Q2 2023 Zoom Video Communications Inc Earnings Call
Reflecting the sequentially smaller renewal base.
As such we expect Q3 deferred revenue to grow at approximately 13% to 14% year over year.
We ended the quarter with approximately $5 $5 billion in cash cash equivalents and marketable securities excluding restricted cash.
We have purchased $426 million of stock representing $4 1 million shares over the last two quarters as part of our $1 billion repurchase program.
We had operating cash flow in the quarter up $257 million as compared to $468 million in Q2 of last year.
Adjusted free cash flow was $222 million as compared to $455 million in Q2 of last year.
Our margins for operating cash flow and adjusted free cash flow were 23, 4% and 22% respectively.
As previously discussed these metrics include a large cash outflow from an increase in cash taxes, starting in Q2.
As we update our full year outlook for the P&L and take into account the lower tax deductions for stock based compensation caused by the lower stock price. We would expect adjusted free cash flow to be between 1 billion to $1, one 5 billion.
Now turning to guidance.
This outlook is consistent with what we are observing in the market today, specifically it assumes that our enterprise business will grow in the low to mid twenties, while our online business will decline, 7% to 8% for the year as compared to the previously provided flat outlook.
For the third quarter of FY 'twenty, three we expect revenue to be in the range of 1.0 95 to $1 1 billion.
We expect non-GAAP operating income to be in the range of $325 million to $330 million.
Our outlook for non-GAAP earnings per share is <unk> 82 to 83 based on approximately 306 million shares outstanding.
For the full year of FY 'twenty three we now expect revenue to be in the range of $4 38, five to $4 395 billion, which would represent approximately 7% year over year growth.
At the midpoint. This represents a decrease of approximately $150 million as compared to our previous full year guidance.
Of this decrease approximately $35 million is due to the stronger dollar and $150 million is attributable to the broader macroeconomic environment.
We now expect our non-GAAP operating income to be in the range of approximately $1 44 to $1 $45 billion.
We are still targeting a non-GAAP operating margin of approximately 33% as we have adjusted spending in the second half to focus on high ROI areas and have seen a modest benefit to expenses from FX.
Our tax rate is expected to approximate the blended U S federal and state rate.
Our outlook for non-GAAP earnings per share is $3 66 to $3 69.
Based on approximately 307 million shares outstanding.
Before opening up for Q&A, we are excited to share our zootopia event with you.
Our Premier user conference and will be run on zoom event.
We look forward to sharing our platform strategy, new innovations and customer testimonials. Please join us at zoom, Tokyo, and our Investor Day on November eight.
<unk> remains focused on building out our platform leading in the hybrid work world enhancing the customer experience and expanding into more and more business workflows.
We will continue to make strategic moves to drive future growth as we navigate the current environment.
Thank you to the zoom team, which has grown to 8000 strong our customers our community and our investors.
Healthy please queue up our first question. Okay. Thank you so much Kelly and again, everyone and we're going to go ahead and move on to taking your questions.
As a reminder to back here from everyone. We do ask that you. Please limit yourself to one question and our first question is going to come from Kash Rangan with Goldman Sachs cash would you mind turning on your camera. Please.
Cash would you like to ask a question today.
Go ahead and get yourself as well.
Alright, well hearing nothing from cash will go ahead, and we will move on William I'm, sorry, I'm, putting you on the spot here I didn't like that your next but William power with Baird. If you'll go ahead and on mute entering your camera on for us.
Great. Okay. Thanks for thanks for taking the question wasn't really starved Kelly.
Noted.
The $15 million.
Macro impacts now in full year guidance, but just help us unpack that a bit how much of that relates to the online pressure versus any changes youre seeing on the enterprise side, where they are for change.
Longer sales cycles any changes in seat counts, while seeking a pushback in any other commentary supervisor.
The majority of that is really coming from online Williams. So when you look at the difference in the guidance and previously we had expected online to be approximately flat for the year and now we're saying it's going to be in the range of 7% to 8% down that's really where the majority of that is coming from on a base of.
About $2 billion, that's where we're seeing it we continue to see strength in the enterprise, which you can see as the increase in deferred.
We are moving more towards backend linearity, which had some impact on the revenue, but we continue to see.
Great work done by our team in getting those deals in just a little bit later in the quarter.
Okay. That's helpful. Maybe if I can sneak one more and I was just really strong phone results quarter to 45 to 145000 customers.
Maybe just any color on kind of sales cycles for deal of that size, where do we expect the revenue to start to flow through and just any commentary maybe just on the pipeline of larger deals that Pfizer.
These are deals generally.
Yeah, Greg do you want to talk about I can comment I mean, yes, I mean, Q2 was a pretty amazing quarter around zoom phone.
Extremely high win rates.
And I think we exceeded the I think you mentioned this is Kelly the 4 million user more grade so to do that in three years is just incredible.
There is.
See a large number of our enterprise customers today are looking for looking for ways to consolidate and have a more modern.
Communication experience and the fact that it's fully integrated with video makes it a natural place to go so I think youre going to Youre going to continue to see this really big uptick in our enterprise has taken advantage of both video and phone together. So when our pipeline is showing that now.
Thank you.
Moving on to me to Marshall with Morgan Stanley .
Great Hey.
Thanks.
Maybe Kelly just started with.
Some of the initiatives that you mentioned kind of taking it on the SMB business and the actions that they're taking and.
Just how that informs the 7% 8% down during the year what would they be without some of those initiatives, what's kind of informed me, Matt and then maybe.
Just if you could kind of speak to.
As you were making some of these opex.
Decisions on what is kind of high priority or high ROI, just kind of what's what is going into that decision making process.
So I think we touched on this I'm just sorry, just a question firstly, we touched on this in the Q1 call as well we will continue as a company to focus on the areas that drive innovation, so that really means R&D as well as driving growth. So that sales ops and we have taken the tact for a while now are trying to be.
As efficient as we can around cost of goods sold and of course G&A to the extent that of course, we always want to ensure the product and the platform is reliable and we're supporting our customers' needs, but trying to do that as efficiently as we can and in fact, we indicate in the prepared remarks, we expect gross margins to come in a little bit higher than where we had previously at 78% for the rest of it.
A year.
And then in terms of online Wendy and her team have just done an amazing job of really thinking about how do we continue to improve the conversion rate of free to paid.
They've done that through different initiatives, especially including pricing and packaging on a global basis, and we've seen retention rates continued to improve as well as conversion rates. We just.
The sort of the challenge that we're seeing overall in the <unk>.
Online business is new new customer addition.
But as they continue to focus on the issues I'm sure that will improve our time as well.
Great. Thanks.
And third <unk>, Peter we have the next question.
Thank you.
I think in the past you've given us some guidance to help us understand on the on the net retention number in enterprise, where some of Thats coming from.
Certainly I think.
Just a quick estimate suggests that youre seeing a continued scaling there.
And in the past I think you've been seeing better support on the larger customers relative to some of the smaller customers. How should we be looking at that right now is that continuing to be the trend where your larger established customers are expanding their use across the platform are you seeing additional strength in the smaller customers are coming up and by the way as well.
Second part to this question I think the implication that I see out of the numbers that you've posted is actually a bit of a reacceleration on new customers on the enterprise side and.
I'd love to hear a little bit about how you're seeing that and I know that you saw you said hey, there is some linearity, creating some challenges at the backend of the quarter, but to also kind of outperform on new customers. There with some of those challenges is pretty nice and Im just trying to understand how much momentum you see in that going forward in the face of some of these linearity.
Thank you sure.
So let me talk about the dollar expansion and then I'll, let Greg or Eric talk about new customers, but we have said for a while when you remember that the strategy for selling zoom phone and zoom rooms contact center et cetera is to sell into our existing installed base. It's exactly as you said, we continue to see some of our largest customers continue to expand.
Some of those zoom phone wins move our customers. When you go back and look at the customer count of how many the growth rates that we saw in greater than 100, K trailing 12 months like it's really significant growth, which supports exactly what you're saying and as a reminder, the net dollar expansion number now is focused on just the.
<unk> portion of our business. It doesn't include the online segment of the business.
But.
Greg or Eric would you either of you like to just touch on new customers for the quarter.
Yeah sure sure just the particularly so Peter you look out into Q2 I look at it you know our enterprise business.
Well, just a very very big.
Hester organization, they deploy zoom not only for <unk>, but also for kind of Madison as well and we do see a lot of the new opportunities that you noticed us so.
Yes extremely well.
On the enterprise.
Yes, I would add.
And Kelly said is that I think will continue to see that.
Solid customer base in the enterprise expanding with us.
I do think when you take a look at online it is.
It is a little mixed because we've got a lot of individual consumers that are down there that we're looking for ways to get them to move from free to paid and what we're doing right now seems to be working but we've got to.
Keep at it and continue to run additional actions that.
I think we've got a really great story, that's coming together on the enterprise.
From a sales perspective.
We're trying to focus more and more on the enterprise on how we're going to market. How we're marketing to these companies and the value proposition again around the whole platform.
We really have a great platform story today that allows companies to have more of an integrated end to end communication of modern communication platform and they can get rid of a lot of point solutions that are they bought 20 years ago that are causing them a lot of pain and cost environment.
So I think we'll see this trend continue.
Thank you and by the way on the on the net retention piece you talked about FX, how much of the drag on net retention because you are not providing a constant currency basis. So that it was due to the FX effect versus just being truly.
Slower growth.
We're not going to break out FX down to that level of detail, but what I will say if you step all the way back and we talked about Q1 call as well if you look at the impact that FX.
And the war in Europe is having on the year over year growth. It's 200 basis points. So you can think about there is two to four percentage points of impact coming from things that are kind of out of our control from both FX and the war on the total year over year growth rate.
Thank you.
And just as a reminder to everyone to allow everyone to get a chance to ask a question. We do ask that you. Please limit yourself to one and we'll move on to Matt Stotler with William Blair.
Hi, everybody. Thank you for taking the question.
Maybe I'll just ask one youll kind of doubling down on on the macro question on conversation. Let me tell you noted that when you look at updated guidance and back out the impact from the online business back out the incremental FX impact versus prior guidance actually implies that you're expecting improvement in the enterprise segment of the business on a like.
Like basis, and so it will just be interesting to kind of give some deeper color on what youre seeing in terms of buying behavior in that segment of the market right I mean like you said.
No one's immune from a slowdown in the macro so are you seeing any sort of change in on the enterprise side and customer behavior and spending patterns or anything like that that you can point to.
We.
We definitely had a strong Q2 in terms of enterprise sales, but you can see reflected in the deferred just came later in the quarter, which is why it didn't really have impact on revenue in the quarter, but we continue to all the things we've talked about right zoom phone, having incredible strength and performance in the <unk>.
Order.
Really already seeing momentum in contact center. This early six months and we have.
Some remarkable names that have signed up for contact center that will be excited to share with you at some point in the future, but already the deal sizes that we're seeing for contact center I think we would not have expected them to come from and they're 18 to 24 months yet.
And all of that shows that the platform transition is really working very very well and that customers continue to love and see the efficiency, they give them zoom and especially as they are thinking about maybe Greg you can talk about this sort of what I've heard from the sales team as these transition of deals moving from the CIO to the <unk>.
And customers really being thoughtful about the cost there and zoom competes very well when it's competitively priced.
I would say it's not.
Why don't we give you surprising to anybody to think that any of these large transactions that are going through approval or getting that extra set of eyes from a finance perspective, but what's interesting is that.
We are in a world where hybrid work is not going away.
Alright, actually complicate things, but having a platform that supports that is really important even at the CEO level right because it helps them with attrition issues. It helps.
Higher the best people it helps them have faster decisions inclusive decision so.
Having the right communication platform those different than having the right decision around secure your supply chain. These are just the top three or four that are sitting at the board and the CEO level and so they do get approved right I mean other than having a couple of sets of eyes, and maybe coming out for us a little bigger discount here or there, which delayed a week or two.
<unk>.
I don't think we had anything major that slip from quarter to quarter, because people weren't going to spend the money.
So I mean I was I mean I have been here now for two months and I was really.
I was personally really amazed by.
How strong the execution was by our sales team and how the deals that were committed flowed through the process.
The other thing that I would just highlight is we also continued to see strength in movement from monthly to annual contracts involve our online as well as our enterprise business.
And as you know that really helps from a retention perspective, and also continues to build the deferred.
Got it.
The next question will come from Matt Vanvliet with BTG.
Yes, hi, good afternoon, Thanks for taking my question.
Wondering if you could expand on the last part or maybe for Greg in terms of the sales and marketing investments.
Maybe some of the areas that you are adding the most head count. If you can if you can talk to maybe the two or three areas that youre seeing the most headcount growth and then from a sales efficiency standpoint, maybe for Greg just.
What kind of processes are you, bringing to the table will bring in.
Maybe just some some different mindsets around driving their sales efficiency.
As we look forward and become more enterprise focused.
Yeah, Greg go ahead.
So the first part of your question repeat it again I heard the sales efficiency what was the first part just head count what areas are seeing the most growth areas.
No no no. That's a really good question right. So one is.
We are increasing our focus up to the larger enterprise side of the house, what we call majors and enterprise right because there's a lot of money. There that were just missing we just don't have the coverage.
So youll see a lot of our investment in marketing going there right, you'll get you'll get a flavor for that assumed tobey as well when you take a look at the value propositions and how.
We're bringing our products to market, we've got a handful of new products that are just they are moving faster than we thought you saw zoom phone Kelly talked about contact center. We've got another one IQ for sales so theyre all going to get extra attention and then the other areas international.
Alright, So international I mean, we are we.
We've got a lot of opportunity there.
And it's untapped.
And so thats getting a bigger attention from us as well.
And then the last one I'd mention is around our ecosystem right I mean, no we don't publish much around our ecosystem.
We've got a potential to grow our ecosystem AD partners and get that force multiplier effect out of our ecosystem. So.
And the other one was on efficiency right.
Now what you said so when you take a look when you take a look at efficiency I think the.
I think the I think we're a little two nights in how we sell our products from a discounting perspective right.
Alright, So I think we've got the ability to be a little smarter about.
How we price and discount our products.
And then again, it's making sure we're deploying our sales resources in the right place right. So.
No.
We don't need to be stuck in a certain boundaries because thats, how we set up.
Coming into the year, our structure and how we manage the sales organization, we can be much smarter now on how we deploy those resources to get the biggest return on those resources, which we are looking at right now.
Great. Thank you.
Eric do you want to add to that at all.
Okay. That's good thank you.
Alright, moving on to reshape jewelry out with RBC.
Alright, well.
Thank you everyone for taking my question I, just wanted to dive a little bit more into some of the wins that you could see on the contact center side can you give us a little bit more color in terms of what types of customers. These are was it a competitive process I imagine youre on CD one of the legacy players, but were there other C cap vendors in that.
Discussion as well probably begin thank you.
When I take that Eric.
Yeah. So thank you Lucy so a compelling mission earlier right, so and still probably early stage of the product development in the face, but actually it is more than what do we expect data because I forgot to mention earlier some of the customers. We started probably they are going to deploy later, but they did it in a very very successful.
And also it will also fund some new use cases.
The internal it support.
Basked, right and applause and some other customers will deploy zoom meetings and as newer phone. They look at our platform solution suite you already have a contact center after they did a test.
Just enough he said Wow It works well and it's also why not also deploy zoom contact center as well with a seamless experience and it seemed back end architecture.
And also we are going to be very aggressive by the double down on that from a <unk> perspective, both part of is ready and it does give us zoom for our own support people for example.
We successfully bodies.
To replace all the contact center solution with our own solutions.
Feedback is extremely positive that's why it gave us no more confidence right no further boosted the team confidence right to sell more in the second half and then also next fiscal year.
Yeah, I would add I would say in almost every one of them we are replacing.
And older legacy solution, Alright, one that is costly and complex and most of them they can't change them and they can't they don't have the flexibility to enhance them right. So we bring a more flexible innovative solution that can be implemented very fast.
Alright, it is integrated with our other solutions.
It is lower cost in many cases and <unk>.
People have been very.
Positively impressed with the solution and what Kelly said that the deals are bigger than we thought they were going to be so yes. It's been a great two quarters now of bringing this new product to market. So we've got some pretty high hopes.
Wonderful thank you.
Thank you Christian.
Next question will come from James Fish with Piper Sandler.
Hey, guys. Thanks for the question.
It's fairly new but you guys talked about the consolidation impact what are you guys seeing with traction specifically with zoom one in pricing overall, especially relative to the early days of zoom, United and Kelly Secondly on guide given you talked about the issue being more on the new subscription side for online are you still assuming monthly churn for online actually.
Get better in the second half of the year like you were before.
So let's talk about that one first so in terms of online we continue to see stability in the retention rates at that 16 month, plus and we'll show you that chart again, when we get to analyst day in November and we're at about 70%.
Our online business now has crossed over that 16 month, Mark So, it's bringing a lot of stability.
What we had talked about previously was we expected to see an inflection point for online in Q4 and given the reduction in the guide is more likely that's going to come in the first half of next year.
And then in terms of the traction of June one so it's just one quarter in but we have seen some some great progress there.
And.
It's serving the purpose that is needs I mean, Greg you can certainly comment on that but it is really meant to ease the buying process for our large enterprise customers and package up the platform in a way for them that really makes sense to meet their needs.
And I think it also just from an awareness perspective.
This extremely large customer base that we have understand that look we're way more than meetings and it gives them a way to step in if they want to try so for example, or to take advantage of our incredible chat functionality.
I mean, it's where we have an incredible chat functionality probably.
Eric Hagen, Gregg remember roughly 70% of our customers don't even though we have and then when they start using it it gets very very pervasive so but it just gives us a way to show our customers that there is a lot more to this platform. They can get value out of them and Thats what were seeing so and it gives us from a from a salesperson in a contractual standpoint.
The ability to walk in and say what does that what does a better contractual relationship looked like resume that can be stickier and longer term.
Now if you want to add to that or no.
Great. Thank you Greg.
Thank you and we'll now hear from Matthew Mcminn with Deutsche Bank. Please go ahead.
Hi, Thanks for taking the question so I wonder about the industry one of the bigger incumbents in the UC and Cc space seems to be hitting some elevated financial difficulty I'm, just wondering what sort of opportunity that presents for you, whether it's organic or inorganic and then just one follow up on linearity I think you'd referenced maybe some back.
And loaded sales in the quarter.
Any more color you can give in terms of what drove this maybe relative to some of your initial expectations a couple of months ago. Thanks.
So I'll talk about the linearity one.
So I think that it's just as we said in the prepared remarks, there's two things happening right more and more of our deals are now coming from the enterprise and the majority of our revenue is coming there and we are definitely now moved beyond the pandemic buying patterns. So our linearity had been much more moderated I would say over the last two.
Two and a half years as the online business itself is more balanced within the quarter just by its nature and then the enterprise business even itself during the pandemic buying periods. It didn't follow the sort of normal deal cycles that we had seen there were less proof of concepts that were less.
Review honestly and now that is really all shifted back and so it's just taken us I think a little bit of time to understand exactly where we were in that cycle and we really saw that we're back to <unk>.
Pre pandemic linearity, which is very normal all right for a SaaS business. It just hasnt been normal for us for the last few years.
Yeah, I can address that organic growth or maybe the M&A opportunity I think that most of you look at the UC and Cc <unk>.
The customer experience.
Too many quarters right and you do go to all rebooted, our phone business right.
Three years.
4 million paid seats and that's the reason why.
We know actually our teeth, we can build a better product.
Why not.
<unk> done all of that takes some time, but it's the organic growth is kind of help us get a better products ultimately can make all of our customers.
And the happier I think we should continue with that accusing you for sure no somewhat.
Technology.
Other areas.
We also like to explore like we recently acquired a solid team is a great asset to us.
There have boss the contact center business and also we keep eye on that as well or ultimately a direction wise I think we have high confidence about our product teams.
We are seeing we believe we can build a much better service.
Great. Thank you both.
Thank you Matthew Thank you and we'll now hear from Alex Zukin with Wolfe Research.
Hi, This is strecker on for Alex Thanks.
Kelly I'd like to unpack the enterprise segment, a little bit more so.
So just to be clear is the growth coming more from ramping reps are selling back into the base with IQ and phone and contact center.
And then giving you maintained the 20% plus growth target is it fair to us for us to assume that you have not contemplated any lengthening of sales cycles are a worsening macro into this line.
And then lastly can you just frame how we should think about the sustainability of this growth.
Beyond this year, because the guidance does imply some some deceleration while on easier comps in the back half. Thank you.
So as I said in the prepared remarks, we have assumed that the linearity that we saw occurring in Q2 is.
Consistent for the rest of the year, so that any of the backend loaded right will contribute less revenue this year.
Each of the individual quarter. So we've assumed a similar trends for the rest of the year.
In terms of future growth, we're not prepared to comment on that we'll do that when we give full year guidance later this year.
And then the growth is honestly, it's coming from both as you heard earlier continuing to expand into our customers. So.
Expansion with zoom phone do my cues and contact center, especially also zoom rooms at a fairly strong quarter as people are still thinking about the future of hybrid work and what does that mean for them and we are continuing to see at least I think in Q2, the percentage of ramped reps was higher than ramping reps and that.
<unk> is a positive contribution.
Thanks, and then just a quick follow up what have you seen in <unk>, so far in terms of SMB and enterprise bookings linearity.
Yes, it's so early in the quarter that we wouldn't comment on that yet.
Thank you.
Catherine Sharpnack wisdom Cam has the next question.
Thank you for taking my question.
Quite a bit on zoom phone contact center could you give us a little bit more detail around the zone rooms. It seems like in this hybrid environment that would probably be.
Getting more traction and can you provide more color around the sales motion. If you ran any specials and who do you typically just place. Thank you.
I'll, let you go with Eric Yeah.
Yes so.
I think the case, where youre still right I think especially when it comes to hybrid office and our hybrid work.
Zimmer hummus is becoming more and more important.
Our zumiez functionality features that inhibition I think I actually build better than any other solutions all there.
We're in the early this year right.
A lot of it being there when they.
Started exploring going back.
We look at it they're coffee was set up and really wanted to make sure. They have a new solution and that's the reason why.
They pick it up with zoom rooms, but also over the past several months and also we do see and some companies also it won't be conservative given whats happening in the.
On the economic upon right and as you know they have a big albeit with canvas most employee probably still working remotely and I would say is kind of sometimes wow. It's a lot of the user demographics and sometimes we see a slow down while overall overall the direction wise and lot of our companies are likely to deploy that.
Innovative solutions like zoom rooms added to truly improve their hybrid work experience.
Alright. Thank you thank.
Thank you.
Moving on to Cte panic Rahima with Mizuho.
Hey, guys. Thanks.
Hey.
Kelly just wanted to unpack a little bit on the online segment. So what sort of trend you are seeing on the churn in the online segment and on the new customer acquisitions, you made some changes on that one on one meetings founding moving to 40 minutes. It's been now more than a month. So what sort of range are you seeing that base fee.
Based on Russia as it is.
Is it.
Below your expectation or what sort of events.
So in terms of churn we have certainly seen that continue to improve and stabilize as we touched on this a little bit in the prepared remarks, it was a little bit better than expected, where we saw the impact youre seeing in the forward looking guidance is the acquisition of new <unk>.
Customers and Wendy and her team are doing an amazing job on initiatives to improve that they just haven't had enough impact yet to offset what we're seeing in the quarter.
For example, what Youre talking about the 40 minute limit really did help in the free to paid conversion and that is considered as you look forward in the rest of our full year guidance and as well as many of the other initiatives, we're working on but when you look at the especially in Europe . The impact we saw there as well as combined with FX and that is <unk>.
More concentrated having a more constant impact on online in enterprise, that's what drive is driving the reduction in the year over year guidance.
Great. Thank you.
Tyler Radke with Citi. Please go ahead with your question.
Hey, Thanks for taking the question maybe a couple for Greg first of all welcome aboard.
I wanted to just kind of get your perspective on the sales organization and particularly in the enterprise just kind of how you see the pricing dynamic obviously, it's a competitive market but.
On one hand, you are driving a lot of value for enterprise customers. So do you think there's an opportunity for maybe higher priced skus or.
And upsell motion.
And then secondly, if you could just comment on the enterprise customer net additions, which I think were down quite a bit sequentially and year over year of service.
Size mix mix shift driver there just any color would be helpful. Thank you.
Take the first one on <unk> I'll give you the second one on the details.
Our number of customers. They go up in the high end, so, but I'll, let you cover that so.
From a value perspective, I don't see us bringing out higher level skus.
I do see us doing though is doing a much better job of.
Describing in articulating the value proposition, we bring to the customer and building business cases for the large enterprises. So they can they can make a bigger purchase with us we don't have to discount as much.
I think we've got we're doing really great in the enterprise, but I don't think we're doing really great and really selling high at that.
Board level CEO level.
And being really smart about how we construct our business cases and value.
And that's something that we're going to work to improve on which I think will have a really big impact so.
So we've got some work to do with our sales force and from a training perspective, but we just did a really big.
Training exercise about two weeks ago and already started some of this and it was received extremely well with our salesforce.
So I mean, we don't what we don't want to do is be like our competition and just try to win on giving big discounts.
Given away free stuff, that's not what we're about.
And then in terms of the growth of the enterprise customer base. So as a reminder, the selling strategy for zoom phone for contact center or zoom Ikea ourselves to sell into the existing installed base and so going forward, especially as you continue to see great progress in those products youre going to.
The growth continuing to come from our existing installed base with layering on of new customers on top of that so you should not be surprised to see that customer count declining even while our revenue is growing.
Thank you.
Karl Keirstead with UBS has the next question.
Okay, Great Kelly just one for you so.
I think a lot of investors on this call anchor our valuation models presumed shares in your free cash flow numbers. So free cash flow for <unk>, obviously came in a little bit light in your guidance for the full year is several hundred million dollars below I think the street consensus so it'd be good to understand that a little bit more so I guess I wanted to ask you.
If you could just pinpoint the factors may be weighing on cash flow and then as everybody models out into next year are there any key things to keep in mind are there any sort of onetime wastes that might be alleviated next year. Thank you, yes. Thank you for asking so.
Just as a quick reminder, we have actually never sort of officially guided towards free cash flow, but we understand this is very difficult to model. So we're trying to give more insights to it and the biggest change that we're trying to help everyone understand is that we have now fully utilized all of our Nols and we are a full cash taxpayer.
So that is having a large impact and in fact in Q2 the way it normally fall right as we actually paid two quarters' worth of taxes in one quarter because you pay like the Q1 estimated provision you pay that in April and so we had.
Double the impact so at.
$2 million to $250 million worth of cash taxes that are now reflected in that.
And the.
The other.
Thing to consider is there's one other impact that is driving up our cash tax rate, which is as our stock price has declined we typically get a tax deduction for things call disqualifying dispositions, which is when employees sell their stock as the stock price has declined as you can imagine employees are holding on.
Will they see potentially greater value in their stock and so our disqualifying dispositions.
<unk> dropped at the same time, we've use of our Nols, which means our tax rate has gone up and our cash taxes have gone up a little bit. So we expect that to moderate as we regain value in the stock price over time.
Okay, and then Kelly just in terms of next year anything one time about everything you just said or.
Should we assume somewhat similar free cash flow margins next year I don't want to corner you into guidance, maybe just talk through variables, yes, well I think the biggest there I mean, we are going to be a cash taxpayer from now on that is that is done I think that the.
Question is what happens with the disqualifying dispositions, which could as the variable deduction, which will largely correlates likely with a potential increase in our stock price over time and how much employees are selling your stock.
Thank you alright, thank you Carl and rejoining US again as Kash Rangan with Goldman Sachs cash. Please go ahead, okay. Thanks, Hello, Kelly, Eric and Greg.
Thank you for taking my question disconnect.
If you look at the business.
Look at the core of our minus the phone call Center.
And the ocular sales house back part of the business trending I mean are you at a point where <unk>.
Most of the online channel.
Seem to be stabilizing and how do we look at the mix of business and coming business over the intermediate term or maybe in the near term as the year unfolds between the core versus the.
The <unk> product and <unk>.
Video products. Thank you so much.
Yes.
Zoom phone with certainly the star.
Star If you will of Q2, but we continue to see strength in our core meeting platform It had really.
Strong growth in the period as well and the majority of our business in online is still core meetings as well so that the majority of that business is coming from for meeting and the work all the work that that team is doing to continue to.
Improve that breeder convert paid the free to paid conversion will continue to drive more strength in the meetings business as well.
But is there a way to.
Do they need what the core is doing minus the funds.
It's a separate separate revenue price yeah.
Cash we don't break it out that way what we've always said is from a revenue perspective, we will start to bring out break out these products when they hit their 10% of revenue.
You can imagine we're getting very close on zoom phone. So I think in the next couple of quarters, you'll likely start to see that which will give you some insight.
Great. Thank you so much yes, thank you kash.
And moving on to Matthew Harrigan with benchmark.
Well. Thank you could you be a little more expensive on the regions.
Strong volume in APAC.
10% even for free form again.
And some other Asian currencies.
Do you have a reasonable buffer besides a turn off toggle off North Korean won.
We get to winter and then lastly, I think you alluded Luke touched on this little bit earlier, but can you talk about any variation in the <unk>.
Online versus enterprise activity by geography.
Fairly different in Asia, and Europe from the Americas. Thank you.
Okay, Let me take the last one first so in terms of online.
Online certainly has been the most impacted in EMEA.
So that's where when we talk about the guidance some of the impact of having there.
Between FX in general and the Russia, Ukraine warrants, having much more of an impact on online than it is in our enterprise business and then I'm sorry, I didn't quite catch the first part of your question.
You were up 10% in U S dollars in that region, even though currency similar to the Euro Japanese yen.
Yes.
Look we have a very stronger.
APAC results in certain markets.
Yeah, I mean, Greg feel free to join in but yes, we did see strength, especially in Japan, we had a very strong Q2 there.
Great. Thank you.
Moving on to Ryan <unk> with Needham.
Our next question just follow up on that last one about Europe .
Online headwinds youre seeing there any geographic variance within Europe , you can comment on the continent wide is it more eastern Europe way any kind of color you can give us there would be helpful. Thank you.
Yes, it's pretty pervasive unfortunately across across the continent that we've seen it.
As you can tell based on the magnitude of the impact.
Alright, Thanks, Kevin.
And our next question will come from Peter Levine with Evercore.
Great. Thank you for squeezing me in here, maybe Eric or Kelly just to tack on another question with contact center can you kind of explain to us where we are with the.
Product today in terms of standing up against the five nights agenda, just the nature of the World and then second if you look out over the next 12 24 months.
Whats going to differentiate zoom context to kind of get customers.
To take a second look and I know squeezing at 30, but Kelly any price one of your prior questions. You mentioned the seat count was higher for contact Center. Just curious can you give us an average seat count for contact center today, who are willing to do that thank you.
Eric do you want to take the first couple crusher.
You look at our Colorado Center by as I mentioned earlier customer experience is extremely reported by the Bureau, this newest solution not like any other solutions no matter on Prem.
<unk> is the solution that that those solutions were built many years ago right. So this is a modern interface and we already have so do you see the customer feedback. We know what are these really long dated to half and also a much better integration with our core UC product as well.
More phone and quite often when you talked about some customer they prefer hey, you're already have economy suddenly widened out right and that is no.
What aspect of the innovation and also look at yourself functionality features that right you can see all the video and also a more and more AI feature as well and also is the AI and <unk> and intermodal interface and I think you know.
Plus I think ultimately we already won the customer Trust me no and it relates to the customer feedback very carefully whenever they have some new feature requests. So anything we can innovate much Buster. That's the reason why I think customers are willing to try a zoom a contact center or should that be poised from cognizant.
And then Kelly anything on the central.
Yeah, what I would say is I think I'm just looking at a list of deals right here on the screen and I think that we probably moved into at least the average deal size being in the triple digits. So we have we have our largest deal approaching four digits I would say and then probably on average is in that triple digit.
Size right now.
Thank you very much.
The one thing I would add and it's probably not a lot of commentary now, but we'll be showcasing a lot of these customers that zootopia.
Alright, so it will get you will have a lot of if you attend any of that or have anybody that Tim that when you hear what's coming out of it youll get a lot of contact center details.
Thanks, Peter and I will move on to our next question will come from Michael <unk> with Wells Fargo Securities.
Hey, Thanks, nice to see everyone. I appreciate you sneaking me on given the rolling into the next hour up the earnings call.
It had some helpful quantification on the major segments of the business and the drivers on the enterprise side the comments around more backend weighted linearity it sounds pretty clear you're assuming a similar shape hold but in terms of quarterly versus rest of year I know <unk> purchasing.
Isn't cycles and enterprise are often significant maybe you can just add more around the visibility you have into the enterprise segment. The renewal base. There I think investors would just greatly appreciate any commentary around the degrees of precision you have with enterprise versus online.
Sure. So as a reminder, our upmarket teams both majors and enterprise that Greg talked about earlier are on six month quotas. So again now that we're sort of beyond pandemic buying periods and we've returned to a more normalized seasonality, which see peaks in bookings in Q2 and in Q4.
So everybody should expect for example, we had this discussion in Q1 as well.
If you remember our last record quarter for Zimbabwe was in Q4, and then we talked about the seat count was actually acquired during Q1 was down and now we're having another record in Q2, so everybody should expect that thats kind of the seasonality, we're going to see as we add these reps all running to which either accelerators in Q2 and.
In Q4, and again Thats sort of just a typical enterprise seasonality that we're going to see based on the way our comp plans are structured.
Thank you alright.
Alright, we have time for one additional question Ryan Macwilliams with Barclays. Please go ahead.
And Americans from SaaS, all the solve the acquisition of your new contact center. It looks really interesting so we're going to see more over there.
Kelly for you just on.
Enterprise ambitions for the next the rest of this year should we think that the bulk of that is coming from zoom phone.
Net seat adds and then just as we think about maturing base of your existing meetings customers right is that additive to growth at this point like you have a sense of where the ZIP code for that net expansion rate is.
Yeah. So I think the enterprise additions for the second half will not be just zoom phone zoom phone is certainly very strong momentum that we are seeing but we expect to continue.
Continued contribution from zoom rooms will certainly be strong.
Contact center, we expect to continue growing as well as new IQ. So that all of those will continue to add to the overall growth in the enterprise along with we continue to see additions in meetings as well and then yes, so as maturity basis that the enterprise meeting, especially.
National League continues to grow like don't underestimate or don't assume that's sort of the maturity level of video adoption that we see here in the U S is at the same level on an international basis, and there is still significant opportunity outside of the U S to continue to grow our core meeting platform.
I appreciate the color by Catherine Alright, Thank you.
Well, thank you to everyone who stayed on with US a little late today and again that does conclude our Q&A session for today Kelly I'll go ahead and turn it back to you for closing or additional remarks. Thank you. Thank you so much everyone for joining us today and appreciating.
Really appreciate all the support that you give it every day.
Thank you so much Kelly and again, everyone that does conclude todays earnings release, we always thank you all so much for your participation and enjoy the rest of your day, we'll see you next quarter. Thank you.