrease from the peak in Q2 over the balance of this year as our hiring and spending catch up with a much greater scale of our business.
It is prudent to expect margins to normalize to lower levels over the next several quarters.
For the full year of F. why 21, we expect revenues to be in the range at $2.37 billion to $2.39 billion, which would be approximately 281% to 284% year over year growth.
This implies that Q3 in Q4 revenue will be only modestly higher than Q2, indicating a decline in quarter over quarter growth.
For the full year of F. like 21, non-GAAP operating income is expected to be in the range of $730 million to $750 million.
We expect to delivered non-GAAP earnings per share at $2 in 40 cents $2.47 for the full year at why 21 based on approximately 300 million shares outstanding.
In closing, we executed well in the first half of our fiscal year with our commitment to delivering customer happiness. We believe we will grow over $2 billion in total revenue this fiscal year, which would be a remarkable milestone considering our guidance was below 1 billion in revenue at the start of this fiscal year.
We are proud at Howard team continued to perform in support of our customers and global community. Thank each of the tires in key.
Before we need to accumulate session, let me turn it back to Eric.
Hi, Thank you Kelly.
I Wonder why did you all to all of which will zuma pulp yet, but all the tubo forties and his teams.
So many features like we do future, we hope to see you all here and consumer Topia.
Now let me just came back to Tom Tom.
Thank you Eric with that let's open it up for questions. If you have not enabled your video. Please do so now for the interactive portion of this meeting.
I will ask everyone to try to keep themselves to one question and if we have time to Dan what we'll do some follow ups, but please turn to keep it to one question and Matt. Please queue up the first question.
First question is from Alex Zukin with RBC.
Thank you, thanks, Matt and Eric first I want to say, thank you from Primelending analyst community and as a parent as a as a husband a you know you've made you made of substance of difference in our lives.
So I guess the question I get most frequently Eric is your most people are now staring at their assumed screens probably more than than watching many kind of content globally. So outside of you're starting to show commercials and between your relevant zoom calls talk about the biggest opportunity for continued bookings growth whether its zoom.
Loans opening up the eyes, you're monetizing consumers filters that you just showed but can you tell us.
The more you.
The better you do this year the harder it is for us to know and understand what's the durable growth rate. How do you comp. This amazing spectacular performance. So I'll stop there I could I could go on for a bit.
Yeah, Alex Footfall, a suite of fruit suited for they'll continue to support for many years I think you will see wire loop slug of their sole money opportunity here and is there all tens of use cases by my kids are often who on the telemedicine had a health I think the suited to find out all the pull apart.
With all the people we connected on mix will have a service or was up and appreciative piece on the customer feedback and its own features and make sure where you have multiple meet you you do not have Missy Petite right I think that's our apart. So we would allow you to maybe give for the future in Oklahoma.
For the monetize again, that's and all the other copart, regardless of laser focused on Wednesday, how to fully meet the capacity levels of connected.
Yes. It is unique and then a decline.
First and then maybe later.
Squeeze one in four for Kelly tell you talked about the differences in churn that you're experiencing from the new customer cohorts that you onboarded through the pandemic and Youve. We've talked previously about what your historical churn looked like for monthly customers and and we know I think a little bit about how it looks and guidance before can you level.
That said at a high level what was the what did you experience with that for work versus where it's been historically and at a high level. What are you assuming in your guidance for that churn for that monthly cohort of new users.
So if you remember are going all the way back to the S. One we talked about that the monthly customers turn on average about 4% per month monthly rate is about 4% and we did see an increase against that in Q2, and we have modeled at that same level going forward as.
We.
With all the uncertainty with how long is pandemic will last and what other potential economic uncertainty. There is we model that same rate going forward.
Got it thank you.
Got it.
Okay.
Your next question is from meta Marshall with Morgan Stanley.
Okay great.
Thanks, and congratulations just wanted to get a sense of where are you think you are kind of any names or a percentage wise on working with organizations that may have kind of adopted you in a department or adopted due in part you know as having multiple services displacing those solutions are kind of having a abe.
For full organization discussion as well as having a follow up discussion as well attacking on phone or rooms are webinars type services and you know do you have the sales teams in places can start having those conversations on broader organization that deployment.
And if you want to ticket.
Sure. So we continue to see growth in the period from bold new customers as well as existing customers and tremendous opportunity with webinars, especially as well as do phone, we actually sign our largest assume phone deal to date in Q2, so exciting to see that continues.
Momentum. We also saw customers that were doubling one of them that quadrupled their existing deployment. So.
We're still in early stages and when we look at penetration like we look at end of global 2000, like there's a small percentage that had a significant and had a significant spend with us so theres tremendous opportunity still had anita.
Yeah, I'm sorry, you went back on you.
Oh, sorry, I'm, just whether you have the kinda sales organization in place the kind of have that gather or Gothenburg compensation. So we as I said earlier, we are hiring very quickly to keep up with all of the demand that potential. The team. Thank you to our amazing him team, which are really working around the clock to keep.
But the man today in sport and serve our customers and the community, but we are hiring absolutely. This is one of the biggest priorities for the rest of this year.
Great Thanks and congrats.
Our next question is from Nikolay Beliov with Bank of America.
Hi, Thanks for taking my question just wanted to continue on the that the topic from the last question anyway, and Kenny as the business gross it's unprecedented tonight's can you help us understand what's happening and company your customer support organization in sales organization, you ERP system I'd said system onboard thing.
Like type or hyper growth scenario. So many people and then maybe putting pressure on the systems and also culturally what's happening inside the organization.
Yeah, that's sort of question, so private pandemic classes and we maintained a steady gross and make sure I'll, let you know 16% for future everything.
Well I know all over again disciplined Emma crises I've seen a business goes it's just.
The good news on the way ahead, we kind of way sort of the company culture. Nobody complaint. We all look at a barrier hall look at other any of the whole economical for fees or a per se I know so we've had a loss of employees, who double down almost all the resources you cost them a success momentum achieved I didn't to pull that help because there's so many new used.
This is new customers well, that's why we know we hired on also employees. All my hand, we also wanted to leverage this opportunity I could send some olive green into next level in chemical privacy security and internal purpose Sunesys case, I think again, you know well very committed like every day what book ASU Hawk, you know what do you.
And when you issues like but you know given the free the calls all of them Peter subscribers. When they try to tend to service, we would like to respond common Amanda I'm not seeing well you know well look like but well very committed to resolve don't Anwar screw should you know to mix looks would it be able to happening so all the U.S.
Yes.
And Eric would use cases, new use cases, I'm, most excited about them and surprised to them off that's it for me. Thank.
Thank God, if I talk about music is probably attendance because the whole five minutes I mean, I give you several like up you'll see the problem next.
Using zoo or the whats you quoted tour.
During the lobster fan base.
I have a close or 50% of the newly launched the problem is you seem to be overdue and open the CSP no of course, the law firm in Florida, I still have well, what's your swap matures.
And I'd also like a source of course, you know community services, which is up you know largest oh.
On the mid two houses so as far doesn't California also use due to also mid to help you in the Middle House is become a Murphy dipal allows those lessons newsy is like that so every day I feel very very excited to see so many new use cases, not a commission like we just an off the positives in the United States when pennies.
It is my Newco all for the what's your experience is very cool.
Thanks, so much and Q.
Our next question is from time to Joey with Guggenheim.
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Yeah, we have you have your test.
[laughter] because everyone is trying to sue.
[laughter] legacy for Legacytexas numbers, but you know, there's I'm going to the offerings radio asphalt not just service now they're based.
All their permission to Smith was one product.
Yeah. So first of all sort of is now you know heads as being a customer since who's on May 2018, maybe boys zoo sort of increase although you know media Congress lever comps and service with resume really Congress and although the positive here we're already.
It is a good it's off we also announced a partnership when they look at the entire you'll see it slid to the also deployed legacy very costly very complex on class keeping that is why not a consorted who's going to one says to me is a very consistent kratos products from an expense.
They did back in architecture, and the infamous off while the total costs a much lower you got a split off much better. So that's why they decided to replace their legacy PBX systems with one system Thunder lies on the unified communication solution.
That's very helpful. Just one follow up going the other thing you mentioned that you find your largest phone deals. This quarter was then also sold to existing video customer or was that a new customer sign up with resume phone.
Oh no. It's we it was already of meeting customer as our video customer as well.
Thank you.
Thank you.
Our next question is from Sterling Auty with JP Morgan.
Yeah. Thanks, Hi, guys. So not within 90 days feature freezes complete Eric I'm kind of curious Where's the focus of R&D going forward and you mentioned diversifying into India in the U.S. How are you structurally changing your R&D effort is that in relation to any type of geopolitical crusher.
Yeah of course school and we accomplished a lot over the you know Pos in 90 days I, but I can tell you.
We take privacy and security is tremendously I'm not saying we are getting you give any of that I will see the majority is just a soft slight revenue doubled down on privacy and security I'm inside of that well have a big R&D team and other sports and in order to engineer leadership team here you. So I'll say north a at all.
So keep you look at a lot of a new used cases, not only for into pie, but also you know the case I depreciating can't go schools and the head of matter because there's so many use cases I think this R&D team I have nothing to is we can really I don't know that most of US again, but it will I went to an a mall.
The tenants you know timely manner and that's why it you know we opened up to army ultimately it's been expand in Pittsburgh I know so we were the lack of it we love. These onshore also from the R&D model looks like India also open up a big albeit we had all of you know president of a quota and engineered wood, China right Rick.
The lead advice, we that we really want to higher engineers and not only here, but also other side also you. This included in the years like because of the sole money. You know features in a cost and that's why I wondering why did you can so I was zuma, Colombia, and <unk>, which is our new user conference with a lot.
He served as you a bird good production on the map.
Thank you.
In Q.
The next question is from rich Valera with Needham.
Thank you let me add my congratulations on another incredible quarter came onto the question is on pipeline. Kelly you were sort of on the record, saying that you entered Q2 with a bigger pipeline than you had entering Q1.
Wondering if you could give any similar color on how you entered Q3 from a pipeline perspective and is there.
Any change in the composition of that pipeline in terms of product.
Or geography.
Oh, so certainly coming into the quarter. Our pipeline is still strong and we're continuing demand that is based on our guidance you can see that the the demand for the year with front end loaded and we saw that per unit performance in Q1, the benefit which we saw in Q2 and that's why the guidance is highlighted in respect.
Revenue for the back half of the year to be effectively consistent with Q2.
Just in terms of the contribution of phone in the pipeline has that changed much any color at all on how you're thinking about the magnitude of phone in the balance of the year.
No. We it's performing as we as we expected and as I said, we're really excited to see our largest deal to date and ongoing up sell so really still can think strong demand for do you see a lot of potential there for the future.
Got it thank you.
Yeah.
Our next question is from Tom Roderick with Stifel.
Great. Thank you. Thank you guys great job I'm on another outstanding quarter.
Eric This is kind of kind of going in conjunction with the question on June phone and thinking about a unified communications platform not just the communications tool for video.
I'd love to hear about some strategic conversations you're having in the context of digital transformation and what else. These customers want you to do and [laughter] in there in conjunction with.
How are your customers and thinking about your next May plan and.
That would be great. Thanks.
Yeah. That's a good question. So I wouldn't say this amended the crisis you know completed it.
Got a rig the ever into pipe everything is possible digital transformation or do you want to support employees no no matter, where the or like what are the traditional from the on premise. It seems really is not a could get about anymore. That's why you put all the club is just so for a service companies doing wearable no reason.
With respect to Doom and gloom I think overall, that's a part of I'll walk you know, we do Congress and often we typically we do is a new was the new reason for any business put because two separate assisted alternative put experience how does that kind of side of that when customers Hootsuite deployed.
On quite a legacy today actually some will they migrate to claw, we want to add a sense, who has a big architecture. The was consolidated into when 60. That's the reason why we know we've positioned the whereby when it's on all the S&P Acinus already before maybe some all the club in cities accessing the also wanted to consulting.
It was 52 for the city to buy the experience. So overall, we give me the most things that's two separate in market. If this is the one thing we do commenting on a cloud, but he did I can books.
When service. So that's up you know a our story when we possibly can some of the cost movie like that.
And Kelly a quick one for you in terms of that the conversation around.
Security, but as you agreed to.
Enable end to end security for not just paying customers, but for all customers, which was recently pronouncements I think.
What is that due to the cost structure is that meaningful we've noticed that can you just talk about that but but yeah. I know you won't see a meaningful impact we certainly have that investing in both our security team. We're thrilled to have taken may have joined us and you'll continue my problem going into [laughter], even going back on the margin.
Got it thank you for great job present expenses.
Our next question is from Heather Bellini with Goldman Sachs, She's joining by phone.
And Heather Press star nine to on mute.
Starts excuse me great yeah.
Yep, great. Thank you. Thank you so much and congratulations.
Yes, Alex started out by saying, Eric and team just thank you for keeping everybody connected where we're so appreciative that and a school starting today I'm them. So all my kids well, we're we're app users today for the for the question I had was really just a little bit Jim phone and I know Kelly just answered a handful of questions but.
Yeah, Eric or Kelly I'm, just wondering if you can share with us how fast do you think you can see the is you know kind of legacy phone systems like how fast do you think that's work from home benefit can drive displacement of legacy PBX says, which we've all been waiting for for quite a long.
Time, and I know this is only sold to new customers that you have so many of berries or to existing customers, but you have so many of those at this point and is there any you know kind of typical competition sphere that you're seeing as as you're talking to customers and they're making the migration. Thank you so much.
Hello, Sir that's as good a question. So I think acquired with this platinum acquired since you've had an enterprise.
Where a five facilities all the customers they still deployed with traditional on premise legacy costs caused the they know PBX systems.
I think you know this time in crisis, I think it's sort of like a week couple of coal.
We bought a good thing about Oh, two and a full softening Bruce digital transformation has decided that in a cloud based PBX for for example, the seem to be called looking that I'm not saying that it's all part you know quite as competitors go videoconferencing for four four is on a lot of India was causing a reduction I.
By the ceiling high I think there's a lot of all the C. Since in the northern when you're supposed to get but also a lot of all the system. The also you know look at it a cloud business solution I've seen with lips, a quite it's just the accelerated data migration from the traditional PBX and as of the club into the system and also the zoom is well positioned well go.
Most of them at least not wanting to all I'm I'm going to the Clos are they also want to look at a new user experience no like resuming solution because it was the 150 I think the you know nektar two clubs 80 miles I wouldn't see you will see a little bit higher I've said a services reach for India was ultimately migrate to you.
Unified collaboration and communication solution as of June.
Let's all flowing through very much.
Yeah typically they influence over competition my student traditional legacy is it safe and some other club is the PBX for those against doing much better position, but we'll have one unified solution.
Andrew has.
Thanks again.
Our next question is from Willpower with Robert W. Baird.
Great. Thank you I would ask a question on the rest of World strength, you saw a surgeon activity. There usage revenue, obviously grew significantly as a percentage of the total what are the biggest speak to you know how broad based that was there any particular regions or countries that stood out I know you talked a bit about India.
And how do we think they're progressing from here do you expect that to continue to grow as a percent of revenue what might mean for the margin impacts of the business today.
Yes so.
Yes, you don't have there yeah. So it looks at it and I will free user or paid on a suspicious why if you've come almost everywhere whatever you look at a number of Ah, which serves you imply website you know the public companies like for so you know and you have to August number one and India and number two different number three candidates.
Number four number five I think he knows you. There's almost full you know every country, but it's hard to you to do because we're using the free and April for them and it's not enough he would like to prepaid and the thumb at the big customers also try a webinar series and also the indeed wide customer might apply the food service I think all debt.
The growth because of though the brand awareness I seem to really put off so for now, but just say no matter where did you have this coming fall we were the lack of take a step back and see what do we can do differently with some of them better you must have a hyper local datacenter like we're just now a data center in Singapore and also though we doubled our India presidents and.
Well done how the Q you know to Africa. The girls from International Friendship now can you sort of feel free to come.
No. That's what I was just going to say that strengthen the growth outside the world was really consistent between EMEA and APAC. So we're very pleased with that and overall that the market. The pricing is adjusted for the markets. So you shouldn't see significant impact on the long term margin based on the structure that we haven't played for our pricing today.
Great. Thank you.
Our next question is from Rishi Jaluria with D.A. Davidson.
Hey, everyone. Thank you so much for taking my question and I'll Echo truly outstanding quarter anything beyond with any of us kind of imagine I wanted to follow up a little bit earlier question, which is some of the moves in China right I mean stop free trials recently stopped direct sales there.
Same time, expanding R&D efforts in India and in the U.S. as well just what's kind of the impetus for this move is just see a signal of kind of discussing a little bit away from China. My response to geopolitical pressure and then number Kelly what sort of impact would this have them from a a model perspective.
Topline and margins. Thank you.
Yeah. So we don't have any any current plans to move our engineering talent out of China, we're focusing on diversifying it by adding talent in the U.S. and India. That's really the goal and our leadership team is currently based in San Jose So there's no change and that overall structure.
For the long term if there were something were to change there would be no immediate impact on our service or our ability to provide services to our customers.
Im sorry in the short term in the near term over the long term there could be a potential impact on the margins as we would need to replace those talent somewhere else potentially.
It's just a I don't know quite decided when revenue wise, it's very small no impact you know curiously you look at it almost every country. We have all kinds of accretion we have a direct the serious about channel where they live in China. The overall revenue where small the all that's supposed to sufficient you're gonna have a special items go to sell to better before so we would like to simplify.
Our go to market no costs actually does support and as soon as the Susan yet a lot of resources why why not a simplified that justice will leverage our sort of parties partners with the why the Liberty No solution I think because that's where it's as simple as a sort of lymphoma outside.
Wonderful thank you telling her.
Thank you.
Our next question is from Phil Winslow with Wells Fargo.
Hey, Thanks for taking my question my congrats on another just phenomenal quarter, what I'm talking about converting monthly users to annual users Kelly that was one of things you're talking about.
Velazco, whatever you can give us an update on sort of what you saw from that call. The Q1 cohort. During Q2 entered your ability to convert those and how should we think about any sort of the.
For the promotions deals are initiative changing going forward.
Yeah of course, so our marketing team is really focused on this running I'm campaigns and reaching out to the customers too I'm, providing the opportunity to convert from monthly to annual and we were happy with the success that we saw in Q2 and are continuing to focus on this and we've also made him on chain.
Just to our online by fund to make it easier for the customers as well to.
Self serve and upgrade if they if they're selling fine. So we expect to see that they continue to be a topic for us as we move through Q3.
Got it thanks.
Our next question is from Shebly Seyrafi with FBN Securities, Yes, Thank you very much.
Question for Kelly, you regarding revenues to be up around 3% sequentially.
But if I assume that your customer count is at least flattish Q to Q your average customer counts going to be up around 16% Q to Q, which implies that your ARPU is implicitly guys be down 13% Q to Q. So my question is I've never seen a double digit decline.
Thank you.
And your ARPU before what would drive that.
Well as we're sitting here right now what looking forward I think it's more around the uncertainty around the churn and what's going to happen with the overall economy, that's really be uncertainty there and why we're guiding flat for Q3, two Q2 that Q3 Q4 revenue we plan.
Got it modestly up from Q2, and you know we've had a significant increase in our mass market customers, where they're just remains limited visibility in terms of the long term contribution for those customers. So I don't think that we necessarily expect that dramatic increase in ARPU that you're pointing out it's more around the uncertainty in try and why that need for the topline growth.
Okay. Thank you.
Our next question is from Brad Zelnick with credit Suisse.
Great. Thank you so much and I Echo my congratulations and gratitude all around and it's nice to see everybody my questions for Eric Eric from a product perspective, how might zoom in the future be able to go deeper into the context in which communications is happening I'm thinking about human behavior or human.
Intense for example to help make the experience even more valuable.
Yeah. That's a great question. That's why please join our human Colombia I think first of all you also why no zoom is notably accumulation true ups can you go deep like cause our mission is to develop a better service, but all that'd be the carbon service, even better than it is sufficient.
No OLED a are you know functionality you know like an auto we have you know not an immediate transcription, but also hub ended eyes that that's how many manner I, let's see if you choose a topic like Eagle Creek Commander, Hey, Chris will not likely to be some of these detecting or something like the all those features on the plus you know look at it.
In the longer life.
I'm going to transmission real time and also in the how to.
She has remotely a lot of who features like is that another Pos you look out of the you know about units logo review and the perspective like public at some of the phone features like illegal future and how to make a lot less stream. You gave you lever a are I think a lot of a technologies like noncommissioned Fiveg and then you look.
Future I think the loopnet at a future of out of those could technologies and surely mixed up we didn't convert seems pretty much there.
Thank you so much like we saw outside at does impossible I wouldn't miss it.
Thank you.
Our next question is from Ryan can Swiss Rosenblatt Securities.
Great. Thanks for the questions with regards to the.
Sales and marketing investment came in a little light there and UBS haven't really strong customer pull for the product or is it your about your go to market motion Hi, My change your sales strategy relative to your further this success today Jim.
Looking at reseller channels or other technology platform partners to take you to market in the enterprise. Thank you.
[laughter].
So the decline in sales and marketing was was partly due to just a strong topline performance as well as efficiencies that we're seeing in marketing when we expect that as a percentage of ran in sales and marketing to increase through the back half of the year, It's a really focused on continuing to higher globally.
We also we did you remember we announced the Master agent program for the phone in Q2, and I really excited about that program and expect it to go country. We continue to contribute more significantly and as we move through the year and on the meeting side continuing our you are mostly direct model, which has been very sick.
For us today.
Got it.
Look briefly at all what are kind of five you took out a marketing efficiency you look at other market. A please go to have a more than 700 and the sort of part of the kitchen well that's another way off like a promote I'm a blend awareness by modem all integration so that makes a hell of a marketing efficiency.
Great. Thank you.
Thank you.
Next question is from salons Siri with William Blair.
Great. Thanks for taking my questions and then congrats.
Yes, I wanted to touch on something a little more probably high level and strategic I'm always they ask you in the past about the convergence and where the slack in collaboration going into let let's turn is a little bit differently, you Wanna wholesome Tobia and this whole event planning space is a huge market and it feels like we an obvious fit for you and you have partners there, but you know the natural extend.
None of this intervention and meeting seems to make a lot a sense. How do you think mother market and then do you think about sort of maybe using the stock in the way to buy but you could also build I mean, he's got to to R&D coming up you've got a lot points between 40, and 32 spend R&D and not all that's going to go to support existing platforms or just some sent them event space I think about it is that a bill.
There's been decision or partner decision. Thank you.
The first part time you have a good question. So you'll have a with all the services like it looks like you you'll have some a good idea I'd say maybe off the call I'm not going to could ever you resolve or put it managers I think that youre right.
Look I think.
You got all those in pulp yet, but not a when it would have a a webinar, but also we need to look at an entire you. All have you been management experience like it's not a when it's just a read on par with three event and the planning and on the marketing and promotion and marketing accounting I material. You know, obviously, we'll know a lot.
Well no I think of the accounting life I think I haven't decided that I think a we believe this no of service as I've said hitting about well have a full that he spent a weapon to reach have inside of that I think the into my soapbox it'll be buda that if ever seen by myself, albeit hardener maybe.
You know acquired somebody I think they slowly propel but its physically why youre. So why not it got to go to be our focus all the park is little high schools like <unk>.
Thank you. Thank you.
Our next question is from Walter Pritchard with Citi.
Hi, Thanks, I'm curious this quarter just as it related to the a really strong new customer ads and a rep. Maybe the came from that channels. How many are you seen an uptick in customers that are coming in.
Through sort of displacements that had maybe not a older generation solution, but had tried something in the last 36 months and and were unhappy with it and switched over.
Well headed even though they do we saw as much of that I mean it definitely.
Customers have been using something I think that what has happened over the last four to five nights and people have realized that just listen they had in place just wasn't up for this to reach out to the strength of what it needed to be in that pandemic and so we continue to see amazing brand who over from some other competitors as they're really looking for.
For something to ensure that they can keep their employees really effectively.
Okay, well keeping them they as well and then of course, yeah. We're super excited about some of the school district that we've seen sign up you know we have the top to school districts in the U.S. as our customers today, so that really highlight the scalability of the platform and then wanting to ensure they have a really reliable solution as they went back to school.
And then what do you think you give phone customer count any any horizon on on that.
That's one of the thing for considering all of that we'll talk about we said that for you found will get milestone update well look at it adds himself he and see if that makes sense a lot that they we gave was actually at the anniversary date and didn't sound. So we might wait till then.
Okay. Thank you.
Thank you.
Our next question is from Matthew Van Fleet with BT AG.
Hi, guys. Thanks for thanks for taking my question a great quarter. There you talked a little bit about channel partners I'm still remains a fairly low portion of their overall sales, but curious no. What the uptake is in total but partners registering as part of the program or is it something that your broker.
Actively doing or is just the demand for the products sort of pulling them in and then on sort of related note from an international market perspective, do you feel like you can hire aggressively enough from a sales head count internationally or do you need to look at partnerships in specific markets that could be smaller growth areas, but but growth there is no.
Yes.
So from from the hiring side, we definitely believe we can hire everything that we need internationally, we've really invested in our talent acquisition team and are doing that on a broad based around the globe to ensure that we were able to hire as quickly as possible as you know, there's a little bit of a longer lead time or notice period.
Internationally that we're hiring as quickly as we can and then in terms of the uptick and you know kind of in partners and we don't give out those specific but we are continuously looking at our channel programs to ensure that they are not only competitive but driving the results that we want but something we evaluate on a constant.
Thank you.
Our next question is from Quintin got really with paper standpoint.
Hey, guys. Thanks for taking my question and congrats on great quarter I'm really just one quick question from our end I'm. Obviously, you guys saw some really strong enterprise traction for Q2 I'm. Just wondering if you get some idea of the percentage of revenues from enterprise customers compared to that 23% we saw last quarter.
We.
Our sharing that like the revenue, we don't call out specifically customers, but we have you sorry enterprise petsmart, but that's at the revenue from effectively customers with fewer than 10 that was 20% in Q2, which is consistent with.
This quarter in that same range.
Got it thank you.
Okay.
Our next question is from each Nike drones with Oppenheimer.
He tight.
[noise] do.
Well come back. Our next question is from Alex Kurtz with Keybanc.
Yeah. Thanks, Thanks for taking the question actually someone that xinda good job because we just switched our school district from Google meeting over to presume for us for the started the fall semester. So someone it deserves a race so rob.
Hi, Thanks.
Kelly as you think about.
Opex training into into next fiscal year I know you don't are going to talk explicitly to it yet, but there's a lot of turn to assume especially in our Q1 of next year and you have a lot of investments that you're making as far as R&D and sales and marketing says we're working through our models and looking into opex levels from Q4 to Q1.
How should we be with a framework for that.
Yeah. So you should expect no operating margins to decrease incrementally each quarter going forward as we are continuing to yes, you said and that's an R&D and that's more in our sales and marketing teams as well and you're getting worse than that longer term margin that we've talked.
Give out historically, we're going to talk in more detail around that at analyst day, but you know the last time, we updated you on this we still said that our long term margin for around 20%. So I think you said you know assume we're getting more in that range, then near to that end to 41.7%.
Okay.
Our lives by the way, it's your kids a school districts.
It has any question so any theatergoers visiting misled doesn't know yunos limits that you're well I can get all right well send them right you, Eric [laughter] well okay.
Our next question is from Ryan Me Williams with Stephens.
Thanks, guys. My question, so presume phone pretty unbelievable rate of achieving global service coverage.
Congrats expansion there John when you mention doubling or tripling the phone seat and very deployments that are part of its expanding global service coverage and have you seen more enterprises trialing himself as is always difficult.
Hi, So certainly international expansion like we said historically that was the biggest opportunity for us and.
I didn't think it for example of that is the two largest info deals in Q2 were outside the U.S.. So that really shows the strings and and what the international coverage is bringing to the phone and sorry, what was the other went Oh enterprise customers trying to yeah, absolutely there are some amazing.
Names that we can't talk about yet, but we're excited about the traction that that we're seeing in the enterprise customer base as well.
But just gum and though.
Our next question is from Pat Walravens with JMP Securities.
Oh, great. Thank you.
As she comes in on time I'm going to give you some real feedback from one of your customers Oh here. She is oh, Okay. Gigi what it said you you school also just switch from Google to zone and GE what is it the like best about so at that rate that really I thought there it really gets <unk> okay.
My teacher, we have a lot screen and our cohort arent real and it's really hard for all of us to talk at once so she puts us in six make apios and I have four or five finishes me, it's really nice to talk to.
Do you work with centric answer it inside of a hobby, where you can easily lives huge grew 80 never get to talk that's why I love. It covers my sense is like.
Thank you trade thing.
For the feedback to date [laughter]. The my question is so Eric when everyone's working from home how do you make.
Where are you work and attractive place to work.
Yes.
Well first of all your daughter tedious gigabytes, a college minimize it today I would like to consult got I'm glad yeah. There has been backpack. So speaking workload is asking for now things are for the foreseeable future will only to work from home, but we've got a good things about long term plan. So many offer dependent.
Good question so what.
You're welcome you know a pretty supply you know, we probably the many customers others, which can be list all of the about working from home, which since the state.
I'm not seeing all possible people working from home Burberry allowed for the is the hybrid meaning twice a week or three days away you can't send all employees back in the whole and some other time you know we all keep working in all piece I know so you can pull the consolidating a lot of of small obviously.
Ladies and only to have offices every everywhere anymore. You also to high tide in almost every omnipod even for the work with the look today, we've got a lot of comedies bird Big open space I think with Adam you know work anymore in the future Oh goodness, we do have caught you know from Mexico to know.
And maybe 12 months you know we can optimize was for the future what companies look like but again you know no matter, what I think it looks like this and steel Pal.
Okay.
Family of time for one more question and last question is from Jonathan Kees with some insights group.
Great.
Guys stuck manner I add my congratulations to the quarter and thank you for a getting me in here. So I guess I have my one question as well so if I cant a clarification. The clarification first maybe more for Kelly go you had said last quarter.
You were a modeling in the assumption that.
[noise] your sales teams with started being more a moderate or more normalized level of business activity I didn't I notice that wasn't in the guidance in the commentary. This quarter is that still the case then that carrier for my square has that's a clarification to my real question is.
Can you tell me about the discounting or the pricing that you have for the enterprise ours piece are you seeing a lot of that's how are you seeing.
Hi, good amount of that thanks.
So in terms of our sales rep productivity you know as you can imagine it was in extreme high level in Q1 and also extremely elevated during Q2 as we look forward to Q3 in Q4, we have modeled it certainly to be lower than that but still higher than what we.
Saw last year, so it's kind of somewhere in between what we thought for the first half of this year, but where it was exiting f. why 20.
And then in terms of enterprise discounting.
Yeah, we don't disclose specifics around that but we haven't really seen a significant change in the buying patterns of our discussion of our enterprise customer.
Great keep up a good work thanks.
Okay that wraps up or excuse me.
Great and I think we'll turn over to Eric for any final commentary.
Or is it has still available looks like.
Yes, good question right now.
No I don't I don't think kinda enticing to answer your question today.
Yeah. So thank you all whole joining us today on the we truly appreciate it for Hello, Hi, It had to being a memorable plus about cloud what investors and analysts. We appreciate your continued support for Zhou. Thank you all see you next quarter. Thank you.
Hi, Thank you. Thank you. Thank you everybody.