Zoom Communications, Inc. (ZM) Earnings Call Transcript & Summary

I'm Meta Marshall. I cover the communications space here at Morgan Stanley. We're delighted to have Kelly, CFO of Zoom here with us today. She is bringing us the conference and also just kind of overall, the lady of the hour, for the conference. So I'm going to start with a brief disclosure. For important disclosures, please see Morgan Stanley's research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. Also for those who are watching online, there is a question portal. Those questions will come up on this laptop in case there's anything else that you think I should be asking Kelly during this time.

Kelly, maybe to start out, there's really only a couple of companies in history that have kind of experienced what you guys did in 2020. But really, this increase used in video is kind of what Eric spoke about when he was starting the company and when you guys went public. Just how is the rapid adoption of video that you saw in 2020? Like how do you view that as transitory versus kind of the permanent vision that Eric always all along?

We certainly think this is a permanent transition that video communications is now going to be embedded in many aspects of our lives. While we are all excited about vaccine distribution and eventually starting to move around the world again safely, the way that I think about it is that we're going to -- we all want to move around the world safely in the way that we want meaning. I don't think any of us long for going back to commuting or flying across the country possibly for a meeting or a day of meetings when we see now that those can very effectively be done via Zoom. We've also heard about more personal cases like telehealth. Think about the fact that probably a year ago, we all would have thought it was really crazy to have a doctor's appointment via Zoom and yet, I did it recently, and it was amazing. It was a doctor -- that she is notoriously late. And so typically, I would have to take half of my day to go to the doctor. And this now will be a Zoom. They ping me 5 minutes before she was ready for me. I talked to her. It took 15 minutes out of my day. And so when you start to see the kind of convenience you can get out of integrating this way of life into your day, it really makes a big difference. And that's how I think we're going to see video be a permanent part of our lives going forward.

Got it. I took a red eye over the holidays, and I can definitely tell you that there is a way I want to fly again and a way I don't. And I don't want you guys have red eye.

You don't want to do that anymore, do you? And they probably do that every week before.

Yes, exactly. How -- clearly, Zoom is part of the vernacular now, but Zoom fatigue is also a part of the vernacular. And there's also kind of this big push towards in-person learning. So how do conversations with customers ebb and flow, kind of as we go through this? I love it, I hate it view of video.

Yes. So what customers love, certainly, employees -- and customers and even executives love the flexibility that this brings to their lives. We've seen it in our employees. We've had them move to be in your family, to move to lower-cost jurisdictions so they can buy homes. And that brings a lot of happiness to employees. And employers have seen that employees are productive. I mean we arguably have the most productive year we will ever have in our lifetime at Zoom. And of course, we've all been remote now officially -- a year ago today was the last day that we had in our San Jose hub. So that's the benefit. Now the challenge, I don't think it's necessarily Zoom fatigue. It's fatigue in general. What we've started to see is working from home, our lives have really even more than they were before becomes a word, right? And so what we're trying to do at Zoom is make sure, we talk a lot about boundaries, making sure that you have something to punctuate the beginning and the end of your day. Because it's not your commute no longer, it's not having to leave to pickup your children, but that doesn't mean that you should be working all the way up to 7:00 just because you're at home and you're not at a dinner somewhere. And so we try to think about boundaries, we try to think about giving tips for things like baby set a 25- or 55-minute meeting because we all used to get a break just moving around from comforts of the conference room. And now you don't even get that. Because you joined a Zoom meeting at 1 minute past the hour, people feel like you're late, and you might have needed that minute to run get a glass of water or a cup of coffee. And so trying to think about how we build these breaks into our day. And then I also think just making sure that we're all making time for our family and friends, and getting outside of wherever you're working and go outside of and take a walk because those, I think, could break up our pace.

Yes. No, I think it's evolving the style in which you use video is definitely like that next generation. So you've created -- like as we think about going back into the office or kind of having this hybrid work environment, you're creating these features that kind of democratize in-office, at-home working. With kind of making the screen look the same, just what other features are customers asking you for as we kind of look towards this hybrid work environment to kind of democratize whether you're at home or in the office?

Yes. So there's a couple of things there. We're really excited about Zoom Apps, which are going to extend exactly this. So Zoom Apps are meant to really enrich your in-meeting experience. So one of them that's in prototype, for example, is Dropbox. So think about that in a meeting like this, we could come into a shared Dropbox space and collaborate together. So it starts to take in-meeting collaboration one step further, that we could actually work on a project together. And that's what customers are looking forward to, things like the ability, enhanced white-boarding capabilities. So that's where in-apps which are in prototype today, they should be available later this year or by the middle of the year. And we're really excited about it. That's really the next step in terms of breaking down those barriers of being in a conference room together or being in-meeting.

Got it. Okay. The Zoom ethos is essentially keeping customers happy, something that you were miraculously kind of able to maintain as you scaled. How does that founding culture and ideal kind of help you scale? And how have you've been able to kind of maintain that with a year now of being remote?

Yes. I think the way that helped us scale was we -- while we're focused on delivering happiness to our customers and our employees, we also really try to make every decision from that perspective. So how does this impact our customers, how does this impact our employees? And is it sustainable for the long-term health of our business? And if you think about it, it sounds very simple, but you're trying to balance a lot of factors, and that is how -- what we carried through during the entire year. We tried not to overreact, and we found ourselves in difficult situations. When we found ourselves maybe overwhelmed at points of time is like how do we make -- for me as a CFO, for example, it was looking at, okay, we need resources, our customers need more help, our employees need more help, but it is really a short-term or a long-term area that we want to invest in? Long term, obviously, are things like engineers and sales reps. Shorter term where when our customer support queue was filling up. How could we -- we didn't want to hire a bunch of customer support reps, and we thought for -- the strategy was for the future. We could start to address some of that through AI and technology. And so for that, we look at it as more of a short-term need. We partnered with third-party resources to address that, and now, we're investing in the technology to meet that. So that's kind of how we made decisions over the last 12 months.

Got it. You mentioned having a lot of focus on account management and getting -- I guess, just how are you taking advantage of this moment? You -- everybody knows you, everybody is using you. This would clearly be the time that you want to kind of get everybody signed on to becoming paying customers. But is the focus, okay, we need to get them into long-term contracts. We just need to get them into being paid customers. We need to upsell them Phone, Rooms, like just -- it can be an overwhelming number of initiatives kind of on your part.

So we are continuously focused on taking market share. That hasn't changed from last year, and it probably won't change next year. And even through the pandemic, our growth initiatives have been pretty consistent, which our continued expansion into the up-market. They are Zoom Phone and they are international growth. All of those areas have really benefited from the increased brand awareness which has occurred over the last 12 months. For example, we are able to put reps into international markets almost as quickly as we can hire them because the brand awareness and the acceleration of video adoption has increased significantly over 12 months, something that would have taken us probably years to have accomplished. Zoom Phone has also really benefited. If you look back over the 4 quarters of FY '21, Q1 and Q2 were a little bit slower for Zoom Phone as the focus of was really on business continuity planning. But in Q3 and Q4, as businesses really turned to look strategically at what is their work-from-anywhere-strategy, Zoom Phone has become an important part of that consideration. And that's how we saw -- why we saw some of that momentum coming out of FY '21 with Zoom Phone.

Okay. Got it. One of the big discussion points we have with customers kind of -- or investors at the IPO was the idea that a lot of customers have always had a multitude of video solutions within their organizations. I think you noted upwards of 50% of customers had 3 video solutions. And kind of to this upmarket push that you were talking about, just what ends up being that entry point? Or when is that discussion taking place of, okay, now it's time to standardize, and now that time is to standardize with Zoom?

Yes. So what's amazing about Zoom is we still see a strong organic or bottomed up push and desire for this product. Even when there are other products in an organization that are perceived as free, it's often preferred by employees to use Zoom. And so it's when -- kind of there's a groundswell typically that a CIO or a VP of IT realizes that it really helps make their employees more efficient, it makes them happier, and it's more reliable. It really comes down to the usability and the reliability of our product that our customers' employees really prefer. And then also Phone becomes a bigger part of that discussion then when they're ready to standardize on a full UCaaS platform, especially if they're already a Meetings customer, Phone becomes a very easy change for them because it's just adding 1 icon on their client. And they start to see additional benefits. Now they have this integration between video and phone, and there are additional features and functionality that you get from that benefits you get from that, such as like 1-click launching a phone call into a video meeting. So it's kind of -- when they're holistically looking at their UCaaS suite, Zoom becomes a really obvious answer for them.

Got it. I mean, on the competitive landscape, you guys still -- I've had many CEOs just today kind of commenting about how they still prefer using Zoom versus other solutions. But clearly, the competitors have worked to advance their products meaningfully over the last year. Just how does that discussion go up? You noted these products aren't free, but a lot of times can seem like they're bundled into a much bigger solution versus you guys having to be a stand-alone investment.

Yes. So we really want our customers to see great value in Zoom. We are extremely competitively priced in the marketplace. And the way that we continue to bring value to our customers is by adding features and functionality without raising the price. We've listened to our customers and understand what problems they're trying to solve, what's important to them. 20% of every release is donated -- is committed to customer feature request. So we really want to make sure that our product is continuing to evolve to meet our customers' needs. And then adding new features into the -- our products into the platform to extend to what they need and give them the benefit of having best-of-breed products that integrate well together, such as working with customers our partners like Slack, or extending our product suite further with things like our own chat products.

Got it. Maybe circling back on Phone. It's seen a lot of traction. I thought most impressively, kind of on Q4 earnings was just how many large implementations that you guys have already. Are there feature sets that you've added over time that have allowed us to accelerate? Is it really just kind of having that opportunity to finally have time to even introduce the conversation? Just what is helping you kind of gain so much Phone traction right now?

There's a couple of things. So over the last 12 months, part of it has been international availability. We are now -- Zoom Phone is now available in 44 markets around the globe, which really enables large multinational customers to have an end-to-end native implementation of Zoom Phone. We also have worked really hard on our features and functionality. And now we are highly competitive in terms of what's available. So they come to us -- customers come to us today for the usability, the reliability as well as the total cost of ownership, as again, we are very competitively priced in the market, and that's why we're winning against other incumbents in the space today.

Got it. I mean in your -- basically, your Zoom suite implementations kind of would have almost doubled over the last year. A question from the audience is just similar of like can you double that again more exclusively? But I guess better put, just how do you -- will Phone always going to be, at least for the next couple of years, kind of be growing faster than how you consider Meetings is growing?

Absolutely. On a percentage basis, Zoom Phone has been our fastest-growing product line -- was in Q3 and Q4, and we expect it as a percentage of growth basis to outpace Meetings in FY '22. And we are really focused. That is one of our strategic growth drivers, absolutely. Now you have to remember, though, Meetings has a really big head start so it's going to take a while on an absolute basis for Zoom Phone to be a meaningful contributor in terms of dollars. But in terms of its strength and growth, we are excited about the momentum that we see there.

Okay. With channel being so important with telephony and international, just how have your thoughts changed about how much is going to go direct? How much is going to go through channel? And just how has the objectives of Ryan Azus, who you hired from RingCentral? Just how has his objectives changed over the last year?

And so Ryan has been really great in helping us probably educate us about the importance of the channel, especially around these Zoom Phone. Historically, before Ryan arrived, we were primarily a direct-led organization around Meetings, and we're using the channel somewhat internationally. Over the last year -- about a year ago -- a little more than a year ago, we started our channel program -- or really, our master agent program for Zoom Phone, and we have modified that program as we've gone through the year after listening to the channel partners and making sure that we found the right balance of what works for them and what works for Zoom as well. So we're really excited. We've seen momentum in the business. In Q4, more than 10% of our deals that came in were somehow touched by a channel partner. So really excited to see that. And we talked about a few key customer wins on the earnings call that were -- came to us through channel partners as well. So excited about the momentum there, and it definitely has become a more important part of our strategy.

Got it. Your guidance of 42% to 43% revenue growth in 2022 -- or fiscal 2022, clearly, you're still seeing growth opportunities. I guess, what should investors think about what is taken into account as far as churn? How much of that is Zoom Phone-led? How -- I guess, just what are the components that kind of went into that calculation between churn, Phone, kind of the up-market sales?

Yes. So some of the assumptions that we made around growth in FY '22 include continued expansion in our sales organization. We are continuing to invest in hiring quota-carrying reps globally. As a percentage growth, international, quota-carrying heads will grow more quickly in FY '22 than U.S. space as we see lots of opportunity outside the U.S. Zoom Phone is a very important part of our growth strategy for FY '22. And then in terms of churn, we think about it we have -- online has become a really important part of our business in FY '21, reminding everybody, it was 20% of revenue coming into the year. It exited at 37% of revenue. So in thinking about that segment of the business, we -- that's the segment that is most volatile when it comes to reactions to companies open -- countries opening or going back into shelter-in-place. And so the way that we're thinking about that is that retention should be pretty stable in Q1 and Q2, but as we look to the back half of the year and the vaccine distribution is more widespread globally that we expect heightened churn in Q3 and Q4 from that specific segment. And then in the upmarket segment, we have a significant amount of renewals that are up in Q1 and Q2 as that you look back last year, remember what was happening in Q1 and Q2. And so we've model a little bit heightened churn there in Q1 and Q2, but then it returns to more normalized levels in Q3 and Q4.

Okay. Got it. That's helpful. And just a couple of questions from the audience. Just the Hardware as a Service business was something that you introduced, just as people are kind of designing for maybe what their back-end office implementations look like. Just what are you seeing there? And kind of what customer type? I think initially, you kind of thought it would be more SMB-type customers, but what customer type is adopting that product?

Yes. So Hardware as a Service was really meant to be a facilitator for both Zoom Phone and Zoom Rooms sales, not as really a revenue driver itself. And that's exactly how it's playing out. We have seen it mostly in the SMB business. And as we go -- think about if companies think about going back to work, it's been really interesting that we've continued to see strength in general in our Zoom Rooms products throughout FY '21 as customers -- even while they're not in the office or taking this opportunity to reconfigure or upgrade their space. And that's where some of the innovation in technology, you mentioned, Meta like smart gallery, which is going to help democratize this, is really important. There's also new technology called kiosk mode, which allows companies to have a reception -- or remote receptions at the front desk. So you can have someone there to greet your employees or greet your visitors but doing it safely, supporting social distancing. And also, it's very efficient for our company as well because you can have an individual receptionist monitoring multiple floors at one time. So these are the kinds of things that people customers are putting in place as they're thinking about their return-to-work strategy.

Got it. On Zoom is a platform you introduced kind of a Zoomtopia. I realize it's still kind of in beta testing in some degrees, but there's a lot of established vendors in the digital event space. I think you also kind of designed it for kind of your prosumer customer. Just why did you think that, that was an opportunity worth addressing with a standalone product? And just how do you see that developing over time?

So what we saw, and I'm sure you've all experienced, is many of these individual proprietors or small business owners moved their businesses to Zoom over the last year, and yet, it's a very disparate experience. If you're taking, for example, a fitness class via Zoom, you might get an e-mail invitation and then you go to another platform, a payment platform to pay for it. And then when it's time for class, you have to go somewhere and find that Zoom link. And so what on Zoom is meant to address is, first of all, making that a seamless experience so that it's easy for both the host and the attendees as well as to provide a discovery mechanism for both hosts and attendees, so that you aren't limited to just your network, for example, a fitness instructor that you know, and they aren't limited to just their e-mail distribution list. It really becomes a global directory of events that are available. And that was what we envision and that's what we're working on in beta today. It also emerged from our corporate customers that they would like to leverage a platform for corporate events just like this, for example. So we're really working on both aspects of that and are excited and are looking forward to having that product in GA likely by the middle of this year.

Okay. Got it. That's helpful. As the world looks towards more video across the board, there's kind of this question of whether it will become embedded in stand-alone apps, whether it will remain a stand-alone product. I think even in some of the surveys we've done for telehealth, people still would be more comfortable in Zoom than kind of going through a stand-alone app. Just how do you adapt to the different mediums that people might want or make sure that you're taking advantage of all those different mediums? And how do you see that space evolving?

Yes. It's a really great question that we are continuously evaluating the -- we announced at Zoomtopia, our API and SDK platform -- part of our platform and are continuously working on that. And I think you're right. I think that as people think about how video is going to be embedded in their products, other developers, we're working with them to understand what that looks like and figure out where is the right balance. Or do we do both? And we might do both. So that's how we're continuing to look forward and more to come on that.

Got it. M&A is certainly a conversation that everybody wants to have with you, telling you what you should buy, what markets you should enter into -- certainly, I get a lot of investors listening me with the ideas. So what categories do you think it makes sense for Zoom to participate in? Will it always be a video-first kind of market? And just how are you looking at M&A opportunities currently?

So we look at M&A, first of all, the potential for it to do two things, which is augment our talent pool, which is a big part of why we acquired, for example, Keybase last year. We've got this amazing set of security engineers which really helped accelerate the development of our E2E. And we also look at it to augment our technology. And I think this is what you're highlighting that you get idea about all the time, which are -- there's natural extensions of the platform. If you think about it, we could very easily go down the workforce productivity path. And that's a little bit of what you're going to start to see from Zoom apps. You could see a natural extension into verticals, especially education and health care are two that are really leading the pack in terms of digitalization. And then there's also, of course, Zoom Phone and that further extension into that arena. So we have a corp dev team. I think they've looked at probably approaching 200 companies over the last 12 months in terms of evaluating all the cool things that are happening out there, the innovations and the new technologies and products that are available. And we have a very high bar for both talent and technology at Zoom, so we just keep looking for the right match.

More specifically I have a question of just how you view the contact center market and opportunity. It obviously gets brought up a lot as a potential expansion area, particularly with Phone.

Yes. We -- so contact center is an absolutely really important part of the Phone strategy. And the way we approach that today is through partnering. We have great relationships with Five9. Eric and Roland are very good friend, also in contact. And what the partnering approach does is it allows our customers the flexibility to work with the contact center that is best for them. And by having a strong integration with Zoom, it makes it seamless to them, but also gives them that flexibility to, too. So it's working well for us now.

Got it. And I mean, maybe to end just because it ends up being kind of a topic of conversation, and we addressed it a little bit about how you're thinking about churn. But clearly, kind of SMB churn or kind of the self-service group is kind of where investors get most concerned. And so just where do you think kind of investors miss maybe what kind of pulse you have on that customer set after a year versus like how are you thinking dynamically about how that customer set evolves?

Yes. I think everybody is longing for life, the way that it was pre-pandemic, and some aspect of that. And I think what investors miss is how integrated Zoom has become in our lives. If you set aside even using it for work for just a minute. I live in a household where Zoom gets used multiple times a day for school, for piano lessons, for poker, for PTA meetings, for hobbies -- meetings around hobbies that they have. And that's where I think people forget that even if like my nieces go back-to-school, it doesn't mean that my sister is going to be excited about driving across town to go to a PTA meeting. And that's where it's going to continue to be integrated into our lives. And sure, around the edges, some people may not want to join Zoom meetings in the future, but I think that the convenience and the flexibility Zoom brings to our lives is never going to go away.

Right. And I think just that opportunity we're talking about, like you've been opened up to -- you're not really just having to deal with your local pool of resources. You can constantly kind of be touching base with somebody else. So well, Kelly, thank you so much for being here today. This has all been super helpful. And thank you for bringing us this concert -- conference, and look forward to talking to you guys more soon. Any other follow-up questions, feed them through myself or through Tom McCallum, who heads up IR. Thank you.

All right. Thanks, Meta. Great to talk to you.