Q3 2021 Zoom Video Communications Inc Earnings Call
Yeah.
We also had exciting wins in the quarter that customers committed to modular zoom product growth at a high quality experience for their users for us I would like to welcome at a time for the zoom laminates.
GAAP is the leading indirectly we didnt us platform.
Q3, EBITDA consolidated are too wet winter buying both the zoom meetings and assuming June to provide a more feature rich video communication service their employees now.
Now were honored to have a palatable committed for long term engagement, where video deploy services across all locations and employees.
A global customer increasing their commitment it'll be sue is rocketing.
Robert This is a global leader in Internet services with when portable Bailey members around the world.
Impress supply the simplicity in a zoom technology.
Eat up for getting the service and at a free to bridge application Robertson has committed for the full Sue you cost for deployment.
We have grown to 42000 meeting for licenses more on that 1000 assumed views and our candidate before consumable items across the globe.
We also want to recognize the Israel Ministry of Education.
Which over the public education institutions the.
The Ministry of Education has anybody about who handle the howden features and a 1.2 million students using.
The leadership and the Ministry has told me that do you think the most appropriate out of video meetings, he Israel's schools because of it and publicity.
Ability and many average for security and fiber.
Thank you for their hard work to provide for trubridge allocation on needs. During this crisis.
And it for all educators chronological youre all heroes.
Thank you.
Telecom. Thank you Robert and thank you Israel Ministry of Education on have you all.
Also thank you as well to all other Constance.
For pop and happiness.
And advise that entire uncertainty.
Now let me talk about on my favorite day event of the year is on the popular E.
On the Cooper, we add it all up 155000 unique abuse attained zoom hoping.
On the premier customer on a community event.
This year's event was held once you really on zoom technology.
We also had over 140 customer speakers ranking from fortune 50 companies more businesses.
And across all verticals share in stories about how we have indicated zoom into all aspects of their communications and which.
We showcased several customers for not just to conducting their business on overall.
They are re imagining and delivery.
Delivering new business services overcome as low.
Moving the new on Apple.
On the way, they're trying out of the zoom cheap debt to deliver this successful event to our user community and the size and scope that is a truly incredible but what events.
We were also able to demonstrate to the world that you can do this too with the zoo.
In summary.
Zoom for full move out for our customers and the communities in that sort of port.
I want to thank our over 3800 employees will continue to still on the business and a truly deliver happening.
With that let me turn things over to cash but for US it's up and look at what our view on zoom platform has to offer thank you [laughter].
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[noise], everyone, Hi, everybody Hello, everyone.
The next day so.
Everybody. Good morning, welcome to introduction for ceramics on [laughter].
On the NGL and natural flow, you're working on I don't take it too seriously on board.
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Alright, good for.
On the.
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Hi balance.
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Really the history on foot glad you could join me today.
Well everybody. We're glad you could join US today, Inc.
Q3, we continue to be inspired by the many creative ways, our customers have been using the down to work anywhere learn anywhere and connect anywhere.
Let me start by reviewing our financial results for Q3, then discuss our increased outlook for Q4 and the full year EPS why 21.
Total revenue for 367% year over year to $777 million in Q3, achieving a 3 billion dollar revenue run rates.
This top line result exceeded the high end of our guidance range of $690 million it strong sales and marketing execution in both our online indirect businesses as well as lower than expected churn.
For the quarter the year over year growth in revenue was primarily due to a subscription provided for new customers, which accounted for approximately 81% of the increase.
On the script he provided for existing customers accounted for approximately 19% of the increase.
This demand was broad based across products industry verticals geographies and customer cohort.
Let's take a look at the key customer metrics for Q3.
We continue to see expansion on the up market as we ended Q3 with 1289 customers generating more than $100000 in trailing 12 month revenue up 136% year over year.
Net increased more than 300 customers over Q2, the highest number of as we've ever had in the quarter.
We exited the quarter with a total of approximately 433700 customers with more than 10 employees.
We added approximately 63500 of these customers during Q3.
Year over year, we added approximately 360000, new customers with more than 10 employees, representing a 485% increase.
In Q3 customers at more than 10 employees represented approximately 62% of revenue.
We also continue to benefit from significant growth in our segment of customers with 10 or fewer employees as small businesses and individuals adopted and maintain their debt licenses.
In Q3 customers with 10 or fewer employees, representing approximately 38% of revenue up from 36% in Q2.
For net dollar expansion for customers with more than 10 employees with over 130% for the 10th consecutive quarter as existing current customers continue to support and trusting their video communications platform of choice.
Both domestic and international markets had strong growth during the quarter Americas grew over 300% year over year.
Our combined APAC and EMEA revenue for 629% year over year and was consistent with Q2 at 31% of revenue.
We plan to 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 for 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 third quarter was 68.2%.
On to 82.9% in Q3 last year and 72.3% last quarter.
The impact on our gross margin is partially due to the dramatic increase in usage related to the pandemic as we are experiencing a higher percentage of free users, including those in over 125000, KBR 12 educational institution. It went back to school in the fall.
It is also due to the continued higher utilization of public cloud services.
We ended the quarter with an annualized run rate of 3.5 billion meeting minutes, approximately 75% growth quarter over quarter.
We are thrilled that a significant percentage for the usage, which are low paid and free participant in the education sector as millions of students and teachers return to the classroom virtually.
With the uncertainty on the longevity of the pandemic. It is unclear how long gross margins will be impacted as we remain committed to supporting the global community.
Consequently, we expect gross margins to be consistent with Q3 into the next fiscal year before starting to improve towards our long term target margin.
R&D expense in Q3, with approximately $25 million up 80% year over year.
As a percentage of total revenue R&D expense was approximately 3%, which is lower than Q3 last year, mainly due to the strong top line growth.
We are committed to prioritizing R&D hiring to drive further innovation expansion and security into our platform.
Sales and marketing expense for Q3 was $141 million.
This reflects an increase of 71% for $59 million over last year, primarily due to investments to drive future growth.
Isn't it a total revenue sales and marketing expense was approximately 18% a.
The decrease in Q3 last year, mainly due to strong top line growth and marketing efficiencies from the virtual production of in Tokyo.
We plan to continue to invest in adding sales capacity and marketing programs over the next several quarters to capture market share and to deliver on our growth opportunities.
DNA expense in Q3 was $73 million up 257% on a year over year basis, as we continue to scale, our GNS function to support a company of our size.
As a percentage of total revenue gene expense was approximately 9% a decrease from Q3 last year.
Revenue upside in the quarter carried over to the bottom line with non-GAAP operating income of $291 million exceeding our guidance.
This translates to a 37.4% non-GAAP operating margin for the third quarter.
This is an increase compared to Q3 last years results for 12.8% and a decrease from Q2, EPS why 21 margin of 41.7%.
Non-GAAP earnings per share in Q3 was 99 cents on approximately $299 million of non-GAAP weighted average shares outstanding and adjusting for undistributed earnings.
This result is 25 cents more than the high end of our guidance and 90 cents higher than Q3 of last year.
Turning to the balance sheet.
Deferred revenue at the end of the quarter with $855 million up 324% year over year.
Looking at bolt are billed and unbilled contracts, our RPL total approximately $1.6 billion up 215% from $570 million year over year.
The increase in our PEO is consistent with the strong demand in execution in the quarter.
We expect to recognize approximately 72% or $1.2 billion of the total ARPU as revenue over the next 12 months as compared to 64% for $330 million in Q3 of last year.
We ended Q3 with approximately $1.9 billion in cash cash equivalents and marketable securities excluding restricted cash.
We had exceptional cash flow operating cash flow in Q3 of $412 million up from $62 million in Q3 of last year.
Free cash flow for $388 million up from $55 million in Q3 last year.
The increase is attributable to strong billings and collections.
For the fourth quarter, we expect to have additional capital expenditures related to the build out of our datacenter infrastructure.
And as a reminder, we will see the semi annual cadence of net cash outflows from Sep purchases to occur in Q4.
Now turning to guidance.
We are pleased to raise our outlook for F Y 21 for both revenue and non-GAAP profitability.
And although we remain optimistic on doomed outlook. Please note that the impact and extent of the COVID-19 pandemic and its associated economic concerns remain largely unknown on.
For higher outlook for EPS why 21 is based on our current perspective of the business environment.
For the fourth quarter, we expect revenue to be in the range of $806 million to $811 million.
We expect non-GAAP operating income to be in the range of $243 million to $248 million.
Our outlook for non-GAAP earnings per share is 77 to 79 cents based on approximately 306 million shares outstanding.
For the full year for 21, we expect revenue to be in the range of $2.75 billion to $2.58 billion would to be approximately 314% year over year growth.
We expect non-GAAP operating income to be in the range of approximately $865 million to $870 million, which would be approximately 876% to 881% year over year growth.
For our outlook for the non-GAAP earnings per share is $2.85 to $2.87 based on approximately 300 million shares outstanding.
In closing as the World is changing there is privileged to be a driving force and net in connection and collaboration worldwide with our high quality frictionless and secure communications platform. Thank you for the entire zoom team.
With that let's open it up for questions.
You have not yet enabled your video please do so now for the interactive portion of this meeting mat sales queue up our first question.
And our first question is from Phil Winslow with Wells Fargo.
Hi, guys. Thanks for taking my question on congrats on another fabulous quarter, I really want to focus in on that customer segment with fewer than on the 10 employees. Obviously strong again this quarter really two questions here that our focus on first you talked about some initiatives over the past several calls just translate more of these for these customers from from monthly to annual contracts wondering for give us an update on that.
And then second question is owner parent interest for the trends that you're seeing in terms of zoom phone attached between these these small businesses on a 10% plus I'm sorry on turned on employee plus segment.
So in terms of the activity that we're doing to convert those monthly customers to annual those continue it's a significant part of the focus of our marketing team and on we have seen moving in that area. It's not something we're talking about and really specifically, but we're excited about the profit and people to continue to see the value of zoom and want to cash.
So longer term agreements. So that's great and then in terms of zoom phone no. What's great about this we have seen consistent performance across all segments of the business on.
All the way for small business up to enterprise in fact, as we continue to see strong performance in the phone. We once again had our highest deal to date in Q3, so very excited about continuing to see progress there Greg.
Great. Thanks, Kelly on a once again thanks for your support on K 12 education I've been on two James with my daughters go on Investor Lisa Thanks for that great. Thank you Bill.
Such increase net next.
Next question is from Bob answer you.
With William Blair.
Hey, guys and let me Echo on my congrats there.
Two quick ones, one that Kelly on linearity in the quarter was there any in terms of deals and then really quickly as you look at.
The expansion of the product.
You build some follow on you've got the PBX working you've got a global your line.
Got into various areas, but for the natural extension might be something like costs on a long terms on how you think about that opportunity and what you might is that an area you might extraordinary you might visit or is that sort of.
Uh-huh too far afield yeah.
Yeah.
Great Steve on thank you. So in terms of Q3 linearity. It was more front end loaded than our traditional seasonality, especially as we continue to see strength in that customer base with fewer than 10 employees that many of them are buying online and there you are buying via credit card what we.
We expect to see ads as especially as we move into Q4, there were going to start and move more towards fulfillment through our direct sales channel that it will be more back end loaded in more credit our traditional seasonality that we saw free cobot.
And then in turn per call Center strategy. We agree with you know the call Center contact Center is a really important part of the strategy around the phone and the way we're approaching that today is through partnerships with many of the great contact center providers that are out there today and we think that works really well as we have strong integrations with them and it gives our customer the.
The opportunity to work with the contact center provider of their choice, but to do it with zoom phone in a very seamless way.
Got it. Thank you yep. Thank you.
The next question is from Sterling Auty with Jpmorgan.
Yeah. Thanks, Hi, guys. So Kelly I want to circle back to the customers would lessons on employees and specifically made the comment that churn was better than expected in the quarter was that attributable to the entire customer base for specifically to these smaller customers.
On my drilling high churn was actually better across all segments of the business. So as we as I mentioned earlier the marketing team is very focused on trying to convert monthly to annual customer than that fewer than 10 days, but we've also seen even in the up market people that are also.
Expanding on continuing to buy more products, which makes them more integrated into the zoom ecosystem and makes them more retentive. So we saw that across all segments of the business actually should be on under 10% of revenue the 38%, perhaps fall back as you get in its debt and this year.
For budget flush and maybe bigger spend by large enterprise.
We think certainly over time that we will move back towards on.
On lower more of our sales and booking being dominated by our direct sales channel, which then yes would ultimately eventually drive down that percentage of revenue from the deal on incentive weighted.
Thank you.
Next question is from James Fish with Piper Sandler Hey.
Hey, Kevin I Hope you had a great holiday.
I know focus will be here on on.
Zoom following but just curious on on zone is that still on data as my understanding but how is the monetization strategy developed over the last few weeks and zoom Topia What commission to zoom taken is there any way to think about the size of this business a few years down the road and if I can squeeze in a second on.
Additionally, what percentage of revenue this quarter came from the greater than 100000 dollar customers this quarter.
Okay for James Great for you in terms of on do yes. It is still in data at this point and we have not yet announced what our minds is the monetization strategy is around that platform on.
We've certainly been working on internally, but were more focused on ensuring that the platform is ready and is meeting the needs of not only the host but also the customers and making that are really seamless on transit.
Transition or transaction for them I Hope you saw the video some of the really for things that are happening on the platform and if you guys haven't checked it out just go look and you can see the classes and events that are happening. There. We will announce our month is steady probably sometime next year, but in terms of how we're thinking about it we don't expect to have us.
Mitigant contribution to revenue next year.
We're really focusing on building on the platform itself and then in terms of your second question that's from.
Percentage of revenue and cash is greater than 100.
Yeah.
Hi, I need to look for and once again I just take a look and see exactly what that is let me come back to James I Havent on my staff, Let me come back to you just have tolmar or come back for me later today. Thank you.
All right next question on the from meta Marshall with Morgan Stanley.
Great. Thanks.
You noted has been topia kind of expansion capability for expansion room within the global two k. and.
Given a lot of room to grow within that customer. So just wanted to see how you feel as if your staff to attack that opportunity or do you feel you're staffed up to attack the global two K. and then maybe just on terms have you have a pretty meaningful cash balance at this point parent debt.
For M&A kind of being discussed in the space, how does that change kind of your viewpoint on how you're looking at M&A. Thanks.
And then for you.
So certainly in terms of addressing in how we staff too.
Serve and take share continue to take share in the global two K. International expansion is a huge area of focus for us when we talked a little bit EPS in the past, but with the increase of brand awareness around the globe. It has really create an opportunity for us to hire in the markets very quickly where historically it would have taken us time to.
You see those markets with marketing spend and now we're able to just go in there because we're seeing tremendous demand. So we're excited about the opportunity and yes AIDS net than our international team are growing very quickly to address that and.
And then on.
In terms of cash balance and M&A, we certainly.
Continuously watch for opportunities to do something with with that cash that debt would be additive I think we've talked about for the past we would look for opportunities in M&A that could either extend our technology or our talent and those are the two areas that we're continuously watching for it for the right opportunity.
Great. Thanks.
This is Tom just wanted to point out on the last question that James It.
It is 18% coming from the greater than 100 cable.
Thank you Tom.
Our next question is from Heather Bellini with Goldman Sachs.
Hey, Kelly. Thank you so much on I two quick questions. One just I guess, just thinking about chat functionality and team based chat collaboration specifically given that category seen tremendous growth during the pandemic as well and just getting the competitive dynamics right. Now you guys have any thoughts on.
How you see that playing out and your ability to compete there and also just a follow up how much of zoom phone.
Driving customers over 100000, where you continue to have another really.
Big quarter, there in terms of bad debt.
So you know our chat product is a really important part of our overall product fleet, especially when you look at zoom bone, it's a very natural tie into it and as we've seen expansion in volume phone. We've seen customers continue to ask for more features and functionality and we certainly are committed to continuing to develop and in a range.
In innovate around in China, and as a reminder, it does come embedded with our meetings on product itself and then in terms of how much zoom phone is driving customers greater than a 100 K. I don't think that we had explicitly called out the number of zoom phone customers we have.
On that specific category.
As we said about volume phone metrics will continue to look at opportunities for milestone metrics, along the way and that could be something we would disclose in the future we haven't done it yet today.
Thank you thank.
Thinking on there.
Next question is from Siti Panigrahi with Mizuho.
Okay. Thanks for taking my question just wanted to ask about the felt seltzer productivity Youre you added a lot of sales people. This year. So could you talk about the seltzer productivity in fiscal Q3 million the off market and what are you assuming in terms of productivity our expense involved mark.
Segment in your fiscal Q for guidance.
So in Q3, we continue to see strong sales productivity across all segments of the business.
But when you care when you look at the results from Q1 to Q2 to Q3, they are starting to come down to down to more normalized rates and when we're looking forward and thinking about Q4 and into next year you'd think about that our reps are returning to more normalized free coburn.
Sales productivity levels and.
That's how we're thinking about it we're still obviously working on our appetite for me to plan, but that's how we're thinking about it for the high level.
Great. Thank you think BT.
Our next question is from Matt Van Vliet with BTG.
Hi, Thanks for.
Correct.
Through this format.
Or more on the international side on the business.
How are you seeing on sort of difference in terms of what's your what's looks like and then secondarily are you having any markets that are.
We're a little bit more difficult to penetrate weather's from security or infrastructure elements that are now either being invested in are you sort of gotten past those impediments to serve.
Yeah. So we for it we talk some about the second for your question first in terms of security and privacy. We obviously focus a lot on as a company on a global basis over the last nine months and all of the initiatives that we have taken and certainly have borne fruit.
As we've continued to invest as well as putting teams in in local markets that helps a lot with also building the trust and confidence for the customer base. There. So certainly that leasing progress there and then on.
In terms of what was it for great. How is the U.S. different in terms of what did you ask about minutes usage is that what you know just mix of are you seeing larger customers for the results for Chris Mers or are there more kind of the individuals there any differences yeah. You know again, we've seen strength across all segments internationally.
On the remember I think it was last quarter, our largest customer in the quarter was on international customer. So we're really excited about the profit they're continuing to make there.
Right. Thank you.
Thank you Matt.
Our next question is from will power with Baird.
Great. Thanks share Kelly you noted the really strong usage growth sequentially.
Cited 75% just growth can you share to kind of help frame how much of that was driven by education vs broader verticals adjusted other way to kind of cut that would be to kind of what that any color you can provide around you.
Free growth generally versus Lucentis in terms of eight growth.
Oh, I'm sorry, yeah.
So as I said in the prepared remarks.
A large percentage of the growth in the usage was from education, but both free and paid.
And Dave is certainly an elevated that elevated percentage of our total usage.
Education continues to be one our strong verticals. It was the second fastest growing vertical again in Q3, so really excited about the progress we continue to make there as well.
Okay for the my second question you noted the record number of 100000.
Take us sales.
For the quarter, which is great for anything you'd point to with respect to key drivers that were there any particular verticals of stood out among the largest cohort geographies and stood out any changes in go to market kind of what what kind of drove the improvement there.
No.
I think it was really diversified across all markets all segments and all verticals as well I think it's more about the continued expansion in our sales organization as well as the increase brand awareness and as companies are continuing to think about the extension.
On this remote working and ensuring that they are keeping their employees productive as well as safe during this time.
Great. Thank you.
Our next question is from past cardiology with Guggenheim.
Thanks for taking my question on turn on a question on the average deal sizes on as you look at the number for new customers for adding every quarter that has gone down which is which was expected but can you comment on the average deal sizes for new customers has that changed at all the last few quarters.
Finishing line sizes.
HM.
We haven't seen a significant change in our overall deal size. If you remember our land and expand its still a very important part of our sales strategy and we see customers in it. We also see customers that are starting with for example, the meetings and then add on to the customers we talked about today.
Telephone a racket on that added on the phone later on so not really a significant change on.
In the overall deal size, especially start.
Thank you.
Our next question is from Walter Pritchard with Citi.
Hey, while for.
Okay, sorry about that you noted the churn was below what you expected.
But I'm wondering within that of the customers that did churn did you notice any trends or commonality that seem to be.
Vincent in are causing the churn that debt that you could help us understand.
No yes.
It.
The churn that correlate somewhat to the overall pandemic and so as we continue to see uncertainty in terms of markets locations with shutdown or shelter in place orders, we see there and we see the most volatility of course in the segment of customers with 10 or fewer employees.
But even that was at an improved level than what we were originally forecasting as I talked about before that's due in part to these actions where were on Youre having.
Having success success in converting customers from monthly to annual contracts.
Great. Thank you.
Yes.
Our next question is from zone Crane with Bernstein.
Hi, Kelly Thanks for taking the time I was wondering if you could explain to us what portion of business customers are on the active host price model versus a named host pricing model and why do you make that distinction what does it mean for you in terms of strategy adoption overall growth and then I have a quick follow up.
Moving on.
So in terms of the approach and why we have active whos vs. Named Jose is because it allows customers that are sure exactly what their usage is going to be to come in and buy zoom at a level that feel comfortable to them and then grow into that so it's a very effective mechanism.
For maybe somebody that's you know newly adopting video communication for expanding and extending it to a part of their organization that may not have used it for and it's a great way for them to have the opportunity to assess what that level of usage is going to be on in terms of what percentage concern that that's not something that we disclose.
Moving to it's really a mix depending on the customer segments and how those customers want to buy.
That's helpful and as far as the customers that are on the ex post pricing model. How long is the lag or how should we think about the relationship between revenue and usage is that a one month lag between the demonetization vs usage for the quarter as for the year, how should we think about that in general yeah.
For the year to be active on Whos model is most prevalent in our up market customers and the typical structure of course again, we're focused on delivering happy for our customers. So these are all things and go for the typical structure for deal would be they would have access to a certain a set number of licenses they would pay for some fraction of that for the first year and then on.
After a year, we would look at where their high watermark was at usage for those homes and that would be their true up then for the next year.
So should we interpret that as meaning customers that have not hit that one year anniversary those maybe in Q1 or Q2 that have expanded significantly in the last year and we should still see improved monetization for those in Q2 Q3 next year, maybe theres absolutely the potential if that in that scenario that yes. There is a step up for those customer.
Or if they've expanded through where we started them in their minimum commitments at the beginning of their contract yet Super helpful. Thank you very much and congrats again same thing.
Our next question is from Brad Zelnick with credit Suisse.
Great. Thank you so much hi, Kelly I, Tom for you guys doing hybrid current good how are you.
Very well thank you.
Echo My Congrats just a question following up on on a earlier question about geographies seems healthy growth all around but if I look at EMEA only 5% growth sequentially, just any reason to call out why it would be a little bit weaker relative to the Americas or Asia Pac.
No nothing significant there to call out some of these regions are just impacted by larger deals in that in the quarter and.
Otherwise nothing significant really happening that's of note again some of the growth across these regions is dependent upon where these markets are from the pandemic sort of cycle and if you look back to Q3 I think at the beginning its use free Europe was in a very optimistic situation and unfortunately, we've seen sort of some of that reverting as we've gotten.
For the back half of Q3, so it's a little bit variable with what's happening in the overall pandemic itself.
Great and if I can throw on a follow up for you just on the channel strategy any updates for you can share on whats the measure.
Success, there and how you're performing against that.
Yeah the low.
So first of all the on the channel continues to be important part of our long term strategy, especially internationally and around things on itself and the way that we measure it internally or one of the ways that we measure internally is by looking at the percentage of revenue that is touched it touched or come through the channel are such that it is.
No that's not something that we've disclosed publicly and in a long time, but it might be something that we continue to evaluate for central disclosure in the future.
Great. Thank you so much for taking my questions. Thank.
Thank you Brad.
Next we have Richard Bilodeau with Needham.
Hey, Richard can you on you.
Sorry about that sorry on undergo hi, Kelly sorry about that.
Yes, a question on operating margins.
You looks like this quarter. You finally started to see expense is catching up with with revenue and you had debt expected decline in op margin you're guiding for another one in the fourth quarter I think last quarter. You said you expected several quarters of decreasing operating margins and I know that kind of takes us into fiscal 21, you can you talk about how you thinking about the trajectory of.
Expenses versus revenue on op margins for the next few quarters. Yeah. So I think if you look across some of our areas of functional stand we want to continue to invest in R&D that is an area. We are absolutely focused on prioritizing hiring at 3% of revenue, we would really like that to be closer to.
Our long term target margin of 8% to 10% and then of course in sales as well focusing on adding sales capacity and also spending a little bit more around marketing as we think about.
Promoting phone in some of the other new products and platforms like on do so those are the areas that we're thinking about investing in that overall as we said over the long term why you should expect to see that margin continued to decrease.
Got you just a quick follow up if I could on on phone.
You've added a lot of functionality to that product Cobrand short lifetime and I guess, most recently really expanded the international footprint, where are you now in terms of where you want that product to be on where you need to be competitively are there any major outstanding features or functionality, you think you need to add to flow into completed.
Yeah, We think we're very well situated from a competitive feature and functionality perspective on energy said, we announced last quarter that we're in 44 markets from a net is doing point phone deployment perspective, so really feel great about the progress we've made around that and are excited about the continued progress that we're seeing with income.
Great. Thanks, Kelly Yep. Thank you.
Our next question is for re she jewelry share with D.A. Davidson.
Kelly. Thanks, so much for for taking my questions Nice to see continued strength in the business just wanted to touch on gross margins again look I think that the rationale of free users makes us on a sense, especially given your enabling K 12, and you're doing some very customer friendly things like were moving free limits on on Thanksgiving said people on F travel, which.
I think we all appreciate you doing those things on can.
Can you help us I think directionally understand how big of an impact is that is there and since you are talking about this impact going into next year is there a point at which it makes sense actually start to break down the costs associated with free customers and then just along for a follow up on the on the zoom phone side volume.
As you already mentioned this but how many you don't need zoom phone seats, you added within the quarter. Thanks.
Yes.
So I appreciate it thanks to for you to.
In terms of the gross margin you know.
As we as I said to preserve our free really committed to continuing to support community.
Momentum through K 12 also living on for holidays like Thanksgiving and were really excited about the operating and for us to do that at this point, we aren't Harrods again.
Yeah My change on the outlook around gross margin and for the foreseeable future you should expect it to be in this range or at least several quarters before it eventually start began back towards our long term targets.
And then.
In terms of Oh, you said you are breaking out for great I don't I don't think we're going to want to break out what do we really value our free customers. Our free hosts and we think for a very they continue to be a very important part of that ecosystem. So I think of it is it will work.
If we didn't have them sitting on our gross margin they would be seeing in sales and marketing in terms of those expenses. So this is just the way that we've chosen to build our go to market and that's just for the trade up in Paris. Other companies why you might see a difference in those on to Andrew.
Thank you and sorry, just in terms of your phone seats added in the quarter. Your total sorry on.
Yeah, we don't disclose were not disclosing exactly universities and in any quarter I will tell you as I said, we had the highest the largest deal to date in Q3, another record setting deal so very excited about that.
Thank you Kelly.
Our next question is from Alex Zukin with RBC.
Hey, Kelly on Tom Thanks for taking the question.
And congrats on a on a good quarter I guess.
Joe We haven't talked a lot about next year I know you are not guiding for next year, but you can imagine the question we get all the time for investors is how to assume grow post pandemic. It was this a pull forward and as people go back to work today, turning on school the turn authors on them. So given the commentary that you.
Talked about with respect to churn rate for the business being better than you expected given the commentary around zoom phone attach again, not asking for specific items for the high level. How would you see how would you kind of.
Talk to us about.
Calibrating growth for next year is it more going to be swung by churn is more going to be swung by zoom flow unattached any any clarity you can provide I think we'll go on what Jeremy I think a couple of things first of all.
On the low working trends that started free pandemic have certainly accelerated during this period of time and while we all hope for a vaccine as soon as possible I think that remote work trends are here to stay and we're excited about some of the features and functionality that we announced at Topia for example today.
Well this and to support customers and employees that are thinking about densely going back to work likely in some sort of a hybrid work environment. So these are things like Smart gallery, which are really net to enable better communications when people. Some of the employees are working remotely and for all of them are in the office. So we're really looking towards supporting an environment.
Like that and believe that our especially our up market customers are going to continue to want to provide that flexibility to their employees.
Then in terms of.
Key growth drivers absolutely do phone is one of the key drivers for next year. It would absolutely on the fastest growing product in Q3, so excited to see that momentum and if you think about the significant day at the meetings customers that we've acquired in Q1 Q on Q3 day.
They are there to continue to support our strategy of selling into our install base and we absolutely expect that to be a key driver for next year.
And just as a follow up for Kelly on churn right. If you think about the cohorts and breaking down those churn rates and principally on the consumer cohort. What is what is the assumption for for Q for that as you go now you know as you start to go into a more vaccines led world again, even when you do give guidance.
It's not like you're going to have great. You are seeing some engagement trends globally from from some regions that are now in a different stage of the pandemic today, but what's going to give you the confidence around that those churn assumptions for next year I mean.
We are taking an approach where we can't predict depend dynamic and so we are taking what we believe is a prudent approach we do assume that the churn in the mass market. So the customers with fewer than 10 will continue to be elevated.
Elevated compared to both the pre pandemic level that we saw as well as extremely low that it compared to the up market segment of our customer base. So our overall like the relative assumptions haven't changed we've just seen slight improvements from what we were expecting and I think thats due to many of them.
We've already talked about people continuing to see the value in do people embracing this remote work in assuming this is how this is going to be for a very long time as well as the efforts that we're making to help people see the value and convert for monthly to annual.
Great. Thank you so much stay safe. Thank you Alex. Thank you you too.
Our next question is from Ryan current with Rosenblatt Securities.
Hi, great. Thanks for question.
Can you expand a little on the relationship with the aluminum technologies for Centurylink little bit there and do you envision that something that you would expand to the rest DSP market its.
Debt from channel relationships are you referring to.
Yeah.
So as I mentioned earlier on channel continues to be an area of focus and an opportunity for growth for us.
We don't really comment on specific relationships.
Because we love all of our channel partners equally and but certainly this is an area will be a driver in areas driving growth for next year.
Helpful. Thank you Yep.
Our next question is from Tom Roderick with Stifel.
Yep, Thanks, Matt Hi, Kelly greatly for you. Thank her thanks for doing that so I wanted to go back to the one question before was sort of on operating margin in the leverage in the model and obviously you know the investments in sales and marketing well I think we all get that very interesting to see R&D be down sequentially, especially with all of the.
Advancements enhancements.
That we've seen in the product can you talk a little bit a bit more about just structurally R&D how much more do you need to throw out a presumed phone on zoom, we've seen a lot of development just for the numbers for the right and then I.
They come back to structurally geographically does does R&D just rise over time as you disperse geographies or how.
Help us think about that as we go into next year share. So in terms of the dollar decrease that you mentioned from Q2 to Q3, that's due to the fact that there was a pretty significant consulting agreement in Q2 related to continuing to build out security and privacy on the platform and that's why you see that decreased from a dollar perspective.
Quarter over quarter, and then long term you know our target R&D is to be 10 per cent ish, that's really where we want that that level of investment to be and your point is exactly right. It will start to increase naturally as we diversify our talent pool, we in terms of geographic locations in hiring we are.
Really focus on hiring the best talent, where ever they are and you know working remotely has really enabled us to do that and to find great talent in multiple locations in the U.S. and also continuing to expand as we talked about it previously in India as well so all of that will help us not only.
Increase our standing as a diversified our talent pool on opportunity for hiring but also to give us. It's 24 seven follow the Sun development approach as well.
Yeah, and I'm glad you mentioned that the consulting agreement. So just really quickly as a follow up.
I mean, you got the end to end encryption really quite quickly what's been the feedback from corporate clients on that and how is the performance of the overall system held up relative to keeping on an option for all customers out there and not just saying.
Yeah. So just to clarify it is available today for all free and paid customers with up to 200 participants in their meeting and so far we are in this state of its generally available that in technical review, so taking the feedback from our customers and so far on that has largely.
Even positive and we haven't seen any impact that would indicate that we need to approach our go to market any differently with it.
Great. Congratulations. Thank you. Thank you. Thank you Tom.
Our next question is from you tie keeping on with Oppenheimer ex Hi, Kelly and his gallery dissolves on just a clarification on the question for me as a clarification on these R&D Alex.
Alex's question on share I, just make sure I understand your on churn change assumptions heading into the fourth quarter are you assuming the same assumption that you made heading into the third quarter or you are taking the churn assumptions that actually transpired.
Actually in the third quarter and.
And then my question is about the verticals I'm sorry, the federal voted for it.
It is a September quarter is at the year end for the verticals are you felt within your own over quarter hubs that behave and how does the pipeline look around debt versus going forward.
Yes, so as we are looking into Q4, we continue to assume that the churn literary assumptions that we're using are more consistent or were using modeling are more consistent with how we were thinking about it as we came into Q3 and not necessarily assuming that we see that improvement that act came to actuality Inc.
You are free.
And then in terms of the verticals heading into Q for you I mentioned earlier, the education with one of our strongest going vertical the government was actually our strongest growing vertical quarter over quarter. In Q3. So excited about the progress that team is continuing to make.
Thats great. Thanks Yep. Thank you.
Our next question is from Shebly Seyrafi with FBN Securities.
Hey, Shebly either line.
Line.
That's true.
Uh huh.
Can you hear me every.
Moving on to M&A are.
Patiently, yes, hi.
So you're on me.
Gross margin was pressured in Q3.
On your lowering the outlook for the near term.
Was the bigger factor the free usage on the public cloud.
Increase.
They are both having about the same impact honestly, it's pretty comparable for between the two okay. The second one I have for you is we're in the middle of a brutal second wave and obviously last time on the first wave.
You guys benefit who line.
So I'm just trying to see if over the past month or two you seeing some inflection point higher than the typical trend over the past six months day because of the second weighted.
I will say that we've seen an inflection point like we experienced in Q1, no I know that but.
Just slightly higher because of the second one is any kind of on that.
It's really early I think that do that but I mean, it depends on where you are describing or when you're characterizing. The second wave is happening some of that will be falling into Q4, and that's that would be reflected in the guidance that we just gave in terms of what we're currently seeing around.
Yes for the the the business environment that we're seeing based on what we understand to be true around dependent on.
Okay. Thanks, a lot.
All right we have time for one more question sorry last question is from Ryan Mcwilliams with Stephens.
Hey, guys, thanks, guys for scrutiny and once again.
No one thing we haven't talked about recently is the rooms, and maybe I'm thinking optimistic approach here, but hopefully as things return to normal in the net.
Next year are you seeing enterprises, starting discussions now about rationalizing their office for footprint and video, enabling more zoom rooms, you just talked about how it's changing yeah. We we actually are so we're seeing customer. They are taking this opportunity while their offices are empty to update our put in.
On rooms, and especially thinking about how this is going to work if they potentially go back in a hybrid environment and how they are going to.
Create an inclusive environment if they have on employee workforce that has now split between remote and you people working in the office and that's why I'm. So excited about for example, Smart gallery, which is really going to enable and empower an experience that.
Beneficial and really maintained this I would call the democratization communication that's been created as we're all working from home right all of our squares or the same size on the screen and for Smart Gallery is going to enable somebody to continue to provide that for their remote workers. When we eventually start to go back and some sort of a hybrid approach.
Thanks for taking the question President Thank you Ryan.
No that was on last question for the day.
Okay. Thank you, Matt and thank you all so much for joining US. We appreciate your support during Q3 and thank you again to all of our zoom employees that made on our quarter possible.
[music].
Thank you everyone.