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

Hi, everybody. Thank you for joining us today. My name is Samad Samana, and I cover software here at Jefferies, including the enterprise commmunications space. And we're really happy to have with us today Kelly Steckelberg, the CFO of Zoom. And Kelly, thank you for your time. We're really excited to hear about the company.

Normally, I kick these off with -- for those that are less familiar with the company, maybe tell us what you do. But if people aren't familiar with Zoom at this point after the last 18 months, I think it would be a shock or so. Maybe we'll start in a somewhat different way. We're coming off of a once-in-a-generation kind of year for Zoom, and maybe let's start with -- let's talk about what the company experienced last year. And how we should think about that momentum as we're coming out of pandemic, and what you're excited about for the business.

Yes, sure. So first, thank you so much for having us. We're thrilled to be here. And last year was absolutely a year of a lifetime, I think, for all of us at Zoom. And just as a reminder to give some context, in December of 2019, we were averaging 10 million daily meeting participants. So that's something if we're joining a meeting on an average day. And by April, that had ballooned to 300 million daily meeting participants. So 30x growth within a matter of months for us. And that momentum really continued through the year last year. The first couple of quarters of the year were focused primarily around companies making sure their employees were safe and productive, and that meant buying Zoom Meetings. And then as we got kind of through the first half of the year and things were starting to stabilize a bit and maybe even normalize in this abnormal situation that we find ourselves in, organizations started shifting to think more strategically about UCaaS and what they needed for that portfolio. And that's where we started to see some momentum building in Zoom Phone. Zoom Phone is our cloud PBX solution that is a little over 2 years old, and we can talk about that in more detail, but that started to grow. And that continued through the rest of the year as well. We have some amazing stuff we can talk about on Zoom Phone. And then we also saw a lot of momentum last year with our Webinars product, as events like this moved from in-person to completely virtual. And that has spawned the acceleration of some innovation, which we can talk about in terms of new events, which is a platform that we announced a few weeks ago, which allows you to really support large corporate events with -- by leveraging the webinar, but adding on to it things like green rooms and wait rooms, the ability to simulcast multiple events at the same time. So really looking forward to a world where we're not going to go back to work, and there's going to be some aspect of that, but Zoom is really here to support the convenience that we've all experienced over the last 1.5 years and support organizations in a way that their employees want to work, which is probably some combination of in-office and remote working.

I can tell you with certainty that even as I've started to go back to the office -- don't worry, completely voluntarily, that my Zoom usage is just as high as it was when I was sitting at home in my apartment. So I don't think that's going to go away. And you mentioned maybe some of the newer products. I guess when you think about the company and its position in the market going from 10 million daily meetings to 300 million-plus, I think oftentimes, you will forget that, that 300 million still leaves ample room for more Zoom users. And I'd love to maybe address that just as the company thinks about the growth algorithm and what the opportunity ahead is? Just the numbers are eye-popping, but I think it would be helpful to understand how much opportunity is still left out there for Zoom?

Absolutely. No, I often get this question. If somebody doesn't have Zoom at this point, how have they made it through the last year, right? Like doesn't everybody that need it, have it? But that is not the case, for sure. So a couple of anecdotes or examples I can point to is, we closed our largest deal in the company's history in Q1. And that was a large U.S.-based financial institution. It was a multiyear sales cycle. And if you interacted with this institution, you would probably assume they were a customer of Zoom because certain individuals in the institution had access to Zoom, probably buying it on their credit card. There were, I think, some divisions or departments that had access because of the type of roles they had, maybe they were customer-facing and they had a different need for it. But not everybody in that organization had access to Zoom. And we continue to see examples like that. And then the metric that we use internally to measure and track our growth and penetration is the Global 2K. So today, if you look at the Global 2000, only 15% of them are spending more than $100,000 a year with us. And that size of an organization, a sizable deployment would obviously mean more than $100,000 a year. So that says to me, there are 85% of the Global 2K that have an opportunity to spend a lot more with us. And when you drop that metric down to how many of the Global 2K are spending more than $1,000 a year with us, the number goes up well over 50%, which shows that there's some probably organic deployment in those organizations that has yet to take hold. And so that -- again, there's still that opportunity to continue to expand, and that's how we think about it.

That's great. And that's what we try to remind investors, that last year, everybody was trying to triage and there's still a lot of strategic decisions that are left to be made out there. And you mentioned that UCaaS is -- that overall component in video conferencing is just 1 part of that. And I was going to ask about the Zoom Phone later on in the conversation, but I think that it's probably appropriate to go ahead and maybe jump ahead to that. And the company is coming off of a strong quarter where you just reported 1.5 million lines, and that's incredibly impressive. Maybe help us understand what's driving that momentum for Zoom Phone? And how companies are using it strategically together with the core video offering?

Yes. So our strategy for selling Zoom Phone is to sell into our existing installed base. And as I said earlier, organizations kind of took a little pause on looking at phone at the first half of last year. But as they came into the back half of the year, they started to, I think, realize that there are thousands of phones and phone lines sitting in offices that aren't being used by people. And by finally taking the plunge and moving phone from being an on-prem into the cloud, that really gives everybody the advantage of having their phone lines no matter where they are. They can carry them around on a mobile device, they can have them on their laptop or desktop. And you also don't need that very expensive phone that's sitting in there. You can leverage a headset to really be your phone. In fact, 85% approximately of our deployments are using cellphone headsets rather than buying handsets for them, which is a much more cost-effective approach. And I think that this -- for some reason, phone has been the last area that IT organizations have really tackled in terms of taking it to the cloud. And when I asked the CIO that one time, he said, well, it's because it just works, right? There are a server somewhere sitting in a closet, and when you pick up that phone, there's a dial tone. So why mess with it? But I think the pandemic has really changed that and really put it on. And as you said, we announced in December that we had gotten to 1 million phone seats. That took us 7 quarters to accomplish. And just 4 months later, we announced that we had gone from 1 million to 1.5 million. So absolutely seeing momentum there. And there's lots of benefits by having Zoom Phone coupled with Zoom Meetings. First of all, it simplifies your vendor approach. It is very intuitive for existing Zoom Meeting users to now use Zoom Phone as when you have your client, it's just 1 more icon there. And then you get other benefits in terms of the integration, like one-click launch from a phone call into a video meeting, or if you're using Zoom Chat, one-click launch into an audio or a video meeting. So there's really a lot of amazing benefits from having those come together. And customers that have seen how we've transformed their meeting experiences now trust that we can do the same for their phone experience.

That's great to hear. And I think the 1.5 million obviously is very impressive, but what maybe stood out even more to me was the 18 customers with 10,000-plus seats, right? It clearly shows that there's enterprise momentum, and it's not just your smaller customers. Maybe what's helping thaw the large enterprise and making them -- generally, they're risk-averse, but we're clearly seeing you guys gain more momentum there. So I would love to maybe understand what's driving the success upmarket as well?

Yes. And we're actually up to 21 customers that have more than 10,000 feet deployed today.

I like the breaking news on a NASDAQ [indiscernible]. I like that.

So I think that what is giving rise to momentum, we actually had strength in Zoom Phone in the enterprise from very early days. And where that comes from, the trust that our customers have in us, in general, as a brand, and again, seeing how reliable Zoom Meetings have been. And remember, Zoom Phone is really running on the same back phone as Zoom Meetings. If you've ever joined a Zoom Meetings and you've used the audio via your computer, you're using the same infrastructure that Zoom Phone runs on. The difference is that Zoom Phone created the opportunity to have phone number management on either end of that and made it easier for like spontaneous calls. And so organizations, especially larger even, right, one of the key things they look to do for is reliability. And given our dispersed data center strategy and all the work that we've built around this modern infrastructure, they expect the same from Zoom Phone as they've come to expect from Zoom Meetings. And then another area that we spent a lot of time investing in is our international availability. So Zoom Phone is natively available in 44 countries and markets, and that is the most markets that you're going to find from an international availability perspective on a native basis of any of the cloud providers. And so what that means is that the largest enterprises are able to do a full Zoom native deployment and capture their voice around the globe. And that gives them the benefits of all the features, including things like extension dialing. And this is really important to large organizations because before we had that broadened international availability, they could do, for example, a Zoom Phone deployment in the U.S., but maybe do a hybrid that integrated with a bring-your-own carrier approach to another market. And now given that international availability, it allows them to do a native -- a more simple approach to that without having to do an integration. And that's -- like you said, that's really important. Some of our largest customers have waited for that availability to bring in.

Great. And since you mentioned international, it's probably -- maybe pun not intended, but if we zoom out and think about international more broadly, obviously, growth there has been very strong. But how should we think about maybe traction generally for Zoom's overall portfolio outside of the U.S.? And maybe how should we think about the top opportunities on international as we look at it today?

So international has always been one of our key growth strategies for the last several years. What has happened in the pandemic is it's really heightened that because of 2 reasons. First of all, the global acceleration of adoption of video communications has been amazing. I think we're all experiencing that. Tom and I did an investor roadshow about 1.5 years ago, and my observation then, so obviously, pre-pandemic was, that Europe was a couple of years behind the U.S. in terms of video adoption. But I don't think that's the case anymore. I think globally, video adoption has become a communication mode that everybody is now comfortable with. And then Zoom brand awareness specifically has also really accelerated during this time. And so what that's done for us is open up markets that, pre-pandemic, would have not been on our road map for a few years, because the way that we typically go into a market before we hire a sales rep is we seed that market with marketing spend so that they're not going into a cold market. And we don't need to do that any longer. We are able to really hire reps and put them in markets where we see demand as quickly as we can hire. So for example, like Latin America, probably would not be a place that we would have invested in for the next couple of years, and yet we've already hired reps there and are really excited. In fact, Latin America was one of our strongest performing regions in Q1. So we continue to see tremendous opportunity in international. And it was a little over 30% of our revenue in Q1. For the long term, we expect they should be 40% to 50% of our revenue. So lots of opportunity there.

Great. And I think that -- we think a lot about distribution, whether that's both on the U.S. side or international. And if there's one thing I've always thought about Zoom, is that it's the virality of it, right? I remember the first time I used Zoom, it was at Jefferies, and it wasn't because management told us to use it or because some sales guy sold it to -- or sales guy or gal sold it to the firm, but it was because users were driving adoption. And as you think about maybe the -- going beyond just the video conferencing and you're selling more, call it, bundles and becoming a core communications platform, how do you think about the go-to-market strategy as you go especially into larger and larger customers?

Yes. So as you mentioned, the freemium model and the virality of Zoom is and continues to be a very important part of our go-to-market strategy. Every day, we embrace and we love our pre-host. In fact, free usage has grown significantly during the pandemic. And if you think about it, every time even a free host starts a meeting, they have the opportunity to expose somebody else [ with Zoom ], which is exactly how you're talking about how you became aware of it initially. And so that continues to happen on a global basis. Now what that leads to then, of course, is a bucket of free users that we present offers to, to try to convert them to paid. The most common reason people upgrade from a free to paid is due to the 40-minute limit. And so promoting usage on the platform is a great way also to motivate people to upgrade. We also market to our free users, things like Zoom Phone and try to encourage them to become a multiproduct user, which often then also motivates them to upgrade. But we love our free users. And then in terms of what's happening in the upmarket, in general, we have account reps who work on a named account basis. That hasn't changed. That's how it's worked since day 1 for the upmarket they met with enterprise teams. And they will look into our free user base if there are domains in there that we can see are -- in their account name, and they'll reach out to them. Especially if they start to see a concentration of free users within a certain domain, then they'll reach out to the VP of IT or a CIO and say, "Hey, should we talk about putting an enterprise license agreement in place?" We still and have been doing events. Harry Moseley is our global CIO, and he is amazing. One of our top sales reps even though he doesn't carry a quota. And he often, through building relationships with CIOs, builds a very valuable referral network for us as well, and that has continued to be relationships that continue to be strong of course during the pandemic even though there have been many fewer events. And so that's an important strategy for us. And then once we have an opportunity to talk to an organization, meeting with Zoom Meetings, as I said, the strategy for Zoom Phone is to sell-in after that, and then, of course, there's a whole opportunity around rooms as well as events that follow that.

Great. And maybe if we -- if we switch gears and I have a few questions. [Operator Instructions] So maybe switching gears. Another interesting piece of news that a lot of investors were focused on after the last earnings call was Eric mentioning CCaaS. And I know the company partners with some leading companies that are doing great. And I'd love to maybe just hear from you what the company's thoughts are in terms of contact center, in terms of a partner strategy. And maybe what Eric was trying to say when he mentioned [ hacks ] at Zoomtopia in September?

Yes. So as you said, our strategy today is that we partner with all the great players in the space, including Five9, Genesys, inContact, Talkdesk. And what I've learned over the last year or so and spending more time learning about the contact center is they all have different areas of strength. Some of them are that they really meet the needs of enterprises, some of them they need more of F&B. Some have great domestic distribution, some are really strong internationally. But there isn't really like 1 contact center solution that fits the needs of potentially all of Zoom's customers. And so starting to think about maybe there's a hybrid approach. Since we have a range of customers all the way from individuals up to Fortune 10, how are we going to meet the needs of all of them in terms of providing an opportunity or an option for contact center? And I think what you'll start to see us evolve to is probably a hybrid approach, meaning partnering for certain segments of our customer base and potentially something provided more directly through organic development or an acquisition for another segment of our customers. And that's the piece that Eric was alluding to and adds a little bit of a tease to encourage you all to come to Zoomtopia in September, and I think I'll leave it at that.

No. I like it. And I like to leave something to be desired to learn about in the future. So I'm sure everybody on this webcast will be listening into that as well. And so I guess, maybe just as I think about the motion with partners on contact center, is it typically -- are you -- is it more of a referral relationship? Or are you brought into -- are you jointly going to customers together? Maybe just help us understand how generically the partnerships work from a technology perspective?

Yes. So we don't have a commercial relationship with any of the partners. So it's more of a referral or that depending on what -- how the customer is approaching their assessment, we might be both submitting proposals or responding to RFPs at the same time, and they want to understand how our phone system works with these other contact centers and how those integrations work. So if that's the case, then of course, we have tight relationships with their sales organizations as well to go in and talk about that [ one thing ].

Great. So I've gotten a couple of investor questions. So I'm going to read them out, so I apologize if my are eyes looking up, but I have another screen where they're coming in at. So what is the stickiness of customers? At what rate are they renewing on an annual basis? And how should we think about retention long-term?

Sure. So the way to think about retention is to segment our customer base and customers with more than 10 employees and with fewer than 10 employees. And we talk about them this way on the call as well. And the customers with more than 10 employees really aligns with customers that are touched by our direct sales organization. They typically buy on annual or multiyear agreements, versus the customers with fewer than 10 is really a proxy for customers that buy online, and the majority of them are buying on monthly agreement. So they don't have a long-term committed contract. So as you can imagine, the retention in the customers greater than 10 is much higher than that in the customers with fewer than 10. And if you really want to get into details, [ the only thing we can ] disclose specific metrics around churn or retention is all the way back to our S-1, and it was the metric for the customers fewer than 10. So if you want to go all the way back there. And what I would say is that -- or the churn for customers greater than 10 is a fraction of what it is for that fewer than 10. Now coming into this year, as we were thinking about planning, it was the first year we're going to see renewals for these customers that bought early on in the pandemic, and we weren't sure how those renewals were going to turn out or how the customers would behave. So we took a conservative approach to that. We were very pleased with the retention and the renewals in the customers greater than 10. It was actually stronger than we had forecast. So that was great. And part of that is what allowed us to increase our guidance for -- over achieve for Q1, but also increase our guidance for the full year. And then with customers of fewer than 10, this has grown in importance. Pre-pandemic, it was 20% of our revenue. The last couple of quarters, it's been in the 36%, 37% of revenue. And that is definitely the more volatile segment of our business given that it's individuals, it's small businesses. And they -- like I said, is a reminder that most of them are buying on a monthly basis. So that's the area of the business that I remain most cautious about. Now the way that the retention curves look for these customers, it's probably very similar to other subscription business you see, where when an individual or a customer subscribes, the highest rate of churn is typically within 2 to 3 months. And then what you see from a cohort, this is on a cohort basis, when you pull back and look of these cohorts, and then you enter this long tail of retention. And so we're kind of moving through these cohorts that have subscribed during the pandemic and moving through these high periods of churn for them. And then what I think we're going to settle into is a long tail of a stabilized renewal rate for these cohorts. But that's going to take a few more quarters to get to that stabilized period. And then I think this will be a really nice segment of our business that renew on a consistent basis. And over time, we expect that customers greater than 10 to grow as we're really focused on continuing to invest in our upmarket business; we're adding sales capacity there. So while the dollar amount of these customers with fewer than 10 will probably be consistent, we expect as a percentage of revenue over time for it to decrease.

Great. Very helpful. And I'm going to read another investor question. So Google Meet and Microsoft Teams continue to innovate on their conferencing offerings. What concern does Zoom have that? Perhaps at the moment in the last couple of years, but that there's more competitors in the environment, and these are 2 large companies. So maybe just how do you think about that from a competitive environment standpoint and maybe how does Zoom continue to differentiate?

Sure. So I think the reason that Zoom has been differentiating continues to be from the very beginning is, first of all, our ease of use, to focus on the user experience, and then the reliability. And the combination of those 2 things are what makes this product work, again, from a kindergartener, all the way up to the largest Fortune 10 company. And yes, we certainly have seen innovation across all markets as in the last year or so, as there's been a huge opportunity for everyone. For the long-term, the competitor that we really think the most about that we partner with and compete with is Microsoft, for sure. We believe still today that Zoom is the preferred product that most users want to use. We do see customers that want to leverage Microsoft Teams for certain aspects of the suite, but they also wanted to use in conjunction with Zoom. So for example, often they want to use Teams Chat, but they want to use Zoom for meetings and for phones. So we do have an integration with Microsoft that allows you to one-click launch a meeting from the team's interface. You can also launch a Zoom Meeting from within a Microsoft-enabled conference room. So we have a strong relationship with them. We have a high deal of respect for Microsoft, but continue to innovate. I mean the way that we stay the preferred choice is by continuing to listen to our customers, understand what needs they are experiencing, especially as you think about going back to the office. I spend a lot of time talking to them about innovation in the conference rooms, things like Smart Gallery, which we create this experience of seeing everybody's face on the screen, even when some are in the room and some are not. Or companion nodes so that when you walk into a conference room, you're able to join the meeting from your device, so you can participate in chat or pooling, but do it in a mode that doesn't send your video on or send your audio on and cause an echo in the room. Like making these things really seamless as we start to think about moving back into the office as video -- video communications is going to be embedded. As you just said, even though you're back in the office, you're still using Zoom license just as much. And I think that's exactly what we're all about to experience. But doing it in a way that is easy and seamless as you move through in-person and video-enabled.

Well, with hundreds of millions of users out there in the world, I'm sure both of you all can do great. Maybe 1 more investor question. Can you talk about converting monthly credit card customers to annual billings? Is there any ambition for the company to push for that over time?

Yes. So there absolutely is. This has been a focus of ours since early last year as we saw -- started to see the significant growth in this segment of our customer base. So our online marketing team has been doing a great job in not only providing offers that include discounts to convert monthly paying to annual customers, but also offer -- making offers to them to buy, for example, in phone because multiproduct customers are much more retentive. We also have spent a lot of time and continue to invest in our online website itself, making it very easy for our customers to add additional products, to upgrade their -- to make sure that we are, for example, adding currencies, different payment types as well globally, all of that to not only expand the online opportunity, but to make it really great. And -- I think the best way you can get people to convert is to give them an amazing product that they never want to leave and have everything about that buying experience be amazing. And so we are investing a lot in that today.

Great. Maybe we'll end with 1 last question. I know we mostly talked about growth and technology. But I think really 1 of the incredible things about Zoom is how profitable it's been through all of this, even with the hyper growth. So just how should we think about margins and the company's profitability, especially how strong it's been for the last several years?

Yes. So thank you. We obviously do really focus on being -- investing appropriately, but always focusing on the ROI as a company. Now the margins -- the elevated margins you've seen over the last couple of quarters are due to the fact that the revenue growth last year was at a pace that we couldn't keep up with from an investment perspective, honestly, in terms of hiring and other spending. So we had over 40% margins in Q1. For the long term, you should expect our margins to be more in the range 25%-plus. As today, we are currently under investing in R&D. R&D in Q1 was 4.3%. We really want that to be in the range of 8% to 10% for the long term. And then sales and marketing, we are also under investing currently today. And so we're really focused on the long term, adding more sales capacity as well as increasing our marketing investment, moving away from a previous strategy of building brand awareness, because we don't really feel like we need to spend there. But focusing more now on targeted product marketing around Zoom Phone, probably Zoom Events and Zoom Apps in the future.

I can tell you the brand is very strong when even my niece and nephew know. They say, let's get on a Zoom. So I think it's become a verb. But Kelly, I think we'll end it there. We're at the top of the half hour. We really appreciate your time today, and it's just been great to see Zoom's success, and we hope it continues.

Thank you. Thank you so much for all your support.