Q2 2022 Zoom Video Communications Inc Earnings Call
People are very happy to expand with a leading packet for who increased their meetings licensees or six bolt to 95000.
And with a global finance financial services customer, who added over 63000 from license mix.
<unk>, our new largest customer.
Both wins work displacement of legacy solution that is zoom, Pete interim assault reliability simplicity and integration.
And let me recognize a few very big wins for the quarter.
<unk> I wanted to work on and you see corporation with Us.
Pamela B.
The auto the Japan and you see is a leader in the integration of IP and a network of technologies.
Their slogan.
Orchestrating a brighter word.
In order to enhance the productivity.
Hi, Bruce and happiness of their global workforce.
See deployed approximately 100 opinions solvent zoom meetings licensee.
I also wanted to work on a secret of technology to the zoom Abominate take.
<unk> is a global mass data story.
The constructor leader innovating word class precision engineering data storage and measurement solutions with a focus on sustainable partnerships Seagate recently decided to modernize and integrated their global communications infrastructure with over 14000 zoom.
If the licenses and over 17000.
Young licenses.
Next is a zoom phone also in.
In Q2 of last year, we were common exxonmobil.
Rich developers and applies next generation technologies to have safely and respond.
Medium assembly meetings are worth drawing needs, while energy and chemical products to the zoom platform.
They began at zoom video conferencing hospital to enable their teams to collaborate globally.
We're a critical I havent seen of a partnership evolved over.
Despite year and excited that Exxonmobil has recently decided to zoom phone could further enhance the user experience for their global workforce leveraging a communications platform that is very easy to deploy and manage.
In addition to this critical customer wins.
Pop also closed another strategic channel partnership.
With Comstock.
Largest cellular operator.
<unk>, which is a work most of the loss of the country by population.
Common cell understand and want to support their 170 million subscribers.
For seamless and a reliable and what you are missing could thrive in a digital workplace era.
They will be leveraging the power of a zoom developer platform and IFC part of improvement to deliver a fully integrated solution lay out their cloud offerings.
The needs for the enterprise segment, and zoom and native apps for the consumer segment.
The cloud version, because telecom cell and assume we're bringing communication to the next level by combining zoom as a strong capability and a feature rich platform with a telecom sales better.
All for an oddity in Edinburgh and localized interface.
Together, creating a powerful tool to improve customer productivity and collaboration.
Thank you AMC circuit, Exxon Mobil and the telecom sale.
<unk>.
In what is one.
Bedroom to build platforms that are combined mid teens, a phone events office technology and develop our solutions.
That is the symbol reliable and frictionless.
Fundamental truth underpins, our leadership position in video conferencing and will help to drive further growth is doable.
One of them and assume groups as we expand our platform and addressable market in the hybrid it world.
Today, we're very fortunate to be a leading global brand with over half a million customers, having more than paying voids.
Our.
Boone taller innovation engine is very strong and boosted by our growing zoom apps developer ecosystem and acquisitions, such as the tax that will strengthen our position in.
AI transmission and translation.
As organizations and in.
In re imagined work in <unk>.
<unk> and our collaboration with.
Faced with a once in a lifetime opportunity to drive this evolution in multiple a multiple fox.
Thanks again to the hard work of our overall target is 700 employees and at the task of.
People loyal customers, we are positioned very well to be successful as a platform and briefing and enabling hybrid it world.
I'm very excited about the future.
Journey has only begun and.
And with that.
Now let me pass it all work together thank you.
Thank you, Eric and Hello, everyone.
We had an example Q2 with several highlights.
The first of which present strains in the enterprise.
We were able to grow the number of enterprise customers spending more than $1 million and <unk> by 77% year over year.
And the second highlight is the acceleration we have seen with inbound.
We grew the number of customers spending more than $100000 in <unk> and zoom phone by 241% year over year.
In August we will reach its actually after right before this call we reached 2 million.
Zoom phone fee only eight months after reaching our first million.
We added eight new customers with more than 10000 feet in the first half of FY 'twenty, two bringing us to a total of 20 SEC.
And in Q2, we broke our record for the largest zoom phone deal to date.
And the same day.
It is important to note that as we just lapped our first full quarter year over year compare since the start of the pandemic, we have seen customers returned to more thoughtful measured buying pattern.
While revenue profitability and cash flow were strong in.
One quarter in the first half other metrics have began to normalize, especially when compared to the unprecedented year over year comp.
In Q2 total revenue grew 54% year over year to one point and here are $2 billion, marking our first $1 billion plus a quarter.
Secondly, five quarters after reaching a $1 billion annual run rate.
The top line result exceeded the high end of our guidance of $990 million.
We saw strength in our direct and channel businesses, which grew at twice the rate of our online business.
In town zoom rooms in Asia Pac.
<unk> also accelerated in the quarter.
The year over growth in revenue for the quarter was driven by a healthy mix between new and existing customers.
Where customers account when sorry, excuse me new customers accounted for approximately 74% of the incremental revenue and existing customers accounted for 20.
That growth of the incremental revenue.
Let's take a look at the key customer metrics for the quarter.
131% year over year growth in the upmarket as we ended the quarter with 2278 customers generating more than $100000 in trailing 12 months revenue.
Thanks for the exited the quarter with approximately 504900 customers is more than 10 employees up 36% year over year and representing 64% of revenue.
In Q2 customers with 10 or fewer employees represented approximately 36% of revenue in line.
Q2 of last year, but down from its high of 38% in Q3 of last year.
As we discussed previously this cohort, which comprises F&B and consumers, who typically purchase online is more volatile and we expect it to continue to decline as a percentage of revenue as customers adjust to the evolving.
Line with government.
Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 13th consecutive quarter as existing customers increase their spend with zoom and upsell them zoom phone and zoom rooms picked up pace.
Both domestic and international markets had strong growth during the quarter.
Our Americas revenue grew 50% year over year.
Our combined APAC and EMEA revenue grew 62% year over year to be approximately 33% of revenue up from 31% a year ago.
In recent quarters.
<unk> made significant investments in our international team.
In Asia Pacific our direct sales team drove several strong wins in the enterprise segment.
However in EMEA, we saw some headwinds is still predominantly driven by declines in the online segment.
Now.
As we enter profitability, which was strong 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 chair.
Charitable donation of common stock.
Acquisition related expenses, net litigation expenses and gains or losses.
Turning to investments.
Non-GAAP gross margin in Q2 with 76, 2% compared to 72, 3% in Q2 of last year and 73, 9% in Q1 of this year.
The sequential improvement in gross margin is mainly due to new.
On <unk> capacity coming online and lower usage during the summer months, particularly for school.
We now expect gross margin outlook to be higher than previously discussed and approximately 75% for the remainder of the fiscal year, even while we continue to support three K 12 education.
Data research and development expense grew by 89% year over year to approximately $54 million.
As a percentage of total revenue R&D expense was approximately five 3% an increase from Q2 of last year, demonstrating our ongoing commitment to building out our engineering teams globally and maintaining best.
Class product and innovation.
Sales and marketing expense grew by 72% year over year to $211 million.
Sales and marketing expense was approximately 27% of total revenue an increase in Q2 of last year, mainly due to investments in hiring.
First thing by sustainable future growth.
We plan to increase investment in global sales capacity as well as digital marketing and events to drive additional leads for our sales teams across meetings phone room and event.
G&A expense in the quarter grew by 73% to 89.
To draw.
As we continue to scale these functions and invest in systems automation and compliance to meet our new scale.
G&A expense was approximately eight 7% of total revenue a slight increase in Q2 of last year.
Revenue upside in the quarter carried through to the bottom line with non.
Operating income of $425 million, beating our guidance.
This translates to a 41, 6% non-GAAP operating margin for Q2's steady with the Q2 last year and Q1 of this year.
Non-GAAP diluted earnings per share in Q2.
Non-GAAP was $1.36 on approximately 306 million non-GAAP weighted average shares outstanding.
This result is 21 cents above the high end of our guidance and <unk> 44 cents above Q2 of last year.
Turning to the balance sheet.
Deferred revenue.
You did the period was $3.0 billion up 59% year over year from $743 million.
Looking at both our billed and Unbilled contracts, our our Po totaled approximately $5.0 billion at.
At 66% year over year from $5.0 billion.
At the end, we expect to recognize approximately 69% of the total <unk> as revenue over the next 12 months as compared to 72% in Q2 of last year, reflecting a shift back to longer term plans.
It is important to remember that because over 40% of our business is billed monthly.
And typically bought online deferred revenue in RP O trends are not reliable predictor of future revenue growth.
As I mentioned last quarter, the timing of our renewals have increasingly shifted at the beginning of the fiscal year with Q1, now representing our largest renewal quarter.
Simply this shift in seasonality as a result of the significant growth we experienced in the first half of FY 'twenty one.
We expect this front weighted seasonality will persist and potentially become even more pronounced given the scale of our base and practice of Upselling co terminus late with existing contracts.
As such.
Total deferred revenue and our POC modestly down from Q2 to Q3.
We ended the quarter with approximately $6.0 billion in cash cash equivalents and marketable securities excluding restricted cash.
We had strong operating.
We went in the quarter of $468 million.
Up from $401 million in Q2 of last year.
Free cash flow was $455 million up from $373 million in Q2 of last year.
The increase is primarily attributable to the topline growth and disciplined spending.
Looking at the remainder of the fiscal year, we expect to increase our capital expenditures related to ongoing data center expansion to support our growth outlook.
Now turning to guidance.
Please note that the ever changing nature of the global pandemic continues to impact our segments and regions.
Cash flow different ways.
Our outlook is based on our current assessment of the business environment.
Specifically, our outlook assumes that our direct and channel business will continue to experience robust growth, while our online business will be a headwind in the coming quarters as smaller customers and consumers adjust to the evolving environment.
And for the third quarter of FY 'twenty, two we expect revenue to be in the range of $1.015 billion to $1.02 billion.
We expect non-GAAP operating income to be in the range of $340 million to $345 million.
Our outlook for non-GAAP earnings per share.
$1 seven to $1 eight based on approximately 309 million shares outstanding.
For the full year of FY 'twenty, two we expect revenue to be in the range of four point year on Euro five to 4.015 billion, which would represent approximately 15.
<unk> is 1% year over year growth.
We expect non-GAAP operating income to be in the range of approximately 1.5151 billion.
Which would represent approximately 53% to 54% year over year growth.
Our outlook for the non-GAAP earnings per share is $79.0
$130.0 based on approximately 308 million shares outstanding.
Before concluding I'd like to welcome everyone to join US in two weeks had been Sophia our two day immersive experience that is packed with exciting product update guest speakers and virtual networking opportunity.
Please.
And on day, one of 'em Tobia, please join us for our financial analyst briefing, where we will be providing you with greater detail on zoom phone the platform our channel partnerships and much more.
And as always he is grateful to be a driving force, enabling connection and collaboration worldwide.
Opportunity in high quality frictionless and secure communications platform.
To the entire zoom 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 each IC drone with Oppenheimer.
Hey, guys. Thanks.
Our medical focus on mute yourself.
Great quarter again, guys Kelly.
Kelly I want to focus kind of on the physician clearly youre doing extremely well.
So it's phenomenal the growth that youre seeing over there.
But can you give me a little bit more insight as to what is to grow grocery meetings right here right now my math suggests a very significant the celebration in Europe.
Spansion right and I would suspect the desktop specifically two meetings decelerating help me think about the contribution of growth of.
With all of the elements and <unk>.
Perhaps how would that change over the next 12 months.
So I think in terms of the.
The expansion rate, you're talking about the implied expansion rate that you calculate it yeah and I just wanted to remind you first of all that when you calculate that it includes all of our customer base.
Those two as we mentioned we are seeing headwinds in the online segment of our business for sure. So that that I would say that while we don't break out revenue, yes, we see strength continued strength in the upmarket and enterprise in both meetings and phone and where you're seeing that.
Challenge in the <unk> metric is really coming.
<unk> and <unk> segment.
So shall we interpret that to me the churn is now finally, rising and Doug category is that the right way to think about this going forward now that the economy will be opening some businesses I guess just going back on the usage here.
Yeah. So remember the online business is primarily not not.
From the all inclusive, but primarily small businesses and individuals and I think what we've seen as well.
Well.
Future of Delta is still unknown, we do see individuals, especially moving around the world and feeling comfortable like I think you were talking about most of us are probably socializing in person now doing fewer things like.
Not happy hours, and that's where we're starting to see some of the challenges. So the net dollar expansion in the online segment is what's driving pulling that number down got.
Got it very good thanks.
Our next.
Steve Enders with Keybanc.
Okay, great. Thanks for taking my question Europe.
I guess I'm, just digging a little bit more on kind of the trends youre seeing in the.
The second half it looks like you are now guiding down a little bit looser downtrend or think before we're talking about enough trend. So just want to get a better sense of what's the biggest incremental.
Question is that you are seeing there and the outlook and what's changed in the past three months specifically.
Yeah. So again, we continue to see strength in our upmarket. We're excited about what we're seeing in the enterprise and phone internationally and international we all saw growth accelerate in Q2, when we look out though what.
Chassis is.
A slowdown in the online segment of the business, which again, even though the pandemic seems to be far from over we are happy that people are feeling more comfortable being out traveling and that's really where we're seeing the slowdown and we had.
If you back all the way up to when we gave guidance to begin.
We have year, we had expected that towards the end of the year, but its just happened a little bit more quickly than we expected and we of course, we feel good that people are out moving around the world.
But it is certainly creating some headwinds as we said in the online segment of our business.
Okay, great and is that creating any.
Getting an opportunity to use them.
As companies do you think about going back to the office or zoom rooms, and incremental activity activity with that product absolutely. So we saw zoom rooms start to accelerate again in Q2, which is very exciting as our customers are planning and thinking about the.
Okay.
Catch rate more than doubled quarter over quarter from Q1 to Q2, so absolutely companies are preparing and planning for welcoming their employees back.
Okay perfect. Thanks for taking my questions Yeah. Thank you Steve.
Our next question is from Taz <unk> with Guggenheim.
The guidance Youre on mute.
Can you hear me now.
And I can't remember that hi, one question on zoom phone. So if you look at the.
The numbers, we reported Tonight, you ran about Fontainebleau, you'll see something in the last four months prior to that you are adding about fundamentals panel Casey.
Corner, it looks like a bit of a slowdown in the number of seats, we're adding.
This quarter is that a fair comment.
Yeah.
Almost exactly the same timeframe because I think we had announced in December that we hit a million and then we announced one five on our call in April and then.
One $2 million on this call. So it's almost exactly at the same pace.
Got it and then just one follow up you said weakness.
Yes.
In the online segment is that coming from just increased trauma are you seeing a slowdown in the new customer acquisition in that in that line item.
It's a little bit of both so as we mentioned, we specifically Boston calendar.
In certain regions like EMEA, where the world.
At least for a period of time was little more open again and people are moving around and that's where we see people taking advantage as being out in the world and seeing some.
Lower top line bookings as well as accelerated churn.
Calendar.
Our next question is from meta Marshall with Morgan Stanley.
Great. Thanks.
Kelly I just wanted to dig into your kind of commentary on more measured spending patterns that you're seeing and I'm taking away from kind of the.
The smaller business commentary that you've been giving him focusing that on the enterprise and so just trying to get a sense does that mean normalizing the amount of seeds that they're adding.
Theyre rationalizing kind of the seeds that they've had that theyre rationalizing the number of video solutions that they're having in house, just what does that kind.
Commentary around more measured patterns around the enterprise business name.
Yeah. Thank you meta we saw this start a little bit in Q1, and now continue into Q2, where I think it's not necessarily measured in terms of how much they're buying but more measured and thoughtful in how they are buying in that they want.
We take their time Theyre doing more complete like proof of concept for example versus if you think about a year ago. They were in the stage of trying to keep the lights on almost and buying groups with me and now they're taking the time to really be thoughtful and.
It's just if it is at its best.
To kind of the way they used to buy pre pandemic, which has just been much more normal buying patterns. So I think that we're back to more normal and the sort of four quarters. As we saw last year was really the blip and now we're back to a more normal basis.
Customers are saying.
And it was part of that just because there's a couple of decisions my phone now or.
Or just anything having to do with them.
I think that.
Certainly the phone is a different buying cycle, but usually by the time they get to sell and they already know you. So it's not that that is necessarily slowing it down it's just that they're taking their time to think about the these decisions that they're making.
Okay, great. Thanks.
Our next question is from Matthew <unk> with BTG BTG.
Yeah, Hi, Thanks for taking my question.
The continued success on zoom phone here.
Called out a number of very large deals.
Curious on.
How often youre being brought in where they're also contemplating a contact center.
Upgrade where you stood obviously the partnership with 5 million has been in place for a while but just more generally speaking how often.
Is upgrading to zoom phone a part of a broader modernization.
In addition across that could potentially include contact center.
Hi, Matt I actually don't know exactly off the top of my head the specifics around that.
We obviously.
Having an integrated fone and contact center solution is it really.
Really important to many companies, which is why we're excited about the deal that we're working on with five nine and as you say we've been partnering with them. We also have other partnerships in place as well and so.
There's nothing different about that that has changed I I'd have to go back and look I don't know exactly.
What the typical catch rates are between those two though Eric do you have do you have a perspective on that.
If you looked at it our installer base right now I think.
Really wanted to migrate from on Prem.
PBF system, most of the cloud, that's where the huge opportunities.
So the comps fall also since the pandemic I think that we do see some of the enterprise customers. They also started asking about hey, what's your.
Club Cognex understood because it's part of it and we're planning now, but that's why we're seeing the business kind of for the new opportunity for us not only for the brand new revenue stream.
For contact center, but also in a modest.
Further grew our convenience as well because.
A year ago right.
Where a lot of any of our customers they really want them to migrate their on flat.
Contact center source now.
Now I'll give you the digital.
Transformation for almost everything.
Every enterprise customers, we do see more and more customers where agency. That's why timing wise is perfect for us to double down on the profit for contact center.
Great and then following up quickly on the education front as schools get back in the session.
Whether or not they can be in person or are not as sort of a.
Debate.
Base here, but.
I guess, what's the what's the I guess potential of monetizing more of that installed base is it still going to be a relatively free solution or how is that strategy evolved. Thanks.
So Matt before I answer without a question as you know our companys value as chair the number one.
I think it's really to help our community.
To support our kitchen close this I would say that's no Bruno <unk> product at no cost, we feel where we never thought about how to monetize our service for those technical schools.
No. They all go back to school right with that I would have more bandwidth.
We thought they slapped with thinking about how to monetize other you know our installer base like inventing something like a free users and you know last year, we were extremely busy habit of work. So habit people stay connected but even then I have a bad I mean, the thing about how to modernize monetize freezes.
The hope would be Brazil.
The consumer right, we never thought about that'd be fun now is white hot like how to think about it.
He brings to the consumer spending how to monetize it pretty this is something where you know we're very excited we do not want to monetize their kidneys law schools.
What responsibility.
As always.
Thank you thank.
Thank you Mac.
Our next question is from Pat won't Rubens with GMP Securities.
Great. Thank you hi, guys.
I mean, I don't think there's ever been a company that has grown so fast and you know realistically pulled a lot of demand forward right because everyone needs.
To get there their video conferencing solutions are in place very quickly.
And now as I look at you know, 54% this quarter Kelly your guidance suggests 30%, 31% in Q18% in Q4. So all of that is just a lead up for Eric what is your.
Top one or two priority.
<unk> in the next 12 months as you go from this hyper growth to a much more reasonable growth period.
You can just sort of contrast, those for US I think that would be really helpful. Sure. So I would say Patrick is that sounds great questions first of all it looked at it prior to the pandemic looked at the outer boroughs or.
As you know folks on input costs like the first the service would be the Congress being introduced to that.
Revenue stream zoom phone both of them are doing well and are introducing a third of what a porcelain outdoor no double down on that and it's always our total acquired Mike I don't know if we did not realize isn't it.
It could be the pandemic crisis already several years ago, probably we should have passed sort of hosting services beforehand now actually know this indeed get arbitrated by producing.
Producing more and more revenue stream new services to support our enterprise that's always top articles. So essentially this is part of our overall Athens right right.
I mean inside of that also there's a there's a new opportunity ahead of us as I mentioned earlier right.
We never realized the somatic consumers right and.
Well, so loyal flour and or the platform they use it a secret of housing.
In brief the consumer strategy.
It's also something on top of our math, it's not that we never thought about it before is white hot but it looks to sink enterprise platform and also consumer those constraints will drive our future growth.
That's great. Thank you. Thank you Patrick.
Our next question is from <unk>.
Please say rafi with SPN securities.
Thank you very much so I look at your implied guide for Q4, it seems like you're guiding it to diesel to around 12% or so plus or minus from 3% or so in Q4 in Q3 with a similar compare I would argue.
It seems like it will actually be.
Be down potentially sequentially from Q3.
Can you elaborate on why that might be the case he talked about the online issues.
Long do they last for example, and if we go to like 10% to 12% growth in Q4.
Should we accelerate afterwards, if the compares get easier.
How should we think about <unk>.
Next year.
Yeah. So.
In terms of what Youre seeing in Q4. It is continued uncertainty around the headwinds in the online segment, absolutely that is driving that.
And.
In terms of how would that imply for.
For next year, we're not ready to give FY 'twenty three guidance today. Unfortunately, so we'll be prepared to do that when we get on the Q4 earnings call and of course, we'll have a lot more learning that that point team to share with you, but that that is what is exactly what continues to drive that in Q4.
Is there any reason why the online issues would be bigger in EMEA than in the Americas and Asia.
Well that issue.
And then a question right because it really what we've seen is it varies depending by region and by segment and depending on where each of those countries our market.
It is in their pandemic lifecycle, and we've seen it ebb and flow over the last 18 months by market and so.
If we wait.
That's the challenge even I think that all businesses are having right now I'm thinking about the future with uncertainty so much uncertainty around the pandemic right now.
It's difficult.
Walt to forecast exactly.
Yes to add onto.
The water cut is there kind of you know the.
Our user base in EMEA seasonality also is affected in.
In particular in the summertime, notably mission, the Covid situation and the user there might have a little bit longer vacation right.
There's a narrative.
Sure, it's a competitor and that's another big difference compared to our visit this year.
Okay.
Thank you.
Our next question is from Ryan Koontz with Needham.
Hi, Thanks for the question great to hear the progress in the enterprise are clicking along there and it sounds like some real strength in APAC.
And if you share with us any additional color on particular market verticals or applications youre seeing that are kind of key to penetrating and getting these big large global 2000 type wins.
Okay.
Okay.
Yeah, I would say first of all it with a capital market is that.
<unk> kitchen in healthcare is to put.
And also we are bringing us more opportunities when they expand into the international market like APAC and also likely lose a telco.
Telecom or sell right and it was kind of a telco partnership we're supposed to have us fast penetrated into each of those type of countries like into most of the new opportunities you know recently relaunched it.
British sort of apps and also you know like some.
Some of the partners in the theater, a new solution.
I, often like a class I commodity strike I think a lot of new opportunities, we do not need to be able to buy ourselves right and those sort of party customers. They can leverage our.
Either API or SDK.
And the zoom App beauty all kinds of new.
Solutions.
Books on all of those are vertical market or even that department as well right, that's where the opportunities are.
So you're seeing some opportunities to up sell into the C pass type applications in the enterprise.
Yeah, Bose actually yeah, because you know it.
Or sort of part of unaddressed need due to the Alberta How's the business also bring this soon.
Our installed base and also.
By establishing the trough right.
Officer in more software, especially is a very healthy channel not only for their own branded conveyor belt, but also where the channel for us.
Thank you Sir.
Those two out.
Our next question is from CD <unk> with Mizuho.
Hey, guys. Thanks for taking my question.
I just wanted to dig into the enterprise segment Q on Q2, those are two big quarters and all of that.
Oh, so what's sort.
And yes, youre doing on your go to market strategy, mainly increasing quota carrying salespeople or any changes there.
You were doing for this normalized environment and foreign used to be one of the big Cross sell.
Opportunity for you and how should we think about the phone.
They can do more normalized renewal environment.
China, we are absolutely continuing to invest in our sales capacity, we are focused on certain regions, especially where we see lots of opportunity like Asia Pac. We've recently hired a new leader there and are really excited about the progress you are seeing with his leadership.
<unk>.
And we are continuing to invest in marketing. So you know as we've move post pandemic era, a little bit in terms of not closing.
What we saw from last year with the lift in brand awareness. We're continuing now to think about how do we invest more in specific.
And then like marketing around the phone rounding room as well as digital marketing campaigns, so helping to commute.
Additionally for all of our teams on a global basis and then also the channel had continues to be a really important.
Aspects of our go to market.
That channel.
Responsible for approximately 27% of our zoom phone sales in Q2, we added six additional master agent partners. During Q2, so really excited about continuing to invest in the channel on a global basis.
Thanks Kelly.
Hmm.
So our next question is from Alex Zukin with Wolfe Research.
Hey, guys. Thanks for taking my question, So I think I'm going to I'll, probably touch on a topic. That's been mentioned here before because I think a lot of people that are investing in the company at this point if there really are investing in the non online story.
Company right at the enterprise story to large business Theres a lot of metrics. There is a lot of kind of pollution of noise. In these metrics. How do we think about the growth of the important part of the business for industrial community over 10 employee customer base, either from an incremental bookings perspective.
Of the incremental revenue perspective, and when does that headwind we're anchor on the business from that.
Pandemic from the the once in a generation SMB buying pattern when does that trough and so when do we see a normalized kind of normalized growth rate for the company.
From an account so thank you Alex first of all we agree with you that you really want everyone focused on the long term potential of the upmarket.
As a reminder, in Q2 that segment of the business grew at twice the rate of the online business. So that gives you some indication.
Of how those two segments are diverging a little bit.
And then.
As we look forward I.
I guess the best way to help you think about it is you want to look at like the net dollar the implied net dollar expansion rate that you were talking about earlier right. You can think about what's happening there.
The net dollar expansion rate for the online segment is under one right that gives you some idea of what's happening again, how to think about those two different segments of our business.
In terms of where is is there a trough I think that is back to kind of trying to predict the pandemic, which.
There it is a difficult thing for obviously anybody in the world to do right now.
As much as we're excited about you know vaccines being more widely distributed unfortunately, as we see delta continuing to grow in certain parts of the world. We have even in the last few weeks like Siem Siem certain pockets are Frank so.
I think that that's going to depend on really what we continue to see in terms of guidance.
But as a guidance around the world.
Got it and I guess, maybe for the year.
You mentioned the seasonality the vacations in Europe is there a way to kind of get a sense for the delta parcels upon about.
EMEA SMB versus U S or somebody just so we can get some sense of the magnitude of change.
I think overall I think our auto market doing well, especially look at North America in the EMEA I think I met market online SMB I think adult.
Wow I know last quarter, you know seasonality COVID-19 situation for sure.
It seems a little bit worse, because they're longer vacation spot here.
Here look out of our North American market I think the op cell phone and also the zoom rooms, because every company are they started coming back in office the new opportunity.
I'll come at Austin, very well, that's why I say, even if our data, but it's kind of all at the end of life that we did not see the big ball and because of the offset by the EMEA.
The hybrid of work opportunities, but I think he looked at APAC APAC, we did not see that at all right.
Last quarter, assuming whereabouts.
I.
Overall as I mentioned earlier, we've got to go back to our enterprise play right because the lobster you know I think because the online business used to be just a marketing tenant like however in auto went out marketing channel, but also contribute a lot of our revenue from a personal perspective now getting it out of that of course and it.
I think I'll hold off on that.
I'll ask Bert healthy part rates why is that.
We can focus on our core enterprise customer and plus you know given that it will become a household name it will bring a new opportunity to monetize it used to be the main innovation for all of that is going to use or just the honest suspicious I wouldn't say that I mean, all of these are sustainable strategy.
It has been two fold the online user monetization.
All of these right monetize all of that.
Our installed base. That's why we are very excited about the future.
Alright, Thank you guys think about us.
Our next question is from James Fish with Piper Sandler.
Guys. Thanks for the question.
Right.
Win with Seagate as an example here how often are you seeing at that phone is leading to a greater number of seats at existing customers or really how can we think about that potential uplift within just your installed base today, we're selling phone with meetings that creates a greater number of seats at current accounts not just meeting overall employee base.
His cell phone into the <unk>.
Two times opportunities that we just don't have as many meetings seats because you can have more.
You can have less hosts than you do employees.
Yes, that's a good observation I think youre right I think in the one year ago, we really did not see that normally they buy more and we can I can see.
Can I tell you know probably a maybe but all of a cell phone and also for the existing.
Installed base of the upsell from you know for the brand new customers.
Most of the you know the cost of a look at our one platform for both video and awards.
Spanning we don't avoid Hakim, Washington, when Apple plus our convenience.
And as they mature now every quarter some variable cost model I get a sweater and not all of this is something new.
And it is very mature across the integrated experience both video and voice are doing very well, especially from now I would say, probably I don't know, but I guess all over it in more and more customers now no argument.
I'm going to deploy a video for US and then deploy it you know we're likely on day one because these people are boats given the dynamics of each business.
Sometimes the property they wanted to probably more than.
On the <unk> license.
Thanks, Thank you James.
Next question is from will power with Baird.
Alright, Thanks for taking the question I guess.
Check question, probably for you Kelly, if we think about that the 10 plus employee cohort.
Market segment, how do we think about one customer growth from here.
And two if you think about that net expansion.
You've been above.
Third 30%, what's the sustainability of that right because you've done a number of growth drivers that you've got the law of large numbers kind of working against you. How do we think about the outlook on that front.
Yeah.
In terms of net.
Dollar expansion, we expect it to stay above 30, and certainly for Q.
100, <unk> and then in.
In terms of Q4, we expect it to be in at least in that range not.
It's a quarter out we don't know exactly but we're predicting to be right in that same range still for for Q4, and then in terms of the customer growth I think that what youre going to continue to see.
Three is ongoing growth driven by large deals. So the customer counts may may slow, but youre going to continue to see growth driven by these big deals as we see opportunities to continue to cross sell with zoom phone.
You heard right, we beat our two largest deals record in the same day.
So really seeing opportunities there and then as people are planning to go back to the office also opportunities for the room, and then think about zoom event, so you're going to start to see opportunities for larger and larger bigger customer wins and I think the other thing to know you know we talked we talked about the partner because if I make sure I mean, it seems like.
So we had a deal this quarter that now became our new largest alright.
New largest customers so that our new customer and I guess, he got for it but now with their upsell rate that you're getting the largest customer. So we're continuing to see the really significant large then and that I expect to continue.
Thank you.
Our next question is from Matthew <unk> with Deutsche Bank.
Hey, Thanks for taking the question.
You talked a little bit about some more measured behavior from customers in terms of buying patterns. I was just wondering can you talk a little bit about the competitive backdrop, whether you've seen peers.
Getting more aggressive, especially larger enterprise customers.
Take their time to reevaluate the future of work.
Covid.
Eric do you want to talk about some kind of I'm sure. So I think are met.
If you look kind of the trend right.
We're a hybrid world for short lateral.
Maybe give windstream right.
And because of that because.
The cost of embracing hybrid world a lot of employee flight students working from home or maybe work.
The remote locations and in all alike.
Prior to the pandemic crisis, why quite often and humanity.
It would be the solution you know this is a good enough right and giving employees now to support a hybrid world.
The breeder service World.
All of US because you know you look at employees, who do not have I. Just part you know sitting next to the right and applause you really worry about our productivity. If you do not give you the best for tools. So that's why you know good.
The profit services were not do well.
Every business is the laggard to employ the vessel biggest service, but always you know given our employees a much better tools to improve their productivity to help employees because to support a hybrid world is not that is beautiful right and I'll give an example, like a compliment switches.
And use it if somebody gatherer feature all of us and our customers do not appear to have a mix it might sound like a sitting in the comparable South Africa.
Joining me locally that express is not as good as this the revenue right.
That's why I think the hybrid world certainly we will have a zoo why isn't it somehow sometimes our competitors.
It's kind of evident apart I think the good news the.
The customers really want to have very reliable six of us.
Sure Paul.
Very easy to use I think that that's the reason why and I think the zumiez positioned much better than any of our competitors.
Thanks, Eric.
My next question is from Bo Young Kim with Citi Hi.
Hi, I'm I'm, sorry, Tyler Radke earlier in the Q&A you showed some progress around.
The major Master agent program. It also had some really large international phone deals. So I wanted to share about what you're seeing in terms of the productivity of.
And all partners in international markets relative to what Youre seeing them from channel partners in the U S and to what extent is that impacted by the decent stage of the Master agent program in international markets as well as a nation state of the broader market in cloud based phone. Thanks.
Okay.
Of the champion we're seeing strength in our channel partners globally, so, but as you say, it's a much newer program and in much smaller internationally. So excited to really this is one of them okay.
Okay says for our channel team, which is expanding outside of the U S is focused for the rest of the year.
So in terms of productivity I don't think that it really their evening, we were really excited about the tough comp so deal, which is one of our largest channel partner deals IFC deal adds to date. So that's really exciting, but we've had significant wins in the U S itself and not seeing dramatic differences in productivity on a global basis.
Okay.
Our next question is going to be from Matt Stotler with William Blair.
Yeah, Hey, guys.
Thanks for taking the question.
I think just just one for me obviously.
You guys have spoken to so far the enterprise opportunity here is really kind of really.
It's.
Exciting and compelling going forward, but given the commentary around.
Or any other ways to monetize the base, whether that's consumer or otherwise.
You may begin.
And update or whatever color you can provide on the level of premium usage that you're seeing today right outside of the seasonality with education.
Really.
The level of freemium users from a platform how that's changed over the past four five quarters.
Thoughts on the back half there and then.
Commentary on what conversion you've seen there or do you expect you could see if you decided to really try and monetize that.
Yeah.
Yeah.
Can you go ahead.
So we still see free users.
A large they've really grown over the last 18 months and there are about 30% of our minutes you said today as compared to like 10% pre pandemic. So that gives you an idea of the NIM.
No we don't.
How about the number of users, but that at least gives you a relative understanding of how they've grown over time.
And like we always say as Eric mentioned about our share value of care you know our value of care, we really care about all those free users, especially to keep people connected during the more difficult time.
Don't try and Theres always.
Hope that they continue to convert or that they have the opportunity to continue in Europe, so more new users to the power of him.
Yeah.
Got it thank you.
Our next question is from Chaim Siegel with MSR advisors.
Hi, Kelly.
And how are you.
Yeah.
Yeah.
I had a couple of questions. If you have time, but.
Since August and it focuses on enterprise I just wanted to know how fast the salesforce is growing and when.
Efficiency for that.
And that's where it starts to kick in.
I guess, that's one and also just related to that on operating expenses.
I'm not sure how long you expect flattish sequential growth, but on the operating expense. It seems like maybe it will start to grow faster than revenues and I'm just wondering with relation.
<unk> two focusing on getting the enterprise business going how fast expenses will grow versus revenue.
Yeah. So.
We've been saying for the last several quarters. There are areas that we were not able to hire and invest in as quickly as.
Sales came through last year, and so what we've been doing over the last couple of quarters is focusing on re accelerating the investment, especially in the areas of R&D as well as quota carrying heads and we are absolutely continuing to do that we.
Still are under invested in R&D and a little over 5%.
Revenue and the long term target is 8% to 10%. So we're continuing to hire as quickly as we can and then similarly in terms of quota carrying head, we're being very thoughtful about the segments in the regions in which we're hiring a fair number like stepping back from it there is a huge tam and a.
I've got opportunity out there and we want to continue to add quota carrying heads in sales capacity into our system to take advantage of that so as long as they continue to see opportunity for growth. We will continue investing in quota carrying heads were also as I mentioned earlier accelerating our spend.
Few marking as we were you were able to pull back a little bit on that last year, but we think now is the right time to continue reinvesting there and then you know the.
The two areas that we always look to be as.
As efficient as we can our G&A and Cogs and G&A, it's kind of right in the range of where we would.
And in the long term over time, we do expect Cogs and <unk>.
Decrease as we continue to move more and more of our services out of the public cloud into the data center our own data centers I mean, we're always going to have a hybrid approach there, but also eventually at some point you're right when cases of pools are more.
One are free to go back to campus as we do expect to see improvement in our gross margins, but we will absolutely continue to to support those students in schools as long as we think it's needed.
Is there a general timing of efficiency.
That should kick in for the enterprise for two salespeople in the enterprise, but <unk> been growing.
And I know at that time I was just wondering if there's like a timeline where page launches to start really performing for you.
I mean, that's.
What I would say is we are continuing to hire quota carrying head quickly and we will continue to do so so that means theres a constant state of having ramping reps in the system.
And since we have no plans to stop hiring quota carrying heads in the near future that I can't say when all of a sudden they're going to necessarily be more efficient.
Thank you very much.
My next question is from Rishi <unk> with RBC.
Alright, Hey, Eric.
Kelly Tom Thanks, so much for taking my questions get good to see you all I wanted to just ask about zoom events. So you know I know initially when you've talked about the product. It was kind of pictures a little bit of a monetization vector for the perceiver segment right, helping peak fitness.
Yoga instructors run classes online, but clearly it.
Eric as much grander ambitions right. The fact that youre going to run zootopia on that I think tells us there's maybe a bigger enterprise opportunity.
Even as companies are looking at doing in person conferences again, they don't want to have a strong virtual and hybrid component to it. So can you maybe talk a little bit about what you see as a longer term basis with zoom or bad, especially.
It seems like the enterprise.
Maybe let's go on that thanks.
Yes, Rishi that's as good a question. So remember last year a lot of October I added some healthier resuming events. You know we started him on zoom at Descartes and we've thought about how to have are those are you know.
And the people working from home are still kind.
And the union by lack of goodness, all I don't know classes all those classes actually you know the reason why we started building the zoom events. However, again, you know we have always listen to all of our customers in particular, our enterprise customers and are they all in all told US Hey does it even more.
Uh huh.
Get it you know opportunities one of the corporate events corporate public does not cause impulse all told US hey, we badly needed that are badly needed that we already have I been a platform we want to ask.
Extended that know how to expand it into a bigger.
And you'll use the Congress like who's going to talk to you. That's why we have sort of a pivot here to Australia.
And a doubling of our corporate it knows where alpha zoom, which is rebranded it as <unk> like we do see a huge opportunity and decided that the consumer where it is.
Not a card is amusements anymore. This is more like on the zoom website, you'll still be able to aggregate the aggregate all those consumer.
Trading revenue in.
I like Oh.
That sit in their class and a sworn sports fan out you know if you look at it our short term opportunity assuming events, but because many of our existing customer pool. I mean, you know platform and I get that because its fast already built but they do not want to go to any other platform now very pacing of the week that the reason why.
Humor, Gaba study the database since last summer.
Pablo.
Alright wonderful. Thank you. Thank you.
Okay, well, thank you to all of our analysts all the time for questions that we have for today.
And that's all done.
Great. Thank you everybody.
And we.
We hope to speak to more of the rest of the quarter and fewer zootopia anything else there.
Thank you all for time today I Hope you all will join US next a mosque Zootopia September 13th and 14th I really appreciate the support as always thank you.
Hi, everybody. Thank you.
Thank you.