Q4 2022 Zoom Video Communications Inc Earnings Call
CEO of service now moving to join our board of Directors tomorrow.
I am looking forward to working together [inaudible] a visionary in the technology space and a successful software executive.
I'd also like to thank [inaudible] stepping down from our board of directors tomorrow for his years of service our board.
I wish him the best in his future endeavors.
Yeah.
Let me also thank our global zoom team customers partners and investors for their support.
Celebrate the 10 year anniversary of our inception, and a three year anniversary of our IPO.
The IPO.
Now I'd like to share with you three key pillars of the zoom strategy.
Which will be out to drive our future goals.
The first of the pillar, it's really about being a full unified communications platform. We've made enormous strides over the past several years evolving from a meetings company into a multi-product platform, including video conferencing with chat or phone and more.
The missing piece with a contact center that it was until our announcement last week, more on that in a moment.
The second pillar is hybrid work because we believe hybrid work is going to become more flexible and less about location.
So no matter where you are always traveling, Zoom wants to make sure you will have a consistent experience.
Whether on zoom rooms on zoom connected device. We wanted to make sure you are part of the conversation and able to collaborate anywhere and everywhere.
The sort of pillar, it's been into workflows, and how we leverage our API marketplace, consumer apps and our SDK.
Many technology companies tell me that they wanted to integrate Zoom into their platform to improve the communication of the collaborative experience for their customers.
For instance, we recently announced a zoom DocuSign integration.
This will allow customers to [inaudible] zoom meeting and approved as part of a simple bi-directional [business] workflow.
We are in the early innings of this transformation of our work and communication. We believe there is a massive opportunity and we plan to address it with the same level of inhibition scalability and simplicity that hasn't made a zoom they're translated platform for hundreds of thousands of businesses around the world.
As a key part of our UC stack.
Super excited about the announcement we made last week, we announced the general availability of a zoom contact center and omnichannel customer engagement solution that is optimized for reading and integrated drive in the [inaudible].
It brings unified communications together with modern contact center capabilities have as customers connect over video and also support the channels like our voice SMS and the web chat.
Zoom [inaudible] Center is symbol for admins to configure and deploy.
It can easily create menus, great teams and a prompt driving Zoom admin portal.
The product is also integral to chat and [video].
Into our existing digital presence like a website.
Helping organizations have conversations with the customers in the right place and at the right time.
This is just the beginning of our plan to modernize the contact center and enrich the experience for our customer and our customers' customer.
Speaking of customers. We ended the year with a lot of great wins.
First, I want to thank Medtronic, a global leader in healthcare technology for expanding their partnership with Zoom. In 2020 Medtronic adopted zoom meetings, zoom rooms, and zoom webinars to enable global employees to communicate and collaborate better.
In Q4 of fiscal 2022 after a careful window flags in process. They decided to add 60,000 Zoom from licenses to a new multi-year agreement.
Thank you, Medtronic [for trusting] Zoom to deliver modern integrated you cut a solution to support your global communication needs.
Thank you into the global Tech noted a powerful mix turbotax Quickbooks Mint credit come up and new chip for entrusting Zoom with their video
communications over the past several years and originally adding Zoom phone to create a unified communications platform across their organization.
Thank you [inaudible] University, which was recently recognized by US News and awarded report at the [inaudible] most innovative school and has been a strong support of Zoom product over the years.
As a leading research university, a highly effective communication platform is very important to drive collaboration between students, staff and the community.
[As you to the zoom to be completely conditions powerful] is 50000 Zoom meetings, 700 Zoom rooms, and 15,000 Zoom licenses as well as Zoom Webinars.
I also wanted to recognize [inaudible], a Japanese manufacturer and pardon me of our building materials and housing.
And then zoom meetings and zoom rooms customer.
[inaudible] has embraced hybrid work for communication and collaboration while leveraging the ease of use of the zooms platform to enhance the customer experience with video tours of their showrooms. In Q4, [inaudible] added 10000 zoom from licensees committing to a unified communications platform.
Thank you Medtronic, [inaudible] Arizona State and [inaudible].
On a state and the mixture.
I'm very grateful to have such a critical group of customers. I love you all, thank you.
The world wants a whole communication platform, one that's integrated with other workflows supports hybrid world in a secure and easy to use.
Zoom is hard at work, ensuring our customers [exceed their] expectations for how businesses collaborate internally and [inaudible] externally.
To sustain and enhance our leadership position in this new era of digital transformation.
We [plan Empire 23] to build out our platform to further enrich the customer experience and expand our go to market motions.
Which will enable us to drive future growth for Zoom.
I want to thank our [inaudible] for their hard work over the past 10 years, we have grown to nearly 6800 strong and are more focused than ever on delivering happiness everyday to our hundreds of thousands of customers around the world.
With that, let me pass it over to [Kelly]. Thank you.
Thank you, Eric and hello, everyone.
Let me start with a few of the financial highlights for FY '22 and the results for Q4, then provide our outlook for Q1 and FY '23.
We delivered another year of strong results.
Revenue grew 55% to $4.1 billion as we exited FY '22 and an annualized run rate of 429 billion.
We grew non-GAAP operating margin to 44% up from 37.1% in FY '21, as we scaled our operation.
And we achieved an adjusted free cash flow margin of 38%.
In Q4, total revenue grew 21% year over year to 1.07 billion.
In Q4, total revenue grew 21% year over year to 1.07 billion.
Exceeding the high end of our guidance of 1.053 billion.
The growth was primarily driven by strength in our enterprise business, which continued to grow significantly faster than our [inaudible].
We also saw strong demand in Zoom phone, which had a record quarter, adding over 550,000 [paid fees.]
Much of the zoom phone growth came from sprint in large customers with a number of customers with more than $100,000 of ARR growing 149% year over year and the number of customers with more than 10,000 [inaudible] growing 122% year over year.
We also added a major global bank zoom phone customers.
We saw a 66% year over year growth in the upmarket as we ended the year with 2725 customers contributing more than $100000 in trailing 12 months revenue.
These customers represented 23% of revenue up from 18% in Q4 of last year.
We exited the quarter with approximately 800,000 customers with more than 10 employees up 9% year over year.
In Q4 customers with more than 10 points represented 67% of revenue up from 63% in Q4 of last year.
As we approach our three year anniversary as a public company, a lot of incredible things have occurred at Zoom.
We've seen unprecedented growth and brand awareness for Zoom meeting.
And incredibly strong momentum for newer products.
We have also expanded he built out our direct channel and [ISP] go to market motion, which we collectively call enterprise.
These customers have high lifetime value and they tend to increase deployment, extend term and churn at much lower rates over time.
Starting today, we will provide metrics that more closely align with the way our internal view of the business has evolved following this trade unprecedented growth and expansion.
This will include the number of enterprise customers and the net dollar expansion rate for enterprise customers.
In the appendix of the Investor deck, you will find two years of historical data for these new metrics.
Additionally, at the end of FY '23, we will continue to provide the number of customers with more than 10 employees in the appendix.
In Q4, the number of enterprise customers grew 35% year over year.
To approximately 191,000.
Revenue from enterprise customers grew 38% year over year and represented 50% of total revenue.
Up from 44% in [Q] FY '21.
We expect revenue from enterprise customers to become increasingly higher percentage of total revenue over time.
We expect revenue from enterprise customers to become increasingly higher percentage of total revenue over time.
Our online business, which we define as customer self-service through our online channel, represents the other half of our revenue up from approximately 25% in Q4 of FY20 [before the] pandemic.
Dennis.
The self-service model is very attractive profitability and cash flow perspective, and while we have seen online grow more slowly as an enterprise in recent quarters and expect that to continue going forward. We are continuing to invest in [inaudible] channel to drive growth.
We will also be presenting our debt net of extension rate.
Rather than our net dollar expansion rate with customers with more than 10 employees.
First, let me start with the historic metrics. Our Q4 net dollar expansion rate with customers with more than 10 employees was in line with what we discussed in Q3.
Being just under 130% [inaudible].
Being just under 130% [inaudible].
9%.
Going forward, we will report the trailing 12-month net dollar expansion rate for enterprise customers, which in Q4 was 130%.
Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 21%.
Our combined APAC and EMEA revenue grew 23% year over year to be approximately 33% of revenue stable with Q4 of last year.
On a quarter over quarter basis Asia Pac revenue grew slightly faster than the overall company, but we saw headwinds to our online business in EMEA, partially associated with the holiday seasonality.
Let me share a few international highlights with you.
We closed our largest overall deal ever in EMEA with 200,000 meeting licenses and our largest Zoom rooms deal in APAC with a customer deploying more than 3,300 Zoom rooms to drive hybrid work across their offices.
We have also expanded our partnership with Deutsche Telekom by committing to developing a joint solution specifically for the German market.
We continue to view international expansion as a major opportunity for future growth.
Now turning to profitability, which is strong in both GAAP and non-GAAP perspective.
I will focus on our non-GAAP results, which exclude stock based compensation expense and associated payroll taxes.
[Charitable donation] of common stock.
Acquisition related expenses.
Net litigation settlement, net gains or losses on strategic investment, income tax benefits from discrete activities and undistributed earnings attributable to participating securities.
Non-GAAP gross margin in Q4 was 78.3% an improvement from 71.3% in Q4 of last year and 76% in Q3 of this year.
The sequential improvement was mainly due to optimizing usage across the public cloud and our co-located data centers as well as the seasonally lower usage during the holiday.
We expect this figure to return to the mid-70s in the short term before improving in the mid to long term as we continue to build out our data center.
Research and development expense grew by 133% every year to approximately $72 million.
As a percentage of total revenue, R&D expense nearly doubled year over year to 6.7% demonstrating our commitment to innovation and product development.
We plan to further invest to enhance our platform, including our recently announced contact center products.
Sales and marketing expense grew by 58% year over year to $251 million or approximately 23.4% of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth.
We remain committed to investing in worldwide sales capacity and product marketing across a comprehensive communications platform.
G&A expense grew by 22% to $95 million or approximately 8.9% of total revenue.
Non-GAAP operating income expanded to $420 million exceeding the high end of our guidance of $363 million.
This translates to a 39.2% non-GAAP operating margin for Q4, compared with a 49% a year ago and 39.1% last quarter.
Non-GAAP diluted earnings per share in Q4 grew to $1.29 on approximately 306 million non-GAAP weighted average shares outstanding.
This result is 22 cents above the high end of our guidance and 7 cents above Q4 of last year.
Turning to the balance sheet.
Deferred revenue at the end of the period was $1.2 billion up 34% year over year from $883 million.
Looking at both our billed and Unbilled contracts, our RPO would total approximately $2.6 billion.
Up 51% year over year from $1.7 billion.
We expect to recognize approximately 63% of the total RPO's revenue over the next 12 months as compared to 70% in Q4 of last year, reflecting a shift back towards longer-term plan.
As a reminder, due to the seasonality of renewals being front end loaded and tapering through the year our collection follow the same trend.
Since our renewal linearity is unique, let me provide you once again with some color on next quarter's deferred revenue.
We believe it will peak in Q1 at 12% to 13% year over year growth and moderate over the rest of the year, reflecting a smaller renewal base.
We ended the quarter with approximately $5.4 billion in cash, cash equivalents and marketable securities excluding restricted cash.
We had operating cash flow in the quarter up $209 million as compared to $399 million in Q4 of last year.
Adjusted free cash flow [inaudible] a one-time $85 million cash outflow related to a legal settlement that was disclosed and recognized as a GAAP expense in Q1 with $274 million as compared to $378 million in Q4 of last year.
It's a onetime $85 million cash outflow related to a legal settlement that was disclosed and recognized as a GAAP expense in Q1 with $274 million as compared to $378 million in Q4 of last year.
Now turning to our FY '23 guidance.
This outlook is consistent with what we are observing in the market today.
Specifically assume their enterprise business will grow substantially faster than our online business.
It also assumes that our year over year total revenue growth rate will modestly accelerate in late FY '23.
For the first quarter of FY '23, we expect revenue to be in the range of $1.07 to $1.075 billion.
We expect non-GAAP operating income to be in the range of $345 million to $350 million.
Our outlook for non-GAAP earnings per share is 86 cents to 88 cents based on approximately 309 million shares outstanding.
As mentioned last quarter, due to our multiyear history of profitability. [We fully utilized our NOL].
We utilized our Nols.
We expect our tax rate to approximate the US blended tax rate in FY '23.
For the full year of FY '23, we expect revenue to be in the range of $4.53 to $4.55 billion, which would represent approximately 11% year over year growth.
We expect non-GAAP operating income to be in the range of approximately $1.43 billion to $1.45 billion, representing non-GAAP operating margin of approximately 32%.
While our revenue grew 558% from FY '20 to FY '22, our operating margin also increased from 14% to 40%.
We are pursuing a massive opportunity and we will continue to focus on the appropriate balance between growth and margins as we build out and deliver on the potential of our platform.
Our outlook for non-GAAP earnings per share is $3.45 to $3.51 based on approximately 312 million shares outstanding.
As indicated in our earnings press release today, our board has authorized a $1 billion share repurchase program that we intend to execute on beginning this quarter.
It not only underscores the confidence that our board and our management team having to keep servicing but also allows us to leverage our strong profitability, cash flow generation and strength of our balance sheet to deliver returns back to our shareholders.
We are excited about the large and growing opportunity ahead of us as we continue to execute on our strategy and growth outlook.
As always, [we are] grateful to be a driving force, enabling connection and collaboration worldwide with our high quality frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community and our investors.
[inaudible], please queue up our first question.
Thank you, Kelly. Again, we will now move into the Q&A session. As a reminder, the best here from everyone. Please limit yourself to one question. Our first question is going to come from Meta Marshall with Morgan Stanley.
Meta Marshall with Morgan Stanley.
Great. Thank you.
And Kelly and Eric.
[inaudible] on the analyst day of COVID and you know.
Close to kind of the renewal.
[inaudible] that your customers are going to have. So can you just speak about the trends you're seeing? We're just trying to get a sense of.
Is this a good phone entry point are you seeing a normalization of kind of room upgrades or what are you seeing as far as like a video license? Because we [inaudible]
[inaudible] just any trends that you're seeing in [inaudible] major renewals kind of come up at the end of this month and into the next month.
Yeah. Thank you, Meta. So we continue to see strength in our renewals, especially in the enterprise business and as you heard from some of the highlights we've talked about earlier, we had a very strong performance from zoom phone in Q4, as well and also zoom rooms as.
As customers are really thinking about the future of hybrid work and how they're going to keep everyone connected as they bring them back to the office. This is a really important strategy for them and you heard Eric talk about some of that maybe Eric once that's on the strategy around that but continue to see strength both in renewables in the enterprise as well as additional phone seats and humans.
Got it.
That's it for me I mean, just in terms of you know maybe just another quick question in terms of what kind of metrics you are looking at as you make some of these sales and marketing investments to just determine what return you're going to see on those or what benchmarks you're kind of measuring yourself against them. And that's it for me.
Yes, I mean, one of the key things we always look at internally is the sales productivity looking at it both from a US and an international perspective, and then on the on the marketing side. We looked at internally. We also look at things like opportunities and needs that get generated from any of those.
Then of course, the external benchmark, we're always looking at is sales and marketing as a percentage of that.
Great. Thank you.
And Michael [Churn] with Wells Fargo has the next question.
Hey there, thanks.
I appreciate you taking the question. I was hoping to ask one on contact center.
And just some more detail. Can you help just frame up initial observations around positioning? Is there a certain size contact center you are targeting? Are there advantages you feel doing video or lessons learned from having fallen in the market? You would point to and just in terms of the go-to-market motion, how different is that how well geared or you from some of those initial conversations? Thank you.
Yes. Michael, this is a great question.
We are super excited about our contact center announcement of last week. And first of all, this is based on our customers' feedback. Several years ago after the launch of a zoom phone, many of our customers told us they would like to [inaudible] Zoom platform for unified communications.
The only missing piece is contact center.
We listen with all of our customers are working so hard [inaudible] Contact Center, but in terms of growth similar to what it would take to grow our Zoom [inaudible], right? For the first of the year for sure right, we arguing with targeted customers who really want them to spend [that I've gone through Empire fall probably] started from meeting for those customers.
Who deploy both meeting and a phone now they look at it the contact center. Also at the same time, we're working very hard at more and more features. I think that you know followed if all of those customers as well as we wanted to embrace of the [cloud-based] contact center as long as we want them to standardize on zoom [inaudible].
And that's our strategy. And that's omnichannel video and is very strong. We also support of SMS and voice and web chat. Again in a lot of hard work and we are going to continue innovating and to drive awesome content growth and based on the early beta feedback. Our customers are also very excited.
[inaudible] To deploy the solution, who you know and really understand at the unified collaboration also had assumed heart and with this solution from a gone up right and very consistent.
Compared to video and [phone], very excited about this opportunity.
Very helpful. Best of luck to you there. Thank you. Thank you, Michael.
Our next question will come from Sterling Auty with JPMorgan. Stanley, thank you for turning on your camera.
Thanks. Hopefully, you can hear me okay, given the wind noise, but Kelly, I didn't quite hear Michael's question. I was just wondering within the guidance for this year can you give us a sense what the enterprise approach typically looks like within that guide.
Yes. So specifically in enterprise, we expect that part of our business to grow at approximately 20% year over year. And then that you think you can back into that what we're expecting from our online business is for it to be flattish for the year, but it might have some variability quarter over quarter.
So.
Typically in enterprise, we expect that part of our business to grow at approximately 20% year over year and then that you think you can back into that what we're expecting from our online business is for it to be flattish for the year, but it might have some variability quarter over quarter.
Got it, thank you.
By the way our enterprise growth was pretty strong as we add more and more new services like [contact center. It's the first one]. We're not going to stop here.
Our company being one that truly understand the enterprise customer needs.
We are going to add more and more enterprise services to further grow our enterprise business. Thank you.
That makes sense.
Thank you.
Jim Fish with Piper Sandler has the next question.
Hey, good afternoon, everyone. This is [Quentin] on for Jim fish. Thanks for taking my question.
The labor market right now remains difficult, especially as youre looking to hire and retain top engineering and sales talent. Can you talk about any changes or impacts you've seen in Zoom's ability to maintain your top talent? And then how you plan on differentiating and acquiring new talent? Thank you.
Yes, Kelly, feel free to chime in. So it jumps you're right, give us a great recognition.
It's pretty challenging across the industry right. And again, you know, we always dominant competent culture and is an extremely important in a fast and hard to make sure we deliver happiness to our customers. You know my number one priority is really to think about our employees how to make sure our employees are happy.
We are doing so many things to really help our employees.
And also again over the past two years.
We more than probably tripled the size of the company. Many employees joined Zoom remotely. Again, that's not easy but good news as soon as we are going to change.
Especially when we get into our mode of employees, how do we make sure offer the flexibility. And also mix will support our employees need by the always [phrase in the] feedback from employees what type of happiness crew always try to understand what's the pinpoint and what can we do differently to [inaudible] our employees. By doing that, I'm pretty sure we are going [to make our employees happy.]
I'm pretty happy.
And we will be okay, and that's always [inaudible].
[inaudible] with Oppenheimer.
Thanks, Kelsey. Kelly, I have a couple of questions for you. First, I think you mentioned in your prepared remarks that you're looking for Reacceleration in the second half of the year. Maybe you can walk us through the kind of the puts and takes and what's behind that assumption and the second question would be regarding the online business.
I know you're only giving expensive rates or the dollar-based expansion rate for the enterprise side.
But given that online is still 50% of your revenue, can you at least give us kind of a rough range of where online net dollar expansion rate typically falls?
Just so we get a sense of how to model that out.
Yeah.
Sure. So in terms of the second half acceleration, you're looking at in the upmarket or the enterprise I should say now. It will be driven largely by continued expansion and growth in our existing customers as well as contribution from some of our new product that we're really excited about including contact center.
And then in the online business, which youre going to see is remember we talked about at analyst day last year, how once those cohort gets to a certain age of 15 months and older Theres a lot of stability that comes with those retention rates by the time, we get to the second half of this year all of those cohorts that we acquired during the <unk>.
<unk> are going to have hit that eight cycles. So it's really going to start to bring stability to the online business in a way that we haven't seen historically.
And then in terms of the net dollar expansion rate can be online can do both.
The disclosing that going forward.
The best I can give you is based on what Sterling just asked which is what the growth rate for that business and as I mentioned, we expect it to be flattish for next year with some variability quarter over quarter.
Very good thank you.
Yep.
Ferrets William power Baird civilian power has the next question.
Great. Thanks for taking the question great to see the strong zoom phone numbers again, I guess I'd love to get more color around the key drivers there it sounds like particularly up market. How are you competing there.
What have been kind of a key differentiator so I'm just trying to understand.
Growth within existing customers versus landing new customers.
Because it's a multipart one.
Perfect.
Where does distribution stand and how important has that been expanded distribution. How much further is there to go using the channel et cetera.
Yes. So that's yeah spirited question actually you know Q4 was a record quarter and went into myself a number of new seats more than half a million if I recall correctly around a 550000.
250000.
And you had added a six plus moved from I think the first one not only for our existing customers, but also for new customers well before they were tossed we built established within all of our customers or the past several years and constantly thinking about how to transform their business to fully embrace the digital transformation how to migrate their on premise consistent toward a cloth.
They always wanted to deploy the best solution across most of our customers already deployed in the.
Videoconference solution and also they won't have one consistent experience by front end expenses very consistent backend also is a very consistent you know prices were reliable and ease of use security and also with a lot of vertical features and that's the reason why a customer would be one of the viewpoint is uniform.
As a customer the windows through the Windows selection process, we have high confidence.
Look at Intuit I look at <unk>, it's not at a thousand of licenses that's it.
Based on our silicon to license right and again, you know that had been as steel. We will continue doing very well and also we are not going to stop here, we will add more and more features more innovations plus combined with the contact center, we do see the upside.
I've said it a gross for personal phone and also our contact center Donegal.
Great. Thank.
Thank you.
I will now hear from Ryan Koontz with Needham.
Hi, Thanks for the question was asked about Europe business workflow strategy, there, Eric and <unk>.
For your API SDK.
What type of applications are used enough where typically it is primarily with tech companies.
Corporate would be helpful. Thank you.
That's a good across and look at all of our.
<unk> three pillars and a unified community platform. We just added a condos under welcome Andy Mortimore of secondary you read about a hybrid work, but sort of on is extremely important which is being used to walk work through platform right now.
SDK, some heska, our customers and with the lack of embed SDK to into their <unk> offering of API also marketplace, but the most important thing is read about zoom apps right. We just did another zoom <unk> integration.
Essentially it's even a meeting times, where it is.
One click and Ocado document I can pull that more and more integration like of that during the meeting type orders that are making timely as well right and if that is the key for our path of growth.
Isn't why we invited a greater leader as CEO of a surface enough right and who joined our board right now.
Now probably the best it will go for application provider right.
Pharma services know how to embed more and more in all.
All the bitterness of workflow applications to the zoom platform and also vice versa. I think that can truly have a customer strike rather leave that zoom interface go to other business context, right. They can stay with zoom interface kind of getting the job done but also we are doubling down our SDK platform.
Education healthcare a lot of vertical industry startup.
The embedded zoom to their offering and that's why we're very excited about both of our fitness workflow platform.
Thank you. Thank you Brad Sills with Bank of America has our next question yeah.
Hi, it's Mike <unk> on for Brian sales supply could so.
First on your churn by cohort love to hear your thoughts and your assumptions around that.
And then second the visibility into the attach rate for contact center.
Sure So Brad you or Mike sorry, if you remember back in analyst.
Analyst Day last fall, we shared a chart that shows how as cohorts age when they get to that 16 months and older. They really stabilize in terms of retention rates and <unk>.
If you go back and look at that Youre able to see what we shared with not only the retention rates, but also where we are in that process and so it's very easy for us now to look forward and predict how those retention rates are going to impact the overall base of that of the <unk>.
Wine business and so that's exactly what we've assumed that they just continue aging because we've seen really strong stability in those retention rates as they get to that 15% to 16 months eight so it hasn't changed even as the business has been kind of overall volatility there it doesn't change in the older things that will just following them.
And then there is some transfer.
Ashford your contact center.
Yeah. So.
It's so early right now we have we haven't done in terms of the tax rate. Yes, we just look forward to the back half of this year and assume that we start to see some revenue there we saw but really yet.
Many really strong enterprise customers sign up for the beta so we're excited to see how it goes.
Great. Thank you so much.
Matt Van Vliet with BT AIG has the next question.
Yeah, Hi, Thanks for taking my question I guess as you look at the many investments you made on the international side of things, where do you feel like you are from a sales force maturity and efficiency relative to.
The efficiencies you've already shown in the U S.
Just as each of those markets mature, maybe any kind of regional or country by country specifics you would be great. Thanks.
So the international team has grown tremendously over the last few years and certainly continue to see opportunity and we talked about this before but as a quick reminder, with the growth and the brand awareness over the last few years, it's really enabled us to go in and put reps, where we see opportunities without having to seed markets with marketing dollars.
I think the big area of opportunity that still exist for US internationally is the channel that is where we know there is a cross functional initiative in the company to really focus on the channel, especially focused around one and that can be master agents that can be carriers Deutsche Telekom and our strong partnership there we just.
Announced is a great example of that effort and we're going to continue to focus that especially over this next coming year, because that's a really important part of the distribution strategy for him.
Thank you.
I'm Matthew <unk> with Deutsche Bank has our next question.
Hi, Thanks for taking the question.
You've talked about M&A being the greater part of the story going forward I'm, just wondering with the pullback in market valuations for some higher growth themes.
Are you thinking about inorganic opportunities and are you seeing more of these.
Opportunities surface, particularly in the private market and then maybe if I can just sneak in a follow up on the.
Customers with more than 10 employees I believe that declined slightly sequentially. Just wondering if theres any color you can give in terms of maybe what drove the bulk of those.
<unk> in terms of customer size.
No.
So in terms of inorganic in the RFP for M&A. We really are continued to be focused on that and I think.
The strength of our balance sheet in terms of cash leaves us a lot of opportunity regardless of what's happening with our stock price honestly. So we will continue to focus on opportunities for augmenting challenge or technology, which is what we've said all along and then in terms of the decline in the you are right.
Was slightly down the netcentric customers with greater than 10 employees and if you back up for just a quick minute remember that when we went public we picked that metric as a proxy for our direct business and their customers with your then churn was the proxy for our online segment and what's happened over time as we see the tremendous.
In online as a channel it started kind of overlap there, which is why we don't think its really the appropriate metric to use any longer going forward, but that decline was driven by churn that we saw in the online segment of our business with customers that have more than 10.
Yes, Matt to add onto water cutting side I think it's time to really look at it the online business and also all the rapidly and extreme by serious channel online business, meaning those customers never interactive is obviously a threat right just to go on less to use our credit card to buy I think that's probably the better. It is the right time for us look at it.
Dennis and also directly to China, So I'd, rather just a tin bloyd because it's skewed a little bit of confusion. Sometimes you also talk to the <unk>, sometimes it's gone up a box and it's time for us to look at a pure online business, meaning they never interact with our <unk> I think that's a better way the better metrics down the road.
Thank you.
Thank you Matt.
Peter Levine has the next question with Evercore.
Thanks for taking my question. So maybe just to piggyback off the contact center discussion I think it's been reported that you are selling seats at 70 per month per agent. So that's obviously a huge discount from the industry average call. It 200, so is the pricing and indication that zoom just doesn't have all the features functionality.
And it just doesn't warrant the premium price or is this just zoom being aggressive, but just trying to get market share and I would assume second part. My question. This is I would assume over time. The idea is to get the full voice functionality AI <unk> and kind of move that pricing up to kind of where the industry is today.
Yeah.
So Peter I would say that.
<unk> has always been disruptive in pricing and contact center is absolutely.
If you look at it across the market in how we price meeting, how we price and some when we introduced it.
Approximately half the price of any of our competitors left right and that continues to be the case with contact center as well.
Over time, we absolutely will continue to add features and functionality of the exact same approach that we took with your phone in terms of the launch and how it grew over time and expanded the reach of the functionality the state.
AME is true with contact center, but you should not take the price as reflecting anything in terms of the quality of that product.
Peter Kelly Wright, our closest shred, it always better product better price and also a much better service.
Thank you.
Chablis Serafini with F B and Securities has the next question, yes. Thank you very much so with your guidance for fiscal 'twenty three it looks like youre guiding for about 11% or so revenue growth in my model fit your bottom line guidance.
Around 40% Opex growth was five four times.
Our revenue growth.
That's an unusual.
I'm kind of multiple for 401, unusually that's indicative of the company's belief that they could grow fast, meaning like 20% plus in the future.
My question really is is the goal here to invest when it has.
You're referring to revenue growth and 23 with the idea of accelerating revenue growth to 20% plus at some point in the future and related to this I know youre guiding for online being flattish this year.
Your goal to get that to at least double digit growth.
In the future.
So as we mentioned in the prepared remarks, I believe we absolutely expect it to be an inflection point and for revenue to start to reaccelerate in the back half of the year. We're not yet you know we're not prepared to give multiyear guidance at this point, but what you should expect is and we're modeling for the <unk>.
The growth rate to be higher than the four years, let's say for FY 'twenty.
Yeah, just quickly prior to pandemic, our gross grocers editors were clear my Domino Unifies every two years, we're going to introduce a new service right to read and mobile it right I'll also upsell over the past three years.
Have to really think about how to happy to award a habit people stay connected that's the reason why we spend a lot of time make sure offer their kid, who tell the school for his services and also and it flips on online business as well right now at the end of the Covid prices <unk> got to go back to our enterprise growth strategy also at the same time.
How to adjust our poorest in deposit growth strategy, which is every two years.
You are going to add a new service now probably every one of your union at a one more new services right. That's the Weibo Foss Thats. The reason why we would adjust the alba grocery strategy to double down triple down on our enterprise customers.
Okay. Thank you. Thank you.
Now moving on to Karl Keirstead with UBS.
Oh thanks.
<unk> narrowed the EMEA and APAC growth has been a big part of the zoom. The story is the U S market has become more penetrated yet in this past quarter the growth in both those regions decelerated pretty sharply Kelly I know you talked a little bit about seasonality in Europe do you mind elaborating on what's happening in international.
When you set your 11% growth target what's embedded in that number in terms of your non U S growth, even if it can be.
Directional.
Yeah. So in Q4, we did see we saw strength in Asia Pac and even saw strength in EMEA too as you remember, we announced our largest deal ever for EMEA, which is super exciting so strength in the enterprise segment of the business, but we absolutely saw an impact from holiday seasonality, which which we expected we've talked to.
About that in the call on Q3, if you remember.
In terms of looking forward international absolutely, it's a really important parts of our growth strategy and we do continue to expect it to grow at a rate that is higher than the U S and so that and we will continue to also add invest in sales capacity internationally at a rate that is higher.
On a percentage basis that we would be doing in the U S as well got it.
Okay. Thanks, Kevin Yes.
And our next question comes from Richard <unk> with RBC.
Wonderful. Thanks. Thanks, so much for taking my questions guys I wanted to go back to look I.
Great.
Reporting our way of reporting things I think it makes a lot more sense, but just when we think about the above 10 and sub 10 employee segment was down sequentially again.
It's actually slightly up versus Q1 and up year over year, how is just relative to your own expectations and how should we be thinking about that segment going forward and maybe alongside that.
When we see these above 10 employee customer count down sequentially I know a big chunk of those are online customers totally makes sense based on your observations. What are you seeing those customers doing are they unplugging are they moving to a competitor or are they just downgrading to a free version of zoom and maybe there is a monetization opportunity down the line. Thank you.
Yeah, I mean, it's so in terms of like this.
This is why this number doesn't make sense anymore, because it's gotten so mixed up between the customers and the channel I think the size of the customers and channel, that's what Scott and really convoluted with this metric going forward and why we're not going to really.
Really to talk about it going forward. So in terms of how we see it going forward honestly regime, we arent even modeling around this metric any longer we are completely moving to thinking about enterprise and online.
I said in the prepared remarks that really reflect how we think about the business and how we're measuring and managing it. So that's what makes the most sense and what you should really continue to see is ongoing growth in the enterprise business was super excited about the strength that we see there and double digit growth for next year and that.
That online is going to be flattish and that's what we've set.
In terms of what these customers are doing.
Especially in the smaller customers, we see them leave and come back to even come back right. We make it very flexible for them to do that and so at any point in time, they might be taking a break but they might come back when it makes sense for them and that's what we want we want it to be easy for them to come and go as they see the need for our products.
Wonderful thank you.
Yes.
And we will now hear from Tyler Radke with Citi.
Hey, good afternoon, everyone. Thanks for taking my question.
Kelly I wanted to ask you just a couple of points on the 20th or FY 'twenty three outlook I guess first how are you thinking about price increases and just generally.
<unk> power philosophically and then second of all the.
The reported revenue this quarter relative to your guide was some of the smallest upside we've seen.
Public company, so just any changes in guidance philosophy, or how you're approaching the guide for this year. It would be helpful. Thank you.
Yeah in terms of the outlook from a pricing perspective, we currently don't have plans to increase our prices across the board we are especially for the online segment of our business. We are looking at opportunities for localized pricing and selling in local currency, which I think will be really.
A whole in terms of especially some of the smaller customers in those markets and getting getting those plans right size to those markets.
But no plans to increase our prices across the board.
And then in terms of.
The beach that you mentioned for Q4.
Yes.
Rone and scale as a business I think youre, starting to see our guidance and our deep get more correlated to the size of the business and reflects the growth rates that we're experiencing going forward.
Thank you.
And moving on to <unk>.
Alex Zukin with Wolfe research.
Hey, guys can you hear me okay.
Yeah, Hey, guys. Thanks for taking my question I've got just a competition to one and then a numbers one.
So Eric maybe for you first given the increasing importance of the enterprise business, the increasing spend there the product diversification, what's the right way to think about this post pandemic competitive environment vis vis Microsoft as well as your other competitors is it the same sales cycles longer more.
Give us a flavor of what Youre seeing and how you are planning for the full year.
Yeah, So again, yes.
Comps competition right Youre always so from Santa Rita from pharma customers right and the city is an affiliate bag of double down on innovation. That's cleaner module that is formulary is very sustainable.
It was really just the folks on some of our competitors.
I wouldn't say first of all and you pick a Mexico for example, and some enterprise customers who spend that is on Mexico. Some indirect customers to standardize on zoom platform for some enterprise customers, you'll get it <unk> been in the report right and look at it all cutoffs Mexicali.
Office 365 deployment.
In terms of co existence zoom.
Zoom and assume.
That percentage increase.
Increasing year over year around a 45% meaningful those all cutoff of Microsoft office three.
<unk> hundred 65 customers deployed both zoom and backstop solution right and also we also on many fronts, we partnered with Microsoft as well right I think that's why the market is huge right and somehow can relax zoom platform. The lack of Max of the chat yeah. The sunquest.
Zoom video and voice I think that it will continue also at the same time right.
Either a contact center are recognizing more and more use services right and in addition to focus on horizontal collaboration FIFO. We also wanted to talk some more.
Like contact center and also some other services as well right on the Baidu that my head of a community.
<unk> against some of those bigger competitors on the other hand, it also integrated more and more recently as well that's a Australia detail got it and then.
So I just wanted to go back to the point that Sterling asked about the.
Our guidance with respect to enterprise versus online the 20% or flat.
Just help us bridge that to where billings guidance for Q1 is negative billings guidance for the full year I think pencils out to low single digits CRP Oh sequentially.
<unk> decelerated, what's the like.
What is the number we should focus on the forward looking metric to give us confidence in that Reacceleration of revenue growth that you are calling for and particularly the sustainability on some of the enterprise and online trends.
So.
Remember that unfortunately billing is not a <unk>.
Good forward looking metric and it's due to the fact that we have this 50 50 split.
In our business and the enterprise.
Business is billings associated with that or what you would expect in a normal SaaS business.
And they're multi year annual the multi year.
In the online business is not that there are many of those customers that are still buying and paying on a monthly basis. So it really doesn't make sense for us a metric and that's why you're going to continue to see volatility in that metric and.
Because of that.
What we tried to give you at least some color around deferred revenue. So you can understand that because also of.
The seasonality in the linearity that we have in our renewals and our billings and.
Unfortunately, the best that I have to give you is as our revenue guidance and that's it I'm trying to give you metrics that better reflect now how would we think about that.
Okay.
Have you guys.
We will now hear from Kash Rangan with Goldman Sachs, Hey, Eric forecast jumps on here just wanted to let you know cash. Unfortunately was on the participant side. So we just pulled them in as a panel, but he used our zoom chat prana.
Product to come on over so welcome to the world of Zoom chat Okay. Yeah. Thank.
Thank you Kellie Hello, Rick How're you doing.
But I'll give you a zoom a tad a T shirt. After this meeting.
Love It love It love it so Eric I think.
2000, greater was Europe transition right.
But it's something you said back in September how are you.
We're positioning zoom for the next era of communications, we have a lot of products in the product roadmap video exchange center or do you have the event platform et cetera.
Curious to see if you.
To get your thoughts on how you're preparing zoom for the next chapter.
The milestones, we should be expecting from the company.
And the go to market transformation strategic initiatives your partnerships et cetera to help.
Zoom be ready for that.
The vision that you laid out in September .
Yes. That's good question is given that you are using zoom chat, it's always our union.
Can you give some pop them none of them is that we're at a comp to unify the commission pot chat or phone.
And videoconferencing and <unk> and all of those missing part of Carnegie Center of adjusted edit on wire to the UC platform and also look at other competitors and also the hybrid to work and have been looking for that as well you're essentially in the next several years. We are working very hard in the transform our business from a meeting company to a path.
On the comp right and in terms of metrics to look at it our enterprise gross now, albeit it used to be the run wise, where small it's more of a byproduct of our online marketing platform because of Covid right that our revenues and gross well also where appropriate but now given the COVID-19 is or the habitable back.
It's a tribute to our enterprises gross in terms of more news services in terms of embracing the platform right you will see in the next several years, we are going to.
Introducing more and more enterprise services and also from a technology perspective.
And also and also some more integration with other previous work of applications I think overall at a multiple widen 12 and their enterprise customers I think that we've lost.
Look at our growth for the next few years.
Thanks, so much.
Thank you Kash.
Matt Stotler with William Blair. Please go ahead.
Yes.
See you guys. Thanks for taking the question.
Maybe just one as you think about building out the pool you'd see stack, obviously, you've got many of the key components videophone everything around those two contact center now.
You're pushing into.
When you look at it.
I'm, especially some of your enterprise competitors some of the.
Large buying that you get from ITE around those other solutions is because they are based on things like foundational productivity tools like E mail or file sharing or scheduling and full featured chat things like that.
How do you think about how those fit into your roadmap or.
If not directly are you satisfy those needs for your enterprise customers to keep moving up market yes.
Yes, Matt first of all.
For now we're focused on unit product within the platform right and no lack of Firestone and Thats. The reason why our cash is using zoom attack, which is our persistent group is a part of our union product commissions platform constantly kind of standardizing zoom a single kind of massive essentially had a message of the group I continue.
Phone call and contact center, that's our unified it can be some powerful pas.
Out of the first Peter of our platform strategy in terms of our certain emo, Canada first of all we are integrating very well with other vendors.
Although further embedded.
Those solutions into the zoom platform play that this was also Australia abdominal.
Multi calm and stay tuned.
Got it thank you.
Thank you Pat City Pentagon he with Mizuho. Please go ahead with your question.
Okay.
Clearly just wanted to ask there was a growth drivers.
Thanks, Les you talked about some of the product. Besides video you talked about phones <unk> contact.
Contact center. So many other products. So how would you rank that could have this drove driver near term versus medium term like two two yourself yeah.
Near term.
Mission early right. We can go to our <unk> Peters unified it Kimicans platform hybrid work and business will go through a powerful and towards a near term driver. We've got to focus on Talbot entrepreneurs, our unified it can reduce platform for the time being on a future driver of not only that but also the hottest, but a hybrid world harvest for the brand.
Local platform those two things will help us to further grow our greenstone alone in addition to unified communication platform.
I mean, one of them would contact center would be reduced.
Producing expert back to have some kind of material.
Introducing the condo Sunday as part of our Union part of convergent platform right and again only source customer already deployed meeting a phone with a lack of deploy the contact center you know overall, we put into the contracts under into other missing piece of the unified <unk> platform together will drive our used vehicles.
The new grocery come from second and third opinion.
Thank you.
Okay.
Taz <unk> with Guggenheim has our next question. Thanks.
Thanks, guys.
Hey, guys can you guys hear me.
Yes.
That's why I'm a question for Eric has been a funnel for Kelly I think as you launch your own contact center, what does that mean for your partnership with Firefly.
Although the partnership is still doing well because some costs already below five now as people assume we want to make sure and we keep improving that experience. However, some customers some brand new customers, who deployed on premise solution and with record consolidated everything zoom platform. Yeah. We were delighted to get at those customers right and again you can always with market is.
<unk> contact center, you look at all of those modules and one of the contact center, there's huge right and sometimes customer already brought by them that they're going to deploy more you know the features comes up also deployed zoom Carnegie Center already brought Genesis episode, Okay again.
We will focus on our installed base, we focus on those customers, who truly believe zoom, you'll see visit with a lack of a standardized on zoom platform right. That's our closest rated.
Got it and then pump for Kelly Kelly, if I look at your free cash flow margins for this year, there's about a four point gap.
Between the operating margin and free cash flow margin going forward as we have a bigger mix of enterprise.
I guess versus the online cohort does that Guy I've got one or do you see a bigger delta between operating margins and free cash flow margins in fiscal 'twenty three.
The gap in operating margin year over year is really being driven by our ongoing investment in R&D, So and a little over 6%. This year, it's still not within our target range, our targeted range for R&D is 10% to 12%.
So that's that's a big driver for US we are continuing to invest and innovate for the future and a little bit of that will be all.
And the overall improvement in gross margins for the long term, but we still are in the middle of that multiyear strategy of moving from the public cloud into our own co located data centers or that's going to take a little bit more time, and then sales and marketing is also going to increase a little bit as a percentage of revenue will continue to focus on sales capacity has been talked about.
And also really and were building upon this amazing brand awareness that we garner with zoom meetings and want to make sure that everybody also understands the great value. They can get from the phone friends and events as well as the contact center. So you should expect to see more targeted product marketing.
But but in terms of I know you don't guide to free cash flow margins, but that the delta between all pretty much just because somebody should that remain consistent in going forward or should that delta widen because now you have more enterprise customers, who are probably paying upfront more and you get you get a better cash flow margins yeah over time, we expect our.
Our relationship between operating margin and free cash flow to go back to what it was pre tender. So if you go back and look at the variability or the I should say the differential you saw there. That's what you should expect to see as we move through probably sort of get through the back half of FY 'twenty three it should start to normalize like that again, we still have some investments in the early part of this year.
Around continued build out of our data centers, we're doing some office build out as well. So you should expect to see capex, a little bit higher than kind of a normalized rate, but eventually we will get back to that norm will be messy stuff.
That's great very helpful. Yes.
And we have time for one additional question, which will come from Parker Lane with Stifel.
Yeah, Hi, Thanks for taking the question with the return of business travel amended being rolled back curious to hear what your customers are thinking about in terms of their plans for this year are you still anticipating that your customers will do more virtual only and hybrid events than they did pre COVID-19 and how does that sort of translating into the demand youre seeing.
For events in 2022.
We really expect that as people start to travel they're going to travel for certain events, but not for all of them. So we really expect the future to be hybrid and that's why we're really excited about argument that strategy and that it can accommodate both in person as.
Well as virtual attendees and that's what we really think is going to be the future because people I think are.
<unk> are excited to be out and being traveling again, but they wanted to do it when it's convenient for them and when it makes sense in their life and it I don't think we expect people to return back to the way it was pre pandemic and it's going to be some combination just as work is we expect events to be the thing.
The pocket.
Quicker to add on to <unk>.
What are kind of aside and look at it the <unk>.
Yes for sure that'll be hybrid like lots of summer I joined six four Dream force New hybrid <unk> bin I had a good experience right a lot of people drawn on that and also to have a separate.
There were hundreds of people there in person, but in the future.
If that is still hybrid win I would see the percentage of <unk>.
Those people, who are going to show up in person it will be more and more but again that is still to hybrid and also a lot of people don't draw on it as well I do not think we'd get back to pre pandemic all the even just the airbnb there in person I do not think that's the case based on the.
Composition with some of our customers.
Yeah. Thanks, Scott Thanks, Scott Thank you partner.
Perfect.
And again that does conclude our Q&A, Eric I'll turn it back to you for any closing comments you might have yes. Thank you all read it first of all Tom. Thank you for the time. Thank you for support and fully appreciate thank you take care.
Thank you so much and again everyone that concludes today's earnings release, we thank you all for your participation enjoy the rest of your day see you next time.