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

Hello, everyone. I am Tom McCallum, the Head of Investor Relations for Zoom. Welcome to our Investor Day here at Zoomtopia. The event is hybrid. This is our fourth and first hybrid event. I know you guys are waiting on the safe harbor. So let me start with a few agenda items here. Today, we have a great lineup of executives who are going to take us through a lot of our strategy, business updates. We have a few IT leaders coming as well. And I'm going to ask you to hold your questions until the end. We have a Q&A session, an executive Q&A session. Please feel free to ask questions then, we'll have mics going around the room. In addition, we are in a quiet period. So we are going to ask you not to ask questions about the quarter. You can try, but we are not going to answer them. So we will have an earnings call in about 2 weeks. So feel free to join the earnings call and we'll give you updates then as well as that outlook. We will be presenting some non-GAAP financial metrics. So please see the reconciliation of GAAP to non-GAAP metrics in the back of the presentation, which is now available on the website in the IR section. Also in this section, you will find our safe harbor. We highly recommend that you familiarize yourself with it. We will be making some forward-looking statements here today, and you should take a look at the 10-Qs and 10-Ks to see some of the risk factors associated with it, and Zoom does have no obligation to update any forward-looking statements we may make on today's presentation. And with that, let me bring up Kelly.

Thank you, Tom. Welcome, everybody. It's so great to see so many of you here in person, some of you for the first time. And of course, welcome to those of you joining us virtually as well. And before I dive in, I just want to say thank you to all of you that have provided us great feedback and input over the last year, some of that you're going to see reflected in our presentation today. All right. I hope many of you had the opportunity to hear Eric's keynote this morning. He shared our amazing platform innovations for our customers in all sizes, segments and geographies. And the theme is really about enabling them to do more flexible work to empower authentic connection and deeper collaboration and to increase equity and inclusion. Our customers love having 1 platform to connect. This love has driven our growth and success, and we are very proud of what we have accomplished over the last few years. Looking back, we scaled. We built and we are now evolving again. This has resulted in a strong financial position, our expansive customer base and our track record of customer, innovation and global brand awareness. We currently have over $4 billion in annual revenue with approximately a 90% CAGR over the last 4 years. We have over 200,000 enterprise customers, which have doubled over the last 2 years. And we've added 1,500 features and enhancements in just the last 12 months. This has all set the foundation for a future that takes us to new dimensions. Zoom is a business that has transformed the world of work as the world has transformed around all of us. While how we work will continue to evolve, we are committed to delivering happiness through innovation, value creation and our ecosystem expansion. I'm going to take a minute to talk through each of these. First, our platform. Our platform is built to deliver frictionless and secure productivity and collaboration. And this has expanded dramatically and is incorporating the latest technologies to help our customers connect. As we add to the platform, of course, our market opportunity continues to grow. And we are very excited to launch new products like e-mail and calendar, which Eric talked about this morning as well as contact center and sales of IQ, which were launched earlier this year. Second, we are a truly global business, and we're proud of our market penetration and excited about the potential to continue expanding internationally. As our customer base grows and their demands evolve, we are able to support them whether they prefer to buy online, direct or through a partner. We strive to create value for our customers across many dimensions and in many ways, including growing their revenue, improving their productivity, saving costs and reducing risks. Our focus on value creation makes us an indispensable partner. And we are excited in a few minutes, you're going to get to hear from some of them directly about the value we create for them. Third, our broad ecosystem includes thousands of partnerships across technology, go-to-market, sales and delivery. According to our partner survey, they have high confidence in Zoom Phone. They see opportunities to enhance their own revenue streams and they give us a Net Promoter Score of 83. Our developers are also an important part of our ecosystem. They build on our platform, creating offerings that enable our customers to do more within Zoom or embed Zoom within theirs. We currently have approximately 125,000 Zoom apps and there are over 2,200 integrations in the Zoom App marketplace. Underlying all of this is our relentless focus on delivering happiness to our customers, our employees and our community, combined with our core value of care. We focus on our customers' success and regularly incorporate their feedback into our products. We have a strong culture of care that engages and motivates our employees. And we have a track record of giving back to the community as we build a sustainable future together. All these growth drivers are contributing to the expansion of our TAM. And by 2026, with our current portfolio, we will be addressing $125 billion TAM. This expansion is happening as corporate leaders look to digital transformation and employees push for more flexible solutions. Estimates of a number of global knowledge workers continue to increase as well. Zoom is very well positioned in this marketplace. We are #1 in meetings according to IDC, and we're #3 in Cloud PBX, but are the fastest-growing of the top 3 contenders. Our platform expansion also makes us a more indispensable partner for our customers. As you can see here, our multiproduct customers at the top represent only 10% of our base, but generate 50% of our ARR. I'll say that again, 10% of our customers generate 50% of our ARR. At the bottom, you can see this large quantity of single product users who already know and love new meetings. And with whom we have built trusted relationships. These customers create an opportunity to move up on this chart with our ever-expanding platform, generating more revenue and retention. Many of our enterprise customers enamored with meetings have discovered the same affinity for Zoom Phone and Zoom Rooms. You can see here with the penetration rate, though, of low double digits, we still have significant opportunity for growth within our existing installed base. We have a diverse customer base that spans the globe in every industry. In the last 12 months, we have seen a strong growing share of business coming from Japan, Canada and Korea. of course, this year, we have seen some headwinds in Europe due to the war. And thanks to all of you, Financial Services is our largest customer segment by a number of customers in the Global 2K. And our penetration of the Global 2K has steadily increased year-by-year as we continue to expand our platform and our go-to-market motions. One of the unique things about Zoom is that we serve enterprises, small businesses and individuals. We have seen a steady increase in the percentage of our revenue coming from enterprise customers after the accelerated growth of online during the pandemic. We also continue to see a decrease in the percentage of customers we believe are individuals using their e-mails as a proxy. All of this highlights that our business is a unique mix of customers of all sizes, locations and industries, and we are thrilled about the opportunity and diversification this brings us. Another trend we have seen coming out of the pandemic is a return to longer-term contracts. This includes a steady increase in the percentage of revenue, you can see on the left there, coming from annual and multiyear deals as well as an increase in the average contract length, which you can see here on the right. As many of you know, we have a unique Q1 weighted seasonality caused by the large influx of customers during the Q1 of the pandemic. You can see this has persisted from FY '22 to FY '23 due to our practice of coterminous selling when a customer adds additional products or products or upsells in their contracts. We do expect this to level out over time. But as today, we see more Q2 and Q4 deals, but this will take us many years to level out. Now let's look specifically at our enterprise business. We continue to see a steady increase in the number of enterprise customers as well as spend per customer. We also have diversity and different tiers within enterprise. The great news is the fastest growth is coming from our largest customer segment. You can see here on the far right with customers greater than $1 million of ARR. We currently have over 220 customers in this segment. Now we're going to switch to our online business. Here is an update from the infamous Slide 14 from last year that many of you loved. And as you can see here from the chart on the right, the trend toward lengthening tenures has continued. Approximately 70% of our online customers today have a tenure of 16 months or greater. From the chart on the left, you can see that these longer type tenures continue to command much lower churn rates on average. This all is helping to increase stability, bring increasing stability to the online business. I'm just going to pause here for a moment. This was really the favorite slide of last year. So any questions on this? Yes, you want to take a picture. Good. Okay. We're very proud of the slide. All right. Okay. Continuing online, looking at our quarterly churn over the last 2 years, we are happy to report that we are approaching pre-pandemic levels, as you can see here on the far right, as compared to the far left over there. In general, we expect stable online average churn rates going forward due to the longer tenure of customers. And in just a little bit, you're going to hear from Wendy about how -- and she will discuss how we're continuing to further attract grow and retain these customers. Now let's take a minute to talk about our operations. We currently have 27 data centers globally and have added 5 new colos since Q3 of last year. As you can see, the percentage of traffic served within our own data centers, what you see on this right-hand chart, has steadily grown over the last year. The fixed costs associated with our colos provides us with operating leverage and uplift to our gross margin. This is in contrast to the variable cost that are associated with the public cloud usage. Going forward, we will continue to maintain some traffic in the cloud to ensure we have continuous and scalable operations. while also enjoying the operating leverage of our own data centers. Okay. As promised, we want to give you a little more perspective on taxes and their impact on free cash flow. As many of you had questions around this in Q2. So this is a new slide. I'm going to take a few minutes to talk through this. We are in a very unique situation due to the rapid acceleration of our revenues and our long history of profitability at Zoom. During FY '22, we became a full cash taxpayer as we burn through our NOLs. I want you to look at the far left column under FY '22 for a minute. During FY '22, we benefited from the volume of RSUs vesting while the stock price was strong as well as high level of employees exercising their options at these higher prices resulting in significant tax deductions, which created an 1,100 basis point uplift to our free cash flow conversion rate, okay, that's what you see in that first column. In FY '23 due to the decrease in the stock price as well as fewer employees exercising at lower prices, we actually are expecting to see a net burden on our free cash flow conversion of 400 basis points. So what this means is that all else being equal, if everything was exactly the same, CapEx, et cetera, year-over-year. The effect of the observed stock price volatility accounts for a 1,500 basis point swing in our free cash flow conversion from FY '22 to FY '23. I'm going to stop here for a minute. There's a lot of numbers on this slide, but this was a really important point that I think many of you want a clarification around. Any questions on this? I know you love talking about taxes and free cash flow. Okay. So I'll just say one more time. All things being equal, the stock volatility alone driving 500 basis points swing from FY '22 to FY '23. If everything was exactly the same, we would have seen this impact on our free cash flow conversion, which is what you guys are all seeing now in the results for FY '23. Okay. Here we go. Our long-term model. This is also something many of you have been asking and waiting for. The last time we provided this update to you was 2 years ago, and a lot has changed since then. So if we start at the top, as you can see on the left is our previous long-term profile and where we are -- what we're updating to today. We are still targeting an 80% gross margin as we continue to optimize around our data center strategy that we just discussed. For R&D, we are committed to reaching 10% to 12% as R&D is crucial for maintaining our innovative edge. We've talked a lot about our expanding platform, and this is a really important part of our investment strategy going forward. Sales and marketing. We expect sales and marketing to land around 30%, considering the expected mix of our businesses in the future. We know we are under this today, but we've talked a lot about why we expect this to continue to grow and a lot of this has to do with the ongoing mix of the businesses. In terms of G&A, we take a very thoughtful, some might say frugal approach to G&A and expect to keep it in the single digits for the long term. Overall, long term, we see our operating margins in the range of 28% to 32%, which is a stellar margin in our industry and speaks to the power of our product, our team and our business model. This model is a framework for what we believe is possible and will aid us as we make decisions on investments and growth. Any questions on this?

[indiscernible] Just a quick question on the operating profit line. You talked about kind of some of the moving parts of cash conversion this year. If we think about it long term, putting aside volatility in the stock price, how should we be thinking about cash conversion from non-debt?

Yes. I mean what we really are striving for is to get back to a normalized model where free cash flow has a relationship to operating margins, right? That's what we had before the pandemic. I think you've had a big caveat taking out the stock volatility. That has to sort of stabilize or normalize, I would say, and we have to move past that to be able to get back to that relationship. And as we move towards -- through this or past, I should say this period of stock volatility, we will give you what we think that relationship is, which is, if you remember, that's exactly how we spoke about it prepandemic. And we'd love to go back to that as well, make it a lot easier for all of us.

Ryan MacWilliams from Barclays. Just with these updated long-term partners, like how should we think about where you win on the spectrum given the growth?

Yes. I mean we are definitely continuing to optimize around growth. And that's why we're going to especially continue to invest in R&D as well as sales and marketing. And we're not -- we're in the quiet period as you well know, we're not giving long-term targets about growth. Today, we will give FY '24 guidance on the Q4 call, but we are -- as we have always been, continuing to focus on driving growth. Absolutely. There's a question over here somewhere. Okay. Anybody else?

All right. As we approach the 4-year anniversary of our IPO, a lot has changed for Zoom. And looking forward, we are committed to growing at our new scale, generating robust cash flows and maintaining disciplined spending to drive profitability. And now let me welcome Graeme Geddes to the stage.

Thank you, Kelly. So my name is Graeme Geddes. I lead our product acceleration teams for our enterprise business and have the distinct honor and privilege to share a little bit of insights into what we're seeing, some of the customer conversations that we're having. And I wanted to start by actually sharing, so I have the distinct honor of meeting with probably 12 to 15 CEOs, CFOs to CIOs every week, and there's one question that I get asked more than anything else out there. And it's this, what's the future going to look like? And I'll tell you, I'm no fortune teller. I didn't see that box to be checked when I was winding my college interest exams. But I did want to tell a story because this is a story that I tell CEOs, and I think it might resonate. And so if you will get prepandemic, I actually traveled globally quite a bit. And for those of you that are global travelers, if you haven't heard of global entry, it allows you to bypass the lines. It's kind of part of TSA pre-check. But what that consisted of was I had to take an entire day off of work, drive down San Diego, sit in line for 3 hours, do an in-person interview and I lost an entire day's worth of productivity. And the pandemic happened. Obviously, we're not traveling. I didn't realize it. Global entry expired. And so now as things open back up, I said, "Oh, my goodness, I'm going to have to go through this same painstaking processed again, right?". So I went to reapply a global entry and I saw a virtual option. So I was able to sign up in a 5-minute Zoom meeting. I was able to get my global entry again and the juxtaposition of what I was forced to do prior versus what the experience is now has really stuck with me. And I use that example to share with CEOs because really, the question they're wrapping with is what is the future? Is everything going to go back to the way that it was. And what I would share with you is that it absolutely isn't. The level of flexibility that we've gotten, we can't go backwards. And it's not just kind of the term hybrid work. You see here, 83% of employees wanting for that flexibility. But you see 77% of corporate citizens are saying that they want the flexibility in the way that they get government services. It extends even where. And I'll share some customer examples where customers in the retail space are looking for virtual or digitized options in the way that they consume retail services or even in the financial services industry with the way that you meet with your customers. And so these are the conversations we're having. We're helping our customers digitize their businesses, not just with the way that they interact internally, but with the way that they interact with their customers. So as Kelly mentioned, it's really this idea of 1 platform to connect. The platform has grown significantly, and it's really the power of the expansive platform that's really helping us in these conversations. And so you see the all-encompassing kind of product we'll hear. But what's more important than that is that Zoom is really kind of surpassed what we've been known for in the past as a video conferencing company with a rich suite of collaboration solutions that allow you to do things like team chat and phone and whiteboard and it's not just meeting that we can ideate, but it's not just about the actual median interaction. It's about what happens before, during and after that, that is really important and resonating with our customers. But the single biggest differentiator that we bring to bear is not just a collection of independent solutions. Zoom's known for it just works, the simplicity. And there's a tremendous amount of thought, time and effort that our product teams do in how we pull these solutions together so that they work all collectively, simplistically as one. And so while there's a lot of times, you might see check boxes, right, that these services are offered by vendor A or B, right, the devil's in the details of how you pull those together. And so these are the conversations we're having with customers absolutely resonating. I'm going to share a couple of customer examples here in a few. But I want to show a quick video that highlights how these different technologies come together, and then we'll take it from there. So let's go ahead and roll the video. [Presentation] Okay. So we saw a lot there. I can't summarize all of that. But what I would say is there are a lot of technologies or part of the platform illustrated in that video that we actually talked about last Zoomtopia, but it's these collection of products and services that are really resonating with our customers. And what I wanted to do is share a couple of examples of not only was this means for Zoom, but what this means for our customers. And we'll start with an example, a U.S.-based law firm. This is a customer that was a strong user of Zoom. But very similar to that video, they were struggling with how do I embrace hybrid work. And they had stitched together a solution that consisted of 5 different vendors that needed in order to tie all that together. And it was difficult for them to administrate. It was difficult for employees to use. And so part of this engagement we had was showing them the art of the possible. And they were able to not only displace those 5 different vendors, so it consisted of an on-premises Cisco PBX, a digital signage vendor. They had a badging and ticketing system. They had a separate audio bridge conferencing provider, and they consolidated that spend, and they embraced our on enterprise bundle packaging. And it's great because this resulted in a fivefold increase in ARR for us. I think Kelly showed that in her slide with customers that having multiple products and services, representing a larger portion of our revenues, signing for a 3-year term, but the most important thing here is it actually resulted in a net cost savings for them. So they simplify things for their employees, they simplified the IT systems for them to support and administrate. They saved money and it resulted in a 5-fold increase for Zoom. Second example, while we're on the topic of law firms, let's just talk about a little bit larger of a law firm. This one happens to be part of the AM100. And this is a customer that had no Zoom before talking with self kind of proclaimed laggard when it comes to technology. They very, very much have antiquated workflows, leveraging fax machines and all of that. So but they knew that they needed to do something. And so they were struggling with an aging UC system. They had an aging Avaya PBX on-prem. And we were able to help them in the conversation of helping digitize their business, help modernize their stack with the introduction of phone meetings and rooms. And significant opportunity. It was an opportunity for us to work with the channel partner as well that provided a tremendous amount of value in their deliberations and kind of their evaluations as they evaluated both Avaya private cloud instantiation, a RingCentral ACO offering and Zoom from a UCaaS perspective. So it was a very large opportunity for us over $1 million ARR in a 5-year term. Next, we have a SaaS-based technology provider based here in the Bay Area. And what's interesting about this, they were really just using meetings before. And as you can see here, really kind of jumped all in with the Zoom kind of stack, but they were most intrigued with some of our newer technologies. So those being notably contact center and our Zoom IQ for sales, conversational analytics capabilities, of which they bought 225 seats. So really kind of a great example of how some of our newer technologies are actually pulling through the rest of our business as well. And this customer, they've rolled out about Zoom 1 enterprise to about half of their users. So still a tremendous opportunity for us to go and capture the rest of the business there. Next, we have a large financial services firm. This is a great example, yet again of a customer going from that single workload, very large user of Zoom and looking to modernize their stack. Yet again, they were leveraging Avaya from a prem perspective. But looking at Zoom phone and some rooms we were able to really help them think through different ways that they can leverage the technology to really digitize the way that they interact not just internally, but also looking at future opportunities with things like contact center and how they engage with their end customers. Kind of going back to that slide that I had around digitizing some of the financial services types of arrangements. So huge opportunity for Zoom with over $4 million in ARR, signing a 5-year term. And there's an opportunity to more than double this from here as we look to expand additional global locations. So this is at HR and payroll services firm that again moved from meetings to the rest of the platform here. The part of the story here that I think is really interesting is, by the nature of their business, they're actually not a heavy medium user. So you see meetings will go there. But prior to this, they may be leverage, I think it was 10 to 12 licenses. So they're really heavy in telephony, heavy and contact center. But they were experiencing significant audio quality issues with their cloud PBX and cloud contact center providers that they had. And we were able to help demonstrate the power of the Zoom platform and the great audio capabilities as well as video capabilities that we have. And so providing a lot of value to them. And so you see here over $750,000 in ARR signing a 6-year term. But of that, the large overwhelming majority is in both phone and contact center. So we do see tremendous opportunities, not just in instances where people are video first, but where they have a kind of a telephony first approach. And next we have, this is a really interesting use case. This is a leading national kind of apartment leasing provider where they were really looking at how did we digitize our business. And they're looking to leverage video in interesting ways to do virtual remote tours of their different locations. And so they were using a cloud provider today, but really looking at how can they embrace video and consolidate that with a single vendor. So they are going to -- they're leveraging Zoom Phone, Zoom Meetings, Zoom team chat, all in these really interesting workflows that allow them to provide kind of this new way of servicing their end clients. So again, 250,000 ARR, signing a 6-year term. So I think maybe going back to what Kelly was saying about kind of lengthening terms, I think, really due to the economic environment that we have, a lot of customers are really looking for that predictability and signing those longer terms. So I think between these. I think there were 5 or 6 customer examples that I shared, but the common thread that we hear across all of these and really resonating with CIOs and CEOs, CFOs. Number one is really around simplicity, consolidating different technologies that they may have into a single stack that's fully integrated and works together. The broad reach that Zoom provides from a global perspective, definitely, this middle one here around time to value. One of the examples that we shared in our last earnings call was a Zoom Phone customer that had purchased in the 6 figures. So over 100,000 seats. And since then, they've deployed over 60,000 seats a Zoom phone. I'll tell you, I've been in the telephony business for a long time and nothing heard of, right? That's a 12- to 18-month project before you realize that value historically. So to be able to do that in just a couple of months' time is tremendous. So the time to value is absolutely resonating and then really getting down to that business agility, those conversations about how do they digitize their business, how do they provide that level of flexibility, again, not just internally to their own employees, but how do they provide that level of flexibility in the way that they do their business. So rather than hear me talk more examples, I'd love to share a great example from one of our customers here with another short video. [Presentation]

And with that, I'll hand it over to Oded Gal.

Thank you, Graeme. I know probably cannot went a little bit further and some of you missed some of the highlights. So it would be good to kind of over the things that we spoke about today. And we'll start with kind of how we think about the different aspects of our road map. First of all, really bring everything to a single platform, having that single client was kind of a big thing for us in this product note. It goes across all of our products from the meeting up to the contact center, building that value of having that single app that you can get all your capabilities in. And it's very important communications and now about toggling from one application to another. It's not just about the end user, but even the agent of the contact center is big value, and we spoke about it at the keynote. And then really thinking about it in terms of the entire journey, not just an in-session experience, but across the different products, the workflow application. It relates to some of our integrations that we've built, providing that before doing after the meeting, and also relates to applications like the contact center, integrating with the new acquisition to solve where it starts in the web. It goes to a phone call, then moves to a video. These are kind of the ideas we have around that aspect. And then really extending the value of Zoom with all integrations and being that platform for communication, and we spoke about it across all the products in terms of integrations. And ServiceNow is a great example where this COO came on stage and talked about this strategic partnership we have with them and the different capabilities that we're building in the products. We'll start with the first one. So e-mail is a good example. You may have missed keynote, but I'm really excited about this. And this is not something that is specific to 1 market or the other, one segment. The integration we have with Gmail and with Microsoft 365, applicable to any user. It provides really the ease of use of having everything in 1 client. The e-mail integrating with chat, calendar integrating with meetings are the highlights, but there's more to it. and we'll keep investing in making that experience more and more integrated and easy to use. That's kind of the first one is basically a client that is part of your application, the Zoom application sits will have mail and calendar clients. The second is the service where we're addressing more the small businesses. It will be something that you'll be able to get to your own e-mail address or you can integrate with your own domain. And it provides end to an encryption when you send a mail between our service users. This is something that will also have an additional cleanability, which is the calendar external users booking, where most counters today are very limited in the sense that allow you to see availability of people inside your organization, but what if you want to schedule with someone outside, this service integrated into our calendar natively will allow that external booking to happen natively in the product. Any questions on Zoom and the calendar? Okay. We continue. Again, the different products that we announced and we are released to market, it is coming in beta this week. So check it out and be sure to update your client to get that experience when it's out. Again, examples of the things that we're doing on the service side, really focus on privacy and the ability to support that integrated experience. Zoom spots. This is some Kelly knows my kind of baby hearing from customers about this loss of community sense, where people are working from home, maybe there's some percentage of people coming to the office and there's a disconnect. People, especially the ones who are working from home, they don't feel they're part of the group, they feel they're silos at home in their kind of further laptop and that's how they go through the day. We're missing all of these conversations that used to happen where you could talk about your personal life, your family. And a lot of actually business decisions are made in the corridors. This is all gone. The example I always have is all hands used to come 10 minutes to the cafeteria, talk to everyone who came to the old hand through the auditorium and exchange greetings but also talk about work. and that is gone today. You have all hands on Zoom and it starts in the hour. And that's it, you have some texture, but that's it. So really, we're excited about this, and it's different from our regular meeting. The way it's different is because it's more fluent. We have all the capabilities in meeting experience, but meeting is more of a scheduled calendar event where you come in and you kind of interact with others in a very regimented way. Here, this is something that you'll get into this space that we call a spot. You'll be able to see everyone people will be able to really get into smaller groups and move in and out quickly between the groups as if they're in an open space. And we really feel strongly that this is a big problem that people have today especially with building trust between each other and building a culture of togetherness, feeling that belonging to the company. This will allow that. Any questions on spots before I continue? Okay. One thing I want to add about spots, going back. One of the big assets that we will leverage with spots is really how it integrates with the actual physical spaces. Meaning, it's not only for individuals on laptops and mobile phones, it's also well integrated into the conference rooms or even an open space. And the idea is that you'll be able to roll in whiteboard, net board with a camera and the screen and microphone and speaker we have this amazing feature that allows you to create a border around that device where only people that are close to the device are being heard and will allow people to come in close to that device and start a conversation with the people who are always on the other side. And that kind of brings together the people who are in the office and people who are remote in an amazing way and a great solution for the hybrid workplace. Okay. Moving on. Feel free to ask questions if you have.

Sure, I have a quick one. Mark Murphy from JPMorgan. Great presentation. Thank you. Is it possible to some of the brand-new future announcements in BME. Help us understand which of these were really being pulled from the customer base? Like which of these had a lot of requests where you know going in that customers are requesting it from you, right, versus something that maybe is a little bit more of a push where you know -- where it's kind of the folks at Zoom seeing an opportunity to create more stickiness around this.

The way we work in the product team is we actually, we hear the customers and their requests, but we try to understand the problem. And in many cases, the solution can solve multiple problems. The idea is to kind of take multiple requests and understand, okay, what exactly is the problem? And then create kind of a root cause analysis and provide solutions. Let me give you an example. What we're doing in the conference room was part of that. People didn't ask to have multiple streams. They just came to us and said, "Hey, we were all at home during the pandemic. We created this amazing experience with Gallery. Everybody was on the same playing field. But now we're concerned that it will be gone when people will be in the office and some people at home, there will be some discrepancy. And we said, okay, how do we solve that? And we say we can create a technology that makes the same experience even if people are in the office in the conference room. So there was no request for Smart Gallery, we were introduced with a problem and we provide a solution. That's how we roll.

Was there a request for zoom mail?

Yes. Well, the request was around an integrated experience. Customers who are saying, hey, I have to toggle between different communication modalities. Can you make it easier for us? Especially around chat and e-mail. And again, calendar and meetings. Think about it. Why would I go to someone else's calendar, if I can go inside the same client and have that integrated experience between my meetings and my calendar? So the question -- the problem was that lack of fluid experience between your communication modalities, and that's how we solved it.

Thank you. I have a question. Siti Panigrahi. Some of the pieces you talked about, some of these products, which are the features or the part of like your meeting on Zoom One versus [indiscernible].

We're still kind of working on that. I don't have a final question, what exactly Zoom One will include from these new features that we provided. But conceptually, the idea is to create more value with Zoom One. So you can imagine that, that's the direction we're taking, where you get a suite of products inside really 1 package. There's no kind of final decision exactly what would be the price and how it will be packaged. Some will be only for enterprises, some will be for all Zoom One customers. So that's something we are still working on, but we'll update as soon as we get that.

[indiscernible] from Credit Suisse. Could you talk to any trade-offs you had to make between client thinness and thickness as you're not expanding the capabilities of the app? Does that cause differences across geographies or bandwidth requirements. And then from a kind of a feature fatigue perspective, maybe can you give us any data points around initial testing and kind of what you've seen there relative to original workflows that you're trying to replace?

That's a great question. We've always been very strict about making our clients very thin because we have people who just come for a meeting and want to download the meeting and move on. We built a mechanism where it actually can gradually download additional components. And for example, if you have an account or you don't have an account, it's also -- we differentiate between the 2, and you will not download all the capabilities in different situations. So we're kind of thinking about it in a smart way.

From a usage perspective, as you're evaluating very be users of the expected client versus what they were being sourced and what the productivity improvement that you see?

Well, we get so many great positive responses, especially with our Team chat that has been out for a while on how they can integrate with the meeting and spin up group conversation just with 1 click. This is one of kind of the features that we have. And now we're adding the ability to really kind of have that mid-teen continue with that same channel inside that meeting. So the reason we've done that is, again, to solve that problem of, okay, you started an adhoc meeting from a channel. Now what happens to that channel text that was there, can you extend it into the meeting, and that's what we've done. So we're making even more integrated and we're getting it. We actually have several customers who are waiting for it, and we're asking for it, but in a different way. They're asking, "Hey, I want my continuation of my chat after the meeting? How can you support us. And the solution we have is integrate our team chat that is persistent with our meetings.

Meta Marshall, Morgan Stanley. Just a question on spot. Has there been internal usage. I guess I want to have a sense of kind of where it's been demoed because it seems really interesting as a way to bring in hybrid workers, but part of the idea of having your camera on all day kind of seems terrifying. .

Well actually, you don't have to. You've seen in the movie, there's -- you can do audio only, and you can mute audio and video, but you can still see who is there. And it's integrated with our chat handle, so you can revert to text, if you want.

But do you have a sense of how usage has been on whether people leave the just anything that kind of says what...

It is early, like I can say that. But I can tell you that text-chat is not solving the problem, right? People want to get a better presence in just a green circle. They want to know that the other person is there. And other tools don't provide that.

Chet Kapoor, Tenzing Global. Do you expect your mail and calendar features to be more popular with online users versus enterprise? .

We are starting with individuals and small businesses, yes. yes. We are -- in terms of the enterprise, we have the Gmail and Microsoft 365 integration, and that will be something that they will use, get a similar benefit in terms of the integrated experience.

Let's get back to this chat to the slide, and chat is here. Really being more capabilities in terms of integrations with Teams Chat. We spoke about a few examples. ServiceNow is one of them. But Asana and others are already kind of providing that capability. It's also integrated into the phone users, where you can actually -- if you have a queue, you will have a channel associated with a queue and people can converse between each other. If I pick up someone else's call, I can let them know through that. So that, again, the problem of having a queue of agents waiting for a core, how do they connect between each other? Today, they had to use a separate tool. Now it's all integrated in 1 tool. The channel and the foreign application all in 1 Zoom Clips is another exciting new product. Really a few known meetings are great, real time. You can make decisions. You can get everyone together. But what if I live in another time zone, and I want to visually provide content to someone or message or even a product demo. I can easily created with a single click and then share it easily and get feedback from that person in different times. All simultaneously, collaborating with Zoom Clips. I spoke about Smart Gallery. This is the extension to that. If you remember, Smart Gallery provides the ability with a single device to break to different streams, different attendees in the room and send them as separate video streams in a gallery. The problem we've seen, and we heard it from customers is that in many rooms, especially boardrooms. There's a long table that you cannot really see everyone with a single care need multiple views. And so this will directly allow you to add more cameras. And then the cameras will really display different views of different people in the room. And with AI will choose based on the face angle, which video to send from that person. So kind of extending the Smart Gallery to be even more intelligent, if you can say that, with -- for more like high-end rooms, where people will invest in multi cameras and will provide that capability of seeing everyone in the best view. Moving to our next category, the virtual agent. This is based on our Solve acquisition, basically integrated it into our contact center solution. So from a packaging but also from product integration, it will be part of that offering. Zoom IQ, I'm not sure if you've seen the product presentation, but there was a lot of details on how it works and the benefits. I think it was well done, can really get the sense of how important it is for sales teams to get feedback on their sales demos. And that's what we're doing here. But now we're adding something even more powerful in the sense that you can off-line start a conversation with a virtual coach and it will tell you how well you're doing without taking time of someone who's making another sale. So really adding more capabilities to Zoom IQ for sales. Zoom Mesh, another great innovation in the sense that if you've ever been in a webinar, even if it runs internally and the video starts freezing, not resume, of course. But in some situations, it happens in the sense that you have a network that cannot really support so many users, especially if they are in the same location. So think of the use case where we have a lot of users coming into the office, but they still want to connect to the old hands from the desk. How do you support that? We also heard from customers who had a lot of small offices distributed across multiple cities and they don't have the option to deploy a server in each one of those branches. The idea is to automatically create a distribution of the media to allow that high performance by just enabling it in the client itself and the client is selected to distribute that media automatically. So there's nothing for the IT person to configure or set up. It just works just like any other Zoom capability. But the idea is really to provide the ease of fuels for the IT and the marketing person to create those high-performance video events without the need for configuring or setting up ahead of time. Next category, the extended value of Zoom. So team chat, back to the integration that we're building. You can see our top priorities are Jira, GitHub, ServiceNow, Salesforce, who will drive conference. We are kind of working on different capabilities that fit mostly organizations, with technical teams and also enterprises that use capabilities like Workday and ServiceNow Marketplace, the amortization of the apps really important in terms of driving developers to have a win-win. If they build an app, you'll be able to go into the marketplace and buy it. And of course, they will get a part of that. Then that's also another problem that we addressed where customers were saying, hey, I as an end user, have to always ask the admin to get the up for me and it takes a long time until they approve it. And until I get the app on my desktop application, it's really frugal process. How can we make it easier? And the idea here is that the admin can actually approve it ahead of time, put it into a list that shows up in the desktop client immediately when someone installing without really going through that process. Okay. Thank you, everyone. I'll have Wendy come and continue the presentation.

Good morning, everyone. I am Wendy Bergh, General Manager of our online business. I'm responsible for the company in revenue and customer experience. Prior to Zoom, I spent over 20 years in leadership roles across enterprise and consumer companies, including ServiceNow, Walmart and LinkedIn. I'm excited to share with you today an overview of the online business and have you into some of the great work the team has been doing to engage customers and drive growth globally. The online business experienced exponential growth over the past 3 years, resulting in a 3-year CAGR of 179% from fiscal year 2019 to fiscal year 2022 and helping to make Zoom a global brand. Online is focused on creating new value for small businesses and consumers and making it easy for these customers to try, buy and onboard with Zoom. A foundational piece of our product-led growth model is our free basic offering, which allows customers to host meetings up to 40 minutes for free, giving us the opportunity to upsell them to our more robust paid offerings. Online is also a flywheel for international and enterprise expansion. Online enables a 24/7 storefront that allows us to engage customers globally, helping to expand Zoom's brand and footprint. Once we land accounts online, we use data-driven signals to transition them over to our enterprise business, where they can be expanded significantly. Lastly, the online business is a highly efficient business, given its reliance on technology and automation at scale. And while we use technology at scale, we also could connect with our users at a more personal and local level using technology as well. The online business is a dedicated and specialized team that is focused on delivering value for SMBs and consumers with speed. By having both the business and the technology teams under one leader and working closely together, we're able to move more quickly and address customer trends as they come up. The online go-to-market team is made up of strategy and planning, e-commerce, marketing retention and user experience experts. The online technology team is made up of engineering, data science, product growth and global payments experts. These teams work together to ensure we deliver an optimized end-to-end experience for our customers. There are 3 core pillars to driving growth at Zoom for the online business. The first pillar is customer acquisition, which is focused on how we market and acquire customers. The primary driver of how we acquire customers for the online business is really around organic traffic as audiences hear about our products mile. As customers visit us, they can quickly onboard with our 3 basic offering that lets any customer quickly and easily host a meeting, start a team chat or collaborate with a whiteboard. While organic is the primary driver of our traffic and how we acquire customers. We sometimes invest in paid marketing to reach new audiences that may not be aware of Zoom yet. Our second pillar is customer monetization. These are the strategies that we use to drive new revenue. A key lever for us is driving free-to-paid upgrades because we have a large free user base. Another key strategy for us is driving upsells and cross-sells for licenses and new products. From an international perspective, we're focused on ensuring and making it easy for customers to pay globally by enabling localized currencies, localized pricing and localized payments. Lastly, in the circumstance where a customer does try to churn or does churn, we do win back offers. And so we go back to them and really try to get them back on as a paying customer. The last pillar is customer retention. And actually, in customer attention and in customer monetization, one of the things we do is drive value with new offers and features. From a customer monetization standpoint, that helps drive free-to-pay upgrades and helps drive that differentiation between our free and paid offerings. From a customer retention standpoint, it creates that stickiness and customer loyalty. From a customer retention standpoint, we also look at mix shift to annual. We know that our annual customers are more loyal and have higher LTV. We also do safe program. So if somebody does try to turn or leave our platform. We will try to save them with different offers. And lastly, we've been relentlessly focused on reducing churn, specifically in voluntary churn, which is when a customer made churn due to a credit card expiring versus the decision that they've made. Now I'm going to talk about some examples of strategies we've used across those pillars to drive revenue growth. The first one I'm really excited to share is one we executed earlier this year with the goal of creating more differentiation between our free and paid offerings. Our free basic offer has helped people connect around the world and drive exponential growth for Zoom. Historically, as part of the basic free offer, we provided unlimited 40-minute group meetings and a limited one-on-one meetings for 30 hours. In May, we instituted a 40-minute time limit to those one-on-one meetings for free basic users. So now they're in line with those group meetings. So what did that do? Well, I'm pleased to say that it had a really big impact on helping us convert their 1-year free base. And so what you see in this visual is the purple box, our free users, who upgraded to be paid users that -- and those 3 users had a tenure of 18 months or longer. So you can see that on May 2, we made this change in between April and May, that purple box expands significantly, Meaning, that we were able to monetize, get more free users that have been with us for 18 months or longer to start paying us. And you can see that, that purple box has remained relatively high sentence. Given the success of this initiative, we're doubling down and creating more differentiation between our free and paid offers. And I will cover a few more initiatives later on that focus on the strategy. I mentioned earlier how easy it is for online to sell at global scale, leveraging technology and automation. A key focus area for us is enabling local currencies, localized pricing and localized payments. So far, we've launched Louis currencies in 12 countries and localized pricing in 3 countries. For localized pricing, we tested in Vietnam earlier this year to understand if we could drive incrementality with a lower price and the results were positive. We have since expanded localized pricing in Mexico and Brazil and have other countries lined up to launch in the future. We also are focused on enabling more payment options globally and locally. Today, we have 6 payment options, and our goal is to expand that number over the coming year. Lastly, we enabled in-app purchases on Android and iOS. This is important because some customers are highly mobile and like to purchase through the app store. So it allows us to reach new audiences. Given our large user base, we want to be able to reach customers while they're engaged with Zoom. With this in mind, we launched in product marketing placements that allow us to reach active customers with monetization offers and value-add messages. One example of a recent monetization offer we executed is a cross-sell offer to Zoom 1 Pro business customers to purchase Zoom Phone. A recent value-add message we provided was making users aware of an upcoming webinar on how to use team chat effectively. This is a really powerful channel for us to reach and engage with our customers on an ongoing basis. I mentioned earlier, a key goal of ours is to shift contract mix to annual, given annual customer merger more low and 2x and have 2x LTV of a subannual customer. By leading with annual offers first across our marketing channels, we have been able to drive the mix up from 28% in Q2 fiscal year '21 to 52% in Q2 fiscal year '23. Earlier, I mentioned that we are we are focused on creating more differentiation between our free and paid offerings. I'm excited to announce today that we'll be launching later this year a initial apps as part of our online Zoom online -- Zoom One Pro business and Business plans. Essential apps provide valuable ways for our customers to run and grow businesses and will be easily accessible on the right side of the client. A few examples of the apps we'll be providing are such, which provides visual agendas to keep meetings on track and increase participation. Twine, Fintivity and Willow enable new ways to host team meetings, and have workshops to increase engagement. And then lastly, warmly and Gondola, which deliver better ways to sell and support our customers. Really excited about essential apps because they will create real value for our SMB customers helping to drive free-to-paid upgrades, more engagement and longer retention with Zoom. You heard Oded talk about e-mail and calendar today. I'm really excited about e-mail and calendar because it's also helping us create some differentiation between free and paid. The Zoom mail and calendar client beta will be coming soon to free and paid online customers. And the Zoom mail and calendar service will be available first to Zoom One Pro business and business plus customers in the U.S. and Canada. By only having the service and our Zoom paid offering and not our free offering, we're creating that differentiation. Kelly mentioned this earlier, but I'll spend a little more time on it. A key pillar for us is an online business is customer retention. And I'm happy to report that we made great strides in this area over the last few years. Online churn for Q2 of this year was at 3.6%, down from a high of 7% 2 years ago. We've been laser-focused on reducing involuntary churn, driving mix shift to annual, adding value with new features and also optimizing our save offers. We'll continue to double down in these areas to create more customer loyalty and stability in the business. I've talked a lot about how online drives revenue, but it's also a flywheel for enterprise. And so online is the fastest and easiest way for a customer to engage and get started with Zoom. But in a start point, our direct business can enable larger upsell for key accounts. Online has transitioned tens of thousands of accounts in the enterprise business, which has resulted on average in a 500% AR expansion of these accounts. To do this, we leverage key product-led growth signals identify when and which accounts to move over to an account executive. And that is it for me today. So I'm going to hand it over to Tom, who is going to tell you what's coming next. Thank you.

Thank you, Wendy. Hi, everyone. We did have a little bit of a scheduling challenge, and we are going to just switch up the schedule just a little bit. The customer panel that was meant to be after launch will now start around 1:30 p.m., and what we're going to do is we're going to have the executive Q&A start at 12:45 p.m. So we've got about 20 or so minutes for lunch break. There's lunch served outside here. You can either bring it back in this room, if you like, or if it's more convenient want more space, we also have a room next door where you can spread out a little bit. Enjoy lunch and come on back again in about 20 minutes. Thank you very much. [Break]

All right, everybody. Thank you. I hope you enjoyed lunch. We are thrilled now to have Q&A and joining me on the stage, of course, is Eric, our CEO and Founder; and Greg Tom, our President. So here you go. We have mic runners on the side, and we're going to open it up for Q&A.

Siti Panigrahi from Mizuho. It's good to see you and thanks for hosting here. And Eric, we saw so many product announcement today. And in fact, Zoom Phone, one of your fastest-growing product and contact center next. So a couple of questions. In terms of contact center, do you similar kind of growth in adoption based on -- although it's just a year? And what other products that you're more excited about near term versus medium to long term? .

Yes, great question. So yes, first of all, so excited to see you all in person, it's not about a Zoom experience anymore. So I think we can see your hands now? So -- and you are so right, I think the Zoom Phone is very important and element of 1 of the most important elements for our Zoom One platform, right? And we are doing very well on that front. But there are 2 new services. One is Zoom contact center, the other one is Zoom IQ Sales. Based on customer feedback, in particular, Zoom IQ sales, almost every one of our customers, they all told us, hey, our sale teams are working remotely, how to help improve their productivity. I think we do see a lot of new deals in the pipeline for the Zoom IQ for sales. In terms of Zoom contact center, again, this is something new, but actually, we are down on that. And we have a lot of engineered resources adding a lot of features every month, every quarter. We have a very high confidence, I think, on the good it can help us a lot in terms of revenue and also the growth. But first year always, right, we found new use cases, right, like internal IT support and also some of our customers, especially for phone customers, they also replace their other on-prem contact center solutions. Take our customer experience team, for example, we did deploy the other cloud with the contact center solution before. And 2 months ago, we replaced that with our own contact center solution. It works extremely well and give our sales team more confidence to sell that. Again, I think that will be the driver. I think, in the next several quarters for both Zoom IQ for sales and Zoom Contact Center.

Do you want me to add to that?

Yes, please.

Yes. So the other thing you have to know is that, every single customer we have, whether it's mass market up to the enterprise has a need for both of those products. It's almost regardless of the industry they're in and where they're at, right? A lot of them have very old contact center-type applications. They're unfriendly. They can't manage them. They can't change with their organization. So they -- almost every one of our customers is looking for something else there. When it comes to Zoom IQ for sales, the value proposition is extremely strong, right? And some of our customers have invested in products like Gong or Chorus, very easy for us to take that business. A lot of them though that are using meetings for the sales force and most of them do, immediately see that and they see an advantage to using it and a benefit for the sales force. So it's been something that's been very easy to take into our existing customer base, which in the enterprise side is fairly large. I mean, I won't give exact numbers, but it's over 200,000 enterprises, right? So also to note, though, we've only released it in a very limited set of languages. I mean IQ for sales is English, right? So all of a sudden, we've got in the next quarter here, another 10 coming out, so it will allow us to expand beyond just English-speaking markets. So I think we've got -- like we did with phone, I think we've got 2 products here that you're going to see companies will expand very fast. It's very naturally replace existing costs they already have, except with us to get an integrated solution people are used to using because it's all built with the same pane of glass, same technology. So I think they've got a good future for them.

Actually, we'll call on Rishi this time.

Rishi Jaluria, RBC. Two questions, if I may, one for the team and maybe one that might be specifically for Kelly. For the -- it seemed like if we think about a lot of the platform innovations that you continue to come out with, including what you've been announcing today, you talk about wanting to get into CCaaS. And we've learned that's a really hard market to get into larger players have tried to flex their way into that and not been very successful doing so. So how do you think about the amount that you have to spend on engineering but then still having that longer-term target, that's significantly lower than what most other software companies would spend. And then maybe just as a quick follow-up. Kelly, when we think about the longer-term margin profile, how should we be thinking about the role of stock comp and your philosophy around SBC and dilution as it fits into that?

Do you want me to talk about the engineering investment first?

Yes. You go ahead, I'll talk about that. Yes.

So we -- as you highlighted, and you all know, we have been underinvested when it comes to R&D over the last several years as we had such a rapid acceleration of revenue. It's been very difficult to up from a hiring perspective. We are now approaching our long-term model of 10% to 12%, and we talked about this morning. We're able to spend fracture about half probably of what our peers spend in this area because we have a very efficient model, both from a platform and our resources. And that's been a hallmark of the company from the very beginning, really, thanks to Eric and his foresight to set the company up in such a way, and that will continue. I mean we certainly have diversified our hiring approach when it comes to engineering, but continuing to focus on being as absolutely as efficient as possible. And then in terms of stock-based comp. And I think -- we're going to give the sort of a longer-term view on this when we get to Q4, and we talk about FY '24. But I want to remind everybody about why you have seen elevation in our stock-based comp over the last several quarters. It's really about ensuring retention in our employee base and continuing to deliver happiness. So just as a quick refresher. Some of you have probably heard this, but -- the way that we grant equity, which is a very important part of our compensation philosophy is based on a dollar amount that goes into a new employees offer letter. And then we back into the number of RGUs by using a 60-day average at that point in time. While employees that got hired a year ago, 18 months ago, when the stock price was very, very elevated, when they came to their first anniversary where they're actually now vested and able to sell some of that stock, many of them were under water, if you will, or under that value that had been in their offer letter. And that does not really promote employee happiness, especially when you think about during that first year, that's what employees are the most at risk for potentially leaving. They aren't vested and they are invested in the company yet. And so we have a program in place where we are doing top-up grants. If employees are under that value upon their first year anniversary, we are topping up those grants to get them back to that level. We think this is really important for long-term retention and. And the way that it's amortized in because that top-up grant continues to vest over the remaining period of their grant, the 4-year grant. So you're going to see this elevated stock-based comp for a period of time. But again, it's all about promoting retention, which is really key to our long-term strategy of growth and development and innovation and all the things you heard us talk about today.

Just to quickly -- thank you, Kelly. Just to quickly add on to that. I think in the future, that will not be a big problem. The reason why for any company, where you see the overpriced stock, right, for a while. And there any value, right, in between for those employees who join what can you do, you have to do some of the ag list, right? I do not think our stock price will be back to 500 again for the time being, right? So that's why that kind of problem will be gone in the future. Yes.

Yes. As the stock has stabilized, we're going to see less of an issue around that. Yes.

Exactly.

Thank you, very much. Michael Turrin with Wells Fargo. Greg, maybe since we haven't heard from you, we could start with you and the others, Eric and Kelly can follow on. You came from Google. So I'm just curious your views on competition and competition, particularly around the surrounding productivity products. Obviously, there's e-mail and calendar attached now. There's been a lot of effort around phone. So can you just speak to what you have to get right to win these surrounding apps and where the toehold with meetings from your perspective, provides a strong advantage.

I definitely can. Yes. I mean there's 2 big players out there when it comes to e-mail and calendar and it's Google on 1 side and Microsoft on the other. Very different, though. I mean, Microsoft is a really big player at the enterprise space, they've been there forever. Google is still at the low end, the SMB facing consumer space. So they do blend and they do compete. I know a lot of you probably didn't announcement around e-mail and calendar, but our goal is not to take on Google or Microsoft when it comes to the enterprise space at all, right? A lot of our customers use those products. They like those products. However, to go back and forth between multiple applications, different windows or I'll say, panes of glass to move between applications, it's very cumbersome, right? So I mean, our whole goal here is to make it really easy for a user that is a meeting user and a phone user and wants to be able to access their e-mail and chat very seamlessly back and forth from 1 screen, right? And our users want that, right? So on the back end, we'll work with Google. We've got a great relationship. We'll work with Microsoft. We've got a good cooperative relationship. So we'll continue to do that. right? Our goal is not to go out there and be in this competitive force with them in the enterprise space.

Okay. By the way, actually, both Google and Microsoft, both of them are very supportive when we launched our EM client, right? Again, as Greg said, we are not going to compete against them, right? We look at it from our user perspective, whatever we can do differently to improve our product and platform experience.

Mark Murphy with JPMorgan. Wondering if you could comment on in the very long run, what do you think is going to be the optimal mix of traffic that would be running through your own data centers versus through public cloud? And why? How do you kind of drive at the right math or the kind of the optimal mix there, right, in terms of your gross margins and the customer experience. And then also, if you have time, could you comment on the adoption of Zoom One. I think we all -- we understand that it's very early. But someone had mentioned, I think, a SaaS company that has half of their employees that already. And I think we're interested in trying to pencil out where you think Zoom One will kind of shake out in the very, very longer run. Is this something that ends up creating like Amazon Prime or like will Uber One, something like that?

Yes. So speaking of public cloud, I think there's 2 benefits. One is, first of all, let's say if we go to the international market, right? And we can quickly leverage a public cloud, to start with, right? And it happened very often. And in terms of costs, also very manageable. In other ways, let's say, our free users, right? It's really hard to forecast the traffic for free users, especially over the past several years, why not lever public cloud. Until we further understand how customers are using our traffic. I think we use the public cloud always, right? But look at our paid -- like interested or the hesitant customers, we know how they are using our product. To use our own data center for sure is great in terms of effectiveness and also its cost efficiency, right? This is always our goal, bringing our big enterprise pay the customer to our own cloud. So -- but we're always with all the boats. And back to the question of Zoom One. We do see while we're making very good progress, in particular for customers to realize the value to deploy Zoom One. They already deploy meeting, the deploy phone. They realize, "Wow, Zoom has an amazing team traded solution and also whiteboard also part of that" I think customers love to, right, love to deploy that solution. Huge value plus as Greg said, Team chat is free and is part of overall the Zoom platform. We're giving more and more value. Essentially, we position Zoom more like a hybrid working operating system, right? Either the customer use our service or maybe we integrate it with other services like ServiceNow, right, for the part of the business workflow. Essentially, that's our platform strategy, doubling on Zoom. We are making a very good progress. you look at adoption rate of the team chat, in particular for those Zoom Phone customers have to realize the team that it's amazing.

Yes. I would add to that, that when you take a look at Zoom One, it wasn't about creating a new product. It was about the way we can package it and make it really easy for our customers to better understand the extended value and then have the ability to do business with us, right? And I'd have to go through all these independent cycles with us and buy independent products and go through the negotiations. So it really makes it much easier for a customer to step in with us. And then as they grow and want to expand, we can expand on top of that. So it's been very, very valuable for that. So I mean it sort of goes hand-in-hand with all the new brand we saw when link that really shows that, look, it is doing as much more than just a video company, we are a true platform. And we can -- people really understand we do so much more now, and they can really put the platform story and the pieces together.

Yes, Ryan, please.

Ryan Mac, Barclays. Kelly, just at a high level, what's more important for Zoom in the medium term, getting back to double-digit top line growth or maintaining 30% operating margins?

I'll let Eric answer that question. I'm just kidding. We -- as I said this morning, so if you weren't all here this morning, we shared a view of our long-term model. And we are absolutely focused on investing for long-term growth and sustainable long-term growth. Somebody asked me in the hallway, your ag margins are actually what you shared this morning is going down from where you are today. And that's because we are continuing to invest, especially in sales and marketing even beyond where we are today, adding to our direct sales organization, continuing to build out our international channel program. And really, all of that is focused on continuing to build long-term sustainable growth rates.

Perfect. And just a follow-up. I like one's presentation where she highlighted the benefit to online revenues from the shift in meeting times for free users. I think you know where I'm going with this. This particularly benefit the third quarter. And then with e-mail and chapter present a similar monetization opportunity here. Do you want to take that?

You want me take that?

Yes, please.

Yes. So I only give you specifics about Q3, right? But I can say the -- I mean you saw the slide on churn right? And we're back to post pant pre-pandemic churn levels, which is fantastic. The -- all those initiatives are running in order to not just slow down churn or stop churn or reduce a bit also to really help every one of those customers, whether they are free or they are paying at some level to understand there's a lot more value they can get from us, right? And so if you think about email, when you think about calendar, that's an area where a lot of them do have other solutions, and they are paying for those solutions. And if we can provide them a level of that solution, no cost, if they're paying customer of ours, they will make that move, right? And the one thing about e-mail and calendar from Zoom is our goal is to be similar, to be more user-friendly, right, to really target that whether it's a consumer, prosumer SMB world to target them with something they can really leverage every day, okay? So I think it will help. That's a big yes. The other thing we had is, I know you didn't ask about this, but I don't know if you saw the announcement of essential apps, right? So we've got a whole bunch of app partners that have built extensions around Zoom that we have a lot of customers, especially at the low end, that just love those. They're all young companies. They've been built with our SDK on our platform. So now we package them together and we're taking them into that entire customer base that NDA has, and they can actually leverage all those apps for no cost for the first year as long as they are paying customers Zoom not free, right? So that gives them another reason to stay with us, become very sticky and get more value out of our application.

Meta?

Meta Marshall, Morgan Stanley. At the IPO, you had -- you expected Meetings to be about half of your long-term revenue and kind of ancillary products to be about as you've expanded the platform, how do you think about kind of that ratio going forward? And then maybe second, I know you get the ass every quarter. But just in terms of your capital structure, you're extending the platform a lot. How do you consider M&A versus kind of other alternatives with the capital structure?

So we haven't really changed our outlook that for the long-term future, we expect Meetings to be about half. We've said in the past, phone 25% and the balance of the products to make it probably another 25%. I mean we could see if Eric has a differing view but remember Meetings had such a huge head start that it's going to take a while, but we have such an expanded wheel now that I think we'd all be happy at some point of meetings was less than half, but again, we have years and years thing for that to take hold. And then -- I'm sorry, what was the second part of your question? Capital structure. Okay. Yes. I mean, Eric, you want to add anything to what I just said first? .

I think first of all, you're so right. And honestly, I'll say we've sort of shifted away from just the meeting being the important product. I do not think back to 2019 IPO story, percentage of meeting or others. I think I do not think that's a long-term sustainable model. The reason why I say that is because it's its own platform. Customers trust our brand, right, dominate that just from the platform. The phone, meeting, IQ, team chat, everything is part of that. I think that's our crucial strategy. Otherwise, you focus on important product -- the problem today, if you focus on our partner product, it's very hard for you to market that, right? That's the reason why we have a team chat, nobody knows that, right? That's why we want to focus on the platform, right? That can dramatically change our future growth trajectory.

And then in terms of capital deployment, just as a reminder, our Board did authorize a $1 billion share buyback, and we'll have an update for that in our call in 2 weeks. And then if you have any M&A questions, ask Sanjay, he's back there. No, I'm just kidding. M&A is a very important part of our growth strategy going forward. We -- you saw already some of the outputs from our Salvi acquisition, which has been tremendous. And really, those technology tuck-ins to accelerate and expand our platform have worked very, very well, and we're continuing to look for opportunities. I think the reason -- part of the reason why you haven't seen more is we have a very high bar for both technology and talent and wanting to make sure that we never disrupt our culture. And Eric is a very hard judge here. So we keep looking and are constantly evaluating opportunities, and I'm sure you will see more of that in the future.

Yes. Kelly point is I'm an engineer, I can't write a code, but I can buy a lot of solutions.

Yes, here, please.

Tim Usasz with Credit Suisse. You've updated us on your long-term sales and marketing targets yet you have almost 2 components of our go-to-market approach, a lower touch product-led and increasingly a higher-touch self-led partner-led approach. Could you help us understand as you think about the long-term structure of your business how is the business split between those 2 channels?

Yes. So as we set those long-term margins, we certainly have taken into consideration how we expect those businesses to keep evolving in terms of percentage of our overall contribution. Just -- I'm not going to give you exactly specific, but I'll give you some touch points. If you remember, prepandemic, online contributed about 20% of our revenue. during the pandemic that went up all the way to almost 60%. And now we're approximately half right now. We do expect a lot of our future growth to come from the enterprise but with the online continuing to stabilize, right, and also be a growth rate, but not at the same rate as enterprise. So all of that was taken into consideration when we set those margins because as you highlighted, is absolutely accurate. The online business is more efficient as it's more of a self touch. But that has been considered and where we think that will eventually sort of level out over time.

Yes. Thank you, Kelly. One more thing actually I'd like to share with you, you look at our online business, right? It used to be we just fun in our product, our online customers online revenue growth. Actually, there's a hidden value. You look at our online business, which is our go-to-market machine, right? Today, we only sell Zoom the service Zoom platform. What if we make our online business become a platform, not only do we sell our own service, but also, as Greg mentioned, a third-party solutions even for other SaaS companies. The reason why today you look at any SaaS companies, as long as they have SMB business, everyone sort of facing the challenge for online business. We already figured a very, I think, a sustainable, profitable way to run our online business. Why not make it a platform to sell any other SaaS services, other new solutions. That's a hidden value. I think we are going to explore, and this is very important for our future growth for online business because the brand alas there go-to-market model also there, right? Why do we want other SaaS companies, they have to repeat all those hard work. We already made it work already today. Again, that's a hidden value. We are going to further explore.

Yes. I think there's another question over here. Please, Lisa.

Team, it's Darren Baker from Prime Cap. I'll ask another question that I know has been asked before, but I'd love to just hear kind of how you're thinking about it most recently. Microsoft in recent years has made no secret of the fact that Teams is a key kind of centerpiece to their strategy within their productivity business. And in particular, most recently, they've talked -- their growth is very much kind of tied to the idea that people will kind of upsell into these higher bundles that include more capabilities around teams and around telephony and meetings and so on. And I know that among those who are following Zoom as an investment, there's certainly a concern that as we come into kind of the 3-ish-year mark here like after the start of the pandemic that some of the contracts that you guys maybe had done in the enterprise to be coming up for renewal and that Microsoft will be coming in with a very aggressive play to try and win away those people who are using primarily your meetings products, but also they would be looking at opportunities to get the broader UCaaS suite in there as well. So I'd just love to hear kind of how you're thinking most recently about that competitive dynamic? And any kind of commentary or thoughts you could provide on just how you think the next year or 2 play out in the enterprise side of the business with those core products rather than maybe the product upsells we've been talking a lot about today.

Greg, do you want to add?

Yes. No. You can add to it. So look, there's definitely room in the world in the market for more than one player. There's no doubt about that, right? There are companies that -- and you'll meet a lot of them here that Zoom saved their companies in the last couple of years. They know what kind of company we are. They know that when we say we're going to do something, we do it, and we are innovating at a rate that our competition could never innovate. What we do in 1 year, they can't do in 10 years. So we will have a platform that will continue to stay ahead of where our competition is. We'll have a platform that really -- it's all built on the same architecture right? It's all built with a really, really small front end. It's stable, it's usable. It's why people love it, right? So if you are a company, I guess, that is really, really trying to cut costs, right? And you're doing it through your IT office, maybe you'll try to move some more people to other options. We haven't seen that, okay? We have seen people that said, "Look, I've made a big investment over here. I've been with them for 10 years. I've been with you for 3 or 4 years. What's the right way to live in harmony together, right? And it's where the line gets a little blurry is when you start dealing with chat, if they put in their foundation, how do you deal with ours since we start with the meeting and bring it in or if they started with ours, it's the same question on the other side. How do we take it all the way down to their artifacts, right? So in the enterprise, there is going to be a world going forward where we can be the best communication platform out there, especially when you're dealing with the external world. Because what you can afford to do is when you're doing your investor conferences or you do in your sales calls or anything that is external, have a subpar experience for your user for your customer for the outside party. So that's how I answer it. It doesn't mean we're not going to compete in certain places, but the world is a big place. So do you want to add?

Yes. Thank you, Greg. I think 2 smaller things I want to add on to what the Greg said. One thing is look at those enterprise customers, right, in particular, for those inverse customers who truly care about the employee experience, you have to give employee a tool that will work best for them. It's very important because you look at young graduates, young graduates from universities, obviously every university, they deploy Zoom. They're very familiar. And for those enterprise customers say, yes, I do not care about the employee experience. I just care about the cost, is there bundle of solution? Guess what? Employees, they are not happy. Their department might buy Zoom solution, right? Because Zoom is sort of becoming a very trustable brand, customers really enjoy using that. More like I use my phone, I never want to switch anymore, right? Even if you give me something for free, right? That's very important. Another thing as Greg mentioned, right, we have to innovate fast, faster than them, right? And the reason why we're doubling our intern resources, we have a lot of new stuff in the pipeline. Plus, even for enterprise customers, we have take resonate right we close, we kind of mention the name, right, the big banks, right? They also deploy Zoom phone as well. They also explore Zoom [ iPod ] as well because they trust us. They know we truly care about them. So that's why also market is big, right? I think that's why -- competition is always healthy. But again, the market is huge, right? I always a minority -- a company of 3 or 4 players or 2 players is very, very healthy. It's good for us, good for Microsoft, it's good for customer.

Back, please?

Peter Levine with Evercore ISI. So I guess sticking with contacts, can you tell us for customers that you Zoom, who are they replacing? Or are these customers running it alongside a competing offering? And then going to phone. I mean you've done a good job scaling that business, but maybe share with us any metrics around net new deals that lead with phone, meaning customers that are new to Zoom. And then maybe talk about pricing, where do you see pricing on phone kind of troughing out?

Why don't you start in contact center?

Yes. So look at the contact center, and I think look at the deals were closed, right? I think pretty much replacing other cloud is the contact center solutions, and also have new use cases, right, internal IT desks. Even take a room, for example, right? And we are replacing another cloud-based contact center solution with our Zoom contact center. Our team very excited. It works so well, and much better quality also. And again, I think Donald would have probably been working to replace -- because we do see some deals in the pipeline for other on-prem and the contact center solution, right? So we're also going to replace them as well because now it's relatively straight forward. Customers, they're already familiar with cloud based contact center. You look at Zoom because they already deploy is Zoom Phone, is sort of relatively straightforward for them to switch to our contact center solution.

Yes. Yes. I would say on the phone side -- I don't know if Graeme is still here, if you want to add, Graeme, but on the phone side, we've seen this incredible progress in 3 years, we're over 4 million users now and I don't see that slowing. The thing about phone and the way we've developed it, it is a huge money saver. Like in general, we really like to push the value we bring not just on the bottom line, but the top line. But when you really look at the way we've designed phone in a number of countries in the world, we support and the technologies that are out there that are -- that have been around for a while, whether cloud or on-premise, we save an incredible amount of money. And we're just moving into a place where when we walk into a -- Eric and I are just gone with a very, very large retailer with, I don't know, 100 stores around the U.S. last week with their CEO and the business case we put together with them and they filed in all the numbers saves them multiple millions per month, right? So it's all about how do we replace these legacy multiple systems as fast as possible. So as we continue to press that on the TCO around phone for the next 12 months, especially in this economy, it will continue to pay back for us. And once again, because it's on the same platform, it's tied into meetings. It's tied into contact center. Now we start to get that slinky value proposition, and we get the user using the single pane of glass. So it really becomes sticky. I'm not sure I answered your question exactly, but...

Just to quickly add on to what Greg excited back to 2.5 years ago, when we introduced the Zoom Phone, I do not think anyone thought we can make a very good progress on for side. But if you look at it today, it's the number. I think the 2 reasons. First reason, Greg already shared. Another reason I can tell you, I think that's the secret sauce. Zoom Phone quality is indeed much better than any other cloud based on service provider. You can do a test. Otherwise, we cannot win so many deals, that's the reason why we're winning I think given that we build our own contact center solution, I think we would like to follow a similar growth journey as well, right, the quality is extremely important for the phone and for the contact center. So.

This is Aleksandr Zukin for Wolfe Research. Kelly, just 1 for you. I'd love to hear how you're thinking about the headwind that could come to the enterprise business next year. from a slowdown of seat growth just within the context of the recession, the increasing news we're seeing about layoffs. Just kind of help in ended from there.

Yes. So we'll have more around this specifically related to Q3 on our call in a couple of weeks. But as we talked about on the Q2 call, what we certainly have seen is deals coming under much more scrutiny my peer is the CFO getting involved in many more deals. Greg knows I spent more time in Q3 on calls with prospects than I probably have ever done in the past. They care a lot about deal structure. Obviously, price is being really important. But again, Zoom is amazing, right, because you just heard all the ways that we can help bring more value to those customers. we can help reduce costs. We can help them consolidate on to fewer vendors, which is really something that CFOs care about a lot. And so those are all the values and the great ways that we help even in these economic. When we're facing economic headwinds in general, and why we will continue to see expansion of the platform overall. Okay. I think there was one more.

Karl Keirstead from UBS. It's actually maybe a little bit of a similar question, but ask it maybe a slightly different way. A lot of investors are concerned about the macro environment, the slowing deal elongation like you've mentioned. And so I'm just wondering if there's the top 2 or 3 things that you all are doing to try and counteract these. Is it new products contribution to growth? Is it cross-selling, upselling? Is it making new feature enhancements to make the product more sticky like -- if you had to rank the maybe top 2 or 3, how would you classify it?

Let me go. Yes. So I think first, and I think Kelly mentioned this is from a selling perspective, making sure early on in every single deal, we're not just dealing with 1 executive. It's not just a CIO. It is the CFO. It is a procurement organization. So we're covering all the bases to make sure that the value proposition of the business case is tight. And we've got all the sponsors or the approvers aligned early. That's really, really key, right? So that will make sure our deals stick, right? The good news is, is that a large number of these deals that we are doing is not just helping on the top line, but it also really does help on the bottom line. So most of them have very, very solid business cases to actually take cost out of these organizations. And we can -- it's very tangible. It's very tangible around phone. It's very tangible on sales IQ. It's very tangible around contact center. As we lay that out, I mean, right now, in this environment, things that help you take cost out of the equation and then also bring additional value, get attention on things that don't, right? So we're very lucky. And the other thing we're very lucky at is that we have such a large customer base that opens their door to us. We don't -- we're not out there just knocking on doors saying, please give his attention. They open the door for us, we can have the trusted adviser discussion, and that really does help us. It puts us in a really good position. I do I mean as we move into the future, we have to give the deals the additional tension with the additional buyers. And I would say as a sales team, our CROs here a summary is about to come up here a bit, it is about doing also continue to do more units or sales rep. And that's where a lot of our add-on products come into play. So instead of depending on 2 or 3 really large deals, I'd rather have 10x more smaller deals to make it up. and plant those season and extend. And so that's how we're driving our sales force. Hopefully, that helped a little bit.

Great. Maybe one more question. Yes, we do have time. We have 1 more question. Anybody else?

Alex Vasti with William Blair. Just quickly on the partnership channel. Could you maybe touch on any high-level thoughts or meetings you're having there regarding initiatives? How do you plan on getting into the larger end consumers? And how might that play in with the larger GSIs?

Yes. So that's a great question. So as a matter of fact, tomorrow, we've got a big partner summit here, and we've probably got 400-plus people here in person and a whole bunch virtually, but we've got 10,000 partners today. And 1 of the things we need to do is be smarter about how we differentiate across those partners especially those that influence go-to-market and new business. So when you take a look at really the, I'll say, the top 30 or 40 that make up 70% of the business, we're making a really big shift to really focus on those partners. The big partners in not just in the U.S. but even places like Japan that move the needle. And so as we move into the future into next year, we'll be running a lot of very specific big plays with those partners. An ASIC in Japan or the CDWs here in North America because they really give us a lot of reach if we invest in them, right? So that's a really big thing for us. The other thing is when you take a look at new products we've mentioned, contact center sales IQ, they're not in our partner's bags yet. So there is a run right now in order to get our partners bringing those products to market as well. right? So we'll see a big lift from the partners in those new products in the platform. Okay?

Great. Well, thank you so much, Eric, for joining us today as well as Greg. We really appreciate your time, and thank you.

Just a quick comment, actually. First of all, again, thank you so much for coming here. Actually, if you have time, please randomly talk with some of our customers, right, ask them why they like using Zoom products? What's their feedback? Probably can answer to a lot of the quests already. Again, thank you so much. So excited to see you all in person.

Yes. I was going to thank you as well because I know some of you made a long journey, but also I'd recommend walking through the show floor in the middle here. There's a lot of different partners we have out there that are showcasing whether it's their devices that work with Zoom additional applications, but it's a really good way to see how people extending our application and really extending the value, which once again gets sticky for all of our customers. So take a walk, I just did the walk when you had a little break, and I was blown away. So Great.

Thank you. Appreciate it.

Well, thank you. Great. Thank you, everybody. And I'm going to bring up Ryan Azus, our Chief Revenue Officer and a couple of our key customers here.

So let's talk to some key customers. So I think that's probably the perfect thing to be doing. And I'm really excited and proud to have a couple of great customers with us here. Jill come on up, Jill Porubovic, not an easy one to say, but Jill from Take-Two Interactive and Julio Pereira from World Fuel Services, welcome.

Two Fortune 1000 companies, they're able to kind of join us and share their story. I guess for starters, maybe we'll start just even background, why don't you go firstly, just a little bit about yourself and of course, World Fuel Services for those that might not be familiar.

Excellent. Thank you for having us. My name is Julio Pereira. I am one of the productivity leaders on the IT side for World Fuel Services. World Fuel focuses on energy management and logistics, supplying fuel for aviation, marine, transportation and commercial. And we've been a Zoom customer for over 4 years now. Fortune 100.

Yes, actually, so not just 1,000. And then Jill?

Jill Porubovic. I've been in technology about 30 years. I'm currently working at Take-Two Interactive. That's gaming like Rockstar Games and 2K or 2 'the bigger labels'. I am VP of Operations. And prior to that, I was at Discovery Channel for 12.5 years, running all their operations with about 300 people in 32 countries.

No offense, but my kids are going to be more excited about 2K.

They need energy.

Why don't we start. Talk about the journey and Jill, why don't you start us off? Just kind of how Zoom got started? And like you said earlier, I know that's kind of across a couple of different organizations? Talk to us about that.

Right. And it will be like the combination of Discovery and take 2. So Discovery, the journey kind of started with the need to collapse environment. If you think about 2016, 2017, we're still rolling carts into rooms. There's still not a face-to-face like client that you can sit down and really work well with through M&A, and I've done 21 of them now, a lot comes from being able to go through and collaborate and bring things together. So on M&A that we had in 2017 sort of brought the camels back and made us had to make a decision. We made -- I made the decision for Zoom actually, and I thought my team was going to kill me because they were not a fan necessarily, but the ease of use is what drove me there. The other platform we were using just it's too cumbersome. And when you're talking about rolling something out to humans that don't necessarily know technology, you need that easy button.

Cool. How about on your end? How about the journey, kind of where it got started and how you got there?

Absolutely. So 2018, I think, facing similar challenges as many organizations, which is not embracing video conferencing because it was too difficult or interoperability wasn't there. And that's how we started on videoconferencing. And that really started to shape the way our organization works. It's a global organization across 200 countries and really moving on to sort of like the unified communication platform, which we then transitioned in early 2019 with Zoom Phone, which I was previewed to the previous panel on what were some of the benefits and really resembled a lot on us, which is reducing costs, simplifying our infrastructure, moving to a cloud, which was our cloud strategy. And then across that, the enablement of Zoom rooms to be able to really collaborate across the globe, and that really transpired into how users embraced and really drove the transformation around communications.

Awesome. Thank you. And Jill, we -- they did show earlier the Warner Bros-Discovery video. You might have seen that?

I was like there's my boss. There's my team.

With Dave and the team and you used heavily Zoom in 2 different organizations, right, different cultures, both, I think, on the creative side. So talk about what's similar, what's different kind of looking at it from the viewpoint of the different companies.

It's so similar. And really, the whole creative space is so different than a lot of the other spaces. So yes, of course, we use Zoom for video conferencing. We're always a video first. It's -- I'm never going to look at somebody's initials or their picture. We're almost all video so that we can connect, but it's not just about that. In fact, it's maybe 60% about that and about 40% on how we leverage Zoom to do all sorts of creative things. Even before the pandemic, from a cost savings perspective, discovery wise, the need to trim costs when we're talking about production, -- it used to be in the old days you would bring in the producers and everybody else to an editing suite that's swanky and you would hang out and you would do the editing together. That's expensive, right? And when you're looking at trimming costs, that's one of the first things that they did there is they trimmed costs and we leverage Zoom in order to be able to do that remotely. And that was, I'm going to say, 2019, maybe even before them. And costs are always the primary thing, especially in creative companies. When you think about the pandemic and what that did from a Take-Two perspective, obviously, you're not going into a live motion studio with your producers, and you're having somebody dunk so that you can capture that for a game, you're not knowing that anymore, right? And so that was all done remotely with multiple cameras, live-action video where you've got the producers who are remote telling Dunk again go higher or whatever, that all became remote. That is still remote today a lot of it. And I can go on and on and on about all the creative ways that the tool is used. And I think it struck me yesterday when I met with the events team, and they were talking about all the cool things that they're seeing from events. And I said, and you have no idea all the cool things that are happening within companies that you're not seeing. So, fascinating.

Thank you. We love hearing it. Because I think of certain use cases, right? It's just meeting. But when you peel that back, people aren't just a meeting, there's so much more that they're doing on the platform, even for the video aspects, let alone all the other applications that we've been talking about. Speaking of other applications, contact centers have come up a couple of times, I think, today. I know that's something that you're looking at with World Fuel. Talk to us a little bit about your intentions there, what you're seeing kind of your current contact center situation?

Absolutely. So I think the strength is really the partnership that we built through the Zoom Phone deployment, which was that constant feedback and product feature evaluation that allowed us to really voice what was really needed in the marketplace for us and contact center is something that we've used for a long time, and it was something that was very limited in functionality. And if we rewind about 1.5 years when the Powerpack came out and we started exploring that, we saw a really big opportunity that we wanted to kind of build as the unified communications platform for us. And we -- luckily, it evolved into a really functional strong product that we're launching it as part of our service desk, but we already have customers that are on other competitive contact centers that are looking to simplify. I think I've heard rationalize the number of products, reducing your software subscription spend. So how do you do that with a unified communication platform. And we believe that Zoom will allow us to leverage in that space around the contact center as well.

So if I'm listening kind of building upon the trust of what phone has done for you, the use cases and then how do you transfer that over to the contact center?

Absolutely.

Do you mind saying what you have today? Who's the...

So we had what we said the silver gold and bronze, but we have Amazon Connect, which is a little bit too involved and not very user-friendly, does the job. It doesn't really allow the scalability in a very simple terms, when you want to empower the business units to be able to build their call flows and adjust their settings. It's not the most friendlier tool. We've also working with Five9 as well. It's a very mature platform, but it does take you away from that interoperability. And there is a lot of IT overhead that is required, both from the partner and ourselves to make sure that everything works very seamless. So naturally for us and strategically is how do we build this all into the same platform where our users live in day in, day out, and they can communicate with the rest of the organization without having to learn a new system.

Awesome, thank you. How about on your side, Jill? Like how is the use of zoom through multiple products? How has that kind of evolved? And how do you see that? I think you also just closed a recent acquisition or maybe integrated?

Yes, can't get out of it everywhere I go. I'm just another M&A. It's interesting to watch how we initially started using Zoom, which was just for that face-to-face conferencing and for meetings, which was life changing. And then moving on to like town halls. And let me tell you, like pre Zoom town halls, and I didn't own it at that time. In bombs every time like, "Oh, I think that's not my space until it was my space, right? And that just would always go seamlessly and then the rooms and everything else. Now we're getting ready to leverage events. So seeing the Zoom itself grow and us take advantage of it. The broadcasting was just announced that will be up our alley as we get ready to expand that a little bit. But also just the use of integration with tools, we're a heavy Slack team Again, creatives like to not be bound by a thing. They like to have the creativity to have best-in-breed products that they stitch together. Slack is one of those. So I think probably 50% of our meetings end up being Zoom in Slack and in order to collaborate.

Leveraging the integration. How about on your side? Any comments just about the evolution?

Yes. I mean I think moving from traditional video conferencing, rooms, Zoom phone. There's a lot of potential we saw and heard throughout today around teams and how the spot, which is really what every organization is looking to solve is how do you maintain that culture of integration with employees being all over the world. And we see Zoom at the forefront of helping customers like us be able to make those solutions a lot simpler so that we don't have to kind of switch your heads and say how -- what additional tools do we need to bring here when we already have them and Zoom continues to build on it.

And that's where that spot came from, right? Its customers saying, hey, we've been on site, we've been remote, but we're missing the water cooler. How do we walk down the hall? What is that? And how do you work to recreate that? And that's an evolution, but like how is that done to capture those moments that aren't as formal as a typical meeting or an interaction, those types of things.

Absolutely.

How about on rooms? And talk about -- why don't you start on like the hybrid strategy, like what is that like for your company? Like what is return to office? I know that comes up a lot, and it's constantly changing for many of us. So what is that? And then how about the rooms and talk about how that's being used within your company.

Yes. I mean that's probably one of the reasons or one of many reasons why I'm here is looking and hearing from peers and others, how are they looking to solve this problem because it's definitely something that is evident. You have different schools of thoughts, whether you bring people certain times a week or whether you let them be wherever they are. The way we are embracing it today is we allow people to be productive wherever they need to be and encourage them to come to the office whenever it makes sense. For that, we have to have the tools such as Zoom Rooms to be able to bridge that experience for folks that are remote and folks that are on-prem as well. And it's challenging. It's something that we've seen some product features with new technology coming out that's going to help make that even better than what it is today. But along the lines is really just being able to have the Zoom Rooms capability, the hot rooms, the whiteboarding, all of that, how do you make it interact, whether you're remote or on-prem in the office space. For us, Zoom Rooms has been, I'd say, the one you sort of plant the seed and then all of a sudden, you realize you have your customers come and knocking on your door and says, I want to Zoom Room in my department, and I want is one of my department. And that's really how it exploded, which today, we're over 125 rooms across, I'd say, about 130 sites that we have rationalized so far.

And I think you probably have less real estate in the portfolio than 130 sites, but probably a similar footprint of rooms. What's that like for Take-Two?

We probably, at Discovery, probably had 600 rooms. And I'll tell you how that happens in 2016, again, creatives are always still aggressive. -- we were running out of space in one of our locations. And so we had to have an early solution to hybrid working. And so we worked on a soft phone solution that was horrible 2016. And -- but it was clean desk policy, everybody, you found your place. We had neighborhoods that people would sync into, et cetera, and that was in order to save real estate space. And just as that grew, the need for Zoom grew. And then as we got more mature, I would say we did it wrong 3 times as we were going through that. until we found the right spaces and things that worked, telephone booths that people can connect in, a pod of 6 people that you can connect in. And what we've learned and what I still see today is like everybody wants to say they have collaboration spaces, okay? If they're in an open space, nobody's going to use them. They just will not get used like a space that's enclosed will get used, but there's a million different kinds of furniture solutions now to provide you with that kind of enclosed space that still feels good. So honestly, Take-Two is looking at as well now, but Discovery takes the cake. Their office that they build out on Park Central, right as I was leaving, probably has about 150 collaboration spaces that are like 2 person, 1 person, 5-person, all sorts of different configurations to meet those needs because there aren't offices. So it's just kind of fascinating how the way that we have flex working and all these things going on turns into the need to collaborate in the space that's confined but doesn't feel like I don't need a whole build-out of a conference room. I can make it pretty inexpensive with lower-priced gear having these smaller spaces.

Awesome. Awesome. And then maybe, Jill, competition, like how does Zoom differentiate itself for you first, just competition or even other vendors. I mean, in your -- both your roles, like there's a variety of software solutions, hardware. I mean you're buying -- I'm sure there's a lot of folks knocking on your door. So what do you see even good or bad, Zoom versus others?

What's interesting, again, you go back to like the creativity and the use of Zoom, and that's what's always going to propel us to be in a product that is -- allows us to have flexibility. So I think one of the best instances of flexibility that I can give you that brings home the need for Zoom for us is during the pandemic, Strauss Zelnick who is the CEO is a very big fitness buff and he decided he was going to do a boot camp for everybody in the company. So we rolled out there. We -- I wasn't there at the time, but they rolled out there and to a barn instead of a big AV system for him so that he could do work out. And that has transformed into a full Beachbody workout that he performs and -- for real man. For real.

Really? Talk about your CEO. Anybody else?

Yes. I mean it's a differentiator. It is definitely a persona thing, right? And so what started out is the small like we'll leverage Zoom to do workouts has turned into, I'm not joking like the whole count down of the workouts and everything else. And we have to leverage Zoom in creative ways because although it looks like a Zoom meeting, really, we're doing it from a control center. We're using it as a transmitter. He wants to be able to see and talk to those people. So we have to trick Zoom in certain ways to be able to do that. Same thing with town halls. He doesn't want a webinar where he's speaking at people. He wants to see the rooms. He wants it to be interactive. And that's just not something I can get with any other product. And they just keep pushing the envelope of all that crazy.

All right. I better come with my exercise gear when I come on site.

Yes. Yes.

How about on your end, how do you see versus competition are the other vendors that you work with?

Yes, definitely, everybody wants to get a piece of the pie, right? But it really boils down to which product works, which ones do you have, the trust and the confidence that it's going to be simple. It's going to -- if reliable, it's secure. And the other part is really the feature enrichment of the continuous deployment of new features and functionality that are always outpacing the use cases that we have. And sometimes we find ourselves looking at the release notes and saying what is there that I can bring them to my business units that they're either suffering or heard it through other channels. But we -- and everybody kind of tranches a little bit when they have to join a WebEx session and it takes 3 minutes to join. And it's the typical all right. We're waiting for more people to join and the meeting already starts late. Those sort of things we take for granted today because we are now used to that one click works, high definition. So when I do have the WebExes and the teams, Microsoft, big teams coming to us and saying, why don't you leverage you already own it. It's not about the economics, it's about the productivity and the user adoption. And I don't see any competition.

Can you say that again? That's a lot. It's not about the economics, about the users, the productivity. Can we get that in a written quote. No.

I think that the economics -- I mean, there is -- we're going through renewals right now. And obviously, Zoom One is at the forefront. And it's really about how do you show your journey as you reduce operating budget significantly. And the other part that's really hard to measure, which is the complexity of maintaining infrastructure, data centers, hardware that has capital expenses. So doing that cost analysis really is a no-brainer. That's why I say the economics is not a problem.

I'm going to bring it all myself. And then any comments just working with our team. I know you've worked with our team for a long time. Any comments would you see when you're going through that.

Well, I'll just say upfront that I'm known for being tough but fair. Sometimes more tough than fair. So I'm not shy about when things don't work or what my expectations are. And I always kind of put 2 camps with the suppliers that I work with. One is a partner and one is a vendor. And there are very few people that fall into the partner space, and Zoom is one of them. And as an example of that, we just went through a renewal and we're in the middle of an M&A and my favorite things, negotiating contracts and all those kind of things, but we had a very, very short runway. So I phoned a friend at Zoom. I'm like, hey, I know you're not in my accounting anymore, but I need something right now like I need you to all these things. And they managed to pull this together. And I think the uniqueness with Zoom is that there's the flexibility of me being able to say, but I don't need that, and I don't need that. And so there's not this rigid structure I have to fit into from a licensing perspective. It's something that I have a little bit more flexibility on with Zoom and they were willing to go back a couple of times and do an adjustment. Like I can tell where they're like, no, not here, but maybe we have flexibility in some other areas. And so we structured this deal in a matter of 2 or 3 minutes. I wasn't surprised when I talked with the person that I love to go to that the WBD deal was signed in like 3 weeks. I'd like, of course, it was because the cost savings that you can show are just astronomical when you're talking about an M&A and being able to look at -- I always call it the do nothing or do something approach. If I've got handsets, if I've got a PBX, if I've got resources supporting it, if I've got a maintenance contract, that is a no-brainer. I'm going to save money all day long.

Can we get that in a quote too? We're recording this, right? I hope. And I guess, just kind of closing off, I mean the world is changing. There's a lot going on. We've had the COVID, the post COVID, is it really over economy and other things. How do you see kind of zoom evolving with everything that's going on kind of around the world and even for your company?

I mean for us, it's just deeper, stronger and faster. Again, thinking about work creatives are always going to be probably more cost conscious than many. Also with the M&As, it's just a constant. So it's the -- one of the easiest things to do in M&A, some of the harder things to do or like to integrate identity platforms. Those are tough. I love that stuff, but it's tough. This is the easiest. So when you go into an M&A, one of the first things I look at is all this. Do you have a handsets, do you have those things? Do you have Zoom? Great. Then we'll integrate those 2, and we've done that multiple times. It's interesting to watch that as people have zoom and now we're like combining the Zoom instances and still negotiating contract for a better rate. So all those things for me, it's more of a double down on the Zoom side, which means I might be even more tough than there as we come up. But I think quality is king, especially for us, you think about content creation and IP, that's all we care about. So I know as I'm pressing Zoom to don't forget that core product of video and audio. It's -- that's it for me. That's my life. And so as I push and push and push that I want that 30 rates per second, I always say to the second you do that, I want 60. I'm always going to keep pushing. So I think that the growth there is -- it's amazing to see all the features and functions and the way people are using it. The creatives are always going to be after that video quality and content and then leveraging all the other things that you come up with.

Thank you. How about on your end?

Yes. I mean I agree everything Jill has mentioned. I think the piece I'll add to that is we heard a lot of departments coming together around after the pandemic, which is your real estate, your IT and your human resources. And I think there's going to be a lot -- there should be a lot more insight as we're seeing with a lot of the data analytics and IQ of how do you learn from what your employees are needing or wanting and how do you get ahead of that? I think that's definitely a huge space than we're seeing already as part of Zoomtopia's announcement. The other aspect is what's the foundation of good quality video is network and really having a robust network that is modern, those partnerships, I think, are going to allow more products of Zoom to be able to grow and expand because we do businesses in like middle farms in field. And sometimes we need that ability to provide the technology, but the means to get it there is really sometimes the biggest struggle. So we hope to see a lot of, hopefully, partnerships around the network to help expand even further.

Yes. We're always working on that. Yes, that we announced on I think they're in this event with Palo Alto Networks, which is taking a lot of the data from both Zoom and the Palo Alto, putting those together and letting you much look at your network from a security and a bandwidth point.

You remind me of something that's also very important. M&A, of course, always about the cost savings. But as you make that transition from a legacy telephony structure over into Zoom, what you can't really get from the telephony side is like who's using their phone? How often are they using their phone? Like, yes, you can go through the legacy call records, et cetera, but that's a tough slog. When you move over to Zoom, you have all that rich data available to you. You don't have -- it's rarely like-for-like because you can't see that if you have 300 people are all 300 using their phone, I always caution like let's go 150 and see what happens. We don't actually give Zoom phone licenses out to anybody anymore because -- we don't need it, right? We need it where we need it, but it's not something we would give out to every human. And that's from looking at that data and being able to say, look, we're giving out licenses and nobody is using them because they're finding other ways to leverage Zoom the core product. So you get not only that savings from doing the initial thing, but then you get that ability to look strategically and see what you're doing.

Awesome. Thank you both. Appreciate the time. And of course, your partnerships.

Absolutely.

With that, I think we'll have Kelly come back up, close us out.

All right. Thank you, Jill, Julio and Ryan for those amazing insights. And as Ryan said, we're just going to take that recording and put it on repeat for the next quarter or 2. Okay. That is our day. Thank you so much to everybody that made the effort to join us here in person and to those of you that joined us virtually as well. If you have -- we hope, first of all, that you found this information insightful and helpful. If you have any feedback, of course, Tom and Charles or I are always happy to hear from you. And please, for those of you that are in the room, take the time, go enjoy the expo hall, meet some customers, meet some partners, meet some salespeople. They're all here roaming around. And I think it's incredibly beneficial for you to have the opportunity to spend some time with them. And last but not least, we look forward to seeing you on the 21st for our Q3 earnings call. Thank you again for coming.