Zoom - Q1 2024
May 22, 2023
Transcript
Kelsey Knight (Corporate PR Lead)
Well, hello everyone, and welcome to Zoom's Q1 FY 2024 earnings release webinar. As a reminder, today's webinar is being recorded. Now I will hand things over to Tom McCallum, head of investor relations. Tom, over to you.
Tom McCallum (Head of Investor Relations)
Thank you, Kelsey. Hello everyone, welcome to Zoom's earnings video webinar for the first quarter of fiscal year 2024. I'm joined today by Zoom's founder and CEO, Eric Yuan, and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed, may be downloaded from the investor relations page at investors.zoom.us. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first, second quarter and full fiscal year 2024.
Our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategies, and business aspirations, and product initiatives and expected benefits from such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today's webinar. With that, let me turn the discussion over to Eric.
Eric Yuan (Founder and CEO)
Hey. Thank you, Tom. Thank you everyone for joining us today. As we continue to execute on the strategic focuses, which I shared with you all last quarter, we are very grateful for the support, feedback, and trust that we have received from our customers and investors. Last month, we closed our acquisition of Workvivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social intranet and employee app into one central hub, forming the heart of a company's digital ecosystem. Incorporating Workvivo's feature-rich technology into our All-in-One collaboration solution will allow us to offer Zoom customers a unified platform that keeps knowledge workers and frontline employees informed, engaged, and connected throughout the workday, regardless of in-person, remote, or hybrid work style.
According to Enterprise Apps Today, communicative employers have mobile workers who are five times more productive and feel three times less burnout. The Workvivo team is working very hard to capitalize on this opportunity, and is 100% aligned with our culture of deliver happiness to customers and employees. We are so excited to join forces with Workvivo and help our customers raise the bar for employee communication and engagement. Last quarter, we reiterated our strong positioning in AI and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made considerable progress towards that vision. We outlined our approach to AI is to drive forward solutions that are Federated, Empowering, and Responsible. Federated means flexible and customizable to businesses' unique scenarios and nomenclature.
Empowering refers to building solutions that improve individual and team productivity, as well as enhance the customer's experience. Responsible means customer control of their data with an emphasis on Privacy, Security, Trust, and Safety. At Enterprise Connect, we unveiled Zoom IQ's new set of in-beta features leveraging generative AI to support Chat and Email Compose and Meeting Summary. We are also building new features to summarize long chat threads, catch up tardy meeting participant on what they missed, and brainstorm in whiteboard. Last week, we announced our strategic investment in Anthropic, an AI safety and research company working to build Reliable, Interpretable, and Steerable AI systems. Our partnership with Anthropic further bolsters our federated approach to AI by allowing Anthropic's AI assistant, Claude, to be integrated across Zoom's entire platform.
We plan to begin by layering Claude into our Contact Center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in Beta, Zoom Workforce Engagement Management. With Claude guiding agents towards trustworthy resolutions and empowering self-service for end users, companies will be able to take customer relationships to the next level. Moving on to some of our customers' wins. I would like to thank Major League Baseball. MLB has long used the power of the broader Zoom platform to strengthen its connection to fans and teams. This quarter, we expanded our relationship by launching a first of its kind of partnership that leverages Zoom Contact Center to enhance real-time replay reviews and then deliver increased transparency to baseball fans. By introducing Zoom Technologies into operations on and off the field, MLB strives to create an engaging and a unique experience for its fans and teams.
I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom Phone seats, as well as Zoom Contact Center to their Zoom Meetings deployment. We brought Responsiveness, Reliability, and Regulatory Compliance to this large expansion. Virginia Tech leveraged Zoom's unified communication platform to build a next-gen solution integrated across meetings, phone, and a Contact Center to serve the entire university community. I would also like to thank Vensure Employer Services, which has grown its workforce significantly the past few years through hiring and M&A. In Q1, Vensure expanded their existing footprint with us by adding approximately 10,000 Zoom Phone seats and 800 Zoom Contact Center seats, as well as our AI-powered Zoom Virtual Agent and Zoom IQ for Sales.
It's so exciting to see customers leverage our natively integrated Phone plus Contact Center solutions and invest in our next generation AI-enabled products across their businesses. Finally, I want to thank My Plan Manager, Australia's leading services provider for the National Disability Insurance Program. MPM chose Zoom Contact Center for its attractive total cost of ownership, a deep integration with Salesforce, and the vision and future roadmap for customer experience. Our journey did not end with Contact Center. Appreciating the value of the platform, they also decided to standardize on Zoom One. We're so happy to partner with MPM to help them deliver a world-class customer and employee experience to their clients and disability service providers. Again, thank you so much MLB, Virginia Tech, Vensure Services, MPM, and all of our customers worldwide. With that, I'll pass it over to Kelly. Thank you.
Kelly Steckelberg (CFO)
Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q1. Here are a few milestones. First, our non-GAAP gross margin of 80.5% exceeded our long-term target. Second, after adjusting for the three fewer days in the quarter, our Online revenue was slightly up sequentially. Last, the moment you've all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter. In Q1, total revenue came in at $1.105 billion, up 3% year-over-year, and 5% in constant currency. This result was approximately $20 million above the high end of our guidance. Our enterprise business grew 13% year-over-year and represented 57% of total revenue, up from 52% a year ago.
As I mentioned in the quarterly milestones, our Online business improved meaningfully in the quarter as it benefited from many initiatives, including the price increase and buy flow optimization. In addition, we saw Online average monthly churn decrease to 3.1% from 3.6% in Q1 of FY 2023 and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected. The number of Enterprise customers grew 9% year-over-year to approximately 215,900. Our trailing 12-month net dollar expansion rate for estimate Enterprise customers in Q1 came in at 112%.
We saw a 23% year-over-year growth in the upmarket as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 24% in Q1 of FY 2023, and span diverse industries such as healthcare, education, government, and more. As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent Sales reorganization. Despite the distraction, our America's 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 headcount 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 on to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, 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 80.5%, 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 2024, we still expect non-GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies. 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 9.6% from 7.9% 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 7.6% of total revenue, down from 8.6% 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, an 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 $0.18 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 was $1.4 billion, up 3% year-over-year from $1.3 billion. This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter.
Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.5 billion, up 16% year-over-year from $3 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 63% in Q1 of FY 2023 and 56% in Q4 of FY 2023. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent enterprise deals arising from uncertainty in the macro environment. We expect Q2 deferred revenue to be down 2%-4% year-over-year, which takes into account the recent trend of shorter durations on Enterprise deals and our renewal seasonality, which peaks in Q1 and declines 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 a net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY 2024. We now expect free cash flow to be in the range of $1.14 billion-$1.19 billion.
In FY 2024 and going forward, we expect our smallest cash tax payments to occur in Q1 and the largest to occur in Q2. Turning to guidance. For Q2, we expect revenue to be in the range of $1.11 billion-$1.115 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 $405 million-$410 million. Our outlook for non-GAAP earnings per share is $1.04-$1.06 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 2024. We are pleased to raise our top line and profitability outlook for the full year of FY 2024. We now expect revenue to be in the range of $4.465 billion-$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 $1.63 billion-$1.65 billion, representing a non-GAAP operating margin of approximately 37%.
Our tax rate is expected to approximate the US 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 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 brands in the world. In Q1, we made some very tough decisions related to team size, structure, and incentives that have 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.
Kelsey Knight (Corporate PR Lead)
Thank you so much, Kelly. As Kelly mentioned, we will now move into the Q&A session. When I call your name, please turn on your video and unmute. As a reminder, in an effort to hear from everyone, please limit yourself to one question. Our first question will come from Goldman Sachs' Kash Rangan. Kash, go ahead and come on video for us and unmute if you would, please. All right. Hearing no response, we'll go ahead and move on to Meta Marshall with Morgan Stanley.
Meta Marshall (Managing Director)
All right. I think I got mine to work. Perfect. Appreciate it. You know, I noted that you were taking down kind of, or not taking down, but giving back some of the growth 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 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 to make. Thanks.
Eric Yuan (Founder and CEO)
Yes, great question. I think it looks like everyone, you know, seem to have just woken up to AI. Actually, we have been busy on AI front for a few years. You look at, the past several, you know, two of the largest acquisitions, right? You know, Solvay and CAT, right? All of them are AI-based. Internally, we also have a AI team as well, because we understand the importance of AI, you know, in particular driven recently by the generative AI momentum. I think first of all, we do have our own AI team. We have our own internally developed AI models as well. We also will take a very open approach. You know, essentially, we announced our, you know, and federated, approach to AI. You know, we announced the collaboration with OpenAI, the Enterprise Connect.
We also doubled down our partnership with Anthropic recently as well. Down the road, you know, maybe some open source AI models available, we are also going to embrace that. Again, you know, we look at everything from the end user perspective, right? You know, first of all, you know, we have a team really dedicated on AI. Also when we sit down with the customers, sometimes customers say, "Yes, we like Anthropic model." Yes, why not? We doubled down that partnership. You know, we can leverage their API as well, right? We are taking a federated approach, which is to put a customer, you know, centric, right? That's why we are very, very excited about this AI, you know, momentum, can truly improve our product experience.
Meta Marshall (Managing Director)
Great. Thanks.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
Moving on to Michael Funk with Bank of America.
Michael Funk (SVP)
Yes. Hi. Thank you, guys. Another question for you, Eric, if I could. Just some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate SKU? How do you monetize AI within your platform?
Eric Yuan (Founder and CEO)
It's a great question. I would say the answer is, you know, about both. You know, you take a, you know, our Zoom IQ for Sales, for example, right? It's extremely important, right? When you send all the sales people back at home or work remotely, how to help them, you know, to improve their productivity. That's the reason why we announced Zoom IQ for Sales, and even way before, you know, the generative AI momentum, right? Internally developing, you know, large language models really helped us, right? We can monetize that AI-empowered Zoom IQ for Sales product.
At the same time, you look at our, you know, feature-rich collaboration portfolio, you know, like a Meeting Summary, the Email and the Chat Compose, you know, compose a chat message, and a Zoom Contact Center Virtual Agent, and also, you know, recently, you know, in beta, right, workforce management solution as well. All of them will be empowered, you know, based on the AI, you know, the platform, right? On the one hand, we leverage AI to look at almost every features we have. I had to empower those features, you know, and also elevated the customer, you know, the product experience. At the same time, a lot of monetization opportunities, right? Zoom IQ for Sales is just one example, right? As we have more opportunities for us.
We think AI does bring tremendous opportunity for us because, you know, we're focused on communication. I take a Workvivo, for example, right? We just acquired them. It's employee communication and engagement platform. You know, how to leverage AI to improve that product experience, that's another example. Full of opportunities here at Zoom with AI.
Michael Funk (SVP)
Great. Thank you, Eric.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
All right, let's go to Kash again with Goldman Sachs. Kash, I think you're out there driving, so he's gonna stay off video.
Kash Rangan (Managing Director)
Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human, I just will turn on that video very quickly on. Eric, I'm curious to get your take. I want you to, if you don't mind, drill a little bit deeper into generative AI. While a lot of software companies are announcing partnerships with LLMs 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 differentiate them going forward, right? In that regard, just so there's a scenario everybody in UCaaS will ultimately have a generative AI strategy.
When you start to have these LLMs work with your core products, given the vast user base and behaviors that you have contained in your knowledge base, how do you think Zoom is uniquely qualified to get productivity scenarios that are very unique to Zoom? Sorry, using the same word again. That could be more enduring as a source of competitive advantage? The first chapter of UCaaS was all about providing that core capability of the technology, which you did an amazing job of. I'm curious the next leg of productivity growth and how you can take this company forward. Thanks so much.
Eric Yuan (Founder and CEO)
Yeah, it's a great question. You know, we have a great integration with the Tesla cars, right? If you use, drive a Tesla, it's just one click and join the call. You know, even if you can't turn over the video, the audio will be always on. Back to your AI question. I think first of all, you know, you look at the generative AI, you know, two things are very important, right? First of all, you know, if you do not, if you do not start a few years back, just then, you know, given the what's going on in the AI industry, AI world, you say, "Oh my God, a lot of things." However, we already started investing in AI a few years back. We should understand that.
The reason why, you know, our Zoom IQ for Sales was developed based on our own, you know, internally developed large language model. Having said that, two things, you know, really important. One is just the, you know, model, right? OpenAI has a model, Anthropic and Facebook as well, you know, Google and those companies. Most important thing is how to leverage these models to fine-tune based on your proprietary data, right? That is extremely important. When it comes to, you know, collaboration communication, right? You know, take a Zoom, you know, employee for example. We have so many meetings, right? Talk about, you know, in every day, like our Sales team, you know, use the Zoom call to with the customers. We accumulated a lot of, you know, let's say internal meeting data.
How to fine-tune, you know, the model with those data is very important, right? Not only just for the AI model itself, because it will evolve for sure, you know. Also, we're also going to embrace. At the same time, how to leverage our proprietary data to fine-tune these AI models towards our industry, that's very important. You know, look at, you know, meeting, take a meeting for example, right? I think, you know, this is, you know, probably, you know, we have way more data than anybody else, right? Given the, you know, all the past many years experience, how to fine-tune that model with, you know, those data. I think this is our unique will help us to deliver unique experience to customers.
If any other company even have, let's say you have a greater AI model, however, how to fine-tune it's a lot of effort, right? That's the reason why we think that's, you know, something unique for us to truly empower AI to, you know, deliver a differentiated experience, you know, to our customers.
Kash Rangan (Managing Director)
Very persuasive. Thank you so much, Eric.
Eric Yuan (Founder and CEO)
Thank you. Appreciate it.
Kelsey Knight (Corporate PR Lead)
We will now hear Oh, so sorry. Please continue. We'll move on to Tom Blakey with KeyBank.
Tom Blakey (Senior Research Analyst)
Hi, everyone. Thank you for taking my question, Kelly and Eric. Good to see you guys. You know, a large competitor of yours has been in the news lately with Microsoft possibly needing to create a separate SKU for their Teams product in terms of debundling that product. I know how important the collaboration component is to Zoom's vision of becoming the communications operating system for large enterprises. Just noting with Kelly's updated color in terms of Online with the Online business stabilizing, which is great, the implied guide for the Enterprise business is for a you know, pretty good decel into the second half.
Just wondering how Zoom's thinking about, if at all, the potential impact or opportunity there, just again understanding the importance of the collaboration component to your product. Thank you.
Kelly Steckelberg (CFO)
Well, as we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is necessarily related to competition and more due to, as we expected, some distraction internally due to the reorganization. We feel great about the structure of our sales organization now with Graeme, especially as our chief sales officer and Wendy leading the Online team, and that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. You know, we're just looking forward to seeing that come to light over the next couple of quarters.
Tom Blakey (Senior Research Analyst)
Okay, thank you.
Kelsey Knight (Corporate PR Lead)
Our next question will come from Parker Lane with Stifel.
Parker Lane (Managing Director of Equity Research)
Yeah, guys. Thanks for taking the question. Kelly, I was hoping you could give us a better understanding of just how to what degree contract duration's actually compressed during the quarter, how much that will be an impact as we progress through the year. Is that more of a factor in any particular product set, or was it pretty much across the board?
Kelly Steckelberg (CFO)
Yeah, it was pretty uniformly across our direct segment of the business especially. Trying to be thoughtful about every decision, which is every buying decision, I should say, which is not new. It's just giving themselves, you know, time to make sure that they're getting the product deployed. We expect it to be, you know, not long-term in nature, but in order to reflect that, you know, we've updated our guidance based on, as we talked about, deferred revenue as well for the coming quarter.
Parker Lane (Managing Director of Equity Research)
Got it. Appreciate the color. Thank you.
Kelsey Knight (Corporate PR Lead)
We will now hear from Peter Levine with Evercore.
Kelly Steckelberg (CFO)
Hi, Peter.
Peter Levine (Managing Director)
Hi. Thank you for taking my question. Maybe, Eric, one for you is, you know, when you think about the use case of AI, and you think across, like, phone, you know, video, Contact Center, you know, where do you envision seeing the most, you know, kind of uplift in terms of, you know, client adoption of AI? Just curious to know where you're seeing that today?
Eric Yuan (Founder and CEO)
I think on many fronts, right? You know, like take a Anthropic, you know, investment, for example, right? For sure we are going to leverage that, you know, not for the entire, you know, portfolio, but we are gonna start it from a Contact Center. You know, the Virtual Agent and, you know, the Contact Center related features. Also look at, you know, our core meeting platform, right? A Meeting Summary is extremely important, right? It's also, we have, you know, the, our Team Chat solution, and also how to leverage that to compose a chat. You know, remember last year we also have a email calendar as well, how to, you know, leverage the generative AI to understand the context, right? You know, kind of bring all the informations, you know, relative to you and it's help you auto-generate the message, right?
When you send an email, you know, back to a customer or prospect, right? Either chat a message or email, right? You can leverage generative AI as well, right? I think a lot of areas. You know, even like say maybe you might be late to the meeting, right? You know, 10 minutes later you join a meeting. You really wanna understand what, you know, had happened, right? You know, can you get a quick summary, you know, all the positive minutes? Yeah, you just also leverage generative AI as well. You also can get that as well. It's kind of almost a lot of key use cases. I think, you know, we'll be empowered, you know, by those AI, you know, the capabilities. That's why we are looking at almost every area, right?
How to leverage generative AI to improve that experience. You know, take OpenAI, for example. This is a great company, and also a lot of companies are leveraging their AI. You know, not only bigger companies, small companies. We also announced a collaboration with them at Enterprise Connect, right? That's why, you know, as I said earlier, you know, three things, right? You understand the, you know, the large language model, how to fine-tune that with your own data, and also revisit almost every feature you have. Are there any ways to empower those features? Are there any ways to monetize? You know, that's why we take a holistic approach, and also we like our federated approach to AI.
By the way, internally, we do have AI team which should understand the large language models, not something, you know, other companies you just, you know, have one cloud to AI, so.
Peter Levine (Managing Director)
Thank you.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
Moving on to Rishi Jaluria with RBC.
Rishi Jaluria (Managing Director of Software Equity Research)
All right. Wonderful. Thank you so much for taking my questions. Eric, I wanna stay on the AI train for a little bit. You've obviously talked about some great use cases, and it feels like there's a big opportunity. I wanna ask about maybe the potential to start to verticalize some of the AI solutions because, you know, it 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, and I'm sure that's one being discussed internally. I just wanna understand maybe how are you thinking about that opportunity to verticalize, and is that something that can make maybe direct monetization a little bit more easy 'cause the value prop is very straight out of the box? Thank you
Eric Yuan (Founder and CEO)
Yeah, that's a great question. By the way, I downloaded OpenAI mobile iOS app. I should ask OpenAI ChatGPT, you know, to answer to that question. Anyway, you are so right on. When it comes to vertical, you know, vertical, I would say the opportunity, there are two things. One is departmental level, another one is vertical industry, right? You look at our Zoom IQ for Sales, specifically targeted sales use case or sales department, right? Contact Center is for support department. You are so right. Down the road, HR department or even marketing, almost every department, they all use Zoom, right? How to leverage AI to build a differentiated, you know, the solution, right? That is the opportunity. That's one, you know, opportunity. Another opportunity, read about, you know, the vertical industry. Like, take healthcare for example.
Zoom by far is number one on telematics, right? You know, how to leverage that, right? With, you know, those proprietary data, right? Also working together with the customers, right? Fine-tune this AI model, right? You know, this is one example. Another example is a lot of law firms are also using Zoom as well, right? You know, how to leverage AI to truly empower those use cases is also another opportunity. I think, as I said earlier, AI truly bring tremendous opportunity to us, you know, we got to leverage that. The good news, we already heavily invested in this area for a few years.
Rishi Jaluria (Managing Director of Software Equity Research)
Awesome. Thank you so much.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
Our next question comes from Catharine Trebnick with Rosenblatt Securities.
Catharine Trebnick (Managing Director)
I got it. Thank you.
Kelsey Knight (Corporate PR Lead)
Sure.
Catharine Trebnick (Managing Director)
All right, in the last two years a lot of changes has happened. First, everybody worked from home, and now people are going back to the office. Has that actually changed any of your opportunities when you're looking at marketing your products? I was thinking in terms of Zoom Rooms, and then some of the areas where you want everybody to be equal in your Zoom Rooms viewing. Has that changed anything? Have you seen anything different from that?
Eric Yuan (Founder and CEO)
Yeah, it's a great question. It's good news this question not about AI anymore. So you are so right. I think during the COVID, right, there's a lot of consumer use cases, right? Almost every family, they have a video conferencing account, like a Zoom account, right? You know, after the COVID, I think that, you know, you look at a usage, right, you know, consumer centric usage, I think less and less. However, to support a hybrid work, you know, enterprise customers, you know, they are going to leverage video conference more and more. Not only just to support remote work, you know, when you, when you try to support a hybrid work, then, you know, how to reserve a desk, all those are basic features, right?
You know, how to make sure, you know, you know, when you know, join a meeting, you know, from the conf room, right, remotely people they can see you, right? Not only just one big, you know, square, right? Everyone, you know, who are sitting in the conf room, you know, equally we have a square as well, the Zoom square, right? So those kind of experience extremely important, right? A lot of features are built, you know, upon enabling hybrid work, right? That's, you know, even Workvivo is another example, right? You know, during the hybrid work, right, you know, quite often user chat, Zoom Team Chat, use the email, or use the phone call or meetings.
Sometimes, you know, also want to, you know, announce a very exciting news and record a video, how to distribute those to employees, and sometimes even to customers. That's the reason why we're part of Workvivo as well. I think hybrid work is going to stay. That's the reason why in a lot of new use cases, right? How to double down on that. You know, take a, you know, conf room for example. You know we have, you know, the Smart Gallery view feature, right? Customers like that. However, in some cases, customers say, "I still done the work. I have a huge conf room. How to support that?" That's the reason why we are working on supporting three cameras, right? That's another way to embrace hybrid work. I think hybrid work does bring another, you know, kinds of, you know, huge opportunity to us.
You know, especially, it's hard to convince everyone back to office five days a week, even for us. You know, even if I talk with many CEOs, everyone, you know, wanted, right, sometimes they wanted his employees more. However, you know, this is kind of to let employee work anywhere, it sort of become a fashion. It's hard to force employee back at home. That's why you have to embrace hybrid work. That's the reason why Zoom can play a much bigger role to support a hybrid work.
Catharine Trebnick (Managing Director)
All right. Thank you.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
William Blair's Matt Stotler has the next question.
Matt Stotler (Equity Research Analyst of Software and SaaS)
Yeah. Hey there. Thank you for taking the question. Maybe just one on the Contact Center side. You obviously continue to innovate on the, on the product front for Contact Center, but last time we got a deep update. There was still some honing that was needed in the go-to-market front. We'll just get an update on, you know, what you're seeing on that front, overall adoption in the Contact Center product suite, and then what you think are the keys to driving further adoption going forward.
Eric Yuan (Founder and CEO)
, you want to take it?
Kelly Steckelberg (CFO)
I can take that. Yeah. Our Contact Center leader is Scott Brown. He is a great addition to our team, and we are focusing from a go-to-market perspective now in the same way that we took Zoom Phone. We are hiring. We have some on board 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, as it's more of a technical sale, and give them the opportunity to eventually, over time, all become versed in how to sell Contact Center. We're in the process of that today, and as I said, we've approved more reps. We're excited about making the investment there.
Matt Stotler (Equity Research Analyst of Software and SaaS)
Got it. Thank you.
Eric Yuan (Founder and CEO)
Yep.
Kelsey Knight (Corporate PR Lead)
Moving on to William Power with Baird.
William Power (Senior Research Analyst of Cloud Software)
Great. Thanks. Yeah. I want to ask a question on Online. It's great to see, you know, that segment finally stabilizing. Maybe kind of two parts tied to that. You know, any early color with respect to the price increases and what you've seen out of that? As you look forward, for the guidance for Online, maybe just some broader framework for how you're thinking about both churn and top of funnel, and what gives you the confidence on both those fronts that this really is gonna stabilize the area?
Kelly Steckelberg (CFO)
Yeah. We've seen a very positive reaction to the price increase. When we, you know, came into the year and we were modeling it, we've actually seen better than expected retention rates in response to that, so that's been really great, as well as Wendy's done a lot of work around the Online buy flow, which has also seen a very positive response. We've talked about this in the past, but there's 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. Those are all the top of the funnel items you're referring to.
They've also done a lot of work to the flow when people, the cancellation flow when people come through, which is also contributing to the improved retention rates, and we feel great about them. They've been, you know, it was 3.1 in Q3, 3.4 in Q4, now 3.1 again, or maybe 3.4 and now back to 3.1 again in Q1. 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. It, the churn we're very pleased with, and we've seen the behavior exactly as we expected it coming back down in Q1.
That gives us confidence that it's gonna be within that range for the foreseeable future.
Eric Yuan (Founder and CEO)
Thank you. Yeah, by the way, just quickly to add on what Katie said, right? As we add more and more new services also can help us more upsell opportunities even for Online segment. Take a, you know, the Zoom Scheduler, for example. We announced that a new service, right? You know, some customers are already paid it for other services like a Calendar date, right? You know, customers say, "Yeah, I'd like it to go with Zoom," you know, deploy something similar, right? This is a part of the package, right? I think a lot of, you know, upsell opportunity for us to target Online segment as well. Great.
Kelsey Knight (Corporate PR Lead)
Thanks, William. Moving on to Siti Panigrahi with Mizuho.
Siti Panigrahi (Managing Director)
Thanks for taking my question. Eric, I just want to dig into this Workvivo acquisition. Do you see that a more of a long-term opportunity, or do you see that something that we can think of, you know, this is some sort of technology that you can cross-sell into their base, you know, in near term? What sort of, you know, is there some particular vertical or, you know, segment where you can see more tracks on there? Could you give some little bit, you know, elaborate in terms of revenue opportunity from that?
Eric Yuan (Founder and CEO)
Yes, it's a great question. First of all, you look at our collaboration platform, right? We really want to offer a unified communication and collaboration platform. You know, customers can live within the Zoom platform, right? Like in today's, one of the problems we are facing, customer also mentioned for us as well, right? You know, quite often, you know, they send all kind of message either to email, it's really hard to find, you know, not scalable, or you send a message through chat, you know, better than, you know, all those public channels, right? You know, customer also wanted to essentially like say, "I want, you know, a video message," right? "I want to share to the entire, you know, employee base and/or maybe a department news," right?
All those kind of, you know, content, right? Are there any other better ways to share and engage with employee, right? I think that's the reason why we think of Workvivo can play a bigger role, right? To focus on those kind of use cases, right? It's not only for the short term, you know, a key missing element of our entire product portfolio, but also in the long run also will help us a lot. Because of the AI, right? Because how do you make sure you have more data, right? Really, you know, collaboration, communication, you know, related data, right? It's Workvivo for sure. You know, every day we use, you know, engage with employees, you know, via the Workvivo platform, you generate lots of data, right?
All those data are very, I would say, is relevant and meaningful, right? How to leverage the AI, right? As I said, that's why, you know, in the long run, that certainly can help us more.
Siti Panigrahi (Managing Director)
Great. Thank you.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
Next question will come from George Iwanyc with Oppenheimer.
George Iwanyc (Executive Director)
Thank you for taking my question. Kelly, maybe building on the stabilization you've seen on the Online side, can you give us a sense of what your expectations are from an expansion rate on the Enterprise side, you know, as you look out over the next couple of quarters?
Kelly Steckelberg (CFO)
Yeah. We don't guide specifically around the expansion rate, but as a reminder, it is a trailing 12-month metric. Given that it's at 112% and, you know, you can look at where the Enterprise growth rate is, that possibly has the opportunity to come down slightly more until it starts to re-accelerate, as we expect, you know, both Online and direct revenue to start re-accelerating as we get to the back half of this year, and that the net dollar expansion rate is gonna trail behind that.
George Iwanyc (Executive Director)
Thank you.
Kelly Steckelberg (CFO)
Yeah.
Kelsey Knight (Corporate PR Lead)
Wolfe Research's Alex Zukin will have the next question.
Alex Zukin (Managing Director and Senior Analyst)
Hey, guys. Can you hear me okay?
Kelly Steckelberg (CFO)
Hi, Alex.
Alex Zukin (Managing Director and Senior Analyst)
I guess I'll try the two. It's kind of a two-parter. One is just a simple: how do you plan to monetize generative AI functionality in the product rather than, you know, making it a part of the overall experience? The second is from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-twenties last year in the first half to, you know, just over 5% in the second quarter guide implied. That's a much larger rate of decel than I think we all contemplated or thought. How do we? Is it upsell? Is it cross-sell? Is it new products that are launching? Is it later revenue recognition?
Like, what is it that's driven that rate of decel, and how do you know, re-accelerate, obviously, but how do you get back to a double-digit growth rate in that regard? 'Cause it seems like that's where a lot of the valuation oomph is coming from for the stock.
Eric Yuan (Founder and CEO)
Yeah, Kelly, I address the first one. You take it a second one. I think in terms of how to monetize generative AI, I think, you know, on, you know, first of all, you know, take a Zoom IQ for Sales, for example. That's a new service to targeted sales department. You know, that AI technology is based on generative AI, right? We can monetize. Also seeing some features. You know, take a, you know, even before the generative AI popularity, we have a live translation feature, right?
Also, that's not a free feature. It is a paid feature, right? Behind the paywall, right? Also a lot of cool features, right? You know, like, you know, take a, you know, the Zoom Meeting Summary, for example. For Enterprise, you know, and the customers, if you deploy Zoom One, you know, deploy Zoom One, they will have those features, right? For tons of customers, you know, see like free, all those SMB customers, they did not deploy Zoom One, they may not get those feature, right? That's the reason, another reason for us to monetize. I think there's multiple ways to monetize. Yeah.
Kelly Steckelberg (CFO)
In terms of the Enterprise outlook, as I mentioned earlier, you know, we expected the distraction in Q1 as there was impact to the sales org, not only from the reduction but also reorganization. We feel really good about the structure of the sales organization now. We've 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 haven't had before, so really excited to have Frederick join us. All of these I think put us to bring us to be very well-positioned to execute for the rest of the year and now we're looking to the sales team to do exactly that.
You know, we talked about we have an amazing platform that's there for them to sell. We're all rallying behind them to support them to see them execute.
Alex Zukin (Managing Director and Senior Analyst)
Perfect. Thank you, guys.
Eric Yuan (Founder and CEO)
Thank you.
Kelsey Knight (Corporate PR Lead)
Moving on to Michael Turrin with Wells Fargo.
Michael Turrin (Managing Director, Senior Analyst)
Hey there. Thanks. good to see everyone. Kelly, on the billings deferred revenue side, you came in a little bit ahead of what you were guiding for, a few percentage points from last quarter despite some duration impacts. I'm wondering if there's any way you can help us quantify those duration impacts either on Q1 or the Q2 guide and anything else you can provide just to help us think through seasonality as you've now passed the heavier renewal period, but mentioned maybe some sales transition impacts still out there. Just help us think through what's contemplated in the guide from a few different levels. Thank you.
Kelly Steckelberg (CFO)
Yeah. I think on the 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 that's 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 it in terms of RPO. You know, 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 bundles, Zoom One, Contact Center, Zoom Phone, those are all products that customers are gonna commit to for the longer term. I think as you continue to see more and more of those in our pipeline and being sold by the Enterprise team, that duration impact will start to expand again.
Then, you know, in terms of the balance between Enterprise and Online, we're, you know, thrilled that Enterprise has stabilized a little bit earlier than we expected. Given the days in the month, you know, the days in the quarter, that's why we gave a more specific view, because it's a little bit tricky when you look at it for the rest of the year. You know, the guidance contemplates all 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 restabilization, if you will, of our direct sales org at the same time.
Michael Turrin (Managing Director, Senior Analyst)
Okay. Thank you.
Kelly Steckelberg (CFO)
Yeah.
Kelsey Knight (Corporate PR Lead)
Ryan MacWilliams with Barclays has the next question.
Ryan MacWilliams (Software Equity Research Analyst)
Great. Appreciate it, guys. Congrats on Zoom Phone reaching 10% of sales. Just thinking back a few years-
Kelly Steckelberg (CFO)
Thank you.
Ryan MacWilliams (Software Equity Research Analyst)
Pretty amazing that this metric only came after reaching 5 million phone seats. Quite the run. look, I love all the AI questions so far, but I guess I'll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to the Online segment versus the Enterprise segment? Have you seen any changes at renewal on the Enterprise side, maybe from an Enterprise logo like current standpoint? Thanks.
Kelly Steckelberg (CFO)
No. Our Enterprise renewals, as you know, Q1 is our highest seasonal quarter, the renewals were exactly in the range of where we expected them to be for the quarter. That was really great to see. In terms of Online, you know, where we've seen strength, we've already talked about, I think it's increasing the top of the funnel. We've also continued to see strength in annual plans, which is great, this is due to the ... Just a reminder, when we did the price increase, we didn't increase the price for the annual plan. It just shows customers, you know, committing to the amazing value that they see in Zoom and the discount that they get for committing to the long term.
Of course, that's amazing for us because the lifetime value of those annual customers is so much greater.
Ryan MacWilliams (Software Equity Research Analyst)
Appreciate the color. Thank you.
Kelsey Knight (Corporate PR Lead)
Patrick Walravens with JMP Securities has the next question. I'm not sure he's out there. Patrick, do you wanna come off mute and start your video for us? All right. Hearing no response, go ahead.
Patrick Walravens (Managing Director and Director of Technology Research)
I'm gonna ... I'll come off mute.
Kelsey Knight (Corporate PR Lead)
Okay.
Patrick Walravens (Managing Director and Director of Technology Research)
I'm gonna turn off the video, and you can see why. Eric, can you talk to us a little bit about sort of the, [audio distortion] and what part of that is appealing to you guys?
Kelsey Knight (Corporate PR Lead)
Patrick, so sorry. Your audio is cutting out for us. Will you try one more time? Unfortunately, we might have to skip you if it doesn't improve. Try again, please.
Patrick Walravens (Managing Director and Director of Technology Research)
Oh, no worries. Eric, can you just talk a little bit more about Anthropic and what they believe in?
Eric Yuan (Founder and CEO)
Sure, sure.
Kelly Steckelberg (CFO)
You heard Anthropic, yeah.
Eric Yuan (Founder and CEO)
Yeah. I think, yeah, Anthropic, you know, is a greater partner and is this greater team. When we look at AI landscape, I think why not double down on that partnership, right?
Given our federated AI approach, right? Internally we discussed that. Happened to be, you know, they are in the middle of raising another round of financing, right? That's why how to solidify our partnership, right? Again, they are greater team and a greater technology, and I think this is no-brainer for us. We invest in them, right? To further, you know, solidify the partnership. Yeah, so that's pretty much because, you know, look at our Contact Center, right? It will further empower our Contact Center offering, right? Also down the road will be applied to, you know, entire, you know, product portfolio. Again, this is very important, you know, to our federated approach to AI, and that's the reason why we invested them, so.
Kelsey Knight (Corporate PR Lead)
Thanks, Patrick. We'll go ahead and move on to Matthew Niknam with Deutsche Bank.
Matthew Niknam (Director of Equity Research)
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's changed there in terms of cash collections. Secondly, in terms of the legal settlement, if you can just quantify and let us know maybe when we should anticipate that. Thanks.
Kelly Steckelberg (CFO)
Yeah. In terms of the settlement, Matthew Niknam, it's not clear exactly when that will be completed in terms of the payment. We said for the full year we're updating. It could be in Q2, it could also be in Q3. We just wanted to give you visibility into that. In terms of your first point about collections, I think, part of that honestly is just the continuing improvement that we're seeing in our team around collections and our ongoing DSOs. Also, as we've seen Online, you know, when there's more Online, especially annual, the Online is mostly paid via credit card, that is an improvement in terms of our DSOs usually as that's growing. Because the DSOs on Online are about three days. That helps.
Matthew Niknam (Director of Equity Research)
The legal settlement, if you could just quantify how much that is?
Kelly Steckelberg (CFO)
It's exactly the amount that's the difference between our previous guidance. Let me say it this way. There was no other change to our cash flow outlook other than the anticipated potential net legal settlement.
Matthew Niknam (Director of Equity Research)
Got it. Thank you.
Kelly Steckelberg (CFO)
Yeah.
Kelsey Knight (Corporate PR Lead)
Shebly Seyrafi with FBN Securities has the next question.
Shebly Seyrafi (Senior Managing Director of Technology and Software Research)
Yeah, thank you very much. You're implicitly guiding for your Enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3%-4% in the back half. It was only double digits in the past. I know you have a lot of changes this year with the Salesforce, et cetera. After this year, do you target double-digit growth in Enterprise, or is it like an upper single-digit growth rate? Also related, the Online business is stabilizing at $480 for the next few quarters it looks like. If Q4, that means zero growth versus negative growth. Is it a growth business afterwards as well? I'm just looking after this year, is Online a growth business? Is Enterprise low double digits or an upper single-digit growth rate business?
Kelly Steckelberg (CFO)
All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both Online and the direct business. That's innovation, it's expanding our platform, it's focusing on investing in the go-to-market teams in terms of what we've talked about earlier, like the Contact Center, adding leader to Europe, really focusing on marketing in the right way. We haven't obviously given FY 2025 guidance, but the goal is, and we've talked about before, you know, starting to see re-acceleration of growth as we exit FY 2024 and having that continue into FY 2025. I mean, we're so early in the year of FY 2024, but lining up everything to anticipate re-acceleration as we exit the year.
Shebly Seyrafi (Senior Managing Director of Technology and Software Research)
And the Enterprise?
Kelly Steckelberg (CFO)
Across potentially all-
Shebly Seyrafi (Senior Managing Director of Technology and Software Research)
No, I'm.
Kelly Steckelberg (CFO)
Segments.
Shebly Seyrafi (Senior Managing Director of Technology and Software Research)
I'm just saying the Enterprise, is it up, upper single digits or a low double-digit growth rate? The way you're targeting it. Not guiding, just targeting it.
Kelly Steckelberg (CFO)
Yeah. I'm not gonna get that specific, especially this early. We'll be prepared, more prepared to talk about that later this year.
Shebly Seyrafi (Senior Managing Director of Technology and Software Research)
Okay. Thank you.
We'll move on to Karl Keirstead with UBS.
Karl Keirstead (Managing Director of Software Equity Research)
Okay, great. Hey, Kelly, just to follow on that conversation about driving for acceleration next year. 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, you know, high 30s, 40% margins, everybody on the call should consider sort of a peak. Then if I could ask a clarification, did Workvivo impact at all, your guidance for this year? Thank you.
Kelly Steckelberg (CFO)
Yes. Thank you, Karl. As a quick reminder, our long-term target operating margin is lower, much lower than where we are operating today. That is, as we've said in the past, to give us the opportunity as we see opportunities for investment to do so. We're really focused on doing everything we can to drive top-line growth and continue to take market share. In the period of time where we've had, you know, slower growth, we've been focused on balancing that with profitability. As we see opportunities, we absolutely could bring our margins down. Yes, I think we're at probably the peak of where our margins are, you know.
Again, we're always being very thoughtful about growth and profitability and balancing both of those. In terms of the Workvivo team, you know, given they're 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 top line and the bottom line today.
Karl Keirstead (Managing Director of Software Equity Research)
Okay. Thank you.
Kelly Steckelberg (CFO)
Yeah.
Kelsey Knight (Corporate PR Lead)
We have time for one additional question, which will come from Sterling Auty with MoffettNathanson.
Sterling Auty (Senior Managing Director)
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. Did we analysts just have the mixed model wrong, or was the disruption or something having a bigger impact on the Online or on the Enterprise business for the rest of the year?
Kelly Steckelberg (CFO)
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. I think the overall mix for the year is probably shaping up to be a little bit different than you anticipated, and even on the that we anticipated at the beginning of the year. You know, as I said, we're doing everything we can to focus on supporting our direct sales organization. The distraction in Q1 was 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.
You know, we're very happy that that's all behind us now, and we're all looking forward to do everything we can to support them and regain momentum there.
Sterling Auty (Senior Managing Director)
Sounds good. Thank you.
Kelly Steckelberg (CFO)
Yeah.
Kelsey Knight (Corporate PR Lead)
Again, this does conclude our question and answer session, so I'll pass it back to you, Eric, for any closing or additional remarks.
Eric Yuan (Founder and CEO)
Well, thank you all for your time. Really appreciative for all your support. Thank you, and see you all next meeting. Appreciate. Take care.
Kelly Steckelberg (CFO)
Bye, everybody.
Kelsey Knight (Corporate PR Lead)
Sorry, Kelly. Again, this does conclude today's earnings release. We thank you all for your participation. Go enjoy your summer, and we will see you next quarter.
