Zoom - Q2 2025
August 21, 2024
Transcript
Operator (participant)
Recorded. And now I would love to hand things over to Charles Eveslage, Head of Investor Relations. Charles?
Charles Eveslage (Head of Investor Relations)
Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal year 2025. 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 and 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 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 third quarter and full fiscal year 2025, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy, and business aspirations, and the product initiatives and expected benefits of 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 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 we may make on today's webinar. And with that, let me turn the discussion over to Eric.
Eric Yuan (Founder and CEO)
Hey, thank you, Charles. Thank you, everyone, for joining us today. We had a strong quarter marked by broadening our Zoom Workplace offering, marching upmarket with Contact Center, and deepening the AI capabilities that underpin our entire platform. The rollout of Zoom Workplace features over the last few months represent the most significant upgrade to the Zoom experience in years. We reinvigorated the UI with the simplicity and reliability that has defined Zoom from the very beginning, while also adding to the capabilities of Zoom Meetings, Zoom Team Chat, and Zoom Phone, and strengthening how AI Companion operates across these modalities. We also brought Zoom Rooms, Visitor Management, and Workplace Reservation to the next level in order to better support our customers' flexible work needs.
And just days ago, we announced the launch of a new Zoom Webinar offering that can host up to one million attendees, revolutionizing the way organizations can connect with massive audiences and demonstrating the clear scalability advantage inherent in our modern architecture. Earlier this month, we took another major step towards our platform vision by launching Zoom Docs.
Docs fits right into our strategy of expanding the platform across more touch points in the productivity life cycle, helping to effortlessly transform information from Zoom Meetings into actionable documents, tasks, and knowledge bases so team can stay focused on meaningful work. In Q2, we landed our largest deal for a new Contact Center customer, who chose our top-tier Elite CX package coupled with Zoom Phone. We are seeing increased adoption of our advanced Contact Center packages as customers seek to utilize our AI capabilities to enhance agent performance.
Of our top 10 contact center wins, all represented displacements of major contact center vendors, and 40% were migrations of our first-generation cloud-based solutions. These metrics highlight how well our contact center meets the needs of customers and prospects, while also validating our better together strategy. In fact, most contact center wins represent either existing Zoom Workplace customers who add on Contact Center, or new customers to Zoom who buy Contact Center in conjunction with Zoom Workplace. This demonstrates the desire for seamlessly integrated customer and employee experience solutions, which Zoom excels at delivering. The seamless integration of the customer and employee experience rests upon Zoom's AI Companion technology as a fabric to unify the whole platform.
Today, AI Companion enhances and employs capabilities using generative AI to boost productivity through features like a meeting summary, chat compose, image generation, live translation, and enhanced features in Contact Center. As these features have grown in popularity, we are very happy to share that Zoom AI Companion is now enabled on over 1.2 million accounts. But we have only scratched the surface. Our progress in broadening Zoom Workplace, building out enhanced AI tools for Contact Center, and amassing a large base of AI users sets us up well to transition into the 2.0 phase of AI-enabled work. In this phase, Zoom AI Companion will move beyond enhancing skills to simplifying your workday, providing contextual insights, and performing tasks on your behalf. It will do this by operating across our collaboration platform to ensure your day is interconnected and productive.
We have more to share about our AI strategy at Zoomtopia in October. We hope you all can join us. Now, let me recognize some of our amazing customers. First, let me thank TIAA, a leading provider of secure retirements and all-account focused investment solutions, for strengthening their partnership with Zoom. A long-time customer, TIAA, upgraded to Zoom Workplace Enterprise Plus, and added Zoom Contact Center and Quality Management in Q2, in order to further enhance the employee and customer experience. I would also like to thank Prime Inc., one of the largest trucking and freight delivering companies in North America. Prime came to us through the channel, and chose to further elevate the experience they provided their drivers with Zoom Contact Center and Quality Management. But the value did not stop there.
Recognizing the power of our natively integrated employee and customer experience platform, they added Zoom Workplace, as well as Webinar and Rooms, to support the collaboration and flexible working needs of their corporate offices. In addition, I'd like to thank Lyra Health, a leader in workforce mental health benefits, for integrating Zoom's Video SDK toolkit into their platform. Lyra has successfully migrated to Zoom, bringing our cutting-edge video technology directly into their applications, exemplifying our developer-focused approach. Finally, Workvivo had an amazing quarter, with wins, including a leading Southeast Asian bank and a famed European automotive brand. Workvivo's success was extended by the Meta partnership, which contributed some exciting new logos in Q2, including a major North American telco.
We are so happy to provide these companies with an employee experience platform that elevates the way they inform, connect, and engage employees, and integrate seamlessly with a broad Zoom portfolio. I'd like to take this opportunity to share the news that after almost seven years, Kelly has made the decision to leave Zoom. Kelly joined Zoom about two years before our successful IPO in April 2019, and her role in that has been a highlight of her time here. She will leverage her skills in helping companies scale and building successful businesses to help another startup in that process for the next Zoom. She has been an integral part of the Zoom journey, steering our IPO in 2019 and then continuing the momentum as our customer base rapidly expanded during the pandemic.
Under her strong financial leadership, Zoom has maintained a consistent track record of profitability and cash flow growth. We are conducting a comprehensive search for our next CFO with the assistance of a leading executive search firm. Kelly will be staying on through Q3 earnings, and given that we have a very robust financial organization through her commitment to talent development, I'm very confident that there will be a seamless transition. We wish Kelly all the best. Now, I'll pass it off to Kelly.
Kelly Steckelberg (CFO)
Thank you, Eric. First, I'd like to thank you, of course, and the entire Zoom team for an incredible experience over the past seven years. Zoom has not only made work more productive, but we have transformed the everyday lives of people globally. As Eric mentioned, I am committed to staying through the Q3 earnings, so this is not goodbye. We'll get to see each other again, and I will help with the seamless transition. Now, back to earnings. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few achievements from the quarter. First, Zoom AI Companion reached approximately 1.2 million accounts enabled as of the end of Q2. Second, we saw amazing traction with Workvivo as we reached 69 customers with over $100,000 in ARR, roughly doubling year-over-year.
Finally, we surpassed 1,100 Zoom Contact Center customers, representing more than 100% year-over-year growth. Now, let's dive into the financial results. In Q2, total revenue came in at $1.163 billion, up 2% year-over-year. This result was approximately $13 million above the high end of our guidance. Our enterprise revenue grew 4% year-over-year and represented 59% of total revenue, up from 58% a year ago. Online average monthly churn came in at 2.9%, down from 3.2% in Q2 of FY 2024. This is the lowest rate that we have ever reported. We saw a 7% year-over-year growth in the upmarket as we ended the quarter with 3,933 customers, contributing more than $100,000 in trailing 12 months revenue.
These customers represented 31% of revenue, up from 29% in Q2 of FY 2024. Our trailing 12-month net dollar expansion rate for enterprise customers in Q2 came in at 98%. The number of enterprise customers at the end of Q2 was approximately 191,600. Please note, this metric has diminished in value over time as we focus on upselling existing customers and landing larger prospects with Zoom Phone, Zoom Contact Center, and other new products. Our Americas revenue grew 3% year-over-year, while EMEA was flat and APAC declined by 2%. On a constant currency basis, APAC grew 1% and EMEA declined 1% year-over-year. Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains on strategic investments, net litigation settlements, and all associated tax effects.
Non-GAAP gross margin in Q2 was 78.6%, as compared to 80.3% in Q2 of last year, mainly due to investments in AI, as well as upgrades to our data center backbone. For the full year of FY 2025, we continue to expect our gross margin will be approximately 79%, before improving towards our long-term target of 80%. Non-GAAP income from operations came in at $456 million, exceeding the high end of our guidance of $420 million. This translates to a 39.2% non-GAAP operating margin for Q2, as compared to 40.5% in Q2 of last year. Non-GAAP diluted net income per share in Q2 was $1.39 on approximately $314 million non-GAAP diluted weighted average shares outstanding.
This result was $0.18 above the high end of our guidance and $0.05 higher than Q2 of last year. Turning to the balance sheet, deferred revenue at the end of the period grew 3% year-over-year to $1.41 billion. The growth was roughly two percentage points higher than the growth rate provided last quarter, partially due to the continued refinement of discounting practices as well as lengthening billing terms. For Q3, we expect deferred revenue to be up approximately 5% year-over-year. Looking at both our billed and unbilled contracts, our RPO increased 8% year-over-year to approximately $3.78 billion. We expect to recognize approximately 60% of the total RPO as revenue over the next 12 months, up from 59% in Q2 of last year.
Operating cash flow in the quarter grew 34% year-over-year to $449 million. Free cash flow grew 26% year-over-year to $365 million. Our operating cash flow and free cash flow margins expanded to 38.7% and 31.4% respectively. The year-over-year improvement in our cash flow metrics is due to higher collections from increased billings, higher interest income, and a prior year legal settlement. We ended the quarter with approximately $7.5 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Under the $1.5 billion share buyback plan, in Q2, we purchased 4.8 million shares for $288 million. This was up from 2.4 million shares for $150 million in Q1.
Turning to guidance, for Q3, we expect revenue to be in the range of $1.16 billion-$1.165 billion, which at the midpoint represents approximately 2.3% year-over-year growth. We expect non-GAAP operating income to be in the range of $438 million-$443 million. Our outlook for non-GAAP earnings per share is $1.29-$1.31, based on approximately 314 million shares outstanding. We are pleased to raise our top line and profitability outlook for the full year of FY 2025. We now expect revenue to be in the range of $4.63 billion-$4.64 billion, which at the midpoint represents approximately 2.4% year-over-year growth.
We expect our non-GAAP operating income to be in the range of $1.79 billion-$1.8 billion, representing an operating margin of 38.7% at the midpoint. Our outlook for non-GAAP earnings per share for FY 2025 is $5.29-$5.32, based on approximately 316 million shares outstanding. With the strength in free cash flow in the first half and increased outlook for operating income in FY 2025, we now expect free cash flow to be in the range of $1.58 billion-$1.62 billion for the full year. Thank you to the entire Zoom team, our customers, our community, and our investors for your ongoing trust and support. David, please queue up our first question.
Operator (participant)
Thank you, Kelly. 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. And our first question will come from Meta Marshall with Morgan Stanley. Meta?
Meta Marshall (Managing Director)
Great. Thanks so much. Maybe just a quick question for Eric. Just where are you seeing kind of the most interest in the AI Companion products or kind of the most usage? And just how does it inform how you're kind of looking to invest going forward? Thank you.
Eric Yuan (Founder and CEO)
Yeah, great question. I think, first of all, I want to share with you, and our customers really like our Zoom AI Companion. You know, first of all, it works so well; secondly, at no additional cost. Not like some other vendors in order to charge the customer a lot, and in our case, this is part of our package. So in terms of the feature set, and, you know, we introduced the AI Companion a while back, right? So I think you look at almost every product in the Zoom Meetings, Phone, Team Chat, or Workvivo or everywhere, right? So empowered by AI Companion. You look at each product, you take a meeting, for example, right? For sure, the number one use case is like a meeting summary, right?
And we keep improving that quality, like in the action item and or meeting summary, you know, are getting better and better. Like in July, we had another upgrade, and quality-wise, even better than previous deliveries, right? And we also leverage our AI Companion, right, to empower our business services. Take a contact center for example. I just gave you a few features we delivered in Q2. You know, like we leverage AI, you know, to focus on Expert Assist. You know, a few features, you know, you know, like, you know, automatically and the engagement disposition, and automatically wrap up notes. And also, you know, for your next action as well. All those AI features are empowering our business services. I just use, again, use the contact center as one example, right?
We look at every service, every features, think about how to leverage the AI Companion to improve our product strengths. That's why we're very excited, and a lot of new features, and also, you know, will be available in next few months and quarters. Also, in October, we have Zoomtopia. We are gonna announce a bunch of AI Companion enhancements.
Meta Marshall (Managing Director)
Great, thanks. Looking forward to it.
Eric Yuan (Founder and CEO)
Thank you.
Operator (participant)
Okay, our next question comes from Arjun Bhatia with William Blair.
Chris Mullin (Managing Director)
Hi, this is Chris on for Arjun, and thanks for taking my question. Real quick, in a similar vein, I wanted to get a better understanding of what's helping drive some of the strong adoption you've seen recently in Workvivo. Where are customers seeing the most value with that? Thank you.
Eric Yuan (Founder and CEO)
So in terms of Workvivo, I think first of all, it's really helped employee engagement. In particular, you know, given the flexible work, you know, how to seamlessly, you know, engage your employees no matter where they are, this is very important, right? You know, you cannot leverage meetings or phone or chat to, you know, to do that. You have to have a new service. That's the reason why we acquired Workvivo and before, right? And that solution works very well. A lot of companies, especially for very large enterprise customers, realize the value, right? And, you know, this is, you know, the experience works so well, very straightforward UI.
And in order to mention, you know, recently, Meta, right, they decided to retire their, you know, the platform, you know, and Zoom is the only platform they supported by for migration and further help us, right? Essentially, when customer look at Zoom platform, on the one hand, communication, on the other hand, collaboration. At the same time, engagement, it become more and more important. That's the reason why Workvivo is playing such a big role. So we closed a lot of new logos in Q2, and quite a few very large deals also in the pipeline as well. So we're very excited about the Workvivo platform. By the way, internally, we're also using Workvivo for any announcement, any news, you know, employees just go to the Workvivo interface rather than go to the emails or chat messages, is really not scalable, not friendly either.
Operator (participant)
Okay. Our next question comes from William Power with Baird. William?
William Power (Senior Research Analyst covering Cloud Software)
Okay, great, thanks. And Kelly, thanks for all the great help here over the years. Sounds like we'll still have you for a little while, though, which is great. You know, I wanted to start, I guess, on macro, right? I mean, that's still kind of center stage have been kind of renewed concerns over the health of the consumer. And so I guess I wondered, you know, within the online segment, if you could comment on expectations and kind of what you're seeing real-time in the market.
I mean, the churn rate suggests that, you know, things are, you know, going, you know, relatively well there, at least okay. But, you know, kind of what's baked in, you know, from a consumer macro standpoint. And then the other side of that is just be great to kind of hear, you know, what you're seeing on the enterprise, you know, in terms of sales cycles, down sales on the video front, et cetera. Thanks.
Kelly Steckelberg (CFO)
Eric, do you want to say anything generally first? You want me to dive in?
Eric Yuan (Founder and CEO)
Just go ahead. Yeah. Thank you.
Kelly Steckelberg (CFO)
So in terms of enterprise, you know, we continue to see growth there, and that's. You can see that reflected in our guidance for the year. We've had a lot of stability in terms of our retention rates, and this is gonna show up eventually in our net dollar expansion that we expect to start to re-accelerate as we come to, like, the middle of next year. And, when you have a chance to really look at the guidance, right, you'll see that we are forecasting, as we said, that Q2 would be the low point this year in terms of year-over-year growth, and we would start to re-accelerate in Q3, and that's what's reflected in our guidance, which we're all very excited about.
In terms of online, as you noted, we see, you know, ongoing improvement in our retention rates there, which I think is reflected about all the great progress we're making in the platform, including all of the Zoom AI Companion features that Eric just talked about, which are included for our online customers as well, that are paying. And so that's been really great to see. I would say the one area that we've seen some headwinds, which is consistent with peers, is in SMB and, like, the small customers. We've certainly seen some, I think some overall concern about the economy there, but, you know, it's, I think, pretty close to being in line with what we were originally forecasting for the full year, so we're just keeping a very close watch on that.
William Power (Senior Research Analyst covering Cloud Software)
Okay, thank you.
Kelly Steckelberg (CFO)
Yep.
Operator (participant)
Okay, thank you. Our next question comes from Siti Panigrahi with Mizuho. Siti?
Siti Panigrahi (Managing Director and Equity Research)
Hi, can you hear me?
Eric Yuan (Founder and CEO)
Yep.
Kelly Steckelberg (CFO)
Yeah. Hi, Siti.
Siti Panigrahi (Managing Director and Equity Research)
Okay, great, great. Thanks for taking my question. And Kelly, it's great working with you. So my question about contact center, you know, it's good to see some traction in the contact center side, but we're hearing from your peers about the macro pressure they are seeing in this market. So how do you see the Zoom Contact Center, you know, features and capabilities compared to your competitors? Like, what's helping you win against them? And then the question, like, when should we expect contact center to be a material revenue contributor?
Eric Yuan (Founder and CEO)
Yeah, yeah, I can start with Kelly, feel free to chime in. I think, you know, that's first of all, you know, you look at the key wins in Q2, right? And we closed the single largest deal in Q2, right? Look at it over the past few quarters, right? So we're making very good progress. Look at the large deals, like in Q1, if I recall correctly, we closed around 90, you know, then Q2 closed like 117, and the large deals, right? And the reason why customer, they truly trust Zoom, because, you know, some customer, they already, you know, are our customer for a long time, and they know, they know we want to innovate together with our customers, like our innovation speed.
They like all those features. In particular, some of the features, AI features, we deliver much faster than any of our competitors. And also, it's not only just the core contact center offering, but also, we also came up with our own Workforce Management, you know, Quality Management. A lot, not like some other vendors, they had to, you know, and resell other solutions in the integration, not as seamless, right? From a customer perspective, realize we are very, very serious about the contact center, and the feature set is great, and also the integration with our, you know, other, you know, the UC platform also is very seamless.
And plus, and the feedback, especially for our customer, they did a POC. After they test Zoom Contact Center, realize, "Wow, it works so well, and it's so powerful," and that's the reason why we're gaining momentum. And, I think in terms of feature set, we can, you know, we have high confidence, you know, we do not lose the customers because of feature set, so...
Kelly Steckelberg (CFO)
Remember, even now with our new pricing tiers that we've added in, we are still very, very price competitive against everyone else in the market. So from a total cost of ownership perspective, when you look at it, combined with the most modern architecture out there, I think it's a very, very compelling reason for our customers to switch.
Eric Yuan (Founder and CEO)
Yeah. And also another thing is every time we made a commitment, we did deliver. That's another way to build trust, with like FedRAMP in Q2, and, you know, and the PCI compliance, and so on and so forth, right? You know, we did deliver, so.
Siti Panigrahi (Managing Director and Equity Research)
Okay, thank you.
Kelly Steckelberg (CFO)
Thanks, Siti.
Operator (participant)
Our next question comes from Ryan MacWilliams with Barclays. Ryan?
Ryan MacWilliams (Software Equity Research Analyst)
Hey, thanks for taking the question. So now that you're seeing more adoption, Kelly, of Zoom AI Companion, how do you think about the costs of providing these generative AI features and capabilities? And do you think Zoom could eventually charge on a usage basis for power users of the generative AI capability? Just trying to weigh cost versus revenue opportunities here. Thank you.
Eric Yuan (Founder and CEO)
So that's a great question, and our philosophy is we always look at everything from a customer perspective, right? Especially for, you know, given the macroeconomic environment, right? So every company try to, you know, save the money, consolidate the cost, and so on and so forth. I do not think we should charge a customer for AI Companion. I mean, you know, we when we launched AI Companion, right, so we already announced, you know, we do not want to charge the customer. However, that's for the workplace. You know, for the business services like a contact center, all those new offering, and I think for sure we are going to monetize.
You know, as I mentioned in the previous, you know, earnings calls, the new solutions or the business services, you know, AI Companion, I think we are going to charge AI Companion, right? For the workplace, you know, and, you know, our core UC offering and collaboration offering, we do not want to charge. You know, I want to say, you know, really appreciate our AI team's great effort, right? And, you know, focus on the quality, focus on the cost reduction, and so on and so forth. I think, you know, that's the reason why some customer look at our offering, look at the total cost of ownership. In terms of support cost, AI cost, and also in the product experience, customer realize, wow, it's better double down on Zoom, you know, deployment. That's the reason why, you know, we are going to, you know, continue winning, so...
Ryan MacWilliams (Software Equity Research Analyst)
And then, Kelly, maybe just on gross margins, like, you know, the impact of generative AI and maybe what you can do to alleviate some of that stuff there.
Kelly Steckelberg (CFO)
Yeah, I mean, we're guiding to 79% for this year, which we feel reflects the prioritization of AI, but also the very strong discipline that we continue to apply. We are holding to our long-term target for gross margins of 80%. But of course, we think at this point in time, it's very important to prioritize these investments as they really, you know, set us up for future growth.
Ryan MacWilliams (Software Equity Research Analyst)
... I definitely think it makes sense to focus on the doctor first. Excellent. Thanks, guys.
Eric Yuan (Founder and CEO)
Yeah, just one more thing. I also want to give a credit to our DevOps team. On the one hand, for sure, we are going to buy more and more GPUs, right? And also leverage that-
Ryan MacWilliams (Software Equity Research Analyst)
Yeah
Eric Yuan (Founder and CEO)
However, our team tried to, you know, saving the money from other areas, you know, fully automated, and so on and so forth, right? So that's another way for us to save the, the cost, right, to, you know, make some room for, for AI, so.
Ryan MacWilliams (Software Equity Research Analyst)
Appreciate it. Thank you.
Eric Yuan (Founder and CEO)
Thank you.
Kelly Steckelberg (CFO)
Thanks, Ryan.
Operator (participant)
Okay, our next question comes from Tyler Radke with Citi. Tyler?
Eric Yuan (Founder and CEO)
Tyler, are you there?
Tyler Radke (Co Head US Software Equity Research)
Yes. Can you hear me okay?
Eric Yuan (Founder and CEO)
Yeah, I'm-
Kelly Steckelberg (CFO)
Hi, Tyler. Yeah.
Tyler Radke (Co Head US Software Equity Research)
Hey, good to see you. Thanks for taking the question. Kelly, I'm wondering if you could just... It was great to see the stabilization, or actually the record high in terms of the online renewal rate. I'm curious if you could speak to the new business side of the equation, and I know Wendy and team have been doing some initiatives to drive improvements there, but how do you sort of see the, the new business side of the equation relative to how you were thinking about it, you know, a couple quarters ago?
Kelly Steckelberg (CFO)
Yeah. So Wendy and her team continue to do a great job of adding features, looking for additional offerings to continue to expand our growth there. I think in terms of our quarter, you know, we certainly saw growth and are very pleased to be able to raise our guidance across the board. The one area that we have seen some headwinds, which I think is very consistent with what you're hearing from peers, is in the SMB and the really small business area, because everybody is concerned about the future of the economy and being very thoughtful about buying decisions. You know, with that said, it's roughly in line with where we were expecting coming into the year, which is why, you know, you've seen us continue to execute against our guidance and be able to raise going forwards.
Tyler Radke (Co Head US Software Equity Research)
Thank you, Kelly, and best of luck.
Kelly Steckelberg (CFO)
Thank you.
Operator (participant)
Okay, our next question comes from Parker Lane with Stifel. Parker?
Jack McShane (Equity Research Associate)
Yeah, guys. Hi, this is Jack on for Parker. Congrats on the nice quarter. Wanted to touch on that large win in the contact center. What kind of initiatives was this customer looking to accomplish, and why did they ultimately choose Zoom? Thanks.
Eric Yuan (Founder and CEO)
I think for sure this customer, they evaluated, you know, multiple, you know, contact center offerings in the market, and, you know, they really want to understand the roadmap and architecture, especially your AI initiative, right? And so, and, you know, given the POC, right, they evaluated multiple solutions, and Zoom excels. And when it comes to comparing against the other vendors, feature set, AI, and the price, and the, you know, the brand recognition, and also, again, they really trust our team. They know we always innovate together with the customers, and this happened before, like, the Zoom Phone as well, and ultimately, it boils down to the trust. They know actually we can innovate.
We innovate faster, we can innovate together, and, you know, given all the features, and we promised about it before, we did it deliver. And it's really like, you know, the Zoom Contact Center. It's not like other legacy solutions, right? It's very smooth to move, very smooth to embrace the AI. We built a new solution with a modern architecture. It's much better experience, so... And why not? So, and pick up Zoom, so yeah.
Operator (participant)
Okay, thank you. Our next question comes from Michael Funk with Bank of America. Michael?
Michael Funk (SVP)
Hi, good evening. Yeah, thank you for the questions. And Kelly, thank you again for all the help over the years, and I'll see you next quarter as well. Another question on contact center, if I can, just clarification. The recent wins, are they more skewed towards internal or external contact center? So meaning employees versus customers.
Eric Yuan (Founder and CEO)
For external, primarily external, right? They use that, you know, to engage with their customers and their partners, right? When we launched, you know, many quarters ago, right, some of the customer uses our contact center for internal, you know, IT helpdesk. But now, you know, majority just for the external facing and for the support team, customer engagement team, so.
Michael Funk (SVP)
That's very helpful. Thank you, Eric. And then, Kelly, I think you mentioned earlier this year when I met with you that you expected contact center growth to ramp similar to phone growth, that that was a good precedent for growth expectation. Are you growing above those expectations for contact center or in line?
Kelly Steckelberg (CFO)
We're in line with that. So it hasn't changed dramatically. I mean, we're very pleased with how both phone and contact center are continuing to drive growth, but it's more in line with what we had expected.
Michael Funk (SVP)
Great. Thank you both.
Kelly Steckelberg (CFO)
Yeah.
Eric Yuan (Founder and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Mark Murphy with JP Morgan.
Arti Vula (Equity Research Associate)
Hey, thanks for taking my question. Arti on here for Mark Murphy, and Kelly, thanks for all the help you've provided us.
Kelly Steckelberg (CFO)
Thanks.
Arti Vula (Equity Research Associate)
One question I had is, when you're looking at Zoom AI Companion, we've heard a lot of great things in the field from customers kind of comparing it to other products that are offered out there. Can you kind of remind us about how you guys think about tracking success with a product internally, given that you don't kind of charge for it directly, you know, beyond having millions of people using it? Is there any way you kind of track it, whether it's utilization, improvement, and retention, anything along those lines?
Kelly Steckelberg (CFO)
Yeah, I mean, one of the metric that we've been talking about on here is account activation. So looking at how many – not, it's not individual users, it's actual customer accounts that have activated it. And you can imagine for larger enterprises, there's usually an approval process that we go through, they go through, but we watch that. And then internally, we're watching things like the number of meeting summaries produced. So some of the other, like, usage metrics is how we're evaluating usage and success.
Eric Yuan (Founder and CEO)
And also, very often, we never have EBCs with our customers, and also they share the stories, right? How Zoom AI Companion, like, it was very accurate summary, action items are helping their, you know, the employees' productivity as well. And yeah, so lot of very positive feedback about adopting Zoom AI Companion.
Arti Vula (Equity Research Associate)
That's great to hear. Thank you.
Eric Yuan (Founder and CEO)
Thank you.
Operator (participant)
Okay, our next question comes from James Fish with Piper Sandler. James?
James Fish (Managing Director and Senior Research Analyst)
Hey, guys. Kelly, it's been great working with you, and my question is more directed at you. You know, you had mentioned here, we're talking about 98% trailing 12-month retention rate, and it sounds as if, you know, we're starting to see the bottom of that. In fact, you know, our math would imply you're actually above 100% today, on the end period.
So can you break down what you're getting across expansion mix between upsell of seats, if you are starting to see upsell of seats again, across, you know, meetings or other products, you know, any pricing changes, adoption of other products like Phone or Contact Center at this point, in terms of how it's impacting that expansion? I get, you know, rounding is involved, but should we not be interpreting that that upmarket is accelerating at this point, but similar to what we saw from a dollar perspective? 'Cause if you run the math there, it would suggest, like, 9% potentially, if you just use the absolute number.
Kelly Steckelberg (CFO)
Yeah. So, when you, when you think about, or the way that we're thinking about looking forward, certainly the growth for the back half of this year and into next year is being driven by the upmarket. You know, very specifically, our direct segment, but even within that segment, the upmarket portion of it. You know, if you look at the growth rate of our metrics with customers with greater than 100K trailing 12 months, in fact, you know, you see that's growing at 7% year-over-year, which is higher than our overall revenue growth rate, which is a good indicator of that.
And so what we see is similar to when we do the end-of-quarter calculation. We've started to see stabilization in our net dollar expansion, and we know that runs ahead of our external reported metric, and that's why I said kind of middle of next year, we expect that to start re-accelerating again. And, you know, that's being driven by the ongoing performance of Zoom Phone, Contact Center, obviously Workvivo is sometimes an add-on, sometimes those are brand-new customers that are coming in. And I would say, I don't know that we're. I mentioned earlier, we've seen stabilization in our retention rates in Enterprise as well, so that's good in terms of even if seats aren't being added for meetings, that we're starting to see some stabilization there in terms of renewal rates from customers.
James Fish (Managing Director and Senior Research Analyst)
Helpful. Thanks again.
Kelly Steckelberg (CFO)
Yep.
Operator (participant)
Okay, our next question comes from Peter Weed with Bernstein. Peter?
Kelly Steckelberg (CFO)
Hi, Peter.
Peter Weed (Senior Analyst)
Thank you. Oh, boy, this is not gonna be very pretty if I'm on that thing.
Kelly Steckelberg (CFO)
There you go.
Peter Weed (Senior Analyst)
There we go. Now you should have me in a normal v- mode on my.
Kelly Steckelberg (CFO)
Yep
Peter Weed (Senior Analyst)
... camera.
Kelly Steckelberg (CFO)
You look great.
Peter Weed (Senior Analyst)
Hey, thank you very much. I appreciate it. Kelly, we will miss you. I mean, you've been, you know, very open and honest with us over time, and it's been very helpful. You know, I'd love to follow up that last question on expansion. You know, I think you'd been talking about getting to stabilization about now, and kind of when we unpack that number, at least in our model, it does look like on a quarter-over-quarter basis, the upmarket definitely saw some strength. Whereas, you know, the kind of downmarket was a little bit flatter, which I think historically has always been the case, 'cause there's a little bit of cannibalization that comes out of that going into the upmarket.
When you look forward from here, where are you seeing, I guess, those kind of early kind of accelerations going on, and how do you think about those kind of escalating over the coming quarters? Is it the type of thing where, like, we can start to see this building on itself, like quarter-over-quarter, or you just said middle of next year, which makes it seem like this is, like, one step up, and then you expect it to be flat? Like, how, how-
Kelly Steckelberg (CFO)
Yeah, sorry
Peter Weed (Senior Analyst)
... is that kind of shaping up?
Kelly Steckelberg (CFO)
Let me clarify a couple of things. So what's gonna stabilize and start to grow again in the middle of next year is the net dollar expansion rate, very specifically. That's because we're on this, it's a trailing 12-month metric. What we're seeing in terms of revenue, when you look at the guidance, is, you know, Q2 was, as we forecast, the low point in year-over-year growth. And now, given the strong contribution we're seeing from Contact Center, from Phone, from Workvivo, we are guiding to reaccelerating growth in, you know, starting in Q3. And that, combined with this stabilization in our retention rate in Enterprise and ongoing improvement in online, all of that is what's leading to this reacceleration, the strength that we see in the future.
Peter Weed (Senior Analyst)
And when you kind of look at the kind of underlying components then that are kind of driving that strength, you know. I guess it's probably not seats, it's many of these additional, you know, I guess both products and versions that-
Kelly Steckelberg (CFO)
Yeah
Peter Weed (Senior Analyst)
... that have been pushed into the market. When you think about the balance between those, you know, getting people to sign up for, you know, one versus, you know, adding a contact center or these types of things, give us some color on the contribution of, of both of those as this kind of acceleration kind of moves forward.
Kelly Steckelberg (CFO)
Yeah, you know, we do see expansion, you know, land and expand being a motion that we see. Of course, historically, it's been the motion we've seen for meetings, but we also see it for phone, we see it for contact center, as well as, especially as we keep adding more. Eric touched on this, but, right, we've really expanded the features and functionality on contact center that allow it to really serve externally. So things like PCI compliance, and FedRAMP, and all the social integrations, which are a necessary component for any company to talk to its external customer base, and that's what's really led to some of this acceleration that we're seeing in contact center.
Peter Weed (Senior Analyst)
I appreciate the additional detail. Thank you, Kelly.
Kelly Steckelberg (CFO)
Yep. Thank you.
Operator (participant)
Okay, our next question comes from Peter Levine with Evercore. Peter?
Kelly Steckelberg (CFO)
Hey, Peter.
Peter Levine (Equity Analyst)
Hi, Kelly. Hi, Eric. Thank you for taking my question. You know, maybe just on capital allocation, you know, Eric, or even Kelly, you sit down and think about strategy, like, and you wanna retain your competitive advantage. You know, you have $7.5 billion in cash. We've seen you move into contact center phone, you know, your productivity apps as well. What's the best way for investors to think about how you plan on deploying that capital? You have the buyback in place, but, you know, it's been a while since we've seen any larger activity. But maybe help us understand the strategy in terms of, you know, what you're thinking in terms of to help reaccelerate top line, if it's new product, is it, is it tech? Just maybe help us understand how you're thinking about that.
Eric Yuan (Founder and CEO)
Yeah, from a high level, so we look at everything, you know, from a customer perspective, right? Quite often when we talk about innovating together, right, and sometimes, you know, customer, they really badly needed this feature. You know, take a Workvivo, for example, right? Customer say, "Yeah, I really like employee engagement tools." We know we cannot build that, you know, in a timely manner. You know, we have to go through the M&A. And as we look at our platform play, and also plus AI, plus business services, there's so many opportunities out there. I do not think we can build everything organically, even if we want to, right? So sort of what a culture before.
But now we are more aggressive in order to, "Hey, how to quickly," and, you know, add those new services or features, right, to beef up our existing offering, and that's just kind of one of the top priorities, you know, here, you know, we're working on. 'Cause especially given the AI era, right? You have to move faster. I think in my view, it's more like a lot of M&A opportunities down the road. That's kind of, you know, our strategy, so.
Peter Levine (Equity Analyst)
Then, Kelly, if you're willing to share a number with contact center, can you share, like, a revenue number or at least a target in terms of- because when phone hits 10%, you gave us that milestone. Is there an internal plan on when you think contact center will hit 10%?
Kelly Steckelberg (CFO)
When we hit 10%, we of course will start disclosing it. But remember, it was in, like, Zoom Phone's fifth year of its life, I think, before it hit that metric, and contact center is, what, in its second year of life? So while we're thrilled with its performance, we aren't quite yet. It's gonna be a while before it comes to a stage where we would be disclosing the percentage of revenue. That's why, you know, for now, we're disclosing customer counts and giving you other metrics around, like the top 10 being displacements, trying to give you color about what we're seeing in the market, but it'll be a little bit before we get to that metric specifically.
Peter Levine (Equity Analyst)
Thank you very much.
Kelly Steckelberg (CFO)
Yeah.
Operator (participant)
Okay, our next question comes from Rich Magnus with Wolfe Research. Rich?
Rich Magnus (Equity Research Associate)
Hey, guys. It's Rich on for Alex. Just wanted to come back to the large customer adds for contact center you were highlighting, and the top 10 wins being displacements. You said 40% were from legacy migrations, so of the six that were not replacing the first-gen solutions, what were the biggest drivers of those wins? Was it pricing, AI functionality, or something else that we're missing? Thanks.
Kelly Steckelberg (CFO)
So I just wanna be super clear about it for a second. So the top 10 wins, all were displacements. Six of them were replacing on-prem existing legacy, and four were replacing other cloud providers. So I think against all of them, I mean, Eric, you feel free to chime in now, but it's just highlights you know, the modern architecture, the contact center that's built with AI at its core from the very beginning.
Eric Yuan (Founder and CEO)
And also, so Rich, believe it or not, actually, you know, quite often customers mention, the stability also is a player. Also plays a very important role. Because when it comes to contact center, it's very important when customers engage with their customers, you have to be very stable, right? And some of, you know, wins customers, it's just number one thing, they just do not like the stability from other solutions, right? And those, they know actually, you know, Zoom always delivers a very stable service with a scalable architecture, and so on and so forth. And that also plays a role as well, right? I think everything together, I think stability, modern architecture, pricing, AI, and faster innovation, I think ultimately together, you know, we are winning, so.
Operator (participant)
Okay, thank you. Our next question comes from Catharine Trebnick with Rosenblatt Securities. Catharine?
Catharine Trebnick (Senior Reseach Analyst)
I'm always late. Sorry, you guys. Anyway-
Kelly Steckelberg (CFO)
No. Hi, Catharine.
Catharine Trebnick (Senior Reseach Analyst)
Good to see you both. So my question has to do with contact center. RingCentral - not RingCentral. NICE just released their $5 phone, and I was wondering, you know, when you talk about contact center, it's pretty much in this bucket. But what's your pipeline looking for UC and contact center? How is that progressing?
Eric Yuan (Founder and CEO)
Yeah, Kelly, feel free to chime in. I can comment on their UC offering, so -
Kelly Steckelberg (CFO)
Yeah, why don't you do that first, please?
Eric Yuan (Founder and CEO)
Yeah, so, yeah, again, you know, it's hard to comment on our competitor's move, right, to into the UC. And in time we will tell. In my view, that's an absolute mistake, you know, because how could they compete against the others, like Zoom and others, right? We had so many years experience with a great scalable architecture. This is hard to believe they are going to win in UC space. And so I could be wrong, but I know I have a high confidence they are not going to win in UC space. So because a lot of, you know, the investment in technology features, integration, and scalability, stability, again, I do not believe that, so.
Kelly Steckelberg (CFO)
Yeah, and, you know, we see contact center driving, you know, new lead for contact center, driving need and desire for a Zoom Phone, and we see it come the other way as well, Zoom Phone driving. We talked about this in the prepared remarks about this better together, and that is really inherent with what we're seeing across the platform. And Zoom AI Companion, being able to leverage all of that across the entire platform just brings so much power to it that I think you're going to continue to see the ongoing, you know, combination of those two products and the rest of the platform be very strong.
Catharine Trebnick (Senior Reseach Analyst)
So just in essence, back to the UC piece, there was no disruption whatsoever, even though it was a $5 price?
Eric Yuan (Founder and CEO)
Even $4.
Kelly Steckelberg (CFO)
We-
Eric Yuan (Founder and CEO)
Even for $4, a lot of new customers say, "Why would I want to deploy that?" You know, "Why do I want to take a risk, deploy something new?" And it's more like today, you already have an iPhone and an Android phone. You want to introduce a new phone. Who's going to deploy that? Who's going to buy that? So that's my opinion.
Catharine Trebnick (Senior Reseach Analyst)
No, I had to ask the question. Thank you.
Eric Yuan (Founder and CEO)
Yeah, great question. Thank you.
Kelly Steckelberg (CFO)
Thank you, Catharine.
Operator (participant)
Okay, thank you. Our next question comes from Matthew VanVliet with BTIG. Matthew?
Spencer Lebov (Equity Research Associate)
Hey, guys. Can you hear me?
Kelly Steckelberg (CFO)
Yeah.
Spencer Lebov (Equity Research Associate)
Hey, it's Spencer on for Matt. Thank you for taking our question, and congrats on the quarter. I apologize if this was already asked, but how are the AI products and the key functionalities driving expansion with existing customers? How much of it is, like, premium tiers or, you know, upselling to premium tiers of the existing footprint versus selling to new phones, contact centers, or just other cross-selling products? Thank you.
Eric Yuan (Founder and CEO)
I think if you look at an existing, you know, the installed base, right? For the workplace customers, right? They look at the value. They see they already use Zoom for a long time, like experience. We keep adding more and more value to customers. Guess what? At no additional cost. You know, this essentially, you know, build a long-term trust. They know Zoom they can trust, right? And not like some other vendors, "Hey, you use our free service." Guess what? After you're stuck with that platform, they are going to increase price with all the features. That's not our philosophy, right? So that's for workplace part. On premium services, you know, like, take again, take a contact center, for example, right?
AI, you know, a companion is a key differentiation because the customer trusts our AI feature set, as I mentioned, right? Of, you know, every quarter, we release some AI features, you know, and to kind of, you know, innovate, right? And, I think that part is not free. We are going to charge as well, right? You know, on the one hand, we want to add more value to existing customers. On the other hand, we can charge the customer with some, you know, features for bringing the services, because those features customer really need, and also is a part of the-
Kelly Steckelberg (CFO)
Part of the.
Eric Yuan (Founder and CEO)
Offering as well.
Spencer Lebov (Equity Research Associate)
Thank you, guys.
Eric Yuan (Founder and CEO)
Thank you.
Kelly Steckelberg (CFO)
Thank you.
Operator (participant)
Our next question comes from Samad Samana with Jefferies. Samad?
Samad Samana (Managing Director)
Hi, good evening, and thanks for taking my questions. So maybe first, just on CCaaS, is there anything you can give us in terms of the mix of those 1,100 customers? How many of those are maybe, like, 100-plus seat deployments versus under that? Just any sense of SMB versus enterprise in the mix there. And kind of related, what's the attach rate of CCaaS into the 100K-plus install base that the company has?
Kelly Steckelberg (CFO)
You know, let me think about this. So we've certainly seen, you know, growth in the 100K customers for contact center. We're up to 117 that we disclosed. So you can see that they're moving into that realm for sure, and we've been working, you know, in the channel and working with partners to also think about how we help these customers with their digital transformation. In terms of the disbursement across that, the size of our deals is, what I would say, is they are definitely getting larger. They're getting larger for a couple of reasons. Because, as we talked about, this added functionality, allowing them to use it externally, as well as we talked about this either last quarter or the quarter before, that with the introduction of the pricing tiers...
If you remember, we started with one pricing tier. We eventually added two more, and the AI Expert Assist, like that Eric was speaking about earlier, is in the highest tier. We actually saw our ASPs for contact center almost double quarter-over-quarter, because it's such a premium feature, and when I looked at the Q2 deals, the majority of them were purchasing in one of the top two tiers, so all of that is contributing to what I would say is not only expansion in terms of seat count, but expansion in terms of value being derived from the product.
Samad Samana (Managing Director)
Gotcha. And then maybe just on the online retention, it's great to see that improvement there. I'm curious how much of that is due to either the new features that you released versus moving further away from the tightening of the grace period, and it's even better than it was before that slight uptick last quarter, right? So is-
Kelly Steckelberg (CFO)
Yeah.
Samad Samana (Managing Director)
Is this, like, the new durable assumption that we should make? Is that pretty reasonable?
Kelly Steckelberg (CFO)
Yeah.
Samad Samana (Managing Director)
Or just how are you thinking through that?
Kelly Steckelberg (CFO)
Yeah. So I mean, this is a great question. I get this question all the time, right? Can churn keep getting better? I will tell you that we are modeling it to stay at about 3%. I think that's a really positive rate, but we continue to see improvements on the platform, and I think that's what you're seeing in this quarter. Because we did see a little bit of the pull forward, if you will, last quarter for the change in the dunning period, as you mentioned, but this is a clean quarter, right? Meaning that it should really reflect, and if you remember, historically, Q2 is typically a larger or seasonally high churn period because of summer holidays.
Typically, for online, we see higher churn rates in Q2 and in Q4 because of summer and holiday breaks, winter holiday breaks, and we don't put friction in the cancellation cycle, 'cause we want customers to use the product as they need. So I think it's very positive to see this down, you know, record low churn rate in a seasonally high quarter.
Samad Samana (Managing Director)
Great. Thank you both so much.
Kelly Steckelberg (CFO)
Yeah, thank you.
Operator (participant)
Our next question comes from Matthew Harrigan with Benchmark. Matthew?
Matthew Harrigan (Equity Research Analyst)
Oh, thank you. Are you seeing anything in the broad sweep of AI regulation in the U.S. or Europe that you think can dampen innovation? You know, it sounds like you've modulated some of your dataset gathering activity in Europe in response to some political concerns, but what's your view there?
Eric Yuan (Founder and CEO)
I think when it comes to AI, we are taking a very responsive approach, right? That's the reason why when we launched the AI companion, we already mentioned it, we are not gonna use any of our customer data to train our AI models, right? And we take customer data very, very seriously, right? And as a customer, they know that, they trust our brand, they trust what we're doing. And so far, I did not see any impact in terms of, like, regulation. And again, this AI is moving rapidly, right?
So almost, you know, the EMEA here, you know, and we all look at the potential regulation, but so far, impact actually is, you know, to us, to our business, I think is extremely limited. You know, like a meeting summary, and it's a very important feature customers like that. I think we do not use our customer data to train our AI model, and why not keep using that feature? I think there's no impact so far.
Matthew Harrigan (Equity Research Analyst)
Great. Thanks, Eric. I guess one, one more brilliant presentation to come from you, Kelly. Thank you.
Kelly Steckelberg (CFO)
Yeah. Thank you, Matthew.
Operator (participant)
Our next question comes from Patrick Walravens with JMP Securities. Patrick?
Austin Cole (Software Equity Research Analyst)
Hey, this is Austin Cole on for Pat. Just wanted to touch on international. If I'm not mistaken, Kelly, you mentioned EMEA shrank 1% in constant currency, and those-
Kelly Steckelberg (CFO)
Yeah
Austin Cole (Software Equity Research Analyst)
... revenues declined last year as well. And if I just look at where we're at this year, looking like maybe on track to shrink again, just wondering if you could talk about what your presence is there and kind of how you're seeing demand in those international regions.
Kelly Steckelberg (CFO)
Yeah, we've certainly seen the economy in EMEA, especially continue to be impacted by the ongoing wars that are happening in that continent, and so, in general, I think all of our peers are facing as well. We, you know, we have been in the process. We have a new leadership team that's coming into place there, so looking forward to that, and we also are really focused on investing in the region. We just last quarter opened up our London Executive Briefing Center, which is amazing. It's a great opportunity to bring customers and partners and prospects all together and really see the entire expanded, you know, Zoom 2.0 story in a beautiful place, and it's really leading. I think it's an area that we're really focused on investing and re-accelerating growth.
Austin Cole (Software Equity Research Analyst)
Great. Thank you.
Kelly Steckelberg (CFO)
Yeah.
Operator (participant)
Okay. Thank you so much, everyone. This concludes our Q&A session. I'll now pass it back to Eric for closing comments. Eric?
Eric Yuan (Founder and CEO)
Yeah, first of all, thank you all for asking about all those great questions. We are very, very grateful. And, also thank you for every Zoomer's hard work, and we are gonna continue to innovate. And, thank you all for your trust, and see you all next quarter. Thank you.
Kelly Steckelberg (CFO)
Bye, everybody.
Operator (participant)
This concludes today's earnings release. We thank you all for your participation. Enjoy the rest of your evening. Thank you.
