Q3 2023 Zoom Video Communications Inc Earnings Call

Zoom assumes no obligation to update any forward looking statements that we may make today on today's webinar and with that let me turn the discussion over to Eric.

Hey, Thank you Tom and thank you everyone for joining us today. So last week, we hosted our first of all it hybrid zootopia using zoom events and it was great.

We unveiled new inhibitions like zoom mail and in Canada.

<unk> enable users to frictionlessly navigate across their email calendar and all the zoom product all within the same client.

And assumed hope here many of our customers highlighted how they use our expanding path to.

No more in the word of flexible work.

And our first a pattern of connect event, we hosted hundreds of channel partners.

We're excited about working with us to drive adoption of the zoom platform globally.

And our developer partners showcased Ed on apps that are connected integrated interrelated workflows to zoom client.

As global organizations adapt to how when and where what happens human connection remiss Paramount.

<unk> is a public appeal to make all kinds of connections possible evocative in a meaningful.

We have developed and launched more than mine.

<unk> thousand 500 features an enhancement on the zoom platform this year.

Advancing how people connect with each other their organization and as their customers ultimately opening their doors wider for creativity and collaboration.

Of course, even as we've thought about our emissions in the Cosmos, we still face a backdrop of a challenging macroeconomic environment.

We continue to see FX pressure and a heightened scrutiny for new business, but remain focused on delivering happiness to our customers by innovating our platform and expanding our go to market the abilities.

Zoom provides a full suite of communications solutions.

The total cost of ownership that enables teams to do more with less.

And our new product I guess Zuma Carnegie Center and Zoom My team for Sears enabled rounding at the news and drive productivity.

The continued strength of our enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments.

As we enable customers to drive greater efficiency. We also are putting on our own efficiency.

We have always been judicious with investments prudent about spending.

And we have commanded robust demand just since our IPO.

So this is not a major shift for US maybe we will continue to drive innovation customer value and our platform expansion.

Violence, with an increasing emphasis on efficiency and profitability.

We are continuing to see strong traction with customers spending greater than 100, K daughters in treating Tomas revenue, which was up 7% year over year.

Some of these customers are increasingly seeing violence and buying the whole platform.

With a thousand of our customers already buying zumba packages.

From an industry perspective, the largest deals came from tech media and financial services and we also had notable wins in retail transportation and the farmer.

On the Tegra Franck letting their first attack portraits, the leader and the creator of the experience management category.

Expanding their partnership with us.

<unk> recently, they obligated consumer enterprise, which provides the full power well there's impossible for their users and allows them to make a meaningful connections with meetings hemostat LIBOR phone and more than one offering.

We are delighted to all of our projects a broader set of communications products integrated into one secure and easy to use platform.

Our enterprise segment comprises not only large publicly traded companies, but also many private companies of all sizes.

Secret ballot.

Hunting, there zoomed implementations by moving towards our full UC platform, Let me give you a few examples.

First of all I'd like to thank Mitchell employer services, a privately owned professional employer organization for placing their task Xu.

In Q3, they added 5500 seats and a 650 Zuma carnival tendency is demonstrating the promise we saw in adopting a more integrated solution for their teams to interact.

Let me also extend that time exclusives for establishing and or to expanding their partnership with zoom.

Which includes zoom slack and zoom contact center.

Founded and liberating focus on bringing sops and opportunities to end represented communicates timeless solution delivers high touch contact center solutions for me the size of companies and a fortune 500 collaborations.

Obviously, a whole well assume Carnegie center addressed many of the customers needs and are gaining confidence in <unk> ability to deliver innovation at a rapid pace he decided to replace their legacy solution with a zoom a contact center.

That's good in our innovation roadmap, while cognizant, who gave us opportunity to further enhance our partnership with <unk> solutions in the quarters and years to come.

I also wanted to extend that GP the number one in SaaS based global employment platform for.

Excluding zoom phone to transform their communication assistance and support employees across their organization.

Chip he understood the value of our integrated platform of our communication products from their experiences using zoom meetings zoom webinars human chat and zoom rooms.

G P. Ultimately operating reports.

And the missing piece in the UC stack.

In order to improve their customer experience, while also enjoying the savings benefits of a cloud based PBX solution integrated into a full communications platform.

Also the likelihood is that GP it assumes global expansion and preliminary part of it.

And has played a critical role in our growth strategy.

<unk> us the agility and speed into new market very quickly.

Okay. Thank you with cortex Mitchell time of sources, and the GP and all of our customers worldwide.

And with that our pass it over to okay. Thank you.

Thank you Eric let.

Let me now turn to the quarter's results and guidance.

In Q3 total revenue came in at 1.1 year or $2 billion up 5% year over year and 7% in constant currency.

This result was approximately $2 million above the high end of our quarterly guidance.

The growth in revenue was primarily driven by strength in our enterprise business, which grew 20% year over year and represented 56% of total revenue up from 49% a year ago.

We expect enterprise customers, who comprise an increasingly higher percentage of total revenue over time.

From a product perspective, we had strong growth in zoom phone, coupled with contributions from zoom rooms and other products.

At Investor Day earlier this month, we introduced a new metric online average monthly churn.

In Q3, this metric continue to improve to three 1% from three 7% in Q3 of FY 'twenty, two and three 6% last quarter.

We are pleased that this metric has now returned to pre pandemic levels.

The number of enterprise customers grew 14% year over year to approximately 209300.

Our trailing 12 month net dollar expansion rate for enterprise customers in Q3 came in at a healthy 117%.

We saw 31% year over year growth in the upmarket as we ended the quarter with 3286 customers contributing more than $100000 in trailing 12 months revenue.

These customers represent 27% of revenue up from 22% in Q3 of FY 'twenty two.

Our Americas revenue grew 11% year over year.

EMEA continues to be impacted by the stronger dollar the Russia, Ukraine War and online performance, which combined led to a decline of 9% year over year.

APAC, which was also impacted by the stronger dollar declined 3% year over year.

Now turning to profitability.

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.

Undistributed earnings attributable to participating securities and all associated tax effects.

non-GAAP gross margin in Q3 was 79, 5% an improvement from 76% in Q3 of last year and 78, 9% 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 this we expect our full year gross margin to be approximately 79%.

Research and development expense grew by 59% year over year to approximately $108 million.

As a percentage of total revenue R&D expense increased to nine 8% from six 4% in Q3 of last year.

This reflects our ongoing investments in expanding <unk> product portfolio and delivering on our customers' evolving needs.

We expect to exit the year in the range of 10% to 12% of total revenue consistent with our long term target.

Sales and marketing expense grew by 27% year over year to $301 million.

This represented approximately 27, 3% of total revenue up from 22, 6% in Q3 of last year.

We continue to invest judiciously in sales capacity and channel partner expansion.

G&A expense grew by 6% to $87 million or approximately seven 9% of total revenue in line with seven 8% in Q3 of last year.

non-GAAP operating income was $381 million exceeding the high end of our guidance of $330 million as we continue to thoughtfully prioritize investments.

This translates to a 34, 6% non-GAAP operating margin for Q3 as compared to 39, 1% in Q3 of last year.

non-GAAP diluted earnings per share in Q3 with $1 70.

24 above the high end of our guidance.

Due to our share repurchase program, our Q3 weighted average share count has decreased year over year, approximately 4 million shares to $302 million.

Turning to the balance sheet.

Deferred revenue at the end of the period was $1 4 billion.

A 14% year over year from $1 2 billion.

Looking at both our billed and Unbilled contracts, our Po totaled approximately $3 2 billion.

Up 32% year over year from $2 5 billion.

We expect to recognize approximately 59% of the total <unk> as revenue over the next 12 months as compared to 67% in Q3 of last year, reflecting the trend towards longer term contracts.

As a reminder, our annual seasonality every Newell's is front end loaded and moderates over the rest of the year, reflecting a sequentially smaller renewal base.

As such we expect Q4 deferred revenue to grow at approximately 2% to 3% year over year.

We ended the quarter with approximately $5 $2 billion in cash cash equivalents and marketable securities excluding restricted cash year.

Year to date, we have repurchased $991 million of our own stock representing approximately 11 million shares.

We had operating cash flow in the quarter of $295 million as compared to $395 million in Q3 of last year.

Free cash flow was $273 million as compared to $375 million in Q3 of last year.

Our margins for operating cash flow and free cash flow were 26, 8% and 24, 7% respectively.

As previously discussed this year, we have seen larger cash outflows from an increase in cash taxes, starting in Q2, which relates to depletion of our NOL and the lower tax deductions for stock based compensation caused by the stock price decline.

We now expect free cash flow to be at the high end of our range of 1 billion to 1.15 billion.

As a reminder, our range assumes that the section 174 tax legislation requires capitalization of R&D expenses will be repealed or deferred by Congress by the end of this fiscal year.

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 approximately 8% for the year.

For the fourth quarter of FY 'twenty, three we expect revenue to be in the range of 1.0 95 to $1, one <unk> 5 billion, which at the midpoint would represent approximately 3% year over year growth or 5% in constant currency.

We expect non-GAAP operating income to be in the range of $316 million to $326 million.

Our outlook for non-GAAP earnings per share is $75 to 78 based on approximately 301 million shares outstanding.

For the full year of FY 'twenty three we now expect revenue to be in the range of $4 37 to $4 $38 billion.

Which at the midpoint represents approximately 7% year over year growth or eight 5% in constant currency.

This represents a decrease of $15 million from our previous full year guidance.

Which approximately $14 million is attributable to the FX pressure in Q3 and Q4.

We now expect our non-GAAP operating income to be in the range of $1 49 to $1 $5 billion.

Representing a non-GAAP operating margin of approximately 34%.

This is an increase of $50 million or 1%, respectively as compared to our Q2 guidance.

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 91 to $3 94.

Based on approximately 304 million shares outstanding.

Zoom remains focused on thoughtfully balancing growth and profitability through platform innovation customer value creation and partner ecosystem expansion.

Thank you to the zoom team our customers our community and our investors.

Kelsey please queue up our first question.

Thrilled to Kelly.

And as Kelly mentioned, we will now move into the Q&A session. So when I call. Your name. Please turn on your video and on mute.

As a reminder, in an effort to allow everyone to ask a question. Please limit yourself to one question and of course, our first question is going to come from meta Marshall with Morgan Stanley .

Great. Thanks, so much for the question and congrats on the quarter maybe.

Maybe just sticking with the online business for a second then kind of the stabilization of that business. You know clearly you saw the turn.

Statistics improved but just wanted to get a sense of how you guys are thinking about stabilization. There. How you guys are thinking about.

Just initiatives, our new ads as well as just free to paid conversion.

Yeah. So we as we shared at analyst day, two weeks ago, we're really happy with the continued improvement in the churn first of all and I think improved even further in Q3 and the fact that now 70% of those cohorts have moved beyond that 16 month period in which they really stabilizing and we.

You just see that happen.

Wendy and her team are really focused on continuing to look at initiatives for conversion does include things like adding local currencies, adding local payment types as well as looking at packages that makes sense. So all of that is still in process and what we're thinking and we.

<unk> talked about before is we expect online to stabilize from a dollar perspective in Q2 of next year and based on our most recent forecast that is still the case.

Great. Thank you.

Moving on to Mark Murphy with J P. Morgan.

Thank you very much I'll add my congrats very nice free cash flow performance.

I wanted to ask you Eric.

The pace of R&D activity is so rapid.

At the moment to what extent do you anticipate that perhaps some of the new product innovations.

And I'm thinking of zoom.

Zoom mail calendar <unk>.

<unk> thoughts and others could perhaps enhance the stickiness of the usage patterns right or drive engagement and collaboration higher in a way that could maybe benefit your either your dollar retention rates or maybe some of the premium plan adoption.

Yes, so Margaret that's a good question. That's one reason why we had a very successful when the pulp here because we've announced the.

So many innovations almost every and emission when we look at it that we can do to either at a value for the existing customer to fulfill sickness or maybe the potential revenue opportunity look at Eric features I think we've always followed out of principle look at EMEA and Canada Lookout of O&M paid users subscribers and we.

We'll now open up for you this way for all of those on that prove buyers and it gives us even calendar for free to use the IMO, Canada full benefit the service with one another.

Greater service, which is independent attributed by looking at all other features like Us force and <unk>.

All those features southern to kind of have our enterprise customers and also make all of this was most.

Not only do the zoom costs getting the meetings, but also can use that.

Limited office environment. So hold for you there for Cheyenne light E mail kind of doses for a class, but so Eric feature inhibition I think for sure. We are at a more modest while customer either drive stickiness or drive additional revenue opportunity like I assume what you're aging and the contact center and whats.

Agents, who might accumulate what your coach and a lot of issues like that so we're very very excited and again and the feedback from our customers are very very positive and very excited about a doubling of those new features and enhancements.

Thank you thank you Mark.

Credit Suisse as friendly has the next question.

Alright. Thank you for taking my question I was wondering if you could talk a little bit about the macro impact on phone adoption and maybe give us an update on zoom production abroad. As you have over the past couple of quarters.

Yeah. So we continue to see strength in zoom phone as a reminder, we announced on the last call that we had crossed over the 4 million CE Mark. We also added nine customers in Q3 that have purchased over 10000 seats.

That brings us to a total of 64 customers in that category. So I think it shows continued strength, especially in the upmarket even in these challenging economic times so.

We're excited about the prospects that we continue to see there and as we keep promising you I will break it out when it gets 10% of revenue so you'll be able to see that then a little more clearly.

Yep fair to add onto Warner carrier side, more and more cautious on increasingly are increasingly looking at our resume the platform Zoom went UC platform uses we look at a partner product all phone or mid teens of Abner or human Shack now look at our full UC stack because that will give you a better experience.

In terms of total ownership cost has also been much better that's high watermark customers are moving towards our full zoom lens powerful and are very excited about the opportunities there.

Great. Thank you very much.

Now moving on to Michael <unk> with Wells Fargo.

Hey, Thanks, Good afternoon I appreciate you taking the question.

On the front end loaded renewal seasonality you had a useful tidbit on the deferred revenue growth Youre expecting in Q4 can you just maybe walk through how you gear up for that as a company have given it a little bit outside of the norm on general calendar cycles that we're used to seeing.

What kind of visibility do you have into that cohort currently and is there anything you can do to shift that profile or is it just kind of gradual.

Rolls forward and you've got induced accustomed to it internally thus far.

So.

As a reminder, this occurred right due to the significant increase of customers. We had during Q1 in the early stages of the pandemic and what has happened is due to the practice that we have internally as making it easy for our customers. We co term when they add on additional products.

Or expand their seat count for example, so it's continued to actually exacerbate if you will when we're upselling customers that front end loaded.

Phenomenon, so it will start to level out over time.

We see customers in Q2, and Q4 being our largest seasonal quarters due to the six month quotas of our upmarket ramp reps, but as you say we are used to it now internally everybody knows this is how it works we're coming into this our third renewal period, and we've seen strength in each of the last two cycles. So.

We're able to accommodate we know how it works and it's just something we know that it's not aligned with most of the rest of the industry, which is why we keep reminding you and trying to give you as much color as possible around that.

I appreciate that thank you.

And our next question will come from Kash Rangan with Goldman Sachs.

Hello, Thank you very much happy Thanksgiving and a bench to see Eric Kelly I had a question on the enterprise business I think most of us on the call today, we're waiting for the tilt towards the enterprise business.

The strength of the enterprise business can offset the weakness in the online business as we wait for that I am curious to get your take on the expense rate I think it came in at 117% or so and the number of customer it used to be higher in prior quarters. The number of net new asset enterprise still.

<unk> still also not quite rebounding in recovery.

Some perspective on how much is macro versus maybe competition from the likes of team et cetera, and Eric how does this play out.

Broader adoption thesis for the zoom platform when are we likely to see these metrics inflect. The other way that could validate your overall thesis that assume it's not just about a V.

Video meetings, but a broader communication platform. Thank you so much.

Eric you want to talk about zoom, one first and then I'll talk about the metrics after that yeah sure absolutely. So cash so that's a good question.

And then you look at it the customer contracts and the move towards industrial and web platform and leverage our full UC stack started fall meetings. Many years ago added a phone a webinar to shatter in salon support, but I think the.

Probably was that previously and homeland accomplished zoom everybody has all the right assuming that the distributed Congresses and that's in order to Kiss and Thats why we are doubling down on was zoom lens marketing awareness also talk with the customers that amount effect not only do we.

Offer the basketball content service, but also.

Our other offerings that are full use of staff and also who also have 110 as well I think that that would take a little bit of time, but not at optimal realized wow zoom, you'll have a full.

And plus we also have a very flexible hemostat frankly, there is a free and it worked so well integrated other UC solutions as some customers are showing a good excitement about adopting the full use of powerful and more and more customers are moving towards our full usage rather than just the <unk> of them and that's why we're very excited.

Because if you look at all of those offerings and working together seamlessly.

In terms of total ownership costs much better because many enterprise customers are trying to consolidate their full usage that uses that could climate in stack, it's different by reminding you of the email while calendar or sharepoint.

The obvious from other vendors, but in terms of uses that you wanted to.

Deploy the best of breed of service. That's why we have been on UC stack plus Mcdonald with Ccs model.

Got it. Thank you so much Eric Duncan cash just in terms of like your comment about renewals I want to highlight especially in the enterprise renewals remain very very strong we were actually slightly ahead of our internal forecast for Q3. So we continue to see we've talked about many metrics growth and expansion in the enterprise.

It's just as you say, we're waiting for that stabilization in online too because it right now its really having.

A dampening effect on the overall growth rate of the company.

Thank you Kevin.

Thank you guys George I wanted with Oppenheimer has our next question.

Thank you for taking my question, Eric maybe with all the enterprise progress is showing can you give us a update on contact center and the adoption that you're.

Seeing there.

Yes, so yes, I'm getting a contract under its new service of a very excited in particular for those customers will deploy our.

<unk> service.

<unk> consolidated <unk> together and also we found it interesting use cases as well not only to lose the traditional customer interaction department is starting to deploy zoom content vendor, but also the internal IP desk as well.

Again.

Contact center sales cycle, a little bit longer.

The meetings, but however.

Showcased our platform capability and the speed of innovation customer very excited and plus you look at our own business right and if we used to deploying.

Other cloud based contact center solutions offered with suite of our own contact Center solutions. Our teams themselves are very very excited and a lot of potential pipeline and lease rate in the pipeline.

So we are doubling down on that and again the part of the side, we have a higher companies go to market side, we are gaining traction as quickly as possible because again picks up takes some time plus also leveraged channel and internal go to market investment and I think thats, a future big revenue driver for us, especially a customer like at CCM you use it together and it was much.

And also the ownership costs are so much there.

Thank you.

Thank you.

Moving on to Seabee panic Rocky with Mizuho.

Thank you. Thanks for taking my question just wanted to ask about macro pressure that you talked about last quarter fell to languish on the enterprise side, what kind of plans you are seeing anything.

And also how does that impact your pipeline as well.

So we certainly have seen impact as I mentioned from FX.

The reduced guidance of $15 million 14 of that is coming from FX pressure and you saw that certainly in our year over year growth in Europe and in APAC.

In the enterprise.

Again renewals say strong excitement about the products, but as we discussed it's continued in terms of additional deal scrutiny.

I think all of my <unk> here CFO now are looking at deals and that's just.

Causing elongation in general not that things are losing where Atlanta, we're losing deals are just taking longer to get done and potentially some of them pushing over quarters, but yeah. We haven't seen that have or have impact, it's just taking longer and longer not that they're going anywhere else. It's just taking longer to get those done now the good news is right.

Especially with all of the new products. The consolidation that we offer is a really great value story for our customers in terms of.

Elimination of additional vendors getting rid of on Prem servers and that continues to be a great story that our customers lives.

Thank you.

<unk>.

Phebe Moffitt Sterling Auty has the next question.

Thanks, Hi, guys, Kelly, maybe firing on want to want to understand the 20% growth in enterprise in the quarter versus the guidance of low to mid 20% for the full year does that mean that there is a little bit of a backend loaded hockey stick or a bump up that we'll see next quarter and specifically I think investors are.

We're really interested in trying to gauge how should that business react as we move into next fiscal year in light of the concern about layoffs across all industries and a lot of your zoom meetings et cetera based on per employee per seat pricing. Yeah. So we certainly we've talked about this the last couple of quarters have seen more.

And more of our deals shifting to the end of the quarter and taking on that more historically natural cycle that we didn't we haven't seen since really early in the pandemic, but that is absolutely the case for us and we have adjusted our forecast for Q4 for some of that linearity as well.

Yeah.

We have continued to see as I keep saying strength in our renewals and I think that's because while there is concern about layoffs. There is this other phenomena about flexible work right everybody wants to continue to working in the way they've become accustomed to and as long as employers are supporting that and their employees. It really means everybody needs is in.

License, if you're out of the office, even one day a week you need that zoom license per phone for meeting for what it was in one and so I think that is really a compelling reasons for organizations to continue to renew with them.

Understood. Thank you.

Thank you Sterling.

Oh I'm sorry.

Even if all those opinions as Larry and offer before the full use of stack and look at acute chest is getting more and more popular and also we are finding those kind of use that for their personal use cases as well because it's free and thats why a lot of traction for other part of the entire UC platform.

Our next question will come from Michael Funk with Bank of America, Michael If you'll please start your video for us.

Alright, Michael.

If you can hear US. Please go ahead to start your video and come off for you to ask your question.

Alright, Miss hearing and hearing no response, we'll go ahead and move on to William power with Baird and William If you wouldn't mind doing the same thing great. Thank you so much.

Alright, thanks for taking the question.

Finally for Kelly.

Pretty notable increase in stock based compensation expense I know you've talked about this at the Investor day to that expected given top ups will be more elevated will be greatly as to get a little more perspective as to how youre thinking about that going forward is this closer to peak levels. They will stay at this level, maybe over a longer term timeframe.

You know how investors should expect that to trend and I guess kind of tied to that.

Youre pretty aggressive on the stock buyback front, what are the plans there going forward and how does that tie into how you think about stock based compensation.

So first we believe that the supplemental grant program is really important for this or that strategy of the company in terms of retaining our employees and keeping them focused and not having to worry about that.

And then a supplemental grants vest over the same period as the underlying granted they are tied to so you are going to see this level.

Continue for a few years as those grants are besting through and many of them. Originally were for your brands. So they have two or three years left in which youre going to see that stock based comp as those underlying shares are vesting with the stock.

Yes.

What is the stock stabilizes then you will see less impact where that are less need for additional grants. So we are we're hoping that we're at that place and that youre going to not see additional supplemental grants on that same level, but until we get past probably another year's worth we might have some more.

<unk>.

In terms of the repurchase as you heard we purchased $991 million, so dollars or 11 million shares. So we have a little bit of room with that and once we've completed that we'll evaluate whether or not we want to ask the board for authorization, we haven't we haven't done that yet.

Thank you.

And we'll now hear from Matt Stotler with William Blair.

Thank you for taking the question, maybe just one more on the online business it'd be great to maybe get some color. Some commentary on the economics of that business the margin profile as it compares to the enterprise segment of the business and what the implication there.

It is as that revenue mix continues to shift specifically in the context of your updated long term figures you gave us a couple of weeks ago.

We've talked about this before our online business is a higher margin business as it's largely not completely but largely untouched by any person from our sales organization. There are some online account executives that are there to answer questions, but it's minimal compared to our enterprise sales organization.

So we certainly took we've done a lot of work on modeling what that looks like and we've taken that into consideration as we laid out our long term margins that we shared with you at analyst day as we looked forward for the next several years and how we think the mix could shift between the underlying and the online site online.

And enterprise businesses.

So thank you.

Moving on to Ryan with.

My apologies Ryan Macwilliams with Barclays.

Thanks, so much.

Follow up on Matt's question Kelly can you hear me, Yeah, Hi, Rel perfect. You previously noted a potential inflection and online business early to mid next year with churn now right at around pre pandemic levels, but we're still seeing revenue declines declines sequentially. In this segment any updates as potential inflection and.

So is there any impact from existing zoom customers Upselling to enterprise on this online business segment. Thanks.

So yes. The answer is yes, there are customers that eventually upsell into enterprise, which is great right because that means theyre expanding and they are becoming a bigger customer overall, which we love to see but that does then it's not company term, but it looks like it's moving out of the online business into the enterprise.

And in terms of.

The way, we're talking about it as a stabilization of online and we expect that from a dollar perspective to still happen in Q2 of next year based on our current forecast that we're seeing.

Regarding.

And moving on to Parker Lane with Stifel.

Yeah, Hi, Thanks for taking the question Kelly you referenced thousands of customers that have signed up presumably one since it launched I believe about five months ago can you help me understand the profile of those customers a little bit better.

You already have them tend to be existing customers that have been migrated onto zoom, one new packaging or are you seeing a big.

Net new cohort as well and then two is it skewing more enterprise for customers that are thinking about going with them. What are you also seeing.

A pretty decent spread across all different size organization.

So Eric I know you love to talk about two months do you want to talk about it for a second just Brazil.

Yes.

First of all I think the Parker you look at <unk>, when we launched several months ago and I look at all of those the customers medium sized enterprise SMB the Odyssey in the body.

That's why we're seeing an almost.

Every market is second.

Move toward as to what package, we didn't see the value we do not see any specific market segment, that's really standing out from all the way from SMB to enterprise.

That is what we anticipated.

Thank you Eric I would just added that that the key customer wins that we saw in June one in Q3 were a pretty balanced mix of new as well as customers that are upselling as they're adding new products to their portfolio. So we're really happy about that they were seeing traction in both aspects of the business.

Understood. Thanks again.

Thank you.

And I hear from sharply serafini with SDN security.

Yes. So thank you very much so I'd love to hear from you.

What do you think your current visibility as compared to say three months ago.

Notice that your RPM group grew by 32% year to year, which is impressive.

But you also have.

A decline in your <unk> percentage over the past several quarters your expansion rate has been declining.

Your guidance for deferred revenue grew two 3% with mimo in getting billings down 10% year to year in Q4, and you've never really had a billings decline in my model. So just talk about the visibility you have right now versus three months ago.

And when do you think you might see this stabilize.

Is it a few quarters at a few years.

So the current Rps.

Pressure is largely related to the online customers and the decline that youre seeing in online as the long term <unk> really benefits from the direct and the enterprise side of our business, which are managed by the direct business and have more annual and multiyear contracts that's kind of why you see.

That shift in terms of the overall percentage.

I would say and then the other impact that we're having that we can't it's difficult to predict of course is FX right. So do you have to you have to consider that which is.

More concentrated in online in enterprise, but you heard we in our guidance that we've reduced we said about $14 million of that we believe to be attributable to FX in general I would say.

The economics or the state of our business Hasnt changed meaning our enterprise business and our enterprise sales organization is stable, they're continuing to operate in the same way the online business with the improvement in churn as well as the way that the majority of it now has shifted out belong beyond the <unk>.

Months is really helpful. In terms of our ability to forecast that business and so I think the visibility is the same there is just some different reasons for all those different components that you are talking about.

The deferred is again the decline youre seeing in Q4 is really due to the front end loaded nature of our business and then remember for the front end billing alright that renewals happen at the front end of the year, that's where youre going to see the upswing in billing, we absolutely and deferred and then it gets amortized over the year. So deferred is coming down and then we have much lower renewals in Q4 as well so.

Thanks, Doug.

Renewables that are filling up the bucket are much much smaller. So it's you mentioned very many factors in there is different reasons for all of those.

Thank you.

Yes.

Our next question will come from Peter Levine with Evercore.

Great. Thank you for taking my question.

I think given some of your customers are pushing back on larger decisions are you able to kind of toggle yourself sports maybe focus more on those back to base opportunities and then Kelly just a follow up can you share how many of those nine I think you said 910000 C phone customers are net new to zoom than maybe just share with these legacy.

Keep your extra placements or are you going in and replacing another cloud provider. Thank you.

Yeah. So first of all remember our strategy for selling zoom phone to selling into existing.

The existing installed base. So I don't know actually a split between those nine but I'm sure that the majority of those were existing customers.

And I think.

I would say there is a focus on the company that as Eric talked about of expanding not beyond not to just bump right, but expanding to the full platform. So that's really what we have our team focusing on now is the one its contact center at Zoom IQ for sales now with E mail and calendar and really thinking about the complete platform, including zoom chat in the.

Adoption within organization. So it for all the reasons, we've been talking about in terms of retention flexibility for organizations to reduce vendors there.

The cost savings the total cost of ownership that they see by having that combined that for all of those reasons, that's really becoming the focus of our enterprise sales organization.

And our next question will come from Matthew <unk> with Deutsche Bank.

Hey, Thank you for taking the question wanted.

Wanted to ask you you mentioned the greater value that customers are seeking out from the broader platform. I'm. Just wondering are there specific areas, where you see maybe more room to strengthen the platform and with the compression we've seen in market valuations. How are you thinking about potential inorganic opportunities. Thanks.

So Eric do you want to talk about the platform and the value. They see yes, sure presumably I think for those customers who deployed zoom a powerful they really like is the reason why if you look at the west thin client interface right and even have a scanner meeting you can't use our zoom or teams shattered.

Accumulative with you our teammates and our customers make a phone call wire board are there now we are at in a human kind of fully integrate together I think that's the.

And a whole lot of it plus you look at our customer.

Used to be deploying all of the partners.

Always have one have on the full use of stacked vessels value in a similar experience and that's why I'm more and more customers no matter, which auto club a distribution leader probably keep a phone for example, or other cloud solutions northern realizes the full value of the entire <unk> platform, we see more and more and our customers. They just reach out to us rather than me rich audit.

Two opposite northern Rethought philosophy, Yeah, I see the greater value.

That's why in a more and more innovations will be built upon the <unk> platform.

Yes, consumer spud, the recently announced and Thats, our focus with Alberta on our platform story.

Stuart.

And just in terms of inorganic opportunities just if you can elaborate on that sure. So.

We continue every day to look at opportunities and yes.

The compression evaluations certainly is not lost on us.

We're always trying to balance of course is what would it bring to our customers what would it bring or the impact potentially on our culture and then of course the value and the state of the technology right. We have a high bar for both talent and technology here at home. So it's been difficult I would say to date to find something that really meets.

All of those standards.

Eric is a very hard judge, but that doesn't mean that we're stopping and we continue to look for opportunities every day.

So in terms of the full platform strength I mentioned, our customer number in things like our experience, let's say if you look at the other biggest service partner.

Make sure we have a consistent experience that is known and then that's why we're tending to look at all of those segregated technology companies like assault.

The card in many years ago again, if you wanted to.

As the folks on.

Brian a new service, we might've thing about an organic opportunity by now and we kind of UC platform. We already have your everything now we just focus on the global market and we are.

They have a high confidence, we will get more and more traction there.

Thank you Andrew.

Moving on to Alex Hogan with Wolfe research.

Hey, guys.

Just maybe.

One question.

Bit forward, it's a bit hard but if.

If I look at the four kind of the shelf is for the forward looking metrics and the implicit guide for enterprise revenue next quarter is about 15% to maintain the low <unk> for the full year. If you. If you go for a second it does look like growth next year is going to be kind of in the low to mid single.

Digits, assuming the normalization or stabilization of the online business and assuming some further diesel with the macro getting tougher with opex growing nearly 30% this year.

What how are we thinking about a worsening environment like what's the recession playbook presume we've seen some companies take some.

Any meaningful steps with respect to employees with respect of dialing up if you will the the efficiency of the business whats the plan.

Whats the recession plan here, maybe for both you and Eric.

So.

I think the year assessment.

In terms of we're not getting let me just make a caveat first of all we're not giving FY 'twenty for guidance on this call. We will do that obviously at the Q4 call.

But your assessment settling the way youre kind of thinking about the topline growth is right in line with kind of how we're thinking about it right now.

And in terms of.

Then from an operating margin perspective, the way we're thinking about it is as we're working on our FY.

FY 'twenty four plan, we are being very very thoughtful about prioritization of investments.

I'd say it and as you noted we have grown our expenses and we've hired a lot this year and so being very thoughtful about ensuring that they are focused on the right things that we are prioritized internally, we are committed to continuing on innovation and meeting our customers' needs.

As well as go to market expansion those are really the top priorities that we have and making sure that we have resources in the right areas for that I guess, that's what I would say.

Yes, so Alex I think have a much better position you will regret it.

The efficiency and the potential productivity improvements by cash flow and profitability and a process as academician of a higher lot of.

Key mix this year I think that they are going to reach a full productivity next year and Thats why I think yeah. I think we can weather the storm and for any either short or long term short or long recession, and yes. We feel we are a company and to drive efficiency and productivity.

And I guess, maybe just as a follow up if I look at the buyback cadence given on the one side Kelly if youre talking about having to issue shares as long as the stock goes down on the other side you have $5 billion in cash on the balance sheet to buy back stock. So how do we because I get a lot of questions about dilution.

Particularly given the supplemental share buybacks at least on that front, what's the right way to think about over the next year over the next two to three years.

M&A, how youre going to leverage that cash balance.

Yeah. So we think based on the share repurchase program that we have we currently have in place we've done a good job of being able to offset the dilution from the supplemental shares.

We wanted to be very thoughtful about our cash those we just talked about M&A for example, and so, especially as we're focusing on our FY 'twenty four plan are balancing the opportunity for managing dilution as well as earnings on that cash and M&A opportunities. So all of those are being.

<unk> as we look forward for FY 'twenty four and that's really what we have to say today, we'll have more to talk about when we come back to the keep our call.

Thank you guys.

I will now hear from Ryan Koontz with Needham <unk> company.

Thanks for the question.

Path to strengthen enterprise and how to think about that.

Revenue growth across different product categories. It's not quantitative can you kind of give us an idea where phone stacks up versus expanded meeting license and any other products look like they could become meaningful in the next next 12 months as you look at that on the enterprise side. Thanks.

So really happy with the progress we've seen with the one with <unk> phones and the strengthened zoom rooms. In Q3, we also certainly see potential in contact center and sales like you. They are just they are just so early that from.

We're seeing progress there and excitement, but it's early stages. So in terms of what they're contributing overall to the dollar amount.

It's minimal at this point, but we are seeing growth in terms of quarter over quarter expansion in those products. So that's really exciting to see.

Thanks Kelly.

And our next question will come from Katherine <unk> with MTN.

Thank you for taking my my question I. Appreciate it one of mine is on your partner program you got in the new partner executives last July .

Could you specify any particular areas that he's going to concentrate on to drive more revenue will be just interviewed and one CRM magazines as anyone to get the 50% revenue through the channel.

Can you just address some of the ideas have yet to implement.

So yeah, Todd Catherines, referring to Todd who joined US I think a couple of quarters ago. He is great at June <unk> key hosted our first partner connect with over 400 partners, where there so that was super exciting to see and while there are lots of opportunities I think one of the biggest areas of.

<unk> is international partner expansion, we've done a good job over the last few years of building up master agents and carriers here in the U S. But it's still relatively nascent outside the U S. So that will be a big area of focus for sure.

Alright, thank you.

And James Fish with Piper Sandler. Please go ahead with your question.

Alright. Thanks for the question most of mine have been asked but I do actually want to ask on the enterprise sales investment that we've been talking about the last two.

A couple of years.

Hey, guys looking at balanced productivity improvements to support your margin stability versus expanding capacity, especially as these reps to over the last few years really have.

Vantage of easier sales cycle with meetings, especially is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point. Thanks.

Yeah, so in terms of our reps.

Are constantly looking at opportunities to help make them more productive and as you were just talking about we've hired a lot over the last few years and as we look forward to FY 'twenty four we will be making many fewer higher so we're really looking for how do we enable the reps how do we make sure that we have the right overlay teams in there.

Right places to support them as a reminder, that we have specialists that are selling contact center and phone and that's a really important aspect of making sure that everybody is aligned on serving our customers and the best way possible. So that is a big focus and we also have a new president Greg Tom that you all net last quarter and he's been spending a.

A lot of time, helping us think about that especially as we're moving up in the enterprise stack <unk> experience is where it is.

<unk> background is.

And then.

And really focusing on making sure that our comp plans aligned that's another thing that we're taking a look at for FY 'twenty for it as well.

It jumps another point just to add onto water purifier and.

So the Zumaya Q4, still a set of product suddenly exit of value to drive our team's productivity, especially within drafts the working remotely.

To manage their productivity and efficiency.

Actions quickly I think we deployed as a micro verticals by end of this fast literally every rep will be fully trained onto microphone sales by not only do we have our suite productivity and also will create a lot of opportunity for us to sell more and more to my people, that's a huge wide with Airbus.

Drive productivity.

Helpful. Thanks, guys.

<unk>.

Moving on to Matt Vanvliet with <unk>.

Yes, hi, good afternoon. Thanks for taking my question I guess, you highlighted zoom rooms, and curious how much of that uptick do you feel like it has been sort of a return to office for a number of companies and really having that mix mixed modality of a conference room and still having remote workers in and how much.

Just sort of risk might come under over the next several quarters of being a growth lever as we've seen layoffs as we see slower macro and maybe thats not an additive spend that companies are going to want to undertake when they're already paying for the individual's <unk> licenses.

Yeah, I think it's very similar to zoom meeting licenses in the aspect of as long as you have a hybrid workforce you need the right technology and your conference rooms.

To ensure that you have this inclusive experience that we've all become so accustomed to and we continue to listen to our customers' customers work on innovation to ensure that we provide that but I don't think its going to go away I mean, we'll see what happens, but I think it's still yet to come to see what happens with like commercial real.

Mistakes, however, zoom rooms, and the importance of those in a hybrid workforce I just I can't.

<unk>.

How important that is I can't stress enough the importance of that and Thats really what our customers are seeing as well as they are in some sort of state of a hybrid work environment.

Great. Thank you.

Also matter and honestly just quickly so it used to be and I looked at a comparable but most of them use it use it internally.

Internal costs now looking at zoom rooms, that's not our case a lot of customers on revenues by type of the customers and partners. So that's the one difference because that's the reason why the customer like assume you talk with the customer partners do you want to make sure I have the best experience right and announced a uniform company.

Companies, who might think about any health employees and a reduced number of employees, just what less desks, but more comparable.

All of US what can we do write to double down on our customer and partner rates.

And that's why we still see good opportunity ahead of us.

Thank you. Thank you.

Great and I'll move on to Tyler Radke with Citi.

Hey, Thanks for taking my question Kelly in terms of the Q4 guide I understand that the currency was a bit of a factor there on the lower outlook, but can you just unpack kind of what you're assuming from a macro perspective.

Is the Q4 guide relative to what was implied last quarter is it incorporating.

Churn getting worse in SMB or weaker net adds or maybe youre seeing something on the enterprise side just help us understand.

The non FX side in terms of what Youre expecting for Q4.

Yeah. So in the online segment of the business for Q4, we expect churn to be pretty much in line with Q3, I mean, it's likely that number is going to bounce around a little bit quarter to quarter and that's going to all be visible to you now as we report it but we're not forecasting any dramatic changes there.

And then in the online segment I would say that the I mean, sorry in the enterprise segment I would say the biggest change that we're seeing is just this continued push to deals being at the back end of the quarter and so that linearity over.

Over the last few years, we had a much more balanced linearity in our enterprise segment and what that leads to of course is deals contributing to revenue in the quarter and we're seeing much less of that as these deals are going back to the more traditional batch.

Backend really really backend of the quarter now we have the benefit in Q4.

Of having kind of the two periods of December 31st closing on January 31 close.

But we are expecting the linearity more consistent with what we've seen in Q3 than what we saw a year ago.

Thank you.

And we have time for one additional question from Karl Keirstead with UBS.

Hi, Carl Great. Thanks for fitting me in Hey, Kelly I just wanted to ask you about.

Your perceived utility of the billings number traditionally we look at that number is.

Decent proxy for business momentum, but.

Obviously minus 10 in <unk> and plus 1% for the full year I am guessing you would argue that that's a poor proxy for zooms momentum. So can you opine on that a little bit because I think maybe there is some consternation about that negative Ken implied percent billings.

Carl I Should've said this earlier so as a reminder, we don't guide to billings, we never have because we don't think that they are a good indicator for us because of the large percentage of our customers that are especially in the online segment of the business that are on monthly contracts and so because they bill and.

They pay US monthly they don't show up in that number and so that's why it doesn't it isn't really a good proxy for you to use.

And as a follow up.

Kelly is there anything else that's skewing that Dr number.

Is there any change to invoicing terms or maybe more flexible payment terms to customers that maybe on the margin are impacting Dr as well.

Nothing significant.

More about the timing.

This first revenue specifically give me about the seasonality of the renewals I can't stress that enough for everybody remember it's the two factors. It's the fact that they build in Q1, and then so youre going to see an uptick in billings and deferred in collections and then that amortize over time and then the billings in Q4 are just a lot smaller.

Yes.

Double impact right now you've amortize a lot of the deferred that was picked up in Q1. So we're down at a lowest period in Q4 and the billings in Q4 are the lightest period to refill that bucket. So it is going to this is going to be a phenomenon that we're going to see for years to come as I talked about until over time, we start to see more and more of our bookings happen.

In Q4, but that's going to take a long time makes sense. Thank you. Okay. Thanks, a lot Carl Thank you everybody.

And again that does conclude our Q&A session for today I'll go ahead, and turn things back over to Eric for any closing or additional remarks.

Thank you first of all thank you for every zoom employees grid work for every customer partner.

Disagree to support you all have a wonderful holiday season. Thank you again on our Q4. Thank.

Thank you. Thank you Eric and again this does conclude today's earnings release and we thank you all so much for your participation.

Our family to Yours, maybe you have a safe and happy holiday season, and enjoy the rest of your day and again, we'll see you next quarter.