Zoom Video Communications, Inc. (NASDAQ:ZM) KeyBanc Emerging Technology Summit Conference Call March 5, 2024 12:00 PM ET
Company Participants
Kelly Steckelberg - CFO
Conference Call Participants
Unidentified Analyst
Good morning, everyone. I guess second meeting here of our Emerging Tech Conference, obviously Zoom's, not so much emerging anymore, but they're still working on a lot of innovation here. To the CFO, Kelly, thank you so much for joining us.
Kelly Steckelberg
Thanks for having us.
Unidentified Analyst
I wanted to just start right in with 4Q, I would qualify as strong. I mean, larger deals on the enterprise side, CCaaS, big uptick. Maybe just kind of start there. And if there's any type of overview, points you want to highlight for the group here. And then the question embedded in all of that is how about the sustainability of that strong 4Q into calendar fiscal '25?
Kelly Steckelberg
So thank you for having us. Glad to be here. We were really pleased with our Q4 results, ahead of the high end of our guidance in terms of top line results, and we saw momentum in both the direct and the online segments of our business. So very, very happy about that. For those of you that have been following us for a while know that we've been really focused on getting to stabilization in the online segment and feel really good about where that is.
We saw really strong retention numbers in terms of online as well, was 3%, stable from Q3 to Q4. And if you remember, seasonally, Q4 typically would be higher. So that was a really nice number to see.
And then on the direct side, you're continuing to see momentum in phone. Also some strength in contact center. And -- again, if you remember, a year ago, we went through a pretty significant reduction as well as sales reorganization at Zoom. And that's taken a little bit of time to work through the team. And I think what you saw in Q4 was our sales organization, really everybody realigned with their quotas, their territories, with new management in EMEA and APAC. We have a new Chief Sales Officer who's been -- Graham, who's been in his job for about a year. So everybody really back at it and feeling good about what they're producing.
And of course, our platform is an amazing place. We can talk about the platform all day long. But I think all of the combination of those factors came together to give that strong result for the quarter.
Question-and-Answer Session
Q - Unidentified Analyst
You mentioned the sales reorg. Where do you kind of feel international kind of gain is splitting [ph] as we head into fiscal '25?
Kelly Steckelberg
Yeah. So international, obviously, was a headwind for us in FY24. Both EMEA and APAC were down year-over-year. Some of that was FX, but part of it is also performance in those markets and the economies there.
So having new leadership has really reenergized the team. There have been some changes made. And I feel like, okay, now they're ready to go. Again we've reinvested in -- we call them executive briefing centers as customers want to come back into the offices again now and start seeing the technology in action. And our goal for FY25 is to get them at least to flat and then probably over the next year start to return them to growth again.
Unidentified Analyst
Great. You mentioned stabilization a couple of times in addition to online and the direct side. Walk us through like the moving pieces underneath that because you're having a lot of success in CCaaS, early innings. You have already had success in phone. Specifically alluding to the core, or the meetings business on the enterprise side, there's -- I think you even hinted that you've come across most of the anniversaries that you should -- so walk us through like what we should expect from fiscal '25 from the enterprise core meetings?
Kelly Steckelberg
Yes. So as you mentioned, really continuing to drive growth through phone. That's where we're seeing a lot of momentum. So very excited about that product and how it's performing. Contact center, very early days, but really good feedback from prospects. In terms of the roadmap we believe we'll have most of the enterprise features now that we need in the next six to nine months for that to really enable us to start competing for the big like 10,000 seat deals, but that's going to take a little bit a while for it to start showing up in terms of external revenue, but very excited about the momentum there.
And then in terms of our existing customers, we were not alone in FY24 in having a reduction. And so we've seen some of our customers come to us and want to work through that on their renewal period. As you mentioned, the good news is the majority of our customers had the opportunity for a renewal in FY24. So we know that the majority of them, if they needed to right-size had the opportunity to do that.
Our teams have done a really good job in having these renewal discussions of really focusing on retaining the spend. So if a customer has more meetings licenses they need, saying, okay, let's get that right-sized. That's great. But now let's talk about potentially upselling you into a Zoom One SKU or adding in Zoom Phone. So what they've been able to do in a lot of these cases is contain the spend and get them onto a higher unit dollar SKU. And why that's really important is because the economy is going to get better. They're all going to start growing. They're all going to start hiring again. And as they do that, we're actually better positioned then to grow with them because now they're sitting in this higher dollar SKU.
With that said, when we look at FY25, we do have a percentage of our customers' still that did not have a renewal opportunity in FY24. And we presume that some of them have had some dislocation in their employee base. And so that the renewals, rightsizing discussion will still be somewhat of a headwind for us in FY25, but to a lesser extent than it was in FY24.
Unidentified Analyst
Yes. Is it too presumptuous at this time to assume that, that could grow in fiscal '26? And I know it's far out there and you can get mad at me for asking the question, but no, from an excited fashion, it sounds like you're anniversarying a lot, you've digested a lot. You've got these customers in the higher SKUs. They're obviously sticking with the platform.
Kelly Steckelberg
Ye. Really focused, as you just mentioned, on logo retention. That's first and foremost, and then dollar retention. I think that FY26, believe it or not, I mean, we're fortunate to have some customers that are on three and five year deals. So while we have -- the majority had a renewal opportunity in FY24, and there's another chunk of them in FY25, will not yet have seen all of our customers have a renewal period.
Now the percentage that's left is decreasing every year. That's the great news. But I think it's a little too early to comment on what we expect the impact to be for FY26.
Unidentified Analyst
Great. Thank you. That was very helpful. You mentioned the success you've had in phone and that's going to be driving growth here in the nearer term. Walk us through the dynamics there. When you talk to investors, this is a competitive space. It's an understatement probably. There's some very big companies going against you there. And you seem to be succeeding. I mean that 7 million plus number, these are big numbers to the audience in terms of UCaaS pie share excluding VOIP [ph]. So walk through pricing? And what are you seeing in there [multiple speakers]?
Kelly Steckelberg
Yes. Phone has always been a very disruptive price point from the beginning. It's $10 if you have metered calling, $15 all-in. And if you think about customers are still sitting with an on-prem instance of Cisco or Avaya. They're paying for those licenses. They're paying for the servers, like they're paying a lot more than that. And so we offer the opportunity to disrupt it from a pricing perspective to save on-prem servers, the people that are managing it. And by the way, now with the advent of AI, like one of the features that you're going to get with Zoom AI companion is call summaries.
So if you're having a phone call, you can get a summary of that just like you can get a meeting summary. That innovation that's going to happen with AI is not going to be happening with those on-prem providers. Like they're -- especially one of them, right, is really challenged just with what it's dealing with in its own right now.
So I think that just like the pandemic created momentum to get some of those on-prem lines into the cloud, but I mean they're still estimated to be 400 million landlines sitting out there. It's big, right? And I think that AI is going to be the next compelling reason to start to break the inertia and get some momentum into moving into the cloud. So we're really excited about that.
As you said, we not only take share from the on-prem providers, we win and take share from the other cloud providers because our product is the most modern architecture out there. And then when you bundle phone with meetings and with chat, the added benefits you get of having it all right there and being able to chat with someone, one click launch into a phone call with them, one click launch into a meeting, do groups together, all of that is a very compelling proposition.
Unidentified Analyst
Especially when it works, which Zoom does. So that's another conversation. You mentioned the pricing there. I didn't have this question prepared, but if you do the arithmetic because you've been very great in terms of disclosure of revenue and units, so we can do the central arithmetic there. It seems like those numbers that we can do when you do the arithmetic are lower. And I know you were having specials when you were first ramping up hard in the last couple of years. When do we kind of anniversary that in terms of fiscal '25 or '26 where that could be a pretty big tailwind in terms of step-up in contractual prices?
Kelly Steckelberg
So there's a couple of things. Of course, at enterprise level, there's always discounts off those prices. But we do -- we have a very strategic selling practice we call free periods. We did it with meetings and it's even little bit more prevalent with phone. And what this does is it allows customers that have an existing contract, we will effectively give them a free period on Zoom during that existing contract so that they can transition. Of course, in return, there's a committed -- there's a formula around the committed contract terms we want on the other side of it.
As you said, the way the revenue works is the full period of revenue gets amortized over the free and the paid periods. So if a customer has a two year contract and say, six months of its free, that 24 months of -- sorry, that 18 months of paid revenue is getting amortized over 24 months. So at the end of that 24 months, when they renew, then there's going to be a step-up as you just indicated.
We've already had some of our customers getting through those periods because phone's been around for a while. So it is a benefit for us. It's not going to be like a huge step up that you're going to see externally, but it is a benefit for us. And it works. It allows them to get in, get the phone lines ported over and then over time, we can return them to a more normalized rate.
Unidentified Analyst
So maybe another catalyst in terms of the growth catalysts, catalysts on the growth catalysts would be CCaaS. You intimated on the fiscal 4Q call that you're seeing this early success in CCaaS and that there could be items that could accelerate that growth. Can you maybe walk us through what you meant by that comment?
Kelly Steckelberg
Yes. So there's a couple of things. First of all, it's the features and functionality. Like we always take the approach of getting a product to market as quickly as possible. And we knew when we released Zoom Contact Center that the features of functionality were probably best suited at that point for small businesses, SMB and our commercial teams. Now we're really focused on adding the features of functionality to get into the enterprise. And that's also reflected in the fact that when we first released the product, we had one price. It was $69. Now in the last couple of months, we added additional pricing tiers, which are $99 and $149, and those include varying levels of features and functionality. The highest level, including some premium AI features like agent assist.
And what we've seen, while they've only -- those tiers have only been out for a few months, the licenses that we've sold in those upper tiers, the ASP is double what the ASP is of the original price tier. So right there, you start to see how this could accelerate even with the same number of seats being sold at obviously double the ASP, which is really encouraging to see.
Unidentified Analyst
What drove that? Was that something very near term that you experienced? Because across your peers in CCaaS specifically, we're talking, you've seen a strong '23, but it seemed even into the fourth quarter, calendar fourth quarter of '23, there was an uptick from some of your peers. And then obviously, your strong commentary there. Is that what drove this potentially maybe change to go after because that's not Zoom, right, to charge more money, I think?
Kelly Steckelberg
Yes, I think that -- you're right. Typically, that is not the approach that we take. There's been such strong reception to the Contact Center and the features and functionality. We've been adding hundreds of features to this product every quarter that it almost was overwhelming, I think, to our customers and having a tiering system is help for them to understand where they need to buy. And well, yes, we always focus on bringing a lot of value to our customers.
We believe even at $149, which is the highest price point, that's less than the average ASP in the market, which is over $200. And so sharing in that value with our customers and with Zoom. And this is going to be really helpful in other ways, which is if we want to talk about gross margins for a minute, right, over time, it's going to help fund some of the investment in AI, which is having an impact because these are higher gross margin products. So that will help balance out some of that investment we want to make.
Unidentified Analyst
We'll jump ahead there, if you don't mind to the gross margin. You mentioned -- and there were some headwinds in terms of AI investments. Maybe just walk us through what that is specifically. And do we need CCaaS to offset those gross margin headwinds? Or could it be actually additive to the model?
Kelly Steckelberg
So we guided FY25 gross margin to be 79%, which is 100 basis points lower than where we were and what our long-term target is of 80%. And this is driven by, as you just said, the investment in AI, compute power as well as anticipated adoption of Zoom AI Companion features that are available today like Meeting Summary, Chat Response. And so our team does a really, really good job and they've been doing this ever since the pandemic in terms of optimizing as much traffic as possible in our own data centers.
We do leverage the cloud. We have cloud providers that we work with, especially when you launch something new to make sure there's enough capacity, but then as quickly as possible getting that back into our data centers. So we don't need the higher level margins for -- from Zoom Contact Center to achieve the guidance because the team itself has a plan in terms of how they're going to roll these features through this year.
I think the interplay will be between adoption, if there's expanded adoption, then Zoom Contact Center could help with that. But we can achieve our overall guidance without that upside.
Unidentified Analyst
Certainly seems like, we will be asking a lot of questions about CCaaS in the coming quarters. Maybe shifting gears, you mentioned innovation a couple of times and investments in bringing new products to market. Does Zoom Chat seemed to have an uptick in the fourth quarter as well? And I think everybody in this room is probably -- I don't want to mention the other company's user, may be forced or otherwise, what is Zoom bringing to market and talk about maybe the success against that large company?
Kelly Steckelberg
So Zoom Team Chat is a product that we've had forever and it's become more important strategically, especially with the growth of phone. Because people generally don't pick up the phone directly and call anymore. You chat and then you launch into a phone call, it's also very important as a retention product, honestly. It's very retentive. People don't want to switch out their chat.
And so we've invested a lot in terms of aligning features and functionality to be competitive in the marketplace. We talked about on the call that it's growing 130% year-over-year. And we have a migration tool to help customers who want to -- who are potentially paying for another third-party tool to migrate over. And we've seen in the last six months. We've seen that the downloads increase four times. So there is a focus.
I think if you step back for a minute and think about like my peers, who are all focusing on vendor rationalization, eliminating excess spend, Zoom has a lot of opportunities to help our customers do that. Chat is one of them, if they're paying for a third-party chat. Whiteboard is another. There's kind of two others in the marketplace that people might be using that they could be paying for.
Our scheduler solution, if they're paying for another scheduling solution, we have an opportunity to help them eliminate that spend. So the total cost of ownership is really strong for our customers. And I think we've been doing a better job of helping our customers ensure they understand the breadth of the platform and the value that it can bring for them.
Unidentified Analyst
And how aggressive does the Zoom want to be in terms of -- just because the company that you're competing against could be equally aggressive in terms of understanding. For the audience, too, I've spoken with Kelly about the ever grander vision of being the collaboration platform, collaboration operating system, I think you called it in the past. So yeah, maybe strategically, how when you talk with the CEO, how aggressive do you want to be here?
Kelly Steckelberg
Yes, I think it's a really good question. And we're really focused on delivering for our customers, right? That has to be the focus, and that's what we do every day. And I always -- we remind people like, first of all, everybody wants to have a choice. Nobody wants to be told what to use, what to do. We've spoken to CIOs who -- they also want to have a balanced vendor strategy because they don't want any one vendor to have too much leverage over them. And so we are going to continue to focus on -- also remember, step back for a second, remember where we are as a company. We have the opportunity to help our customers reimagine some product like Contact Center, Zoom Docs.
With AI -- generative AI at its core from the very beginning as opposed to other companies which are trying to figure out how do you integrate AI or layer it on top of the existing products. And so we really are in a unique space in time and place in the market to be able to do that, and that's really what we're going to focus on.
Unidentified Analyst
Is there any questions from the audience? We have plenty of them here, but okay. Oh, sorry, yes, sir.
Unidentified Analyst
[Indiscernible].
Kelly Steckelberg
I think we announced on the call a $1.5 billion stock buyback. And we're really focused on investing to reaccelerate growth at the top line, and doing that balanced with a buyback, which we feel is a great opportunity to return -- share returns back with our shareholders. And that gives us -- with the strength of the balance sheet, that we have today -- gives us the opportunity to continue to pursue M&A either organic or inorganic opportunities for growth while also returning shares -- or sorry, sharing returns through the buyback.
And we think that's the best approach for now. We're not considering a dividend certainly in FY25. I don't -- I mean we could see what comes in the future, but that's not on the roadmap at this time.
Unidentified Analyst
You mentioned M&A. I think -- we really have a couple of minutes left. So actually make sure I ask a question for the audience here. I think it's -- maybe breaking it down the best you can anyway, in terms of size, scope and maybe -- is this for more of the online or enterprise? I don't think you've ever been asked that question, it's more about enterprise versus online.
Kelly Steckelberg
Really good question. So what we've done historically to date is we've done two like talent acquisitions and we've done two tech tuck-in acquisitions, which have all gone very, very well for us. We've obviously explored a bigger, more transformative acquisitions in the past as well. And we are continuing to do so. We have looked at -- and started actually more recently to look at opportunities for online, which historically, we've really looked more at it from a direct perspective. But online is a different buyer and a different -- one way to continue to accelerate growth in online is by adding more products to the portfolio. We can do that organically or inorganically.
The profile of those buyers are sole proprietors or small business owners. And so it's a little different. For example, contact center probably doesn't lend itself to buying online, right? Maybe at some point in the future, we have a very light -- but those customers probably don't even have it, don't have a need for a contact center, right, these small business owners.
So thinking about, are there productivity tools? Are there other things that they use in their daily running of their business that could be helpful? And then in the direct segment, thinking about, are there opportunities to continue to expand functionality or accelerate functionality in areas that we already have?
Like contact center lends itself very well, not to the core desktop agent, where we're obviously really focused on innovating ourselves and making a lot of progress. But in the areas around the desktop, like workforce management or quality management. Those areas that typically call centers run other third-party software that we are building APIs around, but maybe you could complete a more complete suite offering for them.
And then also the opportunity with kind of like where Vivo was, which is something that sits a little more adjacent to us that we're not focusing on developing ourselves. So again, maybe productivity fits into that area. But those are the flavors that we're looking at.
Unidentified Analyst
Okay. Maybe a final question on the online, this business, it does continue to decline. How does -- how does AI and GenAI fit into that space specifically, but maybe that can become a growth engine again?
Kelly Steckelberg
Yes. So the great thing about Zoom AI Companion, it's included for all of our paying customers, whether they're online or direct. And online customers because they don't have an administrator somewhere, the large organization can take advantage of that immediately, where some of the bigger companies, their administrators, their IT team has to go through the process to turn it on for them.
Now we do have over 500,000 companies that enable it. So that's really great. But the online customers can take advantage of that immediately. And our free customers get a 30-day trial of that. So it can be a free-to-paid conversion driver. It can also be a significant retention tool in that segment of the business because they start to really realize how much better that product is than leveraging other competitive products.
Unidentified Analyst
On the free to conversion, could you give an example of what a typical online customer could be using the AI companion for where they otherwise would say, wow, I really need this. Let me start paying you. That's a huge market opportunity.
Kelly Steckelberg
Yes. I think -- I mean the most -- right now, the most popular feature is the meeting summaries. And meeting summaries, which are so much better than [indiscernible] meetings, where it's not what probably used to be used to -- used to which are transcripts word for word transcripts. Meetings summary now can recognize sentiment, it can recognize who's speaking. It can recognize humor.
It gets a much -- it's like if you were taking notes and it's going to get to the point, I'll say this, where nobody's going to take notes anymore because you're going to walk into a meeting and turn on Zoom. And I know it's great. And then you're going to have the meeting summary and it gets distributed. And it's going to continue to evolve to action items, setting up your next meeting, like this is where it's going to go to.
Unidentified Analyst
[Indiscernible] in SMB.
Kelly Steckelberg
Yes.
Unidentified Analyst
Are there any more questions? I think we're up on time soon here? Yes, I think if there's no more Kelly, thank you so much. Always a pleasure speaking with you.
Kelly Steckelberg
Thanks for having us. Thank you, everybody.