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

All right. Thank you guys for bearing with me. Even in a virtual conference, sometimes you're trying to run back and forth between meetings. Luckily, my computer decided to shut down and restart on me heading into this conference. So Kelly, besides the -- some technical issues on our end, thanks for being here. Kelly Steckelberg is the CFO of Zoom. And how are things on your end?

Everything is great. Thank you so much for having us here today.

You appear a little less frazzled than I am. So that's a good start at the very least. And look, we'll get things going here. If you're an investor on the line, we're going to dive into the Zoom story, which I know pretty well, especially on the telephony side. But if you have any more high-level questions or just any questions in general, feel free to e-mail me at [email protected], and we get those questions in for you.

So Kelly, maybe at a high level, let's talk about how Zoom has shifted from a really great video product that everyone knows and love. To now a webinar product, like [indiscernible] like with OpenExchange or the Zoom Phone and everything that comes after that. So how is that platform strategy progressing so far?

I would say we are right in the middle of that transformation. As you say, everyone's known Meetings and come to love that application. But we have a much broader platform and really excited about the transition to becoming the platform that you use every day as your communication and collaboration solution. So that includes Zoom Chat, which comes with our Meetings platform. As you mentioned, Zoom Phone, which is our cloud PBX solution, which is about 2.5 years old at this point. Of course, Zoom Rooms, which is our conference room solution and is a really important part of the strategy as organizations are thinking about how do they welcome their employees back to the office. And then as you mentioned, Webinars, which we're using today, but also Zoom Events, which is our new product that we announced about a quarter ago. It's been [ KGA ] about a quarter ago, which is really meant to support the broadening of events, which during the last 2 years have -- we've seen massive events that have gone virtual and it support things like lobby and multi-session streaming. So that's been really great to see. And then, of course, we're excited about the launch of Video Engagement Center, which we announced at Zoomtopia and in beta today and will be generally available in the first half of next year. Ryan, you're on mute.

Perfect. See, things are going just to plan already. So a pretty simple and easy product development road map, right, that you guys laid out for [ yourselves ].

Oh, yes. Thinking you were going to say that, yes.

Yes. And that's the thing about Zoom. I try to explain to people. I'm like, guys, like Zoom Phone just came out like a little over 2 years ago now, and they've already got a fully built-out channel program. They got a fully built-out international service coverage, right, distribution globally. And all those things happened during the pandemic, right, when your video side was catching fire. So I guess, at a high level, as we're going back in the office, how are your enterprise customers rethinking both video and then maybe we'll talk about [ Slack ] in a little bit, but their video journey in terms of like going to one solution or going to cloud video?

Yes. So the great thing is that we've seen continued strength in our Meetings solution. I think that everybody probably on this meeting would agree that the work of the future is not ever going to look like it used to in the past, where we're all concentrated in 1 location. I was laughing right before this meeting. If you could see where I am, I'm upstairs in my niece's house working literally on an ironing board. But it works, right? You could be anywhere. And so given that, we have seen really strong renewals for our Meetings product as companies realize that, if anybody is working remotely, even 1 day a week, they need a meetings solution. And they need one that's reliable and easy to use, and it's going to be there. But what's even, I think, equally important is they've realized that you have to give your employees other tools as well, which includes Zoom Phone, which makes it portable. You can take it with you on your laptop, on your phone, it can be anywhere that you need it to be. And then probably equally, if not even more important, is the Rooms strategy. So think about this experience we've all come to love, which is we can see everybody's face on the screen. We can tell who's talking, you can interact through chat. Well, as you start to have this experience of some employees being in the office and some being remote, working from their niece's house, you need to provide a solution that supports that. And Zoom Rooms is going to do that. It does do that. We have features like Smart Gallery, which recreates this experience, where you can see a view into the conference room and see everybody who's there, but it also slices it up so you can see individual faces and who's talking in the room. So that if you're not in the room, you still get that inclusive experience of knowing who you're interacting with. We also have companion mode, which allows you to join the meeting silently but interact with it so that you can chat or you can participate in polling. And this has come out of really listening to our customers and hearing the challenges that they're experiencing. We've heard from numerous customers that they open their offices, they welcome their employees back and then they realize that their offices were not set up in the right way to support this hybrid work approach. So listening and working with them on all the things that are going to make this -- the next phase of transition. I think we all went from all working together to all working remotely to now working in hybrid and trying to figure out exactly what that next phase of work looks like.

Excellent. Now I love the idea that Zoom just works and the ironing board as a desk just works as well.

Yes. It's great.

I mean, I think we all can relate to that over the last 2 years. But look, I think you brought an interesting point. Like as enterprises rethink their [ interest ] and deployments, I mean -- and they're rethinking office space, like you mentioned, in terms of video, enabling Zoom Rooms. I also sometimes think they're going to rethink, hey, why do we have all these servers in our basement for voice, right? Like why do we have all this on-prem hardware? So as we try to reduce our office space footprint, I mean, that's probably a good place to start, especially with some of the feature upgrades and potentially lower total cost of ownership on Zoom Phone. So could you just talk about maybe how your enterprise customers are now attacking the telephony angle as they look to upgrade their video systems?

You are exactly right, Ryan. There are so many on-prem phone solutions still today. And when I talk to CIOs about that, there hasn't been a compelling reason yet, really the pandemic has started this, or that changed it because like you said, there's servers sitting somewhere in a closet that nobody has to touch. And you pick up your phone and there's a dial tone there. It works. So there hasn't been any reason for them to take the risk of a migration. But what's happened over the last 2 years is they've realized there are literally millions of phones sitting in offices being unused. And so having a mobile workforce now has been the motivation for them to realize, you know what, we can get this into the cloud. We can make it really easy and portable for our employees to take their phone numbers with them wherever they are. And as you say, realizing that, very likely, they're going to recognize and enjoy a lower total cost of ownership. And so that has been the compelling momentum that we have seen from our customers. And so as you mentioned, Zoom Phone is a little over 2.5 years old. We're really excited. It's globally available in 47 markets. So you can have a native implementation there. And we announced on the Q2 call that we had crossed over 2 million seats sold. So really excited about the momentum there. And then, of course, there's huge benefits our customers realize when they have a natively integrated phone solution with the Meetings solution, the -- like the one-click launch into a meeting. And so that's -- our strategy is that we're selling into our installed base. As you mentioned, we also have been very focused on building out a master agent program in the U.S. that's been really successful. And now we're fully committed to extending that globally as well.

Yes. unbelievable momentum and penetration to that like channel partner community. Just as you think about going after your own significant install base now at this point, that's expanded, I guess, beyond some of our like wildest imaginations over the last 2 years. I guess on the Phone side, like how do you go after existing Meetings customers? Like what's the strategy there?

So we have 2 different strategies -- we're stratifying our -- sorry, our accounts, I should talk about first. So in the upmarket, we have named account executives. And so they spend a lot of time with their accounts always. So the opportunity for them -- to speak to them on a renewal period or just talk to them to understand what they're thinking about and what their strategy is. And then in kind of our mid-market segment, we have an acquisition team as well as an upsell team. So it might be that the acquisition team at the time that they're selling them Meetings or maybe Phone for the first time, they talk about that with them or potentially upsell team that is going in after the fact and talking again about all the benefits that you can see. And just as a reminder, we're also very competitively priced on Zoom Phone. So when you look at it compared to some of the others in the market, they could really enjoy a benefit. And then as you said, getting rid of some of those on-prem, it really becomes a value proposition in addition to it's an amazing product that is built on modern architecture so they get all those benefits as well.

We're seeing some really large deployments too, I mean, for both video and phone. I mean, in the second quarter, you talked about like over 50,000 seats on the Meetings win and 30,000 last quarter. And these are some of the largest, I would call them, UCaaS deployments I've ever seen. So are you really seeing this largest of large enterprise customers finally moving to the cloud for the first time?

Absolutely. I mean, some of those deployments are in Fortune 50 customers, which I think is a true testament, first of all, to the reliability of Zoom because remember, just as a reminder, Zoom Phone is built on the backbone of the Meetings platform, is -- if you've ever used a voice over IP feature with a meeting, you were using the backbone of Zoom Phone. And then what Zoom Phone did was extend that into phone number support. So we've had time to really build this reliable platform and then, as you said, with Zoom Phone very quickly to add features that obviously are sufficient and really meet the needs of the most sophisticated buyers in the world. And often, what we hear from customers is they really trust Zoom. They know us. They see us as a vendor that has been there to support them. And so making the Phone decision, even when they go through an RFP, really come down to -- as you said, the reliability, the ease of use and the total cost of ownership is why we win around Zoom Phone. And the biggest thing that we focused on recently has been the international availability as -- look, the features and functionality came very quickly. International availability sometimes takes a little bit more time. But as we've crossed over that 47 country market, it meets the international needs of most multinationals.

Yes. That's never easy going country by country, getting service coverage but...

Yes, takes time.

Yes. And there's nothing you can do. Like sometimes it just takes 2 years in certain places. But now you beat me to it. I think the reliability of Zoom and the fact that you have one of these deals kind of like breaks that narrative that, hey, maybe the cloud is only for SMB market, like the largest customers will never go there. So definitely good to see that as a cloud communications guy. But with large wins kind of comes large competition, right? Like people are going after these same type of deployments, and they have relationships too with these large customers. I think a lot of people on this call are kind of thinking through the dynamic between Microsoft Teams and Zoom as you go over these deals. So can you just talk about how you compete with them, in your view, in the space?

Of course. So Microsoft is both a very important partner as well as a competitor for us. And stepping back for a minute, just as a reminder, everything we do at Zoom is focused on delivering happiness to customers. And that means ensuring that they are enabled to choose the products that work best for them. So we often hear from our customers there are aspects of Zoom that they want to use like Meetings and Phone and there are aspects of Teams that they want to use like Chats is the most common one. So there is an interface that is built on Teams so that you can one-click launch a Zoom meeting or a Zoom Phone call from there with a seamless integration. We also have an integration that allows you to launch a Zoom meeting from within a Microsoft-enabled phone -- I mean, sorry, Microsoft-enabled room. And so those are really important integrations because, again, it's back to listening to our customers and hearing what works well for them and enabling them to have products that work best. And with that, we certainly don't take Microsoft for granted. We think every day about continuing to deliver a competitive product and innovate and stay ahead. Our key differentiations, of course, are our ease of use and reliability, but it's also really providing solutions that meet the challenges that our customers are experiencing, like that's innovating with them around Zoom Rooms. And we will continue to do that and really maintain the lead that we have in terms of being a product that our customers not only love but really have come to rely on during this time.

Would you say it's too simplistic to say like if you're a video-first enterprise, you go with Zoom and if you're a collaboration-first enterprise, you go with Teams? Or like -- I guess, how do you think about like where you're better positioned in certain enterprises or wins?

So we absolutely hear from our customers that the Zoom Meetings platform is better, right? It works better. That Microsoft works -- it works fine in certain instances, maybe one-on-one meetings, but when you try to expand that typically or you try to do an international or a larger meeting that really Zoom outperforms in those situations. Now there certainly is the perception in the market for many organizations that Teams is "free"right?" because it's pervasive. It's sitting on their desktop. And for some organizations, that outweighs having a better video experience. Now how they make those choices, I think it varies by organization. But we , I think, always hear from people that when they have the video, the Zoom video experience, it's actually a better one. It just depends on what criteria they're making those selection decisions.

I would definitely agree with that. Now kind of the other end, right, the self-service, individual user side, fully away from enterprise, shifting gears. At your Investor Day, you noted that 18% of your ARR was kind of on these individual, like single e-mail accounts. Is this the portion of customer that's making it difficult to kind of forecast what growth in the segment could be? And I guess, is it like how can we think about where that customer is now as a percent of ARR?

So if you remember, before the pandemic happened, about 20% of our revenue was coming from customers that were self-serving online. And that is not only individuals but also small businesses. And last quarter, that was in the mid-30s. So there's been a significant growth in that. And this -- that -- I would say it's not just the actual individual e-mail domains. It's this whole online segment that is the most volatile segment of our business. They -- a large percentage of them buy on monthly contracts as opposed to customers that buy direct, which typically buy annual or multiyear agreements. And these -- this is the segment of our business that has certainly been the most reactive to news around the globe, around openings or closings, vaccine availability, et cetera. And so this is the segment of the business that is absolutely the most volatile. However, what we've seen is, as this segment of our business, as these cohorts age, and once they get beyond 15 months in tenure, then they really start to stabilize. And the good news is we're working through these cohorts that came to us during the pandemic, they're all aging, and they're getting to a point where sometime next year, they're going to all be beyond the 15 months. Now of course, there's new subscribers that are coming in every single day, but this massive cohorts that we've acquired during the pandemic are going to start to stabilize because they will have aged. And that will really help with the overall volatility that we've been experiencing over the last year.

Yes. And it cuts both ways, right? Like last year, volatile to the upside. Now, it just makes things a little harder to forecast, right?

Definitely right.

I mean, and that would be -- [indiscernible] is probably a new one for a lot of people. That's what we're working on right now. Like how do we forecast next year? And obviously, you're not going to give us numbers or anything. But maybe any breadcrumbs or tidbits around the stability of your core business that I think can help people as we try to model out next year.

Yes. So you're right, we're going to give FY '23 guidance on our Q4 call. But the things that I would think about and that we've talked about is we really expect growth to come from the upmarket segment of our business or the direct segment of our business. And that, that's the segment that's going to grow the quickest. And this online segment of our business is going to grow at a slower rate, which will actually have a dampening effect, if you will, on the overall growth rate of the company. Now some time during next year, we expect to see an inflection point when you have a combination of things like what we just talked about, the stabilization of these cohorts and this aging as well as impact from new products we've talked about earlier with things like Zoom Events as well as Video Engagement Center that we'll be launching early in the year. So that's really all I can say now. We, of course, will have a full view of guidance on the Q4 call.

Excellent, yes. I mean I always encourage people to break news on Barclays conference [indiscernible] fireside. But I can totally understand. In terms of like the level of net new business added for that customer greater than 10 cohort segment, you added about $40 million in sequential revenues. Do you think that's kind of in the right area going forward, like you're comfortable with that number?

Yes. Ryan, I'm really not going to comment beyond -- we gave Q4 guidance on the call, and that's the extent I can really [ comment ] right now.

That's completely fine...

But thank you for the opportunity to have an exclusive right here at Barclays.

Yes. I set you up, you know where I was going. Okay. I guess the other question that I'm getting pinged on and people want to hear about is your recent investment in Genesys and kind of what that means for you guys in contact center.

Yes. So Genesys is a great partner to us. We have many partnerships in the contact center space including, of course, Five9, Talkdesk, NICE and Genesys. And we really think, for the long term, having an investment with them, having a tighter partnership with them really makes sense as -- again, back to delivering happiness to our customers, it delivers happiness to them by giving them eventually a really seamless integration even stronger than the one that exists today.

Yes. That makes sense. And I mean, you work with a whole suite of contact center providers now in terms of integrating the Zoom Phone. Just on your own video engagement contact center, anything to call out there or traction you're seeing in certain verticals is doing along?

It's really super early days as we're just in beta, but very excited that we expected to launch a DA early next year. And I think it's really going to be exciting to see the use cases for this product. If you think about -- especially some of the experiences we've had during the pandemic where you aren't maybe spending as much time outside of the home or welcoming people in. This is going to be a great solution for things like having your repair man see what's going on in your home or maybe you want to buy a couch, showing a designer in a showroom somewhere what your space looks like and what the dimensions of it are. And it's going to just make some of these use cases so much easier and intuitive, right? And we've been doing this the hard way by taking measurements, going somewhere else, looking at it, like really welcoming people into your space in that way is going to be revolutionary. And that's what we're super excited about Video Engagement Center.

That's a really good plan. That's something I think about a lot is like we're still so early in this like hybrid shift or remote work. And like what Zoom and a lot of the companies I cover primarily thought of was, okay, let's put the office in the cloud, and that's kind of the thought process. Whereas like now we're going beyond that. So like how we integrate video or voice into our like hybrid workflows, right? Some of those things you mentioned also, it's like all these little niches that we never think of, we just think they're bringing in office. So yes.

Yes. It's like welcoming video into -- just into your life, right, and thinking about how -- I get asked a lot about like people wanting to maintain Zoom. I'm like we all want Zoom for the convenience that it brings us, right, even if you're not using it for work, right? Think about all the use cases and everything you do, whether it's a child taking a tutoring lesson so you don't have to drive them across town or doing a doctor's visit this way, which I did just this week, so I didn't have to drive somewhere and was able to squeeze it into a 30-minute sliver that I had on my calendar. Like those things make all of our lives so much easier and more convenient. And then we all get to choose the time that we're spending with others in person and make room for that by doing all these other things in a much more convenient way.

Yes. There are so many things we've heard from like workout classes to like you just mentioned like the doctor's office, like you're never going back, right? Like there's something...

It's so much better, right, in the convenience of your own home. And like I said, you don't have to wait. You're not sitting in an office, in a waiting room. You don't have to drive. You can really make [indiscernible] so much more efficient in your life, like set aside work for just a minute, in your life in general, it can bring so much convenience and efficiency.

Well, look, it's the -- so the start of this call, obviously, didn't go as convenient or efficiently as I would have wanted, but I was -- user error on my side. I always look around when I kind of mess up or like have technical issues, it's like -- it's always not a good look for the cloud communications guy to have technical video issues, but thank you all on the call for bearing with me. And Kelly, thank you so much for joining us today here at Barclays TMT conference.

Thank you, Ryan. Yes. It's great to see you.

Appreciate it.