Q1 2022 Zoom Video Communications Inc Earnings Call
Hello, everyone and welcome to the Inc. First quarter of fiscal year 'twenty free into earnings release, I'd like to remind everyone that this call of being recorded at this time I'd like to turn it over to Tom Mccallum head of Investor Relations.
Hello, everyone and welcome to zooms earnings video webinar for the first quarter of fiscal 2022.
Joining me today will be the founder and CEO, Eric Yuan and Zoom <unk> CFO Kelly Steckelberg.
Our earnings press release was issued today after the market closed on may be downloaded from the Investor Relations page at investors Dot dot.
Dot Com also on this page you'll be able to find a copy of today's prepared remarks, and a slide deck with financial highlights that along with our earnings press release include a reconciliation of GAAP to non-GAAP financial results.
During this call we will make forward looking statements, including statements regarding our financial outlook for the second quarter and the full fiscal year 2022.
EMS growth strategy business aspirations to lead the evolution to hybrid work and the continued impact of the COVID-19 pandemic on our business.
These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward looking statements are subject to the 2 risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on form 10-K, as well as the current report.
On form 8-K, we filed with the SEC today zoom.
Zoom assumes no obligation to update any forward looking statements that we may make on today's webinar and with that let me turn it over to Eric.
Hey, Thank you Carl and.
And welcome everyone joining us on today's webinar.
I want to start of by thanking our customers for their commitment of 2 and its fast zoom.
With the July a strong start to our fiscal year with revenue growing 191% year over year as well as strong profitability and of free cash flow.
I also want we will recognize other more than 5000 employees.
Their dedication swab of customer happiness is that incredible advantage and a true up hospital a positive fleet about the loop.
That of keeps the our customers coming back and our ROIC eager for the meat, they're the worst of neat.
Our ability to have our customers by increasing their productivity.
Promoting their employees' happiness on the connections to each other on.
On the reducing the capital related of carbon quota Quint gave us the out of work the gorilla knee.
And it makes it zoom a grid of place for work.
Our company culture. It is strong and we are more motivated the Iowa.
Let me also of bank of view all of our investors for your fast on the support.
So well very critical to our employees our customers partners.
All of the investors. Thank you.
At the top of the word reopen for fear of seats of Korea for.
For us.
Many customers <unk> volatile are looking to create the hybrid of solutions at the.
This speaks to cautiously reopen some offices.
And the second each of industry company and in the video berries, you their optimal working model.
Zoom is here to help each customer calibrated their future work model in their own way.
Many companies on a rebid Anthony the workplace to enhance the the hybrid of work of express.
To meet this need we are not zoom zoom pacer buckhead amount of gallery, which puts zoom and the removed the participant equal holding.
What's the reception this disciplined accounting on the environmental sensors.
We have begun to deliver on our platform strategy.
In February we launched the <unk> video SDK in April the announced of our $100 million zoom or apps from to further build our app ecosystem.
The other apps is the back half users for enabling users to bring their favorite of the apps directly into the zoom expressed in.
The way that inspires collaboration bushes the efficiency.
The healthy habits and the generator much more fall.
We will also launch of zoom events of the image class low which will be focused on our end of <unk> customers and the support.
What's the event use cases.
Recently the survey, we conducted 80% of the U S responded agreed that all interactions. We continued to have a what you all elements post the pandemic.
And of that of figure what he meant higher in many of the other market the service.
Okay.
The hybrid of model adhere to stay and is zoom event will be an accident of solution for all of our customers who are looking to create and of course the company events with a what's the hall and the powerful solution.
We are very happy to announce that we closed all of our largest of the deal era in terms of Ah ha with the with a leading global financial services for them.
That is selected zoom meetings could be played for over 98000 hosts.
That is William whilst also the lots of deals to be closed this quarter. Let me recognize 3 more industry, leading companies that have increased their commitment to zoom.
For us.
I wanted to attack Kimberly Clark, who.
It was the positive brand in the.
The principal part of life for people in more of that 175 of Congress for.
Expanding the reinstated the zoom by adding approximately 25 of thousands zoom from licensees.
As the existing zoom meetings and of beating webinar the customer.
Kimberly crop saw the same reliability of.
Volume and the innovation is zoom phone.
I also wanted to recognize all of our partner British telecom for advocating for the zoom in the decision making process at the Kimberly Clark net.
Net.
Thank you target Corporation, Richard services, which of service together.
At more of them 1000 of 900 of stores and online and the positive on the call with the mission to have the families discover the joy of of everyday life for their commitment to <unk>.
<unk>.
We're very excited of the habit of target.
Zurich communications initiatives for the next level.
By expanding their zoom plasma source of low unifying there in total and external communications on our technology.
As a long standing zoom medium customer, which truly appreciated Eric Foss on the 15th zoom as a platform and a part of it.
And finally, I wanted to think Denzil, Japan's largest and of the worlds second the largest automotive of past company and a leading company in the total group the.
The proceeds of 1 of the zoom family last year on the last quarter, they decided to significantly expanded their use the Apis zoom meetings and the zoom video webinar for internal and external communications.
The Blue now connects the bulge of 7000 employees across offices strength of the roofs and homes.
That's on site the <unk>.
The divested of a zoom has the contributed greatly to our ability to create a work environment that is driving faster decision making.
Okay.
Hey, Kimberly Clark target on the dental Thank you love you.
While all 3 of greatest started in fiscal 2022.
Looking forward to operating you on our hybrid of workspace on our platform evolution throughout the year on <unk>.
The pulp yet which will be held on September 13th and 14th in a virtual format.
Before handing it over the pattern I want to share a quick operations as you know demand for zoom phone has been on amazing.
I'm very excited to announce our new device category.
Zoom phone of plants.
I've invited of Graham to tell you more thank you.
Thanks, Eric Hi, everyone on Graham guess I'm, the head of zoom volume zoom rooms, and I'm excited to be joining the call today from you get hit my zoom phone of clients, our new zoom phone appliances allow our customers to take advantage of the powerful audio and video capabilities of zone and they are a great solution for cash down spaces huddle rooms.
And executive offices of like we also can't wait to see some of the vertical applications that our customers come up with for this new category as well.
And while I'm here I got some exciting news to share I think I'll use the white boarding feature of this device.
So at the end of December we announced reaching 1 million seats of zoom phone solved.
That momentum continues and I'm excited to announce that we have now surpassed 1.5 million seats of zoom phone sold as of the end of September it's been absolutely amazing to see the growth continued to accelerate thank you for allowing me to join you today and now I'll turn it over to Kelly.
Thank you Graham and thanks to you and your team for your hard work and for that Amazing accomplishment.
Hello, everybody.
Our impressive growth story continued in Q1 as you can see.
We continued to win awards and third party recognition for our strong security focused.
Empowering company culture, and lasting impact on society.
Thank you to all of our amazing customers and employee navies accolade possible.
In Q1 of the year over year growth of total revenue remained strong at 191%, reaching $956 million the <unk>.
Topline results exceeded the high end of our guidance of $905 million, the strong sales and marketing execution led by our direct and channel businesses as well as lower than expected churn.
The demand was widespread across the products industry verticals geographies, new logos and customer cohort.
It's also worth noting that our fiscal 'twenty 1 results have shifted our renewal seasonality, which is now more weighted towards the beginning of the year.
The illustrate we saw approximately 4 times more deals up for renewal in Q1 of FY 'twenty, 2 as compared to Q1 of last year on.
Our renewal sales in online marketing teams really outperform is the spring renewal and the success is a testament to their hard work on our products strong and lasting value proposition.
Okay.
The year over year growth in revenue for the quarter was driven by a healthy mix between new and existing customer for <unk>.
New customers accounted for approximately 57% of the incremental revenue and existing customers accounted for 43% of the incremental revenue.
This trend towards existing customers was expected considering the tremendous growth in our base last year.
Let's take a look at the key customer metrics for the quarter.
We saw growth in the upmarket as we ended the quarter with 1999 customers generating more than $100000 in trailing 12 months revenue.
We exited the quarter with approximately 497000 customers with more than 10 employee, adding approximately 30000 customers during the quarter.
In Q1 customers with more than 10 employees represented approximately 63% of revenue.
We also continued to benefit from the solid growth in our segment of customers with 10 or fewer employees.
In Q1 customers with tenor of the your employees represented approximately 37% of revenue up from 30% in Q1 last year and stable quarter over quarter.
Our net dollar expansion rate for customer with more than 10 employees exceeded 130% for the 12th consecutive quarter as customer the acquired more zoom meetings through webinars and bolt on products.
For this customer subset, we expect the net dollar expansion rates remain above 130 per cent for the next day quarter.
For the customers with 10 of our fewer employees, which are not included in net dollar expansion metrics, we expect that cohort to the lower than FY 'twenty, 1 as more volatile.
And more volatile as economies continue to reopen.
Both domestic and international markets had strong growth during the quarter.
Our Americas revenue grew 159% year over year.
Our combined APAC and EMEA revenue grew 288% year over year to be approximately 34% of revenue up from 25% of year ago.
In recent quarters, we made significant investments in our international team, which have already begun to pay dividends.
The global opportunity remains large and will continue to empower our team to capitalize on it.
Now turning to profitability the.
The increase in demand and strong execution drove net income profitability on both GAAP and non-GAAP perspective.
I will focus on our non-GAAP results, which exclude stock based compensation expense and associated payroll taxes charitable donation of common stock acquisition related expenses and net litigation expenses.
Non-GAAP gross margin in the first quarter was 73, 9% compared to 69, 4% in Q1 last year and 71, 3% in Q4.
The sequential improvement in gross margin is mainly due the optimization of public cloud resources.
We expect gross margins remained relatively stable in the low 70 as long as we continue to support free pay per 12 education.
Research and development expense grew by 97% year over year for approximately $41 million.
As a percentage of total revenue R&D expenses, approximately 4.3%, which is lower than in Q1 of last year, mainly due to the strong top line growth.
However, on a quarter over quarter basis expenses grew by 33% demonstrating our commitment to building out our engineering team globally, and maintaining best in class product and innovation.
Sales and marketing expenses grew by 84% year over year to $191 million.
This reflects an additional $87 million over last year, primarily due to investments in hiring to drive future growth.
Sales and marketing expense was approximately 20% of total revenue a decrease from Q1 of last year, mainly due to strong topline growth.
We plan to continue to invest in adding global sales capacity and brand and product marketing programs in order to capitalize on our growing leadership position and growth initiatives.
G&A expense in the quarter grew by 51% for $73 million as it can do to continue to scale. These functions and invest in systems automation and compliance to meet our new scale.
G&A expense was approximately 7.7% of total revenue a decrease from Q1 of last year.
Revenue upside in the quarter carried through to the bottom line with non-GAAP operating income of $401 million exceeding our guidance.
This translates to a 41, 9% non-GAAP operating margin for Q1.
A large improvement from 16, 6% in Q1 last year and a slight improvement from 49% in Q4.
Non-GAAP diluted earnings per share in Q1 was $1.32.
On approximately 305 million non-GAAP weighted average shares outstanding.
This result is 35 above the high end of our guidance and the dollar in 12 of them above Q1 of last year.
Turning to the balance sheet the.
<unk> revenue at the end of the period of $1.1 billion up 98% year over year from $552 million.
Looking at both our billed and Unbilled contracts, our RP O a total of approximately $2.1 billion.
Up 94% year over year from $1.1 billion.
We expect to recognize approximately 72% of the total RPM as revenue over the next 12 months consistent with the level of this metric last year.
It's important to remember the deferred revenue in RP O trends are not reliable predictor of future revenue growth due to the large the set of monthly billing in our customer base.
In addition, the timing of our annual have increasingly shifted at the beginning of the fiscal year with Q1, now representing our largest renewal quarter.
We expect sequential increases in deferred revenue and <unk> each of the remaining quarters, the lower as our available population of annual renewals it's small.
We ended the quarter with approximately $4.7 billion in cash cash equivalents and marketable securities excluding restricted cash.
We had exceptional operating cash flow in the quarter of $533 million up from $259 million in Q1 of last year.
Free cash flow was $464 million up from $252 million in Q1 of last year.
The increase is primarily attributable to strong sales execution and collections.
Looking at the rest of the fiscal year, we expect to increase our capital expenditures related to ongoing data center expansion to support our growth outlook.
We also expect of legal settlement, which will be disclosed in our 10-Q to be of cash outflow in late FY 'twenty 2.
Now turning to guidance.
We are pleased to raise our outlook for Q2, FY 'twenty, 2 and the full fiscal year.
Please note that the impact and extent of the global pandemic still remain largely unknown or.
Our outlook is based on our current assessment of the business environment as well as our own research and conversations with customers.
For the second quarter of FY 'twenty, 2 we expect revenue to be in the range of $985.919 million.
We expect non-GAAP operating income to be in the range of $355 million to $360 million.
Our outlook for non-GAAP earnings per share of $1.14 from.
The $1.15 based on approximately 311 million shares outstanding.
For the full year of FY 'twenty, 2 we expect revenue to be in the range of $3.975 to $3.99 billion.
Which would represent approximately 50% year over year growth.
We expect non-GAAP operating income to be in the range of approximately 1 point for 2.5 to 1 point for $4 billion, which would represent approximately 45% to 46% year over year of growth.
Our outlook for the non-GAAP earnings per share is $4.56, then the $4.61 based on approximately 311 million shares outstanding.
Before concluding I am happy to highlight that we recently launched our ESG website, which can be found on our investor relations and corporate web site.
We also recently published our social impact report, which can be found on our zoom terrorist website.
Getting back to the community has always been a key tenet of what we do at zoom.
We look forward to updating our investors as we continue along our ESG journey.
As always zoom is grateful to the a driving force, enabling connection and collaboration worldwide with our high quality frictionless and secure communications platform.
Thank you for the entire team our customers our community and our investors.
If you have not yet enabled your video. Please do so now for the interactive portion of this meeting Matt Please queue up our first question.
Our first question is from <unk> Kidron with Oppenheimer.
Yeah.
Okay.
Okay.
Milestone today announced $1.5 million.
I'm trying to think of the past I think you'll launch for us in early 2019. So you took a guess of couple of years to get to a million and then 5 months to add another half of million. Although at the beginning you didn't have the global availability as you had in plus who are on pushing as hard on commissions.
Beginning from the sales standpoint, so help me think about what is the pace of addition, Kelly or should we take this to about 100000 per month. For addition is that sounds like the more recent kind of track record here and maybe also you could talk about the success of our zoom, United your ability to kind of bundle.
Meetings phone and chat together, how much of your renewal activity comes in the United right now versus maybe a quarter of 2 ago. How successful are you in that effort.
So we're really excited about the momentum of zoom phone and it was great to have of Graham as a guest star today on our call and what I think youre seeing in with the gathering EFI is that there is definitely increased momentum happening there. So it took us on <unk>.
7 quarters to get to that million dollar I mean that million C level and then yes that was in December so it's taken us about 5 months to add an additional 500000 seats for that number so it doesn't happen exactly.
Equally each of those months right as you can imagine there are trends at the end of the quarter, but we absolutely are seeing an acceleration of the momentum there and very excited about it.
And with respect to the United plans of how much of what you'll renew on activity.
Thompson of this type of a bundle for them.
Yeah, so absolutely our salespeople take the opportunity when there's the renewal to talk about cross selling and up selling in terms of the specific packages themselves, we arent going to disclose the actual breakout of that but a lot of what you saw the slows and the revenue coming from new customers is the opportunity that they saw the upsell either zone.
On our Webinars for rooms as people are thinking about going back into the office seats of again, that's great. Thanks, guys. Good luck.
You said just the quickly add on to what our credit side of it of commerce to zoom phone gross what's fascinating is that the board our product innovation.
Reliability true the availability of all of the vertical features there are so many customers no matter, which of solution at the probably be bought on the on prime or other cloud based off of the solutions. The auriga zoom is for this.
Alright, good thanks, Thank you.
Our next question is from Dan Bartus with Bank of America.
Okay.
Sort of again.
Hey, guys I am sorry to see you.
Thanks for taking the question so kind of you had modeled heightened churn in the first half of this year related to renewals coming up.
Based on on what you're seeing what's the reality do upmarket renewals really mean heightened share, whereas it's showing more of an enhanced expansion opportunity versus what you expected and maybe just continuing with the theme on the other side of the business you know the 1 to 10 employee base I'm just curious what's the latest of what Youre seeing in the second half of.
This year any reason to be more optimistic than when you started this year. Thanks.
So we were really pleased and as I said great.
Great. Thanks to all of our renewals and sales of online marketing team for their great work done in Q1, as we had a better than expected result in terms of not only retaining customers, but also upselling them during Q1, especially in that cohort of customers with greater than 10 employees. So that's really it.
Exciting to see as we.
And we expect that momentum to continue as we carry through the year of ways to get significant renewals also coming up in Q2 as well.
<unk> of the customer segment with fewer than 10 employees as we mentioned in the prepared remarks, we're still expecting that to be more volatile as that's the segment that we've seen over the last 15 months has reacted more quickly to the openings of potential closings of markets around the globe.
Alright, great. Thanks, guys.
Good day.
Our next question is from Alexander <unk> with Wolfe Research.
Hey, guys. Thanks for taking my question and congrats on another great. Great report I guess in the first for Kelly on I've got a quick 1 for you Eric Kelly the on.
The ending debate on the stock I believe is that what does growth look like in 2022, and I know that youre not kind of guide there now and we understand the terms of unknown factor, but can you help us better understand the trend that you do have control over to the specifically how much are you increased your quota carrying capacity relative to pre pandemic levels, which is what are you seeing on the productivity of.
Of the sales organization relative to pre pandemic and what's driving that productivity for that.
Yeah. So first of all we can continue to see tremendous opportunity.
We were thrilled with the performance in the up market in Q1 as Eric just talked about we had our largest deal to date and we had some amazing customer wins and so we are continuing to invest.
In our direct and our channel sales organization, especially and we've seen.
Pretty consistent sales productivity it.
Just going back to levels that are more reflective of pre pandemic, but but at an elevated level from there given the benefit we have of the global brand awareness, our expanded portfolio of products and so we're really excited about the future.
Especially in that upmarket in international as well as you heard they are of 34 per cent of revenue and then of course, we'd look to zoom phone and the continuing momentum that we're seeing there.
And then Eric the return to office is on everyone's mind, you know looking at some recent articles I think it's on on your mind as well was that it would be logical to think about zoom rooms is really starting to become a material growth driver in this new and developing hybrid world can you talk about what youre seeing from that product today, how do you think about the op.
For <unk> in terms of just the sheer number of conference rooms that are out there and what are your most forward thinking clients doing today and how does that impact on the spend relative to.
That youre seeing.
Yes, that's of Great question first of all I wanted to say I'm of final view, because they'll go weekly no operators, sometimes the data update about of what's going on at the market wherever the Dol on thank you I think of it accomplished zoom rooms, that's a huge opportunity in particular for every business. When they are reopening of their office because of the way the.
All of the zoom rooms, all of the hub rooms are very different the day.
As I mentioned early on.
<unk> got a review, which puts the room for this spin.
And the remote it but it has been on equal footing that of kind of expressed I didn't know at the request of the before but in the future of more and more of lags that of lot of innovation on zoom rooms, I wouldn't say this is probably the third revenue driver in terms of solve of usage and lots of of new use cases also was more important to me of that.
8 of comps for the comp room of losing the setup customer of reliable considering the experience many of them in the back of the whole because of the few trades about of hybrid when they are looking for the whole. We also want to have a consistent experience.
Another reason why a hospital not only do they deployed the backstop of zoom meeting of weapon or all of whom but also the likelihood of covering expenses as well. So that's another driver for other customers to stabilize on zoom viable for meetings webinar or the phone.
Again, a lot of innovation on the pipeline for the.
The zoom rooms.
Alright. Thank you guys I appreciate the couple of months.
Thanks.
Our next question is from.
From Patrick won't Ravenswood JMP securities He's joining through audio only.
Yeah.
Hi, Pat.
The Patrick are you there.
The press star sixth on mute yourself.
Hi, sorry in the car you don't want to see that.
Eric I would love to hear what you are.
Sort of like 3 strategic imperatives that you have for this year.
The I'd love to hear what you think they are.
Yes, so Patrick so I was simply yes, we like kind of driving very safely.
Thank you.
On the share of resumed my personal.
For the August serve as the company you know key initiatives quite so I share with all of our team.
The started the year for me I think suite for BARDA for me as the CEO of right number of as Greig, a day and make sure from some of our company culture to maintain the common culture evolved for Ebola of ophthalmic culture, because you have so many employees coming on board of remotely number 2 is the <unk>.
My time on the platform on the platform platform is not only a kilo video conference of Abbott company, notably appeal of video booths.
But also the overall platform lots of on the least about some of the very big lots of kind of scratching. The good deal. So thats more of them my personal part if you look at it as zoom from Australia. The perspective first of all I think of how to mixed Shaw support all of those of businesses, we opened and read into the offices, that's a very very important.
Why you see a lot of ambitious on 1 of that of angles right either of the copper room on the phone or even building of chat on meeting that's the number 1.
The initiative number 2 is really about the international market expansion that the.
Huge opportunity from the 25% for more than 30% I think we do see a lot of opportunities from other EMEA APAC, Japan on a lot of opportunities might recall to invest more and the second thing lots of on the Liza is overall power to make sure. We all of a powerful strategy the worse.
I'll do the offered on our platform driven by our zoom of events zoom apps on the UC platform and also of our XD Cabinet I think that you know essentially that of the setup.
For the future growth, a big kind of inverse of the multiple of our platform.
That's super helpful. Thank you so much.
Thank you Patrick.
Next we have sterling on <unk> with J P. Morgan.
Okay. Thanks, Hi, guys, great to see you I love the zoom price Gogo.
So first just wanted to see.
Sort out.
You added about $74 million in revenue quarter over quarter. This quarter of about 30000 customers. If I look at the same addition last quarter actually mathematically points for the average new customer being smaller of this quarter than what we saw last quarter. Some of what youre seeing in the business or is there something else going on underneath those metrics.
Yes.
I think that it actually.
Turns on when it is in the quarter in terms of the renewals. So think about especially Q1 has been very weird timing from last year, where all of those the.
The real dramatic change in the business happened on March 15th for literally halfway through the business. So what we don't have the full benefit of all of those rules yet in this quarter youre going to see it come into next quarter and Unfortunately in Q1 is always going to have that kind of funny phenomenon because most people co term with their original.
The 8 which was sometime after March 15.
And last year.
Gotcha.
The other thing or the lack of editable more neutral look out of Q1 of our Q2 last the fiscal year and for most of revenue growth driven by it'll auto for all of them buyer. So I presume on consumer SMB business no. Starting Q1, we do see you know driven by logic customers enterprise customers right Ultimate zoom phone as well, we proof of our largest ever deal right.
As of the very good of scent I think of you know.
That's the future trend driven by our <unk> customers.
That makes sense and then maybe 1 quick follow up can you give us an update on your plans on where you are to monetize on zoom in zoom events.
Yeah. So on zoom has 2 parts 1 is about of the corporate events on all of our ease of BARDA consumer of consumer of events I think our applies to launch our corporate even for US. The ascend today is we have so many in our web and our customers. They are looking for a lot of new inhibition necessity.
Kind of run their annual use of Congress everything on land, that's why it in the double down on our EBITDA platform I think of well get into books on the corporate EBITDA for us on and then later this year. We are also on probably the G. Our consumer events essentially you've had the time, you'll have a zoom meeting of wholesale accounts you can sell a ticket you can teach anything on that.
The small of the the opportunity for the second half of this year.
Makes sense. Thank you. Thank you Sterling.
The next question is from meta Marshall with Morgan Stanley.
Great. Thanks.
Kelly you noted the gross margin pick up was largely due to kind of gains in efficiency, but just was there any contribution from you know students may be returning to in person and just the less uses from students that's worth calling out and then maybe the second question. Just you know you also noted that international.
All of us continuing to see traction from a lot of those channel investments you made kind of at the time of the IPO just.
You know where are you on channel development and the U S versus international and just how do you see that developing.
In terms of the gross margin. It was really was more around continuing to optimize with our public cloud partners.
As we scaled up we've had the opportunity to work with them on better pricing packages and that's really what that the series of rather than seeing a dramatic shift yet in the students going back to school and as we've talked about before there is a pretty significant impact on the gross margin due to the free paper as well and we are.
What we expect is that is going to do what you say that was going to come in over time is if all of the sudden they were to go back to school you would see a pretty dramatic step function improvement on the gross margin, but I expect that youre going to see that probably happened starting in the fall as more and more students are able to safely go back to school.
And then in terms of international expansion specifically around the channel. This is a really great question, we had a discussion about that.
Last couple of weeks. So the team has done a really good job in focusing on our U S channel strategy, especially around zone and building out our master agent program and we are now working on building out the out internationally, it's probably didn't guessing, but we're probably where we were in the U S a year ago.
So it's probably about a year behind in terms of our international channel strategy. So great that there's opportunity ahead, and Laura and her team are working on that now.
Great. Thanks, guys.
The next question is from James Fish with Piper Sandler.
Hey, Kelly and Eric Thanks for the questions on the Kelly actually happy early birthday Tomorrow.
Early birthday for you to Jay Thank you.
Yeah.
You know Eric you guys noted of win with Kimberly Clark for Zoom phone, yet 1 of your competitors sites.
Really <unk> is 1 of their key partners are you penetrating those tech incumbents that have in theory really opened up their installed base is more of a I'm specifically talking like on a buyer for example, more than you were last year as.
As well as what are you hearing with carriers about partnership opportunities.
I think of first of all I think as of Kelly mentioned earlier, you know not on 1 of your Chilean Barbara directed some of it of comments from equipment and a lot of lot of our customers. The already good recruiting of initiatives with those carriers all partners on Master agents, we are already of doubling down on that basis.
Essentially it becomes more and more importantly, our mutual fund gross net Australia day I'm inside of that every time when we were working together with the our channel partners for carriers pick up British Telecom for example, when they work on it look at the gallery is our potential of the prospect of.
Out of the value of the hour zoom for service.
The other 1 is realized this is the services, where the seawell, but also look at we share the roadmap yourself you said Wow, that's amazing because of the competitive any other solution in the on.
All of the cloud based solutions.
Of the lives of our roadmap really lies on the usability on the integration with video meetings Webinars and also the reliability of the securities and the that's the reason why women by the British Telecom the aggregate of for zoom out of Kimberly Clark basis, if the huge disappointment I think overall, we see more and more deals.
You can put you called out when customers the tests of our solutions, we have a high of Carbonous zoom phone is much more in the meetings that any other solutions part of it.
Okay. That's helpful. If I can sneak on 1 more obviously some exciting announcements with zoom.
And from an appliance and other things for the last 3 quarters I guess, how are you thinking about chat functionality of really outside of the.
Video experience apps as well as kind of a broader customer experience and collaboration markets longer term presumes growth opportunity.
So screw the question so it accomplished the human check might we already had in the buildings for many many years some customer of even sunrise on zoom video simple zoom attack all of our approach is always look at the Airbus you from the end user from Casa perspective, the already deployed of slack is wonderful and of the 2 best of breed.
For the service we are working together very well some customer we wanted to spend on the Arris, Inc. For Mexico is okay. We also in brokerage of as Max of the cheese, some parts of the might be using other chat on standby of everything on our of classics overall I think I. The last thing the customer leaves with the lack of adjusted equaled 1 shred of solution for everything that's why I think.
The integration with our meeting on the phone for store kind of help drive of all of the uses for our customers again without taking on we're open minded approach no matter, which dilutes entitlements on now using we wanted to make sure we'll have much better integration experience.
Thanks. Thank.
Thank you.
Next question is from Cte for underground with Mizuho.
Hey, Eric and clearly with the fear of.
Thanks for taking my question.
I wanted to dig into the 100 day polygon.
The crossroad.
The restaurant paying hundreds of collagen that segment. So this was the big renewal quarter for you guys. So just wanted to understand what sort of changes you have done to drive such such as the and what have you learned so that he can apply in the Q2, and then a little bit color on what sort of growth in terms of on is that more users of our cross selling.
What you saw in that segment.
Yeah. So first of all of the <unk> take the last part first it was really a combination of both as we talked about some of the customers. We mentioned in the prepared remarks, we saw expansion in terms of users some transition from active hosts to enterprise licenses as well as additional.
The products being deployed.
And what we did I think we talked about this last quarter we.
And made sure that especially our upmarket reps.
We're aligned with the goal of renewing as many customers as possible. This quarter. So we had a special bonus program in place for them to help them focus on renewals and it really works in that program.
He is in place also for Q2, so we're looking forward to a strong renewals performance you need to adopt.
Okay.
Quick follow up on the it's really impressive to see that 90 day 90000, plus user customer. So when you think of your addressable market and on when and.
And mainly in the enterprise business is now looking to reopen so how many such large customer you could potentially close.
Well I think the way that we look at it is there is a huge market opportunity already is while we're super excited about deals like this when you looked at for example, the global Teekay or the Fortune 100, they're still a relatively small penetration in for.
<unk> of customers that are paying us more than $100000 I think that in the global to pay we're still under like 15% that are paying us more than $100000. So that to me. This represents opportunity that is ahead and we have our sales team is doing a great job of focusing on all of those opportunities we have regular check ins.
With them and so there's the being the potential is still from NASA.
Thank you thank you Bob.
Thank you for it.
Our next question is from will power with Baird.
Great. Thanks for taking the question.
Eric earlier on for the previous question you spoke to some of the there is of strategic focus for you and the team this year and I think Brad at the top of that of near the top of it.
So what's the focus on turning zoom into a broader platform and looking at those opportunities. So as you look out over the next 3 years and putting zoom phone aside which is already having tremendous success on zoom rooms, as you've looked at the SDK slash API opportunity, which is rolling out if you look at zoom events now.
What gets you most excited in terms of the bigger growth opportunity and I guess within that what are you thinking about today in terms of contact center here all of the new cash providers talk about the importance of contact center and you probably get the right.
Every quarter, where does that fit into the equation there too.
Yeah, well that's a wonderful question I think there's so many things I'm very excited every day, but the comps with all of the club for a day.
And we'll be excited for next for 5 years I would say number of Etsy is about assume of apps.
So if the sensory if you look at zoom right zoom all of them. When we go to a zoom in Malaga mitigation tools right given the pandemic crisis a lot of consumers consumers are using zoom again of steel for the you know for.
For the British communications or maybe of consumer communications Mike.
If you look at it as zoom interface.
It does not give you a lot of the context.
I'll just bring you, though the context for this is do people centric of integrated on the road away of it before the meeting zoom or are you on a complete games together you kind of proof of my ex will be of course, but how the grid integration of it's all about the survey monkey. The all others, you're essentially zoom, we become operating system for folks on the people centric interface for the zoom apps that the.
Huge opportunity, it's part of our overall marketplace Australia.
<unk> zoom SDK and the other integration that's the most of the exciting opportunity.
Hey, the comps with contact center is part of our part of our UC platform.
And that's the reason why I mentioned, the zoom Copia and of scheduled of September 13th or 14th of stay tune you will see something hopefully we can do something for 1 of the contact center again, that's also of the bigger market to be we do integrate very well with our grid of part of an apartment on and also the Hagen banks the PTO Inc.
Context on the whole bit about getting to the more against some of the state using.
The 2 of them that is unpopular.
On Florida. Thanks, Thank you will.
Next question is from Matthew Mcminn with Deutsche.
Hey, guys. Thanks, so much for taking the question.
The first just on zoom phone if I could just go back the congrats on the success.
Can you give any more color in terms of where you're seeing some of the accelerating growth both in terms of customer cohorts the.
Upmarket versus small business and then talk about some of the geographic mix, where you're adding subs and then just the go back to churn, particularly for the less than 10 employee base, maybe Kelly can you talk about how that trended in the quarter realm.
Relative to expectations, and then talk about what's embedded in your forecast for the second half of the year. Thanks.
So in terms of zoom phone, we continue to see success across all segments of our business as we said from the beginning we were really excited about continued expansion into the upmarket and we currently have 21 customers with more than 10000 feet.
The zoom phone. So I think that shows that we really are seeing momentum in that upmarket in the enterprise customer base and so that's really exciting and then international was the fastest growing segments in terms of geographical location for zoom phone the platform So thing really why.
<unk> Fred momentum across the.
And then in terms of the the ones that are 10 cohorts. You know we have we've talked about it consistently being the most volatile cohort we've seen significant growth as you know of.
Year of little over a year ago with 40% of of revenue growing to the mid 30 currently and that's certainly been a segment that had been a lot more volatile than in the up market due to the fact that first of all most of them by a majority of them by on monthly plans. So that's the flexibility that we give them.
And we want people to stay with him because they need it but we have seen volatility in that segment and we have modeled when we came into the year, we modeled accelerated churn in that segment and it.
That's how we're continuing to think about it as we look for the rest of the year.
So.
Just to quickly add a little bit of part of what the kind of 5 the new kind of pulling the deployment today I do not think of any customer no matter of big into part B part from the do not have opened before the or to have some either on from Oclock. Thus the reason about you can look at the other growth that it means our solution is the better because of it we are replacing.
Any other solutions is not a brand new market right. So that the replacement really have sauce for drive up our growth nor of the big enterprise on credit the on Prem deployment of SMB customers or even the enterprise customer who deploy all of the cloud based system solutions the lives of our solution.
Yeah.
Got it. Thank you both for the color and congrats thank.
Thank you.
Our next question is from Karl Keirstead with UBS.
Thanks for everybody Kelly I'm going to ask you a fairly prosaic question about cash flow.
Congrats on a run rate.
$533 million on operating cash flow of great performance. So Kelly I think are we in a number of investors make some assumption about the GAAP between operating margins and operating cash flow margins. So given that zoom you. Obviously raised your full year operating margin guidance by a decent amount.
You might see people apply that GAAP and raise the operating cash flow margin guidance or estimates as well, but I. Just wanted to ask you as everybody is tempted to do that whether it is anything happening in <unk> that you would encourage us to keep in mind as we adjust our cash flow estimates. Thank you yeah no. Thank you for asking.
And that for all.
The first of all of Q1 due to the high level of renewals in the thing are our biggest was the biggest bookings quarter last year right and so a big renewal quarter also means the largest billing quarter for the year.
So that leads to also the opportunity for exceptional collections in the quarter. So the bear that in mind.
This will be the largest billing and renewal quarter of the year.
From the prepared remarks, and then as we continue to go through the year you should go back to see how the relationship between free cash flow and operating margin existed kind of free pandemic. If you go all the way back for the sort of more normal operating period. That's what you can start to see as the new through the year the AUM.
Only kind of exceptional considerations for the rest of the year is the U S. S E T purchases in in situ and Inc. Q4, so that remember that cash build up as we go through the 1 and into Q2 and then there's the part isn't the same interest rate.
And then Kelly, maybe as a follow up this dynamic of renewals being front end loaded. This fiscal year, you cautioned us to be careful about our RPI O and Dr. Sequentially is there anything else that that kind of renewal front end loading distorts or changes in terms of the seasonality and any other metrics that you would encourage us.
Keep in mind.
Well the 1 we just talked about the billings and collections right. That's the that's really the impact okay terrific. Thank you very much yeah. Thank you.
The next question is from Champlain, St Rafi, but at the end securities.
Thank you very much so as kids go back to school, what kind of gross margin uplift are you thinking about as possible on the second half of the year.
For example use of 74% are you thinking of bill like a couple of points of uplift in the second half.
Following their view of a long term target of 80 per cent for the gross margin part about your expected timetable to get there.
Yes.
Yeah. So currently we in our in the guidance that we just gave we have not modeled any impact or benefit from return to school as we are committed to supporting the needs of those for as long as we're in a situation where it is it safe for students to return if they were to.
All of a sudden go back, which I don't think of how it happened and you would see certainly a couple of points improvement in the gross margin I think what'll happen likely is it it'll be more major than that and little by little you'll start to see the gross margin starting to creep up again, but in terms of the timeline around that long term margins.
At 80%, we haven't set of timeline as it remains still unknown on how long that service has been the means by the schools.
Yes.
Our next question is from Tyler Radke with Citi.
Okay. Thanks, a lot of taking the question and I loved the Siem the Domino I'm glad we didn't have the writer question Susan that the wipes business.
The Australia that's of Great idea for next time I forget you off.
So all of that I'll go first.
So Kelly I wanted to ask you, obviously really strong revenue growth this quarter, but I think most investors couldn't help but notice the the magnitude of upside relative to your guidance was smaller than we've seen in the last 4 quarters.
You, obviously called out better than expected churn and customer adds but look good relative to the street, but just wanted to understand was there anything unusual that maybe held back.
The more robust revenue upside relative to your guide or is this just kind of the.
The new normal that we should expect given you're starting to lap some tough comps yeah. I think yeah. We talked about this also in last quarters call as well as we really started to round the year on some some very difficult comps and also you know we're approaching.
You know almost $4 billion in revenue this year, we're becoming a very large company and I think are still very pleased with our guidance of 50% year over year growth, but yeah. This is going to be more than the normal which is what I would expect you know of a company that at the scale that these are more normalized growth rates that piece of it.
Okay.
Great. Thank you.
Next question is from Matt Stotler with William Blair.
Hey, guys. Good for you and thanks for taking the question.
I'll just ask 1 hop on.
On a little bit of late.
We have a conference going on so I'm, sorry, if somebody asked already but.
Obviously, the the zoom events platform, which was great to see is something we've been thinking about for a while in the kind of saw the on zoom release of <unk>.
That would be of part of this going forward.
Double click on.
How meaningful will be opportunity with zoom events could be obviously it makes a lot of fundamental sense from a lot of companies, but I hope some of our events on zoom, but as you think about what that broader opportunity could look like what are the numbers round average qualitative would be helpful. Thank you.
Eric do you want to talk about the vision sure episode of it so much. So the reason why the bureau of Zoom of humans is first of all we're really.
<unk> received a lot of weighted back from a customer side of the Rd posted a loss of zoom <unk> now all of the amount of the more especially of the prevent and post the event on our.
How to run efficacy of virtually.
On lat likely to the the ticket zoom the pulp you booked.
Some of the day of are you planning the no the zoom the popular in the all of the way until you finish the everything mix of everything you can count on 1 platform that's opportunity coming from oil well I think given the you know the.
The Asa of pandemic heartache for like later, but the more pressure no for us how to quickly instead of by the customer needs, but we do already have a lot of installed base for zoom video webinar I think it's the monarch of natural migration.
Migration to the zoom humans platform also at the new 1 of new opportunities not only of trend from the corporate events, but also later this year for the consumer presume argument.
The mission of early right, you really kind of a host of very meaningful event on you can sell of tickets to your participant will have a tighter integration with the payment of provider as well as the reason why it couldn't be it in all of the revenue driver on both the corporate side and also on consumer side.
Thank you thank.
Thank you.
Next question is from Matt Van Vliet with BT IAG.
Hey, everyone. Thanks for taking the question I appreciate it I guess.
Thinking about the channel question, a little bit differently curious how much of an opportunity.
Is that for for the video on when we saw it or at least for those of the landing spot for the video side.
Or is that primarily zoom phone right now.
Driving most of the channel business.
No early on we saw great success as selling selling meeting through the rack and we've continued to expand our channel relationship across the both meetings and phone.
But it's it depends on where the customer is then sell right, we really want to meet them and provide them the opportunity to have access to our sales organization in whatever manner works for them. So we do obviously sell both meetings and phone on a larger percentage of our zoom phone business.
Come through the channels I think that's just based on historically how organizations have typically bought but again, it's really up for the customer we want to meet them wherever they feel most comfortable.
Great. Thank you.
Hey, Matt.
Our next question is from tasks of jealousy with Guggenheim.
Hey, guys. Thanks for taking my question. Another question on Zoom phone you have been selling through through channel partners and direct as well on accretion of about the impact of margins when the sell through the channel was the sort of indirectly because I've heard that the lot of spear of some residuals here of a bit of the channel partners.
Sell through them. So can you talk about the hit to margins for zoom phone when the seller deal directly with the southern put you on the button.
Yeah Yeah.
We certainly have a channel program that we think is attractive.
The attractive and competitive in the market, but I will say, we thought a very long time about setting the rates and where they are and allowing them to having a differentiated product. So the way that we see it is while there is some impact of the overall margin when they're the channel partner involved it's really about the broader.
Opportunity to continue to take market share and grow as quickly as possible and again back for the last question, we really want our customers to be able to buy and the way that feels the most comfortable for that so while there is some of them have to see margin overall, we think that for the long term, it's absolutely sustainable and it's really the best approach.
As we continue to focus on growing top line.
And just 1 more housekeeping question you didn't I don't know if you give us the number of zoom phone customers. This quarter was in the last quarter was 11000.
Maybe I missed it but can you comment on the number of zoom phone customers. This quarter. Yeah. We did not disclose that that's 1 of the things that we're gonna do you Wanna milestone basis, and the next milestone where we are likely to dispose of it will be analyst day at the until the end of the cap.
Thanks, guys. Thank you very much thank you.
Our next question is from Jonathan Kees with summit insights group.
Great Hey, Thanks for taking my question in the congrats on the quarter of I just wanted to of double click on Eric Your comments earlier about for.
Bones, and that Youre, winning more and more it sounds like from other cloud providers of yes is that.
Coming of bigger part of our the wins for phone do you see that as an D day are the stronger growth trajectory versus replacing the legacy premise of our phones.
Phones business and as well as.
If you can provide any details in terms of like any bake offs between you and the other phone just providers that'd be great I know you may.
The hesitant, but the more detailed of better thank you.
Sure I think first of all your other kind of limit of 2 years. Since we launched this new from the white lots of reported 1 point of 1 maybe the.
Low paid seats at the Grandma shared all of it the whiteboard session is order of $1.5 million.
It doesn't tell us from my <unk>.
Works right. So the day it looked at lot of enterprise customers very largely deployed on Prem solution. That's a huge opportunity for aerie, the par business service from <unk>.
Subscribers, including zoom, so and the zoom I think of the Cob is the phone business is the base.
Non of Margaret a sales accommodated for sweet win there. So I think of where a part of that and also look at the other vintages, who already deployed cloud based of home solutions now all of the growth coming from replacing those solutions with the field a lot of abuse right on a no matter of Richmond with too.
We do see the you know.
The customer.
The other cloud based upon submission of switching of loss. There are multiple reasons first of all of the already good we already Peter Foss suddenly didn't look on of our solution is the modern interface much better integration of the video because ultimately we think.
For the video of our statements see those 2 we can brooks into White springs, otherwise you'd be brought several of those through simple boom Assembly solution for video for.
Any of the perspective, it's not a consistent on Norwalk zoom is much better position of the any all the windows on Datacom I know so we look at all of our other you know the.
None of the zoom event apps on most of the webinar zoom rooms of lot of odyssey's overall cost of them alive. Our experts right. That's the reason why we looked at on opportunity could come from lot of enterprise on Prem deployment or the cloud based on.
You know opportunities from other from some.
The progress we do see growth coming from almost every day.
But again too early of hotel and you get 2 years, maybe the next 2 years I can share more with some video of a number.
Look forward to it. Thank you Eric Thank you.
Our next question is from Chaim Siegel with Elazar advisors.
Yeah.
Thank you.
Yeah.
We can hear you on.
Oh No I said my question on this thank you Oh, okay.
No.
Yes.
My all sorts of Weird suite of Florida. Thank you rich.
Thank you can we have our next question is from <unk> <unk> with RBC.
Eric Kelly. Thanks, so much for for taking my questions nice to see continued momentum in the business.
Wanted to ask a little bit of a philosophical question on.
Which is around hybrid work right I mean, I think it's consensus at this point that the workplace of the future is going to be hybrid.
But you have this really enlightening survey a couple of months ago 1500, zimmers of what that means in everyone's very sharply divided on what hybrid work is whether that's home as the primary or the office of the primary something in between so for.
The simple kind of question..1 is hybrid work mean, when you think about that and is there a particular market.
Auto.
Yeah. So I'll go ahead of of work that you think the Zip.
Yes, so sort of risk.
Of course, a little bit of broken but anyway. So to answer to your question. So I happened to read on.
On the article today from Bloomberg.
In May I think the data in the survey right the 1000.
U S. Adults.
On a certain percent of the respondents the mission of the need of Collectability.
If you look at of the millennials, although the Genesis of the day the number increases for the Fortinet per se right. So meaning when you gave the collectability.
2 of those employees all of us the often lose the patents. So the Ada pumps hardware first of all of that of it become midstream however, different businesses, we might have on dip it in a way to manage the hybrid world I've got 2 days in the office of Sweden. The August is different right and also the minor 1 they can always on elevate the at home losses could be different but.
Overall, the definition of the hybrid work is about sort of the ability to get employed flexibility.
Yeah.
Alright.
You Rishi.
Okay. We have time for 1 more question and the last question is from Tom Roderick with Stifel.
Okay, great. Thanks, Matt for the question, Hi, Eric Hi, Kelly, Great to see you.
I was thinking back to a year ago on on your first quarter call last year and with all of the great success, you're still spend a fair bit of time on that call kind of walking us all through the big plans on how to beef up security in and solve for a lot of the the emerging concerns that we're coming with all of this jump in activity I think it's pretty telling to your success on that.
Front that we haven't uttered the word security once on this call I think but I also recognize the threat vectors arent going away here can you just give us an update Eric to your thoughts on.
What what what you need to do to stay ahead of the security plan you've reached end to end encryption. Your 90 day plan was the success, but what's next how do you stay ahead of it.
Yes. This is grid of the question before I talk about of next can meet the IP for the fixed step back for sure of what I had to happen right. Because you know zoom or the build of the so for enterprise customers. We never thought of it of K 12 schools of consumers consumers, who are going to use the we never thought about that private dynamic crisis. That's in Boston a lot most of the channel.
For the coming from that for.
Well I think that we really take it out of seriously right moving.
The board more than doubled the size of our company and the reason why is the 1 of adequate of more resource on privacy of secured I can tell you. We have almost of 2.2 hundreds of people looking for the private credit now it is true I would really doubling down on that that's what the cool as well so critical.
All of our customers. The reason why you know earn its possible.
We understand what out of habit I know the.
That's why a lot of people joining our weekend of backend of last May on April the 90 days and I'm still running the newmont for the security.
<unk> share of everything open transparent now that's the secondary sort of the thing I think of we see prudent of privacy is not only of feature to the out of court. The EMA in terms of per se and the functionality of features a roadmap of innovation areas right. This is our I've been the new.
Our approach of also we share everything with our customers. So in terms of us to be civic of features or E. Hoffman a lot of the smartest things Mike you know like the recently added a notification and particularly out of a lot of zoom acts in the zoom App the Mike wanted to and the the span of your meeting you know the.
The content without the.
The trading customers, what's the demand that's not as good of from a security perspective, a lot of the smaller inhibition on Datacom. So again, we do spend a lot of upon the resource on that that's still a part of the overall ambition for the supporting the privacy and of secured is extremely important for our vehicles.
It's a great update thank you Eric the buyer.
Of the Red Lobster recently on the lookout at the RSA Security Conference you know they are using zoom as well right. We have a lot of cost we could accomplish for standardized on zoom platform it of dovetail with <unk>.
The securities Bert nurses.
Yeah.
Great. Thank you.
Do you.
And that was the last question, we have time for today.
Thank you everyone and thank you for joining us.
Thank you all so really appreciate thank you for.
Hi, everybody. Thank you.
Yeah.
The recording has stopped.
Goodbye.