Q1 2023 Zoom Video Communications Inc Earnings Call
Ill hand things over to Tom Mccallum head Investor Relations, Tom take it away. Thank.
Thank you Kathy Hello, everyone and welcome to <unk> earnings video Webinar for the first quarter of fiscal Q1 fiscal 2023 I'm joined today by Zoom is founder and CEO , Eric Yuan and assumes the CFO Kelly Steckelberg.
Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors <unk> Zoom Dot Com also on this page you'll be able to find a copy of today's prepared remarks, and a slide deck with financial highlights that along with our earnings release include a reconciliation of GAAP to non-GAAP financial results.
During this call we will make forward looking statements, including statements regarding our financial outlook for the second quarter and full year full fiscal year 2023, our expectations regarding financial and business trends impacts from macroeconomic developments in the Russia, Ukraine War our market position.
<unk> growth strategy and business aspirations and product initiatives and the expected benefits of such initiatives.
These statements are only predictions that are based on what we believe today and actual results may differ materially.
Forward looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K, and quarterly reports on Form 10-Q zoom assumes no obligation to update them.
Statements, we may make on today's webinar and with that let me turn the discussion over to Eric.
Alright. Thank you Tom Thank you Eric for joining us today.
As we continue to execute on our strategic pillars I shared with you last quarter well very good April although support him as fast we have received from our customers and investors. Let me just start I mean, some original news then touch on our new product launches and finally discuss some exciting customer wins.
The 400 megawatt to kind of.
Yeah.
Just in the last week, we closed our acquisition of a solid risk. We believe we have strengthened our capabilities around our conversational AI and salary.
<unk> of our contact center product.
The nature of the cost of experience is undergoing a fundamental transformation as enterprises increasingly look to engage with our customers.
Exceptional personalized and after these days.
We recognize this is shipped and installed in solving achieved laser focused on providing the very best conversation on technology and empowering customer support leaders to deliver better experiences.
We believe <unk> technology, we have broadened our contact center offering with the <unk> self service and AI capabilities that are truly enable fast and personalized customer resolutions improved agent productivity and valuable insights.
We are very excited to join forces with a solving.
Our growing number of contacts on our customers set a new status for <unk>.
Customer service.
A key part of our strategy.
Nimble more and more business workflows within our platform.
I'm Super excited about our recent launches of zoom LIBOR and assume Q4 sales.
LIBOR is arming keys with the power of continuous collaboration with easy to use solution that of Hawaii of whats your space to collaborate before during and after the meeting.
And it will have a <unk> reached their full potential we have launched a zoom out Q4 sales of conversational AI solutions.
And then I this customer interactions.
Surface psi's axis and content.
Meetings.
This new product launches encapsulates our strategy.
Move into adjacent and workforce, both horizontally and vertically in order to ensure all of our customers are getting more and more out of our platform.
Now we are into customer base well.
Happy to share that Humana, one of the nation's leading health and well being companies has expanded their relationship from zoom meetings to include approximately 24000.
Films to integrate our voice and video.
They are a communications platform. Thank.
Thank you Amanda.
I also wanted to attack Avis budget group, a leading global provider of mobility solutions operating suite of the most recognized brands in their industry, So avis budget and zipcar.
Except for expanding from being a zoom meetings and zoom is customer to being a broader your cost of customer.
They continue to stay similar to the connected.
Added approximately 10000 zoom films across many of the global offices and car rental locations.
And in addition to a zoom meeting and is doing some our <unk> solution includes a very robust.
Assistant acumen had a product that a further drives collaboration seamless and integrated with.
Our cheddar product is used by a number of large enterprises, including a fortune 10 company with over 130000 users.
I also wanted to thank Lulu.
Neither.
Residential solar and home experts.
Happy to zoom meetings customer who has recently enabled their 4000 employees to enjoy at the use of a zoom a check.
Blue Mill.
Chaucer zoom attack is the ease of deployment and to enhance communication and collaboration across their team.
The next two weeks, a very special because they've demonstrated the strengths of our platform offering and hauled a contact center as a critical component of the platform.
I wanted to thank Tim House.
A leading physician practice in the U S for their trust and resume.
Theyre inhibition folks the team is committed to delivering the best quality experience possible for their employees heska, our providers and our customers.
Our long standing our zoom meetings zoom webinar and as soon as customer Kim House recently expanded their service with solid and office doing some licenses across their organization.
And is there a journey into their <unk>.
Even their seamless experience across our platform these are potential wider.
Zoom contact center too.
To modernize internal ICU support of services across their case on the consolidator of choice in health care affiliates.
And the last but certainly not least I wanted to thank Franklin Covey.
A leading provider of leadership individuals effectiveness and base as Christian training and assessment services.
Franklin Covey started as a zoom meetings and assuming <unk> customer.
In Q1, recognizing zoom is expansion in the contact center and proven ucas capabilities, they decided to deploy zoom phone together with zoom Carnegie Center.
We saw them as it goes hand in hand to spend to support of many of their extra norcross underneath in the U S, including voice and video channels as well as our steel business.
We look forward to continuing our journey is Franklin covey by delivering additional capabilities as we enhance and expand our contact center offer.
Thank you Humana.
Lew Mail, Kim House, and a Franklin Covey.
I'm, so grateful to have such a critical part of our customers.
We hear everyday from our customers about just how much impact it.
Unified communication platform has had on holiday to mitigate it internally.
An extra <unk> <unk>.
Recently, the Commission, Florida, Florida resorting to qualify as soon as the baby's body and provide a framework for organizations looking to understand their unified communications investment.
The study indicate that zoom has unified communication platform could provide a 261%.
Investing over three years.
The organization is there a module with a payback just in the last six months.
This did not come as a surprise to us or our customers.
Let's see and feel the value of the zuma aggregate, but it doesn't set up healthy bar for water organizations can strive to accomplish with almost flattish more scalable and a growing suite of communications solutions.
And as accomplished look to empower hybrid workforces zoom can drive further efficiency gains through our robust zoom rooms offering.
And is there a intangible benefits as well.
A new study from got enough found that employees with more flexibility in terms of what style and a location.
More connected to their organizations culture.
We have found this to be true <unk> Xu.
And are working to help our customers realize similar goals by anybody in productivity and a bit on a crossing our t's, whether they'd be person remote all hybrid.
As always let me also affect our global is zooming team customers partners and investors for their agreed as fast and as support and a is that a possible war to pattern. Thank you.
Thank you, Eric and Hello, everyone. Let me start by also extending my warm welcome to the Salve team. We are thrilled to have you join the zoom family.
I'll first discuss the results for Q1, and then provide our outlook for Q2 and FY 'twenty three.
In Q1 total revenue grew 12% year over year to $1.074 billion near the high end of our guidance.
The growth was primarily driven by strength in our enterprise business, which saw a steady increase as customers as well as in customers as well as improved renewal rates year over year.
We also saw ongoing success in zoom rooms, and Jim pounds, which reached 3 million feet during the quarter.
Renewals in online improved sequentially the growth was impacted mainly by international headwinds, including the strengthening of the dollar and the Russia, Ukraine more.
Revenue from enterprise customers grew 31% year over year and represented 52% of total revenue up from 45% in Q1 at FY 'twenty two.
The number of enterprise customers grew 24% year over year to approximately 198900.
We expect revenue from enterprise customers to become an increasingly higher percentage of total revenue over time.
Our trailing 12 month net dollar expansion rate for enterprise customers in Q1 came in at 123%.
This is in line with expectation as existing enterprise customers continue to expand their investment in a new platform with growth rates to be getting to normalized following the very high rates of expansion previously.
We saw 46% year over year growth in the upmarket as he ended the quarter with 2916 customers contributing more than $100000 in trailing 12 months revenue.
These customers represented 24% of revenue up from 19% in Q1 of FY 'twenty two.
Yeah.
Our Americas revenue grew 15% year over year.
Our APAC revenue grew even faster at 20% year over year.
Performance in Americas, and APAC was partially offset by the flat year over year growth in EMEA.
This was primarily due to continued headwinds in the online business.
On a quarter over quarter basis, we believe the Russia, Ukraine War has broadly impacted our online business in Europe and is expected to weigh on the balance of FY 'twenty three as well.
Now turning to profitability, which was strong from both GAAP and non-GAAP perspective.
I will focus on our non-GAAP results, which exclude stock based compensation expense and associated payroll taxes 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 Q1 was 78, 6% an improvement from 73, 9% in Q1 of last year and 78, 3% last quarter.
The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co located data centers.
Given the improvements we are seeing so far this year, we expect gross margins to be in the range of 76% to 78% for the remainder of the year, which is higher than our previous view of the mid seventies.
Research and development expense grew by 105% year over year to approximately $85 million driven by our focus on innovation.
As a percentage of total revenue R&D expense increased to seven 9% from four 3% in Q1 of last year.
Our new product launches reflect our ongoing investments in expanding <unk> platform and our commitment to delivering on our customers' evolving needs.
We plan to further invest in R&D to reach our long term target of 10% to 12%.
Sales and marketing expense grew by 40% year over year to $267 million.
This represented approximately 24, 9% of total revenue up from 20% in Q1 of last year.
We remain committed to investing in worldwide sales capacity channel partners and product marketing of processing platform.
G&A expense grew by 26% to $93 million or approximately eight 6% of total revenue.
non-GAAP operating income expanded to $400 million.
Beating the high end of our guidance of $350 million as we are seeing the benefit of efficiencies in our cloud operation.
This translates to a 37, 2% non-GAAP operating margin for Q1, compared with 41, 9% a year ago and 39, 2% last quarter.
non-GAAP diluted earnings per share in Q1 was $1 <unk>, an approximately $307 million non-GAAP diluted weighted average shares outstanding.
This result is 15 above the high end of our guidance and 29% lower than Q1 of last year.
Now turning to the balance sheet.
Deferred revenue at the end of the period was $1 3 billion up 22% year over year from $1 1 billion.
Looking at both our billed and Unbilled contracts, our RPM totaled approximately $3 billion up 44% year over year from $2 1 billion.
We expect to recognize approximately 63% of the total <unk> as revenue over the next 12 months as compared to 72% in Q1 of last year, reflecting a shift towards longer term plan.
As a reminder, our seasonality of renewables is front end loaded and tapers through the year and therefore, our collections followed the same trends. This leads deferred revenue to peak in Q1 and moderate over the rest of the year, reflecting the smaller renewal base as such we expect Q2 deferred.
<unk> to grow at approximately 9% to 10% year over year.
We ended the quarter with approximately $5 $7 billion in cash cash equivalents and marketable securities excluding restricted cash.
We had operating cash flow in the quarter of $526 million as compared to $533 million in Q1 of last year.
Free cash flow was $501 million up from $454 million in Q1 of last year.
Our margins for operating cash flow and free cash flow remained strong at 49% and 46, 7% respectively.
For the fiscal year, we would expect free cash flow margins to be roughly three to five points lower than our non-GAAP operating margin taking into account the lower deductions for stock based compensation caused by the recent stock volatility.
The section 174 requirement to capitalize and amortize R&D expenses could further impact our free cash flow if congress does not differ repeal or otherwise modify the existing legislation.
Over time, assuming a more normalized FCC environment, we would expect our free cash flow margin on an annual basis to track approximately at or above our non-GAAP operating margin.
Last earnings, we announced our $1 billion share buyback plan.
As of the end of Q1, we had purchased $132 million of stock representing one 2 million shares.
Now turning to our FY 'twenty three guidance.
This outlook is consistent with what we are observing in the market today, specifically it assume that our 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 the fourth quarter of FY 'twenty three.
For the second quarter of FY 'twenty, three we expect revenue to be in the range of $1 115 to $1, one 2 billion.
We expect non-GAAP operating income to be in the range of $360 million to $365 million.
Our outlook for non-GAAP earnings per share is <unk> 90 to 92 based on approximately 308 million shares outstanding.
As mentioned last quarter due to our multiyear history of profitability, we are fully utilize our Nols.
We continue to expect our tax rate to approximate the blended U S federal and state tax rate in FY 'twenty three.
For the full year of FY 'twenty three we expect revenue to be in the range of $4 five three to $4 55 billion, which would represent approximately 11% year over year growth.
We are raising our non-GAAP operating income to be in the range of approximately $1 48 to $1 5 billion.
Representing a non-GAAP operating margin of approximately 33%.
Our outlook for non-GAAP earnings per share is $3 70 to $3 77 based on approximately 309 million shares outstanding.
Before we conclude I would like to update you on our recently issued inaugural ESG report.
Report includes information regarding our ESG initiatives and policies environmental performance and target details at zoos and our employees charitable contribution diversity metrics and an index, providing standardized reporting according to this that the framework.
As always zoom is grateful to be a driving force, enabling nextgen in 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.
Chelsea please queue up our first question.
Thank you Kelly and again, everyone. We are moving into our Q&A session and as a reminder, please limit yourself to one question to ensure that we can hear from everyone today and our first question will come from Mitra.
Pardon me meta Marshall with Morgan Stanley .
Perfect. Thanks, so much guys and congratulations on the quarter.
Clearly you guys are seeing a lot of traction on the phone front I just wanted to get a sense of as you look into fiscal 'twenty. Three. This is what you think could be kind of other categories of of kind of ancillary products that could contribute to growth and just when you would expect.
Outside of core video to be more than 10% of revenue.
So we're super excited of course about recently launched products, including Whiteboard and contact center. We saw some contact center deals you heard some of those names that Eric talked about at the beginning of the call and then of course zoom rooms continues to be a really important part of our strategy going forward, especially with <unk>.
I think the ever evolving status of what flexible and hybrid work is going to look like in the future in terms of when I expect any of those products I think on a combined basis, we do see that.
Combination of those products exceeding 10% of revenue today, we've always committed that as soon as each any individual product gets to 10% of course will start disclosing that.
I think that's likely not likely to happen in FY 'twenty, three but probably in FY 'twenty for FY 'twenty five youll start to see some of those.
Lines coming into their own and.
Producing at least 10% of revenue.
Great. Thanks, Congratulations. Thank you Peter Thank you and our next question will come from Matt Stotler with William Blair.
Hey, Matt Hey, guys, Hey, Thank you for taking the question maybe.
Maybe just one on contact center for me, obviously, good to hear some early wins there.
I would love to get an update I guess more broadly on how the adoption.
<unk> demand that youre seeing for that product specific use cases that you're seeing customers kind of rolling out for and then as you think about the functionality roadmap from here.
We are the most critical pieces obviously.
As you saw will be coming in on that side would love to get your thoughts on that going forward as well.
Yeah, Matt that's a good question first of all very very exciting, Florida have several contacts and appeal to customers because the cost and the proven new cost capabilities.
Capabilities and for those customers. So they already deploy zoom meetings and also either already closed in the form of your argument deploy zoom phone with preferred deploying some mechanics venezuala causes already bureau to work get about call routing engine or right and a lot of features called contact center contact.
<unk> features already beauty and also which filed an auto when we just one use case unlike.
Enterprise services broadly speaking this is a much bigger opportunity for us.
Adding more and more features.
And they were quite a solely compositional AI capabilities and even some notable features like workforce management Q&A module like says that all of those features.
Attitudes and mechanics, and we are going to become a very very I would say very meaningful lobbying buys contact center support we're very excited and keeping working extremely hard and very exciting.
Very helpful. Thank you. Thank you.
And our next question will come from Michael Funk with Bank of America.
Yes, hi, and thank you all for taking the question Tonight. So there are a lot of similar a lot of thinking and thinking about the added capabilities.
Whether it's your phone or contact center, how is that changing your sales strategy.
And the way that where you are.
Interact with customers and then how should we think about that also we're expecting the sales cycle potentially lengthening that if you added more complex solution. Thank you.
Yes.
Feel free to chime in I think first of all I do not think that the complex because of the trust our established customer always ask about it about our product roadmap, we wander off often more behind in Tucson by based on the very consistent of Trona in express and similar back end architecture and our costs are already deployed.
Zoom meetings from attack and also to Pollo as new funds zoom rooms, now given the context, it's a no brainer customers yeah, a trustee Albrecht tussle capabilities and with laboratory test your contact center as well. That's the reason why when we announced <unk> also see the early adoption is pretty good not a dimension that xuemei Q4 sales because we received an order.
Feedback from customers the positive view, we want to us offer mobile either look at all those use cases, starting from Masseuse Department supporting demand and our contact center and maybe the other department welcome and more and more water and the new services new product innovations and features because I do not think that have you introduced any complex suits.
Process, because <unk> already established right, it's more of a officer Ian for new customers when they do a reference check with other very happy customers I think it is again it is a pretty straightforward process.
I would just add that sorry.
You know land and expand is a very tried and true sales strategy for zoom from the very beginning and working with our account teams. We have these experts in the overlay team that come in and continue to do land and expand and it's working very very well. So I completely agree with Eric isn't adding complexity, it's just continuing to.
Build our relationship with our customers. This is what we've been doing since day one.
Alright, well thank you both so much.
Thank you Michael Kash Rangan with Goldman Sachs has the next question.
Hello, Eric Kelly how are you.
Thank you guys for you guys.
Eric I was deeply intrigued by your launch of the conversational AI product through the acquisition, albeit please.
Can you just give us a sense as to the product roadmap, how does it integrate with the zoom platform and relative to the embedded competitors in the conversation and dosing space.
Would it be zooms competitive differentiation.
<unk> seems like a.
One level, you're entering the CRM market and not in the way Salesforce Dot com and so on so we're good but you're getting into a level of customer engagement, which is very different than <unk>.
Rio meeting stockholders can you tell us a little bit more about that thank you. So much yes, Jordan question. So first of all when you look at cognizant.
Huge market right a lot of use cases, so I also by the way a lot of enterprise customers. Today. This stupid deployed on Prem contact center switches in next few several years, we have been migrated to the cloud I'm inside of that I think to have a customer similar to the market with a cloud offering we need to make sure that any future graduates regression similar to what do we need it.
Before to have a customize it to buy from on Prem to cloud we set aside a lot of feature site.
Corner cases, so I would have to act.
It's more like a no brainer, most investor keeping machines, but we have to as you look at it a yacht in the E. R M.
New you've got a lot of other contact center solution providers, even though have AI capabilities before right. Now this is something new and we are doubling down on that.
That is a one.
What I would say the key differentiation.
Foster.
Much better AI capabilities and in terms of overall depreciation I would say the video is a key use case right.
Further improve the interaction between our customers our IP supported with employees and hardwood <unk> analyze the video composition speed.
Speech to text transmission and recently like Zoom IQ for sales and this is very important for us in terms of integration.
Service now with Linda lawsuits or others I think this is a feature we have.
As I do not think that that's a key differentiation because every contact center solutions. They all have that so again.
We are seeing that as a huge opportunity opportunity ahead of us because the cosmos the likelihood of new solution. The modern solution not like the old architecture very hard to innovate by given the progress we've made over the past five years for some of them. We are going to go into do something similar that's why I'm very excited.
Thank you Eric and Kevin Thank.
Thank you. Thank you guys.
And moving on to CP panic, Rocky with Mizuho.
Let's see.
Thanks for taking my question I wanted to ask you about your fiscal 'twenty three guidance.
You talked about FX headwinds maybe could you.
Give us some more color on the FX headwinds and also the impact from Ukraine, where on the EMEA side, it's mostly going to impact online segment. So what should we expect in terms of growth rate or two in the online segment versus enterprise.
Yeah. So in terms of FX, where we're seeing the impact of course is in the euro the pound and the yen and if we look at the trends that we've seen in Q1, but a combination of both.
The strengthening of the dollar as well as the impact for the war.
It.
Built into our guidance is an expectation that the combination of those two factors is having about a 1% impact.
And that's largely.
The war is largely the impact of the war largely on the online thing that we haven't really seen the impact in the enterprise. The FX of course is extending across both of the segments.
Thank you Tim.
And our next question will come from Ryan Macwilliams with Barclays.
Hey, guys good to see again.
One on guidance.
Kelly just how should we think about soon reaching your second quarter revenue guidance from a segment standpoint.
Just wondering here given some fluctuations in your online business, maybe what we could see some strength in the next quarter yeah. So.
If you remember last quarter, we talked about that enterprise will be growing in 20% plus for the year and that online would be flattish. We said that flattish meant that it could be a little bit about zero it could be a little bit below zero, depending on the quarter and then the other thing we've talked about is that inflection point coming in Q4. So.
You should expect that Q2 is also going to be another volatile quarter for the online segment given all the factors, we just talked about but that we really continue to see strength in the enterprise and Thats, where the growth for Q2 will be driven from and then by the time, we get to the back half of the year. That's what we're really going to start to see that stabilization.
Of the online.
So the color that you guys yep. Thanks Ryan.
And moving on to <unk> with RBC.
Wonderful.
Hi, Eric Kelly, Tom Thanks, So much for taking my question.
Wanted to drill into the <unk>.
There are that we're seeing across the board I appreciate all the color, but maybe can you give us a sense for how is how have you seen the NR for 100 K customers generally trending have you seen that hold off hasn't gone down and maybe you can just help us understand usage patterns for your largest customers. Thank you.
Thank you Rishi as a reminder, last quarter, we shifted to the new metric.
Net dollar expansion for our enterprise customers. This is as we were starting to split out sorry Enterprise segment I should say so as we're starting to split out the business between enterprise and online as we think Thats really the most appropriate way to look at the business going forward and how we're managing it internally so that metric did.
Historically, we had disclosed 130% or above that came down to $1 23, which is really right in line with what we were expecting as you think about the overall growth rate of the company and as we've indicated we expect the enterprise segment to be growing 20% plus the net dollar expansion.
Should be tracking.
The deceleration if you will and it should be tracking to that as well and that's why it's coming in right at one site, which is just what we would expect.
Yeah, sorry, just a quick follow up I heard I think specifically at the 100 K level right because I'm sure. There is more churn going on in kind of a medium level versus new six figure customers without putting a number on it how would you say that the IRR for that cohort of your largest customers has trended over time and how is it trending now yeah, it's higher than the 123.
So that's what I would say as we've really continued to see strength in both the new bookings as well as renewals in that segment of our customer base alright.
Alright wonderful thank you.
Cities Tyler Radke has the next question.
Either.
Eric Kelly Thanks for taking the question a question on the cost side of the equation here. So you outperformed I think by four or 500 basis points. This quarter on operating margin yet it seemed like it's still a.
A decently strong hiring quarters can you just talk about if youre finding more efficiencies in the business.
Theres something specific this quarter and then as I look at your gross margins again, it sounds like youre expecting them to come down between $76 78, you were above that this quarter. So just anything in terms of new capacity.
All center stuffing deployed that that would impact kind of that trajectory. Thank you.
Sure. So actually gross margins were stronger than we expected in the quarter and if you remember in Q4, the way that we talked about the outlook for gross margins, even though we don't explicitly guide to them was we talked about expecting them to be in the mid seventy's for the balance of the year. So actually 76 to 78 for the rest of the year is higher than we were anticipating coming into.
The quarter and that improvement as we really have made a lot of strides in terms of optimizing our cloud our cloud usage and getting that into the colo. Thanks to our Dev ops team.
And that is really helping drive the improvement in the operating margins going forward and as you said, we do continue to see strength in hiring continuing to attract great talent, which we're really excited about continuing to invest in R&D, which is really important for the long term innovation and commitment to our platform.
Thank you.
And our next question will come from William power with Baird.
Good afternoon. Thanks for taking the question so I guess Kelly.
For you as you look at the fiscal Q2 revenue guidance. It came in a bit stronger than I think we and the street might have bad yet the full year is still pretty consistent.
Any other color just as to the puts and takes in the second half of the year and I guess, just as part of that just trying to understand the key drivers around your confidence.
Re accelerating revenue growth in fiscal Q4, what are the key drivers of that.
So when.
When we gave you for guidance and it continues to be the case today, we continue to see strength in our enterprise business and that's both on new bookings as well as renewals and then when you think about the opportunity coming with all of these new product introductions Super excited about zoom events, which came last year of course zoom rooms in their strength.
The new contributions that are possible from whiteboard as well as contact center and that's what we think is going to drive the growth continue through the rest of this year and then online we while we saw some volatility in Q1 as we talked about at length already and we expect to see some of that continue into Q2 by the time, we get into Q3 and <unk>.
Q4, there's a couple of things that are happening first of all the team has done an amazing job with new initiatives around pricing and packaging and localized payment types, which is really driving strength across the board, especially internationally as well as the fact that we see stabilization occurring just because of the aging of our cohorts. So.
Does it go all the way back to last year's Analyst Day. We showed you that chart right, which shows how once cohorts get to that 16 months of tenure they really start to stabilize in terms of retention rates that has continued to hold cohort after cohort even after even when there is volatility earlier on and so by the time, we get to Q3 and Q4.
You start to see 75 percentage plus of our cohort in that 10 year, which in and of itself drives a lot of stability in the online business, which leads to not only stabilization, but potentially growth in the back half, which is what we're modeling today.
Okay, great. Thank you.
And well move on to Parker Lane with Stifel, I think might be having some difficulties with the CDO. So he may not appear on video today.
Hi Parker.
The Parker if you'll go ahead and come off for you that would be great.
Great sorry about that it's maximizing return for Parker Lane, Yes were in transit today, both of them. So sorry for the no video but.
Just thinking about the customer announcements that you made it feels like there's a good variety of industries is there any industry that you are noticing that youre seeing a lot of demand from maybe kind of lagged behind everybody else during COVID-19 and is still going through the transition or have started to transition that others haven't.
Yes, I wouldn't say, it's pretty consistent.
Our installed base from <unk> healthcare and financial services, and it's a pretty consistent right customer with electric consolidated in autoimmune meetings and also with the zoom phone Donlin would assume.
<unk> center, but also more and more customers.
Deploying the <unk> solution as well that it puts us in a team in China, what's extremely well, it's likely that a solution. That's also free Anaheim inside of that I think I do not see any specific specifics.
The vertical industry right.
Kind of.
Make a bigger difference compared to other industries and overall, it's very consistent.
Our installed base and opinion more and.
Simply they were more.
Value more services take a wider board for example, if I look at it early adopters across industries.
Promising.
Alright, we will go ahead. Thank you. Thank you well move on to Matt Vanvliet with BTG.
Yeah.
Hi, good afternoon, Thanks for taking my question.
So I guess thinking about overall direct sales headcount investments that you look to be making over the next year plus.
Or any specific SKU across various regions that you are finding you want to invest more heavily in.
And then sort of alongside of the Omnichannel side, how much of that is driving this pretty significant increase student zoom phone versus direct sales and kind of where investments are going to grow around channel enablement as well.
So we are continuing to invest in our sales organization globally, but you'll see and as a percentage of over a year over year basis, greater investment happening internationally, including channels. So we've made huge progress in our channel investments and contribution in the U S. But that's largely Nathan still internationally and.
The team is doing a really great job of looking for not only master agents, the carriers and it depends on which which works best and depending on each of the regions, but that is a significant area of focus for us this year.
Okay, great. Thank you.
And moving onto Alex Zukin with Wolfe research.
Hey, guys can you hear me now.
Kelly, maybe just for you can you remind us what the differences in either the operating margin or free cash flow margin profile between the online and enterprise business because it looks like you're massively outperformed.
Cash flow at the same time as the online business actually declined 2% and so I want to understand just how much reliance is there you gave a free cash flow margin target for the full year at least a range how much of that is based on the performance of the online business versus the enterprise business and Eric If I think about this.
Stock based comp whats the plan for the company how should we think about that on a go forward basis in terms of either repricing peoples are accused giving giving more share with just curious how you're thinking about.
Eric you want to go first.
If you could kind of address the first one.
Okay. So Alex.
The impact that you've seen in the outlook, we're giving from free cash flow is much greater impact from stock based comp then from sort of a.
Any inbound or any change in the balance of online versus enterprise, so what's happening because of the stock volatility we've seen much fewer stock based comp deduction.
Employees are choosing to hold onto their their options or are there rfps at this point.
And not either not exercising or the injection itself just isn't as great.
So that's really the significant contributor to why Theres a difference that we've given from the Q1 performance to the outlook for the rest of the year.
Yes, so I would expect for your second question.
Our company culture is they never happens right.
My number one priority to make sure our Zumiez blue happened right together and make our customers happy and prior to Covid, we had a little bit over 2000 employees today almost 7000 employees.
The hardest so many employees over the past few years guess, what with each one assume the stock price was too high we cannot control the price, but we can control that didn't happen and so on.
Our employees certainly for all those employees will join or past three years after the sulphides, followed and much higher than the saltworks today.
We did issue the new stocks level.
Ultimately how to make sure those employees happy every time.
Every quarter every week, we look at other anything we can do differently to make sure. Our employees. This is always ongoing FERC is our number one park as always.
And Kelly just maybe just.
The question I meant.
In terms of the differential in terms of the margin profile of the two businesses as there is one of them inherently more profitable than the other.
Yes, the online business as we've said before contribute more substantially from an operating margin as well as cash flow perspective, because they largely are untouched by our sales organization. So they don't they don't have the associated expense from a commissions perspective, they may have credit card fees.
With it but.
A few points.
Versus the commission, that's the biggest difference youre going to see between those two.
Got it thank you.
And moving on to Matthew <unk> with Deutsche Bank.
Hey, guys. Thank you for taking my question I'm wondering have you seen any pairing back or.
Moderation of investment from some customers in light of growing macro concerns and if so is it varied by either geography or customer side. Thanks.
I think we really havent, especially at the enterprise, we have continued to see strength in renewals as well as addition of new customers and expansion into additional products. So we really haven't seen that in terms of concern I think.
We've heard from other people that what they are really focused on might be if they were limiting spending it focus more around potentially hiring or travel and of course zoom is a great alternative here.
If theyre focusing on limiting internal travel and so we really haven't seen that impact today.
Got it thank you.
James Fish with Piper Sandler has the next question.
Alright, thanks for the question.
Jamie Thanks for the question.
Deferred revenue grew about eight nine points faster than you anticipated this quarter, but it did seem like durations extended a little bit are you guys incentivizing customers of the sales team to extend those durations or is it more a factor of the product mix like fallen in contact center picking up which if it's for ladder and we're seeing kind of a long term RPI grow faster than current.
I guess why wouldn't we see deferred revenue grow as you get more and more your deferred revenue upfront and that helped the free cash flow margins versus the operating margins.
So our compensation structure around this or incentives for either reps or customers has not changed James we do have discounts in place for customers in terms of multi year agreements, but that has been consistent over time.
And we.
As we're seeing more and more of the revenue contribution coming from enterprise, we are and I think as he moves sort of past the COVID-19 buying cycles. We've seen people go back to buying more and more longer term agreements. We also have seen a lot of initiatives even online in terms of opportunities for customers to buy annual rather.
And then monthly and the team has done a really great job of incentive that as well. So we are seeing kind of an overall shift across both segments of the business to longer term. The reason you could see.
An increase in non current RPI, but not necessarily deferred is because they don't always pay all of those multiyear terms upfront. They can have a three year deal, but only pay a year.
Less often they will have a three year deal, but pay monthly, but it's not uncommon to have like a three year deal, but only pay one year.
Alright, so booking booking three years Boeing makes sense, okay. Thanks, guys.
Happy birthday next week you are too.
If I could wrong with Oppenheimer has our next question.
Hey, guys nice quarter, Kelly couple of quick ones for you.
<unk>.
On the phone subscriber additions great to see the 3 million milestone.
If my math is right into Q kind of nine months to get from 2 million to $3 for Q seven to get from one to two so are we seeing a deceleration in the pace of phone.
Additions or maybe my math is wrong here and then on the duration of the enterprise contracts is great to see that customers are signing longer term contracts could you talk about duration, how that has changed quarter over quarter in <unk>.
How do I think about the discounting that comes along with the longer duration contract.
So first of all around zoom phone, we actually said, we achieved $3 million during the quarter not at the end of the quarter. So we are sitting above $3 million.
At the end of the quarter so.
I don't.
You actually can't do the exact job based on information, we get it and so I wouldn't assume there is a deceleration in that rate. Okay, and then in terms of the longer term contracts.
A little bit of what I was just discussing with James is that I think people at customers as they move past the pandemic and really thinking about how they're going to support their employees. In this post pandemic flexible hybrid work theyre committing to our platform and theyre committing to it in a longer term, especially as they are bringing our multi product.
And seeing the efficiency that they got it makes sense for them our structure around that has not changed so we do as we always have offered discounts for size of deal multi product multi year willingness to pay up front, but that hasn't changed it's just that because customers continue to see the value of zoom and committing to.
That for a longer term.
You bet.
Just quickly on the Manhattan, we've got to look at it a number of the seats of patency the sort on other hand also do not forget at the quality of service right.
We kind of deliver a powerful mix of workforce happen, but let's say in talking to some other no cloud based up from service providers and their customers and talking with our customers and as you know, we make our customers happy and a philosophy not only for all of the on Prem.
The phone service customers my microphone on the clock, but also some other cloud based and on the customer also migrated from other cloud based.
Services to zoom platform as well and a further proof and we deliver a better experience Mega Cosmos.
Our momentum so very good. Thank you. Thank you. Thank you for your time.
Sure. Please say rafi with FBR securities well move on to the next question.
If I can very much so with your guidance for deferred revenue growth of 9% to 10% in Q2. It looks like your with your revenue guidance youre getting to be slightly negative on a billings basis. In Q2. So my first question is do you think thats the low watermark in terms of billings growth. This year, and then secondly related to that.
That.
I do think that the deferred revenue growth can accelerate meaningfully in the back half, especially with the easy compares in the background.
The deferred.
Yeah. So remember that our renewals are front end loaded. This goes all the way back to early in the pandemic. When we had that large inflow of bookings in Q1 and that it's.
Q1 is still behind for renewals in that that decline through the year and so based on that our collections and our deferred.
It's not one to one but they largely follow that similar trend because you have this large inflow of deferred revenue in Q1, but that is getting amortized throughout the year and then the renewals as they are they are lesser each period are not the same right to necessarily we feel what's being amortized over the over the year. So.
That's why you have that trend and you won't necessarily I mean, it's going to change over time as we start moving to more and more of our new bookings to a normalized seasonality of back half of the year, but that is going to take some time given just the large amount of bookings we saw a few years ago in Q1 and then.
In terms of Q2 being the low watermark.
That.
It's not.
It could be even lower in Q3 as we are still continuing through that renewal cycle that I. Just described that's what billing statement or revealing I'm sorry, yes.
Thanks, Jeff.
Patrick <unk> with JMP Securities. Please go ahead with your question.
Hi, you've got Aaron on for Pat Thank Mike you've changed [laughter], given the layoffs hiring freezes on hiring slowdowns were seeing from the tech sector can you give an update about what you're seeing on the hiring front and you're hiring approach with the changes.
Yes, we are we had a very strong hiring quarter in Q1, we continue to attract great talent and as we mentioned in our prepared remarks, we are still continuing to invest in innovation. So very focused on hiring in R&D as well.
You need to build out our platform and produce new products and then also very committed to continuing to hire in sales and marketing as we continue to expand our sales capacity on a global basis and focus on product marketing also on a global basis. So while we are always focused on being as efficient as we can around G&A and Cogs.
We are continuing to invest there as well as at the levels that we need to continue to support the expansion.
Just quickly if you look at the hour and though the revenue base plus exterminate.
A positive into most of our cash flow right. So why not a gabaldon R&D new product he's iconic sexy right now I think a well more flexible much better position and given this sort of a greater recognition economic downturn and that's why we're very excited about our future more services and more.
<unk>.
Thank you.
Thank you.
And the next question comes from Ryan Koontz with Needham.
Thanks for the question I wanted to ask Eric about your contact center strategy on a more was solving existing partner that you worked with previous to the deal and do you envision solely being a stand alone player where you can use that to augment existing other contact centers or how do you envision kind of saw the whereas going to rollout into the zoo.
<unk> platform and be a holistic offer. Thank you first of all we are very excited about our Salisbury acquisition knowing that.
This is a greater team laser focused.
Seasonal <unk> talents and technology first of all we are going to embed that into our overall content contact centre offering that number and for sure in terms of.
We needed to also keep making that a product as a standalone product keep doubling down on that.
So that our service as a Standalone service.
In the next few weeks or few months.
We are going to discuss it but overall, we got to look at a bigger picture right cost convenient a full blown great contact center experience observed in the <unk>.
<unk>.
Product be part of that and many customers already told us very excited about this acquisition.
Got it thanks.
Thank you.
And we'll now hear from Michael <unk> with Wells Fargo.
Hey, there nice to see everyone. Thanks for taking the question Kelly you mentioned the outlook calls for modest Reacceleration of growth in fiscal Q4 thinking through the drivers and assumptions Theyre. Just beyond compares is there anything you can add to help us think through how much of that comes from some of the online headwinds rolling off of the model the seasonal profile of.
<unk> coming through as we get closer to the exit of the year or just other pieces streamlined club and on the EMEA impacts in the flattish growth that youre seeing there in Q1 anything you can add just around if that changes if that's a change in terms of the fiscal year outlook and how much of that could be incremental versus the targets on what youre seeing when you frame the outlook for Q.
For us thank you.
Sure. So the acceleration in Q4 is coming from both online and enterprise. So online is due to the great initiatives that they're working on in terms of pricing and packaging and payment types in local payment currencies as well as just the aging of the cohorts.
Get a lot more stable as they age past that 16 month eight.
Term, if you will and what we're seeing is by the time, we get to Q4, we're going to have 75 ish percent of our online cohort that of age to that level. So that really brings a lot of stability to the online segment.
Should return it to not only being stable, but also growing and so that's really exciting and then the enterprise. We continue to expect growth to expand due to expanded sales capacity. There you just talked about continuing to invest in AE investigator International channel as well as contribution from all of these amazing new products that are.
New wing to grow and find their sea legs. If you will and will really continue be able to get to the back half of the year, including whiteboard contact center events all of those things that will start to see more and more contribution from those.
And then they want to do at EMEA.
EMEA.
So increments, adding incremental I mean that is really.
Difficult to predict right now given the state of what's happening in EMEA.
Yes.
They talked about the impact from FX as well as the war is approximately 1% of revenue.
Counted in our current outlook and guidance that we've given so.
If things.
And any way to work to improve dramatically Susan that there could be upside but.
I think we are all in a wait and see mode. There.
Very helpful. Thank you.
Moving on to Peter Levine with Evercore.
Thank you for squeezing me in.
Maybe to follow up on the I think the prior Atlantic question with your phone contact center core meetings.
Seemed like there are a number of different buyers.
Work that you have to go after right to gain market share. So for one of them on the enterprise side I'm, assuming you're seeing sales cycle was.
If you are selling popcorn context chemical packages taking longer.
Okay.
But really ask what should we think about.
So in marketing leverage longer term, how do your secret on go to market kind of leverage now that you have.
Forming yourself.
Eric just talk about that.
But certainly.
So in terms of our go to market, Australia similar to water related before I think it works well, so and improved unit cost and with customer right and given that we have so many very hybrid customers over the past two years, and which should have an award having people stay connected for any new services.
Very happy you're trying to test their services.
Because of that Abel sale opportunity the huge life and have already established a trust customers immediate knowledge just looking for other solutions just to work. Let me given you have some solutions that can truly make a employee workforce hybrid right I'm inside of that zoom IQ for service licenses off when we launched that we already have several.
A customer reason why the customer funnel of a breath and are doing in the auto sale.
Peter will always to cover the customer Hey, This survey time without a service and overall I think it's a trough or is there any new and upsell opportunity should it be relatively easier even if the buyer is different because the CIO. The automated these senate weizmann spend that I'm, assuming the meetings in the fall of Donegal contact centers might be for <unk>.
And also by the way to not forget about also.
So the precision of Ciena solution right and that's the reason why a customer looks at it a full <unk> stack zoom has ever seen.
That is the case and Thats why customers, who trust us by the way, we do everything by ourselves very considered and fund an express, whereas forgettable back in and also very efficient architecture as well that's why we are.
We're optimistic about our go to market Australia in terms of marketing for sure we do not need to spend so much money to promote its been brand zoom already became a worldwide auto mixed well folks on it looks like a vertical market quite some of them you know in person events and also the stay as close as possible.
First of all with the prospect of customers and Thats, our focus right not unlike a previously we've read of folks onto the brand in the market that's not our focus market in the flash market.
Thank you Peter and we have time for one additional question, which will come from Matthew Harrigan with benchmark.
Thank you can you talk about how it had been.
Private <unk> networks, especially relative to the limitations of Wi Fi on the security side really help the enterprise opportunity or over a period of time, both as far as sort of the Tam and the specific.
Alternatives you offer for them.
First of all thank you saw for waiting for such a long time awesome requested.
I think look at Wi Fi or corporate aligned network or <unk> exiting from our perspective as well as any technology helped improve kosmos connectivity, making the connection is stable.
We are very happy right, especially in the beauty of <unk> is great, but a lot of every country already deployed at <unk> and also.
Looking at our observation optimization technology and.
Supported a very unstable now to work, even if <unk> and <unk> also.
The open to buy more.
If you need it but overall I think anything from infrastructure leader to help improve customer we do collaborate in distress.
That's why we can all kept <unk> youll see cheap.
We've just to make sure we build at our applications to leverage the master infrastructure security about happy to install the Kosmos.
Thanks, Eric Congratulations.
Thank you Mr inclusive.
And again this does conclude our Q&A session for today, So Eric ill turn things back to you for any closing or additional comments well.
Well. Thank you all I really appreciate again, thank you for avid zumiez how to work thinking for avid customer partner investors very very.
Really appreciate it. Thank you again thank you.
Alright, Thank you, Eric and again, everyone that does conclude todays earnings release, we thank you all so much for your participation enjoy the rest of your day and we'll see you next quarter.