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

Well, great. Hello, everybody, and welcome to day 3 of UBS' 3-day tech conference. I think we've got a fantastic lineup of software companies on day 3. I'm excited to have Zoom here. But today, we've also got Microsoft and Mongo DB, Informatica, a number of high-profile firms. So exciting day today. Kelly Steckelberg is the CFO, and Tom McCallum is the Head of IR and they're both joining us today. And if any of you have questions during our fireside chat, you should have a question function in front of you, feel free to type it in. Or if you prefer to e-mail me directly, that's fine as well. Kelly, Tom, welcome.

Thank you.

Thanks for having us.

Yes, of course. So Kelly, rather than get into things like churn risk, et cetera, we'll hit that a little bit later on. I wanted to get to the heart of your growth drivers and run through those potential sources of upside actually. So maybe what we can do is focus on what the key growth drivers are for next year. But maybe you could sort of lay out the 2 or 3 most important ones, and we're going to hit on each one to flush them out in a little bit more detail.

Sure. So Zoom is really excited about being at the interesting transition point of moving from being a killer meetings app to being the communication and collaboration platform where you spend your day. So starts with meetings that we all know and love. And then in addition to that, we have a Zoom Phone, which is our cloud PBX solution, it's a little over 2 years old. And we're really excited about the momentum that we have seen there over the last year, especially coming out of the initial phases of pandemic. Organizations are really thinking about the future of work and realizing they have literally thousands if not millions of phone lines sitting in offices that are not being leveraged in that by moving their cloud -- sorry, their phone service into the cloud, they can give that efficiency and effectiveness to their employees to let them take their phone numbers with them more wherever they go, on their mobile device, on a laptop, whatever. So we've seen lots of great momentum there and we are excited about that. There is also, of course, Zoom Rooms, which is equally important to the future of work strategy. You think about as organizations are welcoming employees back into the workspace, conference rooms and the technology in them are point and center in there. Something we've all enjoyed during this pandemic. I think is this experience we've come to have on the screen where you can see everybody, you understand he's talking we hear them, you have the opportunity to interface with them via chat or maybe pooling. And so -- we have innovations like Smart Gallery is part of Zoom Rooms, which recreates this experience when you have some people that are in the office and some people that are working remotely and making sure that it's very inclusive to everyone involved. We also have companion mode, which is the ability to join the meeting silently when we walk into a conference room so that you can leverage your device to participate again via chat or being pooling if you're not missing out on the extra ways to communications that are going on during the meeting. We're really excited about Zoom Events, which is our new product which launched about a quarter ago. If you think about work is going to be hybrid in the future. So are events. Events like this, right? Like we all are excited to be able to come together in person. But I'm sure you've experienced this call live, there's a lot of efficiency and reach that is gained by having these events virtually. So finding the right balance of bringing those 2 together in the future, new events will be really helpful and integral in that. And then we have Video Engagement Center, which is going to be generally available next year. And if you think about how video has revolutionized the way that we work, think about now having that really changed the way that we live and the way that we do things. So think about welcoming a repairman into your homes. It doesn't have to take a service call all the way out to house just to realize any need or part that he doesn't have and come back later. And you could show them with Video Engagement Center what's going on or think about one of my couch. So rather than any measurement tracking on to the store, you can welcome a designer in your home via your iPad or device to show them this is the space that I'm working on. And that's what video Engagement Center is going to enable. So we're really excited about all of these platform leases coming together. And then really other -- another significant growth driver for us is international. The brand awareness that Zoom has gained during the pandemic would have taken us years and probably millions of millions of dollars to achieve. But what it's done as well as the acceleration of video adoption on a global basis and really opened up the opportunity for us to continue adding sales reps in any market where we see demand. And that will be a big focus. It was a big focus for FY '22. We continue to be a big focus for FY '23, and we will be adding sales reps as a percentage in growth more quickly than we'll be adding them in the U.S. So really excited about those -- really those are kind of the 2 main pillars of growth we see for the future.

Yes. So let's start on some of those. And maybe we'll start on the one you just mentioned, Kelly, and that is the overseas growth. So maybe 2 questions there. Kelly, are you able to frame what the penetration of video conferencing is, let's say, in a typical large enterprise in the U.S.? And then what is it in areas like EMEA and APAC to give us a sense of how big that opportunity is? And then secondly, are you able to frame the sort of magnitude of the sales investment that Zoom is making to go after that?

So the way that we think about penetration and the opportunities out there is by looking at the Global 2000. So when you look at the Global 2000 little less than 20% of those accounts are spending more than $100,000 per year with us. So $100,000 is the size of a reasonable implementation for a company of that size. And so that just tells you how much opportunity is out there. And the way that we're addressing it is that every Global 2K account has an account executive attached to it. And their objective is to build long-term relationships with those accounts as it takes time to build them these companies make decisions about when to make technology changes in a very deliberate fashion. So we just want to make sure that we're there and we have a seat at the table whenever they're ready to make that decision. And then in terms of how we're thinking about adding sales capacity and growing, there's 2 aspects of that. There certainly are reps and leadership, which we've invested a lot in Western Europe, especially in this last year, our next year. I think Asia Pacific will be a really critical part of our growth strategy. And then we're also really focused on expanding channels, channel partners as well, especially around these phone. So during the last year, 18 months, we've really built out a successful master agent program focusing on selling to phone in the U.S. And those relationships are largely regional based, so you don't have one partner on a global basis. So now there's a very complicated efforts focused on expanding those programs internationally as it will really be -- continue to be a growth driver [indiscernible] in the coming year.

Got it. And Kelly, on the effort to lean in upmarket and increase the portion of the Global 2000 that are spending more than $100,000 annually with Zoom. One of the investor fears is, as you do that, you're going to run smack into Microsoft Teams. So how do you address that concern and frame how big the opportunity is for 2 vendors. This doesn't perhaps need to be a winner-take-all market.

Yes. So I think that's a really important point. If you look across kind of any market, generally, there emerges 2 strong competitors in that space. And we -- in terms of Microsoft specifically, we have a great partnership with them. We are focused always on delivering happiness to our customers and that means listening to them. And what we hear from our customers often is they want to leverage Zoom for things like meetings, for things like phones, but they want to use teams for chat. And so you have an integration with Microsoft teams, where you can one click launch as you meeting, you can one click launch as you phone from the team's interface. You can also launch a Zoom meeting from a Microsoft naval conference room. So we have a great partnership with them to focus on delivering that to our customers so that it works very seamlessly. However, we never take Microsoft for granted. They -- as we expected them to be our competitor for the long term, and they are. And so we're really focused on continuing again, listening to our customers, what are the problems that they're trying to solve, innovating around those and really being the product they choose. We do win because of our ease of use and our reliability. And that was the case before the pandemic. I think we really saw that during the pandemic in phase, right? But our product was simple enough for literally kindergartners to use in their classes all the way up to brand here, right to restore your internet accounts it was like even my parents can use it. And so that's something that we continue to stay focused on even as we add [indiscernible] functionality, making sure that it's intuitive and easy to use and then, of course, reliable, like we were just talking earlier about some outages in the space yesterday, and we didn't experience that in our platform. And that's because we take a very concentrated effort in ensuring that we're building out a platform in a global network that's highly reliable.

Got it. Kelly, I'd love to ask you one relatively timely question on Microsoft while we're on the subject. Investors are obviously well aware that they just launched a new product, they call Teams Essentials, which they describe as going after the SMB market with better feature functionality than their free version, charged at $4 per seat per month. What's the -- what's sort of the Zoom reaction to Essentials?

Yes. So they previously had a skew of product that was available that was a $5 skew. It was a slim-down merging of teams. And this is now just kind of taking that and moderating it again and slimming it down to $4 skew. And again, we never take Microsoft [indiscernible], I just want to say that. But I will tell you that what's interesting about this, and we certainly had lots of questions about is that generally, the perception of Microsoft in many organizations is it's in "free" because it's sitting on the desktop, right? And it might not be charged to an individual department owner that is interested in buying a meeting product. And so I was talking to our COO, Ryan about this. And his reaction with executives like you know what I can to meet against $4, -- It's easier going to be get $4 than the perception of free. So I think that's how we see it. And even when it's perceived as free, we know and we have many customers that are willing to pay for Zoom for all the reasons we just discussed, even when Microsoft is sitting there on their desktop. And so they want the ease of use. They want the reliabilities. They want a video product that is truly real time. There's no wait and see that it works no matter how many people you have on meeting, no matter if you have international people joining at their experiences and quality is just as good as those sitting in the U.S. And so those are all the reasons that people choose Zoom even at a price point that is higher than $3 or potentially $4.

Got it. Okay, great. I've sat a few more questions to keep going on Meetings before we get to some of the other growth drivers. One of the other questions I have for you, Kelly, is when we do calls with large enterprises, very often they've given employees not just one video conferencing tools. But in many cases 2 or sometimes we even hear 3, where they have Zoom, they have Teams, they have Cisco Webex and they'll let the employees use the tools as they wish. And by the way, when we have how they're used, Zoom comes out pretty positively on that. My question to you is, when do we get to a point where those enterprises start to consolidate down maybe to one tool to save costs, simplify? Is that starting to happen yet? Or do you not envision that happening for a while?

I think it's going to vary because every organization makes these decisions for themselves, but it's absolutely starting to happen. I can tell you I spent time recently with a leader at a large services company, and she was describing exactly the situation that you just did. And when they came into pandemic, they had all these services, and they were kind of trying to gear certain parts of their company with certain services. And then they just decided to let the employees choose and let them have whatever they wanted. And Zoom by far, was the chosen product, and we've seen our deployment with them, go up, I think 15x or something like that in the recent months because of that. And it is really interesting, right? Because -- Some of those other products, they work fine. They work fine in certain situations, mostly one-on-one, but it's when you start expanding. And I always thought it really interesting when you hear like what we use Zoom for our external client meetings, but we use other products integrally that means that you're not getting your employees the best experience possible. You realize that you want to produce the floor for client meetings, but not necessarily internally. And I think, as you just said, like, people are realizing it's much more efficient as a company to just have everybody on the same platform for meetings, the phones with chat, like it just makes it easier to communicate across the country.

Okay. Excellent. Maybe another question on Meetings is the opportunity to effectively monetize the vast free base. And I want to ask you about a couple of opportunities there. One is on the advertising side, which I'll ask after this one. But first, in terms of large enterprises utilizing free Zoom seats and trying to get them to convert to pay. I must have been, I'll tell you a small anecdote internally here at UBS where I've become an advocate of Zoom. So some employees have paid Zoom seat to meet and set up licenses, but some employees inside UBS have free Zoom seats. And so if they want to set up meetings with our institutional investor clients, it taps out at 40 minutes, and I'm always hitting our senior management to convince them to increase the number of paid Zoom seats. So I'm working on your behalf, Kelly...

Thank you, Karl. We really appreciate that.

But how big is that opportunity left? Is that kind of de minimis now? or do you feel like it's still there?

Absolutely, it's still there. I think that what's happened -- I always get this question about like how do the people try to leverage licenses? Do they kind of share it's really hard to share a paid license because we don't allow concurrent meeting. So you have to be really thoughtful about how you do that. Or as you just said, you're limited to the 40 minutes. And we -- first of all, we love all of our [indiscernible]. It works for some people to that point. But I think what organizations are realizing is that it's really inefficient to have to have your employees be thoughtful about, okay, I get the license from this time to this time or, okay, I have to keep my meetings, so fewer than 40 minutes, and that's tricky, right? -- especially you're having a meeting with a client, you might be at a really imperative point that all of a sudden, you need to wrap it up. And so we absolutely continue to see opportunities to convert free to paid. We focus on this, both in small customers, all the way up to large. And every quarter still a significant growth from expansion in seat within the existing ones.

Okay. And what about that second one I mentioned, that's kind of intriguing. The media has made a little bit about it. Eric talked briefly on the call, leveraging advertising opportunities to take advantage of those free users. How big could that be Kelly? And when would we expect to start seeing that being a needle mover?

Yes. So we are free -- no, account base has grown dramatically over the last 1.5 years. And as we looked across that, trying to think about where are there ways to potentially monetize especially in markets where they're really thoughtful about [indiscernible] And first and foremost, I want to say, we are focused on delivering happiness to our customers. So that means we want to be very thoughtful about who could potentially see an ad where they are, they're paid,if they're in meeting, all of those considerations have gone into our thought process around this. So we are in very early stages of this. We are testing it in markets outside of the U.S. And we'll continue to iterate and find the right balance that works. The -- what we would strive for is that advertising brings value to those that use it. Maybe it's an extension of the time of the meeting or maybe there's something in that advertising in that video that is helpful to them. And so that's the balance that we're trying to strike. And we're not in a hurry to push this out on an asset basis. We really want to test and learn as it's something new for the company. And in terms of its contribution to revenue, I would not expect it to have a significant contribution in the near term, certainly not in the first half of next year. Maybe in the back half of next year, we start to see some competition for it, but we're taking a very thoughtful approach and learning from it as we go.

Got it. Okay. That was terrific on the core meetings. Maybe, Kelly, talk a little bit about the phone opportunity and how you and the team at Zoom size that opportunity. You're not going to grab every single phone to cloud deal out there. But you've got a shot at grabbing a pretty good share. What's your realistic goal as to how prevalent Zoom phone could ultimately be?

Well, thank you. We agree with you, and we're really excited about the momentum that we see in Zoom Phone. We announced on our Q2 call that at the end of August, we had achieved 2 million seats. And I think that's a really fast rate in terms of getting to that level, and we'd outpace some of the competitors in terms of our quarterly adds there. And as I mentioned earlier, some of the things that are really key to continuing to drive the growth in Zoom Phone our international availability. We are available in 47 markets on a native basis, which is really important for like U.S. based multinational so they can do a native implementation to cover all of their employees. And then an international channel program is really important look. And we're focused on delivering that. And we're excited about the momentum that we see there. And when you look at our core strategy for selling Zoom Phone selling into our existing installed base and then, of course, these channel relationships that we're continuing to build out. And when you look at the attach rate when we look at Q2, remaining customers that have Zoom Phone on a deal basis, it's in the low single digits, which shows you that there's a tremendous opportunity just within our existing installed base. And then when you look at the market that's out there, there's a huge opportunity as well. And so we're really excited about the future at Zoom Phone.

Got it. And Kelly, in terms of the disclosures that you and Tom are going to provide, I noted on this last call, you didn't give us an updated seat count, but you gave us a revenue growth at the mic over interpreting that maybe you want to hear the Street a little bit more towards phone revenues rather than phone seats.

So with Zoom Phone, as with all of our other new products, the way that we think about it is that we will give milestone metrics. So for Zoom Phone, specifically, we gave an update when we hit 1 million seats. We gave an update in a 1.5 million, and then we gave 2 million. I think likely the next milestone update would be 3 million, something like that. We haven't decided exactly. But as I was saying, we don't do them quarterly. We do them based on when we achieve these big numbers or milestones. So that's why. So you shouldn't read anything into it.

Got it. You teased us into thinking that it would be a quarterly metric, but be Patient for the next one. On Zoom Rooms, Kelly, how much opportunity is left because, I guess, if you wanted to take the other side of it, you would think, boy. If an enterprise was going to quote "Zomify offices and small conference rooms, wouldn't they have done that by now as people are starting to trickle back. So if that's not the case, how would you frame the remaining opportunity in Zoom Rooms?

So we saw some companies that did this during the pandemic, but we are seeing more companies do it now as -- I don't know, depending on where you are in the world, like I will say that tech companies in the Bay Area are in early stages still of reopening their offices. So we haven't reopened our offices yet. We'll do that sometime early next year. And what we see is, as they start to open their offices and welcome employees back, that's when they're having this realization of like, oh, I think we're going to be in a hybrid work environment forever. It's unlikely we're going back to day where all of us are sitting in the office. We're all sitting around a conference room together. And so what that creates is this interesting situation of like how do you be newly inclusive for those who are sitting outside of the meeting room. And we've heard countless really countless stories of companies that either invite their employees back and then realize, "Oh, we don't have the right technology for this. So they sent everybody back home to work on, as you say, Zoomify their rooms or they may have a situation where they invite their employees back, and then they realize like, "Oh, wow, this isn't a great situation, the experience for those that are not type of the room. So then they ask their employees to go sit at their desk and use Zoom from their computer. So that of course, that's not the incretion they want to create. They want to have the opportunity where their employees that are in the office have the opportunity to be with their colleagues. That's why they're there, right? That's why we -- a big benefit all experiences going to the office. And so I think that this is going to be a year, not multiyear transition for companies to really see how important to use the office, how they leverage the space like our employees tell us, they want to come to the office for a collaboration for communication to see and socialization might see their colleagues. It's not just to their desk and work. And so the conference room or corporation spaces are going to be more critical and play a bigger role in office space of the future. And so I think we're at early stages of seeing how this plays out. And again, it's back to innovations like Smart Gallery with many modes that are really important to that. And for conference rooms that don't have the right technology, both software and hardware, we're going to see those transitions over the coming year.

Okay. Let's talk a little bit about some of the "new new" stuff that isn't even likely to be a revenue driver next year. So after the Five9 deal "couldn't get over the hump," you and Eric and the team announced that you're organically going to build a CCaaS product. Now for those that cover Genesys and NICE and Five9 know that it's a relatively complex space. So how can Zoom from this starting point build a world-class product? Are you going to go after sort of one corner of it? Or maybe you could just describe what the CCaaS strategy is?

Sure. So we are planning to launch our Video Engagement Center in the first half of next year, and that will initially really be focused on think about situations where maybe a repairman, right? You're trying to help a repairman and see what's broken in your home. You're trying to help a designer see where you want to put a couch in your living room. You need to see a doctor, and you want to do that in the privacy of your own home. So it's those types of use cases. You're right. It's a complex solution to build. So we expect to start with that and learn from our customers and what's good to see them. And then over time, to build out the other features and functionality of a full-fledged contact center, including things like omnichannel support. We just become really critical today with all the different ways that companies communicate with their customers. And so it will absolutely take some time. I think -- I like it to Zoom Phone. So when Zoom Phone launched, right, it had a large percentage of the features and functionality the companies needed. And those continue to evolve and grow over time, especially as we listen to our customers, a lot -- we heard from them. What do you need? There are thousands of phone features, right, that -- and probably a very small percentage of them that are used and the those ones will be focused on. And today, Zoom Phone has become a product that we have Fortune 50 customers even here. So you can tell it's evolved to a product that really needs to be for the most sophisticated buyers in the world. And that's exactly the path that I expect for video engagement center.

Got it. Okay. That's interesting. I want to talk a little bit about kind of something that's even a little bit more futuristic. So after Facebook made this big announcement about "metaverse", I was talking to one very large U.S. retail bank about their collaboration needs, their use of Zoom, et cetera. And I mentioned how cool it would be to adopt something like that Metaverse end state and how maybe you're working on it, and it will be available in 5 years. They said no. In fact, they have a team working on it now, where they can use things like Oculus mass and have essentially 3D meetings, and it's coming sooner than you think. So how are you and Eric thinking about leveraging this incredible video conferencing brand and platform into more 3D type virtual reality collaboration meeting. Where is that? I'm sure you got a skunkworks project on it right now.

So Eric's vision has always been to make Zoom meetings better than in person. And in many ways, it's already happened today when you think about things like transcription and translation, both. And so Meta or the meta universe is a very natural next step in that. So we absolutely -- it's something we've been thinking about. We partner with some of the companies that you mentioned to make this come to reality and absolutely agree that it is an important part of the means of the 2.

Got it. Okay. We'll stay tuned for some cool announcements on that front. Okay, good. If that's all right, Kelly, let's -- with that as an interesting backdrop about your growth drivers, let's dive a little bit into some of the numbers that investors care about. So one point I wanted to ask you about is on the guidance for the fourth quarter, you mentioned that the sub-10 customer segment could -- I think your language was have a challenging quarter. Maybe you could describe unpack for us what you meant by that? What's challenging? Is it really seasonality? Or is there something else?

Yes. So I want to just clarify in how we think about churn for our customer segment. So there's the direct business and then the online business. And so the tech business, those ones in terms of the way they buy and the renewals are mostly annual or multiyear agreements. And we've seen very consistent behavior this year in terms of renewals in that segment of the business. And with pre-pandemic, right? I think for all the reasons we talked about, organization realizes that everybody knows their organizations really need to zoom license as they move forward. Now in the online segment of the business, this is where we have a range of customers. They could be individuals all the way up to small businesses. And this segment of our customer base, they tend to -- of course they tend to -- they have a different buying pattern there's about 40% of them is that buy on from a basis. So there's a lot more volatility in this cohort of our customer base. And so we saw impact of this in Q2 and Q3. That's why you had a chance to join us on the Analyst Day, we shared this analysis that shows how we reward age over time. And how -- when they get to kind of 15 months, their retention rates really, really stabilized. And that's true even when we've seen sort of volatility in the churn in the earlier cohort. And so what's happening in the segment of our business is. First of all, they are aging. They're all -- especially those large codes we acquired during the pandemic are aging through. And as they hit that 15-month age, it really starts to bring stability to the business. Now the other thing that's happening in the segment of the business, though, is that we're returning to kind of what I would call normal seasonality. So we experienced that during the summer. And we've talked about it on the Q2 call as we were looking into the summer. We weren't quite sure how much of it was really seasonality versus potentially more permanent COVID impact. And the fortunate thing is that it was really seasonality. We got half the middle of September, we saw a strong uptick in those in [indiscernible]. And that was great to see. And as we're looking towards the end of the year, for example, we expecting normal seasonality that we always see at the end of the year due to the holiday on a global basis. So that's how we're thinking about that segment of the business. The returning to more normalized seasonality, we would expect to see that in FY '23. And then stabilization is occurring as these cohorts continue to age and get into that 15 months, it's going to start to bring some stability into the business.

Got it. So maybe just to be clear, Kelly, to use definitions correctly, there's a broader online segment at Zoom. And within that, there is the very small business, the sub-10 segment. If I'm interpreting you correctly, that broader online segment might see a stabilization a little bit sooner than maybe the sub-10 would where it could be sequentially down for a little bit longer than the broader online group before it begins stabilizing. Is that the right framework?

Yes. I think -- so in general, the growth rates in the direct business is growing more quickly than we expect in this online segment of our business. And you're exactly right, in the online segment, there are -- there's a range of customers in this, right? And they all have slightly different buying patterns, depending on the organization. We typically see businesses have a higher rate of retention than smaller type individuals or smaller businesses. And we expect the growth rate of that the online to inter business to be less than the upmarket as we move through next year.

Got it. Okay. Good. And then, Kelly, as the mix of these different customer segments, the stronger growth upmarket online and then the smaller and even individual as that mix continues to shift next year as it invariably well, how does that mix shift cascade down into any of the other numbers? Is there a margin or cash flow difference as that mix shift? What should we keep in mind as we model that mix shift next year?

It's a really important point because even though the online segment of our business, is very likely to sort of tamp down the growth rate of the total company because the enterprise is growing more quickly. They are a very important part of our customer base because they are contributing -- they were about 35% of our revenue last quarter. So they're contributing a lot to the topline as well as they are very highly profitable as many of them self-serve. In general, if you look at gross margins, there really isn't a difference across those customer bases. We have a highly efficient platform and approach that cuts across all aspects of our business. So really, the only difference there is in the sales and marketing in the direct business and the channel business versus the online segment, which again is largely self-serve, not completely but largely.

Got it. And as that upmarket group becomes a larger portion of your revenues, does it change the growth metrics that you would encourage investors to monitor like should we pay more attention to DR and billings will ARR be introduced as a more critical metric. Does it change any of those things, Kelly?

It's a really good question, Karl. So the thing is just a quick reminder about Zoom is why like DR and billings are not a great metric for us as they are for many other SaaS companies because we still have a large percentage of our customer base that are billing and paying monthly. So they don't really show up in billings, they don't show up in deferred if they can defer it might be for a week or 2, certainly not a year. And so that's the challenge. I think potentially, over time, if the upmarket really becomes a much larger percentage. But at 65% versus 35%, you're still going to have a lot of noise in those metrics from those monthly billers that are a large percentage of that online segment of our business. So it's going to take some time for what I would call more traditional SaaS metrics to make sense for Zoom. As we're thinking about the guidance for FY '23, though, we're thinking about how do we help investors and research analysts really understand the trends as we understand they are very counterintuitive to most companies right now, given the trend of our renewals, all of these different aspects of our business. So we'll really think about what would be helpful for you as we come towards our Q4 call.

Okay. Great. Maybe a couple of more questions, Kelly. So on the margin front, you've guided some pretty extraordinary 39% operating margins this fiscal year. I think everybody understands not just for Zoom, but for most software companies, that it will be hard to sustain current level margins. So the last time I looked at the Street consensus, I think they were assuming a mid-30s or even a little bit lower next year, understanding you haven't provided guidance. But in terms of the variables that we should think about, I guess, one is the point you made, and that is as that highly profitable self-serve segment becomes a smaller portion of the business, that might have a margin impact. Obviously, you need to chase after that incredible international opportunity that comes with sales costs. Are those a couple of the variables we should keep in mind? And are there a couple more?

Yes. There's something that's even just more fundamental to it, which is the revenue growth over the last 2 years has been at a rate that was so accelerated. We couldn't need to keep up with it from a hiring and investment perspective. So if you look at 2 areas that are really important for driving investment in topline growth, it's R&D. So our long-term target for R&D spending is 10% to 12%. And we are currently sitting at a little over 5% of revenue. Now that's -- so we're half of where we should be, but it's better than 3% was where when we came into the year. And so we are continuously focused on adding engineering talent on a global basis to make sure that we're staying ahead. We're innovating. And so that's a really important area of investment that we're focused on. And then there's also sales and marketing -- So sales, really, we're focused on continuing to add sales capacity on a global basis, as we've already talked about. And then marketing as well. So pre-pandemic, we will really focus on spending marketing dollars around brand awareness. During the pandemic, we largely stopped all marketing spend because we had -- we're in a very force situation of having such demand, we didn't need to spend around marketing. Now thinking -- we now we're thinking about more targeted approach to marketing, focusing on exclusive products, making sure that everybody that knows about the meeting knows about Zoom Phone, those Zoom Rooms and the great value that they can bring to customers. So you should see continued growth in spending in sales and in marketing. Now the areas that we're very focused on continuing to be as efficient as possible is, of course, COGS and gross margin. Our gross margins are around 76%. For the long term, we want them to be exposed to 80%, but that is going to be a multiyear strategy to get there as we're focused on continuing to build out capacity in our own servers and data centers and move more of our traffic out of the public cloud, which is great. It's been an amazing benefit for us, but it comes at a cost, and so trying to balance that out a little bit. And then G&A. So we always want G&A to be as efficient as possible, and it's right in the range that we would want it to be at 9%. So that's -- all of that leads to you should expect continued contraction in our margins on a quarterly basis for at least next year and maybe even...

Okay. That's super clear. Maybe I'll finish as we come up against time on that last point you made around the gross margin impact of moving traffic off of the public cloud vendors onto your own data centers. Obviously, a timely issue given that our conference, and I think Barclays was impacted by that AWS outage yesterday, but it doesn't sound like Zoom was all that affected, which is great news. But where are you, Kelly, on the journey to divert traffic away from your external third-party public cloud vendors?

And just to be clear, on going forward, we will always have a hybrid approach. We have absolutely seen a great benefit of being able to move so quickly into the cloud and some amazing partners that help us with that. And what that allows us to do for the future is make sure that we always have worse capacity or seasonal capacity as we need it in this scale up and down. In terms of moving from the cloud into our own base centers, we're in early stages. It's taking time. As many of you know, there are largest traits around availability of servers just due to the supply chain situation. And we are being very thoughtful as always, around any significant transitions like this because, first and foremost, we're focused on reliability and making sure that we don't cause disruption to our customers. So you should expect this to happen literally over the next couple of years.

Okay. quite gradual. Okay. Why don't we end there. Kelly, Tom, thanks for carving out time to tell the Zoom story and educating our UBS clients. And if I don't have a chance to speak to either of you before the end of the year. Also happy holidays to you and your families.

Thank you, Karl. We really appreciate the time.

Okay. Thank you.

Bye, everyone.