Q1 2024 Zoom Video Communications Inc Earnings Call
Despite the distraction our Americas revenue grew 8% year over year, while EMEA and APAC declined by 8% and 5% respectively.
The decline in EMEA was primarily attributable to the outsized impact of the head count reduction due to local regulations prolonging the process.
The Russia, Ukraine War and the stronger dollar.
The decline in APAC was primarily attributable to the stronger dollar.
Moving onto our non-GAAP results, which exclude stock based compensation expense and associated payroll taxes.
Acquisition related expenses.
And that litigation settlement net gains or losses on strategic investments undistributed earnings attributable to participating securities restructuring expenses and all associated tax effects.
non-GAAP gross margin in Q1 was 85% an improvement from 78, 6% in Q1 of last year and 79, 8% last quarter.
We are pleased that we have achieved our long term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co located data centers.
For FY 'twenty four we still expect non-GAAP gross margin to be approximately 79, 5%, reflecting additional investments in new AI technology.
Research and development expense grew by 25% year over year to approximately $106 million.
As a percentage of total revenue R&D expense increased to nine 6% from seven 9% in Q1 of last year, reflecting our investments in expanding our product portfolio, including zoom contact center AI and more.
Looking ahead innovation will remain a top priority for zoom.
Sales and marketing expense grew by 4% year over year to $278 million.
This represented approximately 25, 2% of total revenue up from 24, 9% in Q1 of last year.
G&A expense declined by 10% to $84 million or approximately seven 6% of total revenue down from eight 6% in Q1 of last year as we focused on achieving greater back office efficiencies and savings.
non-GAAP operating income expanded to $422 million exceeding the high end of our guidance of $379 million.
This translates to a 38, 2% non-GAAP operating margin improvement from 37, 2% in Q1 of last year.
non-GAAP diluted earnings per share in Q1 was $1.16 on approximately 304 million non-GAAP diluted weighted average shares outstanding.
This result was 18 cents above the high end of our guidance and 13% higher than Q1 of last year.
Turning to the balance sheet.
Deferred revenue at the end of the period with $1 4 billion up 3% year over year from $1 $3 billion is just slightly above our guidance and primarily driven by renewables during our largest seasonal renewal quarter.
Looking at both our billed and Unbilled contracts our R. P O totaled approximately $3 $5 billion up 16% year over year from $3 billion.
We expect to recognize approximately 59% of the total ARPA as revenue over the next 12 months as compared to 63% in Q1 of FY 'twenty, three and 56% in Q4 of FY2023.
The sequential increase in current <unk> as a percentage of total ARPA was primarily due to shorter contract duration and recent enterprise deal arising from uncertainty in the macro environment.
We expect Q2 deferred revenue to be down 2% to 4% year over year, which takes into account. The recent trend of shorter durations on enterprise deals in our renewal seasonality, which peaked in Q1 and declined throughout the year.
We ended the quarter with approximately $5 $6 billion in cash cash equivalents and marketable securities excluding restricted cash.
We had operating cash flow in the quarter of $418 million as compared to $526 million in Q1 of last year.
Free cash flow was $397 million as compared to $501 million in Q1 of last year.
Our operating cash flow and free cash flow margins were 37, 9% and 35, 9% respectively.
Due to our net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY 'twenty four.
We now expect free cash flow to be in the range of 1.14 to $1 one $9 billion.
In FY 'twenty, four and going forward, we expect our smallest cash tax payments to occur in Q1, and the largest to occur in Q2.
Now turning to guidance.
For Q2, we expect revenue to be in the range of 1.11 to 111 $5 billion, which at the midpoint would represent approximately 1% year over year growth or 2% in constant currency.
We expect non-GAAP operating income to be in the range of $45 million to $410 million.
Our outlook for non-GAAP earnings per share is a dollar and four cents to a dollar and stick them based on approximately 307 million shares outstanding.
As our online business is stabilizing we wanted to give you all some additional one time color on how we see it playing out in the coming quarters.
We expect our online revenues to be approximately $480 million in Q2 and be relatively flat thereafter in FY 'twenty four.
We are pleased to raise our topline and profitability outlook for the full year of FY 'twenty four.
We now expect revenue to be in the range of 4.465 to $4 $485 billion, which at the midpoint represents approximately 2% year over year growth.
Or 3% in constant currency.
We expect our non-GAAP operating income to be in the range of $1 six $3 billion to $165 billion, representing a non-GAAP operating margin of approximately 37%.
Our tax rate is expected to approximate the U S federal and state blended rate.
Our outlook for non-GAAP earnings per share is $4 25 to $4 31 based on approximately 308 million shares outstanding.
As we look to reignite growth and maintain profitability, we are committed to doing so in the right way.
We are pleased to have recently issued our second ESG report, which includes additional data regarding our greenhouse gas emissions inventory and recommit zoom to achieving 100% renewable energy for our direct operations by 2030.
Our core value of care is as important as ever.
It is embedded in how our product fosters emissions reductions while supporting inclusiveness.
It's also evident in our corporate and employee giving.
You've heard it from Eric we are innovating extremely quickly to bring our customers the immense benefits of generative AI and empower modern collaboration.
We are trusted and loved by our amazing and diverse set of customers.
And we are fortunate to be one of the most recognized brand in the world.
In Q1, we made some very tough decisions related to team size structure and incentives that are understandably caused distraction in the short term, but at the same time exemplify our commitment to long term growth and profitability.
With a focus on the future we have refreshed our mission and vision.
One platform delivering limitless human connection.
Thank you to the entire zoom team, our customers our community and our investors.
With that Kelsey please queue up our first question.
Thank you so much 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 and as a reminder, in an effort to hear from everyone. Please limit yourself to one question and our first question will come from Goldman Sachs's Kash Rangan.
Cash go ahead and come on video for Us and I need if you would please.
Alright, well hearing no response, we will go ahead and move on to meta Marshall with Morgan Stanley .
Alright, I think I got my door perfect.
Appreciate it you know I noted that you were taking down kind of or not taking down but giving back some of the gross margin upside that you saw in the quarter and noted that that was for some of your AI investments you know Eric I guess I'm, just wondering how you're judging.
It kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development, that's going on versus investments that you want a bank.
Yeah. It's good question I think it looks like Irvine.
Similar to our hobbies.
Well.
Actually we have been given.
Therefore on a fall a few years and look at the past several new towable largest acquisitions, Mike Salisbury, and carrots right of the AI based in China and in <unk>. We also have AI team as well because we understand the importance of AI in particular, Chilean risk mitigated by genetically momentum I think first of all.
We do have our own team, we have our own internally developed modems as well. We're also we're tick up or will open up Bruce you essentially we announced to our you know the Federated.
Bush and Obama announced a collaboration with the opening of our.
In Nebraska connect we also doubled on our partnership with <unk> and so a big reason that as well and then down the road maybe some old resorts motors available. We are also going to be Bruce that again, we look at everything from end user perspective first of all we have a team really datacom.
And also when we see the dominate the customers some type of customers rely on topic model, just why not with Arbitron that a partnership we collaborate with our API as well right. So we are taking a federated approach retrieves it which is to put a customer centric right. That's why we're very very excited about this.
No momentum can truly improve our product experience.
Alright, thanks, Thank you.
And moving on to Michael Funk with Bank of America.
Yes, hi, Thank you guys.
Another question for you, Eric if I could with some more detail on how you think about AI integrate into your own platform do you think about it more as a background.
Hansman or have a separate SKU and then how do you monetize.
AI within your platform.
It's great question I would say the answer is a border boats Utica.
Our zoom IQ4 suits sport exam right is extremely important.
When you sign all the sales people back at home or working remotely how do you have with them to improve their productivity and that's the reason why we're agnostic xuemei coupons juice and even way before.
General momentum right and internally developed.
Lots of I'm Gonna models really helped us like we can monetize that AI empowered as you Mike you for suite product I assume you took out of our feature rich collaboration portfolio.
A meeting summary that email Panama even.
And the Cheddar composed chemo combos, which had a message and alumina cognizant of whats your agent and also.
And recently in beta right workforce management solution as well all of them will be empowered.
Based on the AI.
The platform right. So on a Y head with Liberty or to look at almost every features we have hired to empower those features and also elevated our customer the product dispersed I have seem to have a lot of our monetization opportunities like zoom Occupancies as just one example, right as we were more op units loss again.
We think they are.
Thus bring tremendous opportunity for us because we focus on communications I think of what could be more fun alright, with just a puzzle is employee communication and envision powerful how to leverage AI to improve our product experiences at the not exact example, again full of opportunities here at Zumiez.
Yeah.
Great. Thank you Eric.
Thank you.
Alright, so let's go to Kashagan with Goldman Sachs cash I think youre out there driving so he's going to staff video.
Exactly thank you very much I appreciate you're watching out for my safety, but just so you know that I'm not a bot.
I just want to turn on that video vary.
Yeah quickly on so Erik I'm curious to get your take sense I want you to if you don't mind drill a little bit deeper degenerative AI and while a lot of software companies are announcing partnerships with LLS based on the content and data that they uniquely possess.
We're also at a point, where many companies are identifying very unique workflows and productivity scenarios that that differentiate them going forward right. So in that regard just so.
Theres, a scenario everybody and Ucas will ultimately have a generative strategy. So when you start to have these analytics to work with your core products and given the vast user base and the behaviors that you are contained in your knowledge base. How do you think zoom is uniquely qualified to get productivity targets that are very unique.
I'm sorry, you asked me the same word again.
You bet.
That's it.
Could be more enduring as a source of competitive advantage. Because this was chopra of Ucas was all about providing the core capability of the technology, which you did an amazing job, but I'm curious that next leg of productivity growth and how you can take this company forward. Thanks, So much yes. Good question.
We have a grid of integration with the Tesla cars right. If you just drive a Tesla is just one clear we would have joined the call.
If you kind of thing over the video and the audio will be oversaw enemy. So basketball AI question I think a football.
The agenda.
<unk> is very important so first of all if.
If you did not startup for your spec just given what's going on in the industry. I Award is Oh, My God a lot of things. However, we have already started you must be a few years back we should understand that the reason why our zoom Aki for Sirius was a developer of based on our own.
Generally the variable enlarge it I'm going to model from inside of that attrition is in a really important one is the model rising.
<unk> has a model and for Opex and in Pittsburgh, as well, Google and those companies, but most important thing is how to leverage these modules to fine tune based on your proprietary data right that is extremely important with eight accomplishment of collaboration communication right No takers zoom in our employee for example for example of assortment.
Museums and talk about that.
Everyday <unk> use the zoom call to work with the customers, we accumulate a lot of let's say internal meeting data how to fine tune the model with those data.
Very important not only for the air molded itself because it will evolve for you know and also we also are going to embrace a same time hard to leverage our proprietary data to fine tune. These AI models towards our industry. That's a very important you know Luca if you pick a medium for example, right I think that even though this is a problem.
You know, we have remote data than anybody else right given the all the parts of the many years' experience hardware fine tuned on our model.
Those data and I think as our unique.
A high pass due to the delay of a unique as principal customers. If have any other comments you might have let's say you have a greater emotive. However, how to fine tune. It has a lot of effort right. That's the reason why we've seen that.
Something unique for us to truly empower <unk> to deliver a differentiated experience and Oklahoma Cosmos.
So thank you so much Eric Thank you Priscilla and I will now assess.
So sorry, please continue.
Okay, well move on to talk lately with Keybanc.
Hi, everyone. Thank you for taking my question Kelly and I can see you guys.
There was some large large competitor of yours in the news lately with.
Microsoft, possibly leading to create a separate SKU with our teams.
Uh huh.
Teams product in terms of the bundling that product I know how important the collaboration component is two zooms vision of becoming the communications operating system for large enterprises.
Just noting with Kelly's updated color in terms of online without with the online business stabilizing which is great.
The implied guide for the enterprise businesses.
Good day sell into the second half. So just wondering how zoom is thinking about if at all with the potential impact or opportunity there just to get an understanding the importance of the collaboration or into your product. Thank you.
As we noted that we talked about earlier in the quarter I don't think that the the adjustment that youre seeing is necessarily related to competition and more due to as we expected some distraction internally due to the reorganization, but we feel great about.
The structure of our sales organization now with Gran, especially as our Chief sales officer, and Wendy leading the online team and that we made the hard decisions to get them focused and ready now to execute for the rest of the year and.
We're just looking forward to seeing that come to light over the next couple of quarters.
Okay. Thank you.
Our next question will come from Parker Lane with Stifel.
Yeah, Hi, guys. Thanks for taking the question.
I was hoping you could give us a better understanding of that.
To what degree contract durations actually compressed during the quarter, how much that will be an impact as we progress through year end.
It's more of a factor in any particular product set or was it pretty much across the board.
Yeah, It was pretty uniformly across our direct segment of the business, especially.
I'm going to be thoughtful about every decision, which is every buying decision I should say, which is not new it's just <unk>.
Taking giving themselves.
Time to make sure that they are getting the product deployed and we expect it to be not long term in nature, but in order to reflect that year, we updated our guidance based on as we talked about deferred revenue as well for the coming quarter.
Got it appreciate the color. Thank you.
We will now hear from Peter Levine with Evercore.
Hi, Peter.
Alright. Thank you for taking my question, maybe Eric one for you is when you think about the use cases of AI and you think across like phone video contact center, where do you envision as being the most kind of uplift in terms of client adoption of AI.
Curious, where youre seeing that to that.
I think on many fronts right like a pickup as opex.
Investment fundings number right for silver going into labor that not only for the in park.
Photo, but we're going to start to form a contact center.
The virtual agent and the contact center related features but also look at it our core meeting platform immediate summary, as extremely important right.
And as also we have.
Our team, which had a solution and also how the labor that the proposed chatter and remember last year. We also have email candidate as well hardware no leverages degenerative AI to understand the context right.
Bring all the information relative to you and is happier auto agenda to the massive right. We use a senator email back with our customers a prospect right, either China message or a human rights and leveraged generally is about right I think a lot of areas you don't even legacy legacy maybe you might be later in the meeting right.
I mean, it's literally join the meeting if you don't want to stand in water.
It happened right.
You get a cricket summary over the past 10 minutes Yeah, you're just also general area as well you also can't get to that as well is kind of almost a lot of.
A key use cases I think we.
We'd be empowered by AI capabilities. That's why we are looking at almost every area how to leverage <unk> to improve that experience you know take a open the iPhone XOMA. This is grow the company and also a lot of companies are leveraging their AI not only bigger companies and small companies. We also announced a collaboration with him at <unk>.
Right. So that's why I said earlier, you know two or three things like you and extended the loss is not going to model how to fine tune that it was your own data and also revisit the almost every feature you have are there any ways to empower those features are there any ways to monetize that's why we take a holistic approach and also we like our.
Fred as opposed to by the way we internally, we do have AI team, which should I understand the logic language models not attempting all accomplished.
One comparable to AI.
Yeah.
Thank you thank.
Thank you.
And moving on to Rishi <unk> with RBC.
Alright wonderful. Thank you so much for taking my questions, Eric I want to stay on the AI trained for a little bit you've obviously talked about some some great use cases, it feels like there's a big opportunity I want to ask about maybe the potential to start to vertical lives from the AI solutions because.
Feels like you have a huge opportunity around distribution doing things like adding AI tools on top of videos for video interviews and giving real time signals. For example, I know for that one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity. There are verticalizing is that something that could make maybe direct monetization a little bit more easy because the value prop is very.
Straight out of the box. Thank you.
This is clearly request by the way I downloaded the <unk> mobile iOS App store also opened Teddy Gbt's two to also put out a question, but anyway. You also write off when it comes to vertical in this vertical I would say the opportunity that <unk> is a departmental level and other ways of vertical industry right you look at our Zuma four students.
Specifically targeted use case seems to be pumped right Congress center is for supported the Bob you also write down the road HR Department, even marketing almost every department. They all use zoom right powerful lever to EI computed differentiated solution that has the opportunity that's one.
Opportunities another opportunity Rita about the vertical industry that take a health care for example, zoom by far number one on Panama.
Right and are hard to lever that and with those.
There was a provider of data and also working together with the customers right and defend Cumulus AI model right and this is why in with them or not example is a lot of law firms are also using zoom as well right and in order to truly empower those use cases is also another opportunity I think as I said earlier, it's truly bring.
Tremendous opportunity to us so we got a don't ever that the good news we are already heavily invested in this area for a few years.
Awesome. Thank you so much thank you.
And our next question comes from Katherine <unk> with Rosenblatt Securities.
Okay got it thank you.
Alright.
And the last two years a lot of changes happened first everybody work from home and now people are going back to the office. So is that actually changed any of your opportunities when you're looking at marketing your products I was thinking in terms of zoom room, and then some of the.
Areas, where you want everybody to be equal and zoom room dealings has that changed anything have you seen anything different from that.
Yeah excluded goodness question not about our AI anymore.
So you are right I think are doing a corridor is a lot of our consumer use cases by almost every family you have with the company a contract consumer comp right. After the call with I think you look at it use it right in a consumer.
Central usage, I think less and less for hoyer or support a hybrid of work in the enterprise customers. They are getting at a level of video content and more and more not only just a support of remote work.
And when you try to support hybrid work hard.
How to resume a desk, although the basic features and are hard to make sure you know.
We use.
Joining the meeting from the comp room by removing people.
See you not only just the one big.
Oscar right so.
You know who are sitting in the cough room.
Equally we have a sphere as well as human spirit right. So those kind of experience extremely important a lot of features a beauty in a pump in the body hybrid to work right now even what we will is not example, right dealing in a hybrid world right. You know quite often you the chat zoomed human child use the email or a phone call or meeting.
But sometimes you also want to know.
<unk>, a very exciting news a recorder video, how do distributors to employees and somehow even to customers. That's the reason why we're quite a work veeva as well I think a hybrid world is going to say that's the reason why a lot of new use cases, right hydro double down on that.
For example, we have.
<unk> got a review feature I customers' likelihood. However in some cases customers are stood on a walk up a huge call room hardware product. That's the reason why we are working on supporting three cameras right. That's another way to embrace hybrid hybrid world I think a hybrid world that does bring another tens of.
Huge opportunity to us.
Specialty is harder leukemias Airbus back office five days a week at unit four us.
If I could.
As many of you as everyone in one case might somehow as we monitor employees more but however, this has kind of led.
Colette employee work anywhere, it's sort of become a fashion is hard but forcing blow back at home. That's why you have to embrace hybrid work. That's reason why zoom can play a much bigger room to support our hybrid work.
Alright. Thank you. Thank you.
And William Blairs, Matt Stotler has the next question.
Thanks for taking the question maybe just one on the contact center side. So you. Obviously you continue to innovate on the product front for contact center, but last time, we got to keep update there were still some holding it was maybe on the go to market front or just give us an update on what youre seeing on that front overall adoption of the contact center product suite and then what do you think are the keys to driving further adoption.
Going forward.
Video on ticketing pick that yeah. So our contact center leader is Scott Brown. He has a great. This into our team and we are focusing from a go to market perspective now in the same way that we chips inbound we are hiring we have some onboard already but we are hiring additional.
Contact Center specialists, who will act as an overlay team and be there to support the account executives to go in and it's more of a technical sale and give them the opportunity to eventually over time all become burst in how to sell contact center. So we're in the process of that today and as I said, we have approved more.
So we're excited about making the investment there.
Got it thank you.
Moving on to William power with the herd.
Great. Thanks, Yeah, I wanted to ask a question on online it's great to see that segment. Finally, stabilizing maybe you kind of two parts tied to that any any early color with respect to the price increases and what you're seeing out of that and as you look forward for the guidance for online maybe just some broader framework for how you are thinking.
About both churn and top of funnel what gives you the confidence on both those fronts that this really is going to stabilize there.
So we've seen a very positive reaction to the price increase the when we came into the year in your modeling it we've actually seen better than expected retention rates in response to that so that's been really great as well as when he's done a lot of work around the online by flow, which is after <unk>.
A very positive response, and then we drive ins in the past, but theres a whole roadmap of other initiatives that are being worked on and continue to be added including things like additional payment currencies additional payment types and additional offerings. So those are all the top of the final items, you're referring to.
They've also done a lot of work to the flow when people at the cancellation flow when people come through which is also contributing to the improved retention rates and we feel great about them now they have been it was 3.1 in Q3 $3. Four in Q4, now 3.1, again and maybe Corey.
Back to $3, one again in Q1 and as we said, we expect Q2 and Q4 to be seasonally higher quarters due to the holidays in those periods and the flexibility we give our customers to come and go as they need the product. So the churn we're very pleased with and we've seen the behavior expect exactly as we expected it comes.
Back down in Q1, so that gives us confidence that it's going to be within that range for the foreseeable future.
Thank you.
By the way just quickly add on water cutting side, so as we add more and more new services also kind of help us more upsell opportunities even for that segment in particular.
Zoom is scheduled for example, we announced that a new service right.
Some customers over to Peter for other services like our can debate right Cosmos, yes, it'd likely to go with zoom deploy something similar right is as a part of the package, but I think a lot of upsell opportunity for us to targeted O&M segment as well.
Okay.
Thanks, Pam and moving on to Cte panic Rocky with Mizuho.
Thanks for taking my question Eric.
I guess I just wanted to dig into this walk Evo acquisition do you see that more of a long term opportunity or do you see that something that we can think of.
This is some sort of technology that you can cross sell into the base.
You know in near term and what sort of you know is there some particular vertical or in a segment, where you can see more traction there could you give some little bit elaborate in terms of revenue opportunity from that yes. Good question. So first of all you look at our clubs and platform right, we really want to offer a union.
Communication and collaboration collaboration platform customers leave Athena zoom platform I can today as well for the problems. We are facing customer also mention the process was right quite often.
These are all kind of message either through email is E reader hardware fan not as scalable oilsands methods, which had burdened all those public channels right customer also want to essentially likely I'll walk.
A video message I wanted to share it to the entire employee base and Omega Department of news right all of those kind of.
The.
Content right are there any other better ways to share and engaged and indeed quite right think that's the reason why we singled Walker, we will complete a bureau right to focus on those kind of use cases right. It's not only for the short term.
A key missing element of our entire portfolio, but also followed in the long run also so.
We will have us a lot.
The AI right because the hardware mix, we have more data right and reading of collaboration communication related to data right is what can we look for everyday use.
Engagement of our employees.
What we what platform you are general loss of data right. All those are very I would say is relevant and meaningful right how to leverage the AI right.
That's why as you know in the long run that.
Certainly it can help us more so.
Great. Thank you. Thank you.
Our next question will come from George <unk> with Oppenheimer.
Thank you for taking my question Kelly, maybe building on the stabilization you have seen on the online side can you give us a sense of.
What your expectations are from an expansion rate on it and our price alright.
You look out over the next couple of quarters.
Yeah.
<unk> guide typically around the expansion rate, but as a reminder, it is a trailing 12 month metric so <unk>.
Given that it's at 112% and.
You can look at where the enterprise growth rate is that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect both online and direct revenue to start re accelerating as we get to the back half of this year and then the net dollar expansion rate is going to trail behind now.
Thank you.
And Wolfe Research's, Alex <unk> will have the next question.
Hey, guys can you hear me okay.
<unk>.
So I guess I'll try.
Kind of a two parter one is just a simple how do you plan to monitor monetize generative AI functionality in the product rather than.
Making it.
Making it a part of the overall experience and the second is from an enterprise revenue growth perspective, I think the rate of diesel being contemplated from the mid twenties last year in the first half to just over 5% in the second quarter guidance implies that's a much larger rate of diesel than I think we all.
<unk> contemplate or thoughts.
How do we as an upsell as a cross sell.
Is it new products that are launching later revenue recognition like what is it that's driven that rate of diesel and how do you.
Reaccelerate, obviously, but how do you get back to a double digit growth rate in that regard because it seems like that's where a lot of the valuation of interest coming from for the stock.
We're trying to address.
Address the first one you've taken a second amount I think in terms of how to monetize generally generative AI I think.
First of all in.
<unk> Q4 series for example, nothing new service to targeted assist department that is AI technology is based on generating really high right. So we can monetize and also seeing some features.
Even before the generative AI popularity have a lie with transmission pitcher right and also that in all three feature is a killer feature right behind the paywall and <unk>.
So a lot of features right.
No takers zoom meeting summary for XOMA for enterprise.
And the customers if you deploy zoom one deploys wildly with how those features right fauxtato customers, you'll see that our free all of those are SMB customers. They do not deploy zoom why they may not that of those features right. That's the reason why another reason was to monetize I think that there is a multiple ways to monetize.
And then in terms of the enterprise outlook as I mentioned earlier, we expected the distraction in Q1 as there was impact the sales are not only from the reduction, but also reorganization and we feel really good about the structure of the sales organization.
Now and we are also as I mentioned, we are prioritizing where we want to continue to invest and just recently committed to adding more reps in the contact center team. For example, we hired a leader in Europe , which we Havent had before so really excited to have Frederic join us.
And all of these put us.
Give me very well positioned to execute for the rest of the year and now we're looking to the sales team to do exactly that.
And yet they.
We talked about we have an amazing platform that is there for them to sell and we're all rallying behind them to support them to see the next Q.
Perfect. Thank you guys.
Thank you.
Moving on to Michael <unk> with Wells Fargo.
Hey, there thanks, good to see everyone Kelly.
Billings deferred revenue side.
You came in a little bit ahead of what you were guiding for two percentage points from last quarter. Despite some duration impacts. So I'm wondering if there's any way you can help us quantify the accretion impacts either on.
Q1, or Q2 guide and anything else you can provide just help us think through seasonality of have now passed the heavier renewal period, but mentioned, maybe some sales transition impact still out there just help us think through what is contemplated in the guide from a computer for levels. Thank you.
Yeah, So I think on them.
Billing duration impact as I said earlier, we don't expect this to be a long term impact. We think it's just indicative of some of the uncertainty in the macro environment today, and just watching and being thoughtful about the impact that it's having on deferred and then you also heard.
Heard it in terms of our PEO, but we've seen this impact before and we've also seen customers come back then and I think especially as we continue moving towards more bundled one contact center inbound.
Those are all products that customers are going to commit to for the longer term. So I think as you continue to see more and more of those in our pipeline and being sold by the enterprise team that that duration impactful start to expand again.
And then in terms of the balance between enterprise and online where.
<unk> that enterprises stabilize a little bit earlier than we expected.
Given the days in the month the days in the quarter. That's why we gave a more specific view because its a little bit tricky. When you look at it for the rest of the year and the guidance contemplates all of the things that we already talked about in terms of the pipeline and all the initiatives. The online team is working on and then of course, the re stabilization if you will of our day.
Rx sales org at the same time.
Yes.
Thank you.
And Ryan Macwilliams with Barclays has our next question.
Great appreciate it guys and congrats on zoom phone, reaching 10% of sales just thinking back a few years pretty amazing that this metric only came after reaching 5 million tons.
Quite a run.
Okay level. The AI question, so far, but I guess I'll just ask the boring macro question.
Kelly are you seeing any differences in the impact of the macro to the online segment versus the enterprise segment and have you seen any changes at renewal and the enterprise side, maybe from an enterprise logo like.
Churn standpoint thanks.
So our enterprise renewals as you know Q1 is our highest seasonal quarter and renewals were exactly in the range of where we expected them to be for the quarter. So that was really great to see.
And then in terms of online.
We've seen strength that we've already talked about I think it is increasing the top of the funnel. We've also continued to see strength in annual plan, which is great and this is due to the just a reminder, when we did the price increase we didn't increase the price for the annual plan. So it just shows customers committing to the.
<unk> value that they see in zoom and the discount that they get for committing to the long term, but of course, that's amazing for us because the lifetime value of those annual customers is so much greater.
Thank you.
And Patrick Wall Ravens with JMP Securities has our next question I'm not sure. He's out there Patrick do you want to come off mute start your video for us.
Alright hearing no response isn't going to help all come off mute.
I'm going to turn it off the video and you can see why.
Yeah.
The.
Eric can you talk to us a little bit about sort of the.
Okay.
Okay.
Right.
Okay.
Perfect.
And what part of that is appealing to you guys.
Patrick So sorry, your audio is cutting out for us where you try one more time and unfortunately, we might have to skip you if it doesn't improve but try again please.
No worries.
Eric can you just talk a little bit more about anthropic and what people need.
Yeah.
Sure sure sure.
And sorry, if I can yes, yes, I think yes.
So opex is.
A grid of partner and has greater team and when we look at it.
Atlanta escape I think how you why not double down on that a partnership.
And given our spread to the AI approach internal ABTS caused that happened to be that.
In a matter of using are not around the financing right. That's why our photo solidify our partnership but again they are a good team and a grid technology and I think that there is no brainer for us we invested a bite to further.
Unify the partnership and yeah. So.
That's pretty much because.
Our Congress underwrite.
The empower our cognizant offering right and also donald or be acquired.
Our entire product portfolio again this is very important to our further at a federated approach to AI and that's the reason why you're ready to do so.
Thanks, Patrick will go ahead and move on to Matthew <unk> with Deutsche Bank.
Hey, Thanks for taking the question just two quick ones on cash flow maybe for Kelly first accounts receivable the last two years.
It's been about a drag of $80 million this quarter much better only about 29 million wondering what changed there in terms of cash collections and then secondly in terms of the legal settlement. If you can just quantify and let us know maybe when we should.
Anticipate that thanks.
In terms of the.
This settlement Matthew we it's not clear exactly when that will be completed in terms of the payments. That's why we said for the full year we're updating.
It could be in Q2 could also be in Q3. That's why we just wanted to give you visibility into that and then in terms of your first point about collection.
Part of that honestly is just the continued improvement that we're seeing in our team around collections and our ongoing dsos.
And also as we've seen online.
When theres more online, especially annual bat is the online is mostly paid via credit card. So that is an improvement in terms of our DSO is usually as thats growing at that the dsos on online are about three days.
That helps.
And the legal settlements if you could just quantify how much of that is it's exactly the amount that the difference between our previous guidance that there was limited. This way there was no other change to our cash flow outlook other than the anticipated potential net legal settlements.
Okay. Thank you.
Shep, Lisa Rafi with SBA Securities has the next question. Thank.
Thank you very much. So you were pleasantly guiding for your enterprise growth rate to decelerate to something like 6% in Q2, and maybe 3% to 4% in the back half.
Was only double digits in the past so.
I know you have a lot of changes this year with Salesforce et cetera. After this year or do target double digit growth in enterprise was an upper single digit growth rate.
Related the online business is stabilizing FRE for the next few quarters it looks like.
Q4, W zero growth versus negative growth is it a growth business afterwards as well I'm just looking after this year is online our growth businesses enterprise low double digits.
Single digit growth rate business.
All of the investments that we're making today are focused on growing the topline and investing in ways to do that for the future for both online and the direct business. So that innovation is expanding our platform. It's focusing on investing in the go to market teams in terms of what we've talked about it.
I would like to contact center, adding later to Europe really focusing on marketing in the in the right way and we haven't obviously given FY 'twenty by the guidance, but the goal is and we've talked about before starting to see reacceleration of growth as we exit FY 'twenty four and having that.
Continue into FY 'twenty five.
So early in the year of FY, 'twenty, four but lining up everything to anticipate reacceleration as we exit the year.
In the enterprise.
So I'm just thinking to enterprises.
Upper single digits, where a low double digit growth rate the way youre targeting it I'm not guiding just targeting yeah, I'm not going to get that specific especially this early we will be prepared more can you talk about that later this year. Okay. Thank you.
And we'll move on to Karl Keirstead with UBS.
Great.
Kelly just to follow on that conversation about driving for acceleration next year and earlier on you talked about innovation being a huge priority that seems to me like there's the potential to shift a little bit the growth margin trade off as you invest to drive growth next year I'm wondering if you're intending to signal that.
Hi, 30%, 40% margins everybody on the call should consider sort of a peak and then if I could ask a clarification did work vivo impacts at all your.
Your guidance for this year. Thank you, yes. Thank you Carl So as a quick reminder, our long term target operating margin is lower much lower than where we are operating today and that is as we said in the past.
<unk> give us the opportunity as we see opportunities for investment to do so we're really focused on doing everything we can to drive topline growth. We continue to take market share in the period of time, where we've had slower growth we've been focused on balancing that with profitability, but as we see opportunities we absolutely could bring.
Our margins down.
So yes, I think we're at probably the peak of where our margins are.
But again, we're always being very thoughtful about growth and profitability and balancing both of those and then in terms of their work vivo team.
Given their amazing and we're really excited about bringing them into the family, but they're having really I would say minimal impact on both the topline and the bottomline today okay.
Okay. Thank you yes.
We have time for one additional question, which will come from Sterling Auty with Moffett Nathanson.
Great. Thanks, guys hopefully my connection holds up just wondering back on the enterprise given the online $480 million a quarter.
Stabilization it implies the enterprise revenue is well below street consensus Jade, we analysts just have mixed bottles.
Or was the disruption or something having a bigger impact on the online or on the enterprise business for the rest of the year.
But I think there's two things I think first of all we've seen online stabilize much more quickly than we anticipated or than we had been indicating to all of you. So I think that the overall mix for the year is probably shaping up to be a little bit different than.
Than you anticipated and even honestly that we anticipated at the beginning of the year and then we're doing as I said, we're doing everything we can to focus on supporting our direct sales organization the distraction in Q1.
With with not de Minimis right. It was as I said it was across not only the reduction, but also a reorganization and some changes to incentives and comp plans and so.
We're very happy that Thats, all behind US now and we're all looking forward to do everything we can to support them and regained momentum there.
Sounds good thank you.
And again this does conclude our question and answer session. So I'll pass it back to you Eric for any closing or additional remarks.
Thank you all for time really appreciative for all your support and thank you see you all next.
I appreciate it.
And again.
Sorry, Kelly and again this does conclude todays earnings release, we thank you all for your participation. So go enjoy your summer and we will see you next quarter.
The recording has stopped.