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

Now I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings webinar for the third quarter of fiscal '23. I'm joined today by Zoom's Founder and CEO, Eric Yuan; and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also on this page, you'll be able to find a copy of today's prepared remarks, a slide deck with financial highlights that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook fourth quarter and full fiscal year 2023, our expectations regarding financial and business trends, impact from the macroeconomic developments in the Russia, Ukraine war, our market position, opportunities, growth strategy and business aspirations and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discussed in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make today on today's webinar. And with that, let me turn the discussion over to Eric.

Thank you, Tom, and thank you, everyone, for joining us today. So last week, we hosted our first fully hybrid Zoomtopia using Zoom Events and it was great. We unveiled new innovations like Zoom Mail and Calendar, which enable users to frictionlessly navigate across their e-mail, calendar and other Zoom products all within the same client. And Zoomtopia, many of our customers highlighted how they use our expanding platform to do more in the world of flexible work. At our first partner connect event, we hosted hundreds of channel partners, who are very excited about working with us to drive adoption of the Zoom platform globally. And our developer partners showcased add-on apps that connect interrelated workflows for Zoom client. As global organizations adapt to how, when and where work happens, human connection remains paramount. Zoom is purpose-built to meet all kinds of connections possible, effective and meaningful. We have developed and launched more than 1,500 features and enhancement on the Zoom platform this year, advancing how people connect with each other, their organization and their customers, ultimately opening the door wide for creativity and collaboration. Of course, even as we celebrate our innovations and customers, we still face a backdrop of a challenging macroeconomic environment. We continue to see FX pressure and heightened deal scrutiny for new business, but we remain focused on delivering happiness to our customers by innovating our platform and expanding our go-to-market capabilities. Zoom provides a full suite of communications solutions and an attractive total cost of ownership that enables teams to do more with less. And our new product like Zoom Contact Center and Zoom IQ for Sales enable revenue generation and drive productivity. The continued strength of our enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments. As we enable customers to drive greater efficiency, we also are focusing on our own efficiency. We have always been judicious with investments, prudent about spending and we have commanded robust margins since our IPO. So this is not a major shift for us. We will continue to drive innovation, customer value and platform expansion, balanced with an increasing emphasis on efficiency and profitability. We're continuing to see strong targets with customers spending greater than $100,000 in trailing 12 month revenue, which was up 31% year-over-year. Once more, these customers are increasingly seeing value in buying the whole platform, with thousands of customers already buying Zoom One packages. From an industry perspective, the largest deals came from tech, media and the financial services, and we also had notable wins in retail, transportation and pharma. On the tech front, let me first thank Qualtrics, the leader and the creator of the Experience Management category, for expanding their partnership with us. Qualtrics recently upgraded to Zoom One Enterprise, which provides the full power of the Zoom platform to their users and allows them to make a meaningful connection with meetings, team chat, whiteboard, phone and more in 1 offering. We are delighted to offer Qualtrics a broad set of communications products integrated into 1 secure and easy-to-use platform. Our enterprise segment comprises not only large publicly treated companies, but also many private companies of all sizes who see great value in enhancing their Zoom implementations by moving towards our full UC platform. Let me give you a few examples. First of all, I'd like to thank Vensure Employer Services, a privately owned professional employer organization for placing their trust in Zoom. In Q3, we added 5,500 Zoom Phone seats and 650 Zoom Contact Center seats, demonstrating the promise they saw in adopting a modern integrated solution for their teams to interact. Let me also thank Chime Solutions for establishing and already expanding their partnership with Zoom, which includes Zoom One and Zoom Contact Center. Founded with an unwavering focus on bringing jobs and opportunities to underrepresented communities, Chime Solutions delivers high-touch contact-center solutions to midsize companies and Fortune 500 corporations. After seeing how well Zoom Contact Center addressed many of the customers' needs and gaining confidence in Zoom's ability to deliver innovation at a rapid pace, they decided to replace their legacy solution with the Zoom Contact Center. Executing our innovation road map for Contact Center will give us opportunity to further enhance our partnership with Chime Solutions in the quarters and years to come. I also want to thank G-P, the #1 SaaS-based Global Employment platform for trusting Zoom Phone to transform their communication systems and support employees across their organization. G-P understood the value of our integrated platform of communication products from their experience using Zoom Meetings, Zoom Webinars, Team Chat and Zoom Rooms. G-P ultimately opted for Zoom Phone as a missing piece in their UC stack in order to improve their customers' experience while also enjoying the savings benefits of a cloud-based PBX solution integrated into a full communications platform. Also, I'd like to add that G-P is Zoom's global expansion employment partner and has played a critical role in our growth strategy, giving us the agility and speed to enter into new markets very quickly. Again, thank you, Qualtrics, Vensure, Chime Solutions and G-P and all of our customers worldwide. And with that, I'll pass it over to Kelly. Thank you.

Thank you, Eric. Let me now turn to the quarter's results and guidance. In Q3, total revenue came in at $1.102 billion, up 5% year-over-year and 7% in constant currency. This result was approximately $2 million above the high end of our quarterly guidance. The growth in revenue was primarily driven by strength in our enterprise business, which grew 20% year-over-year and represented 56% of total revenue, up from 49% a year ago. We expect enterprise customers to comprise an increasingly higher percentage of total revenue over time. From a product perspective, we had strong growth in Zoom Phone, coupled with contributions from Zoom Rooms and other products. At Investor Day earlier this month, we introduced a new metric, online average monthly churn. In Q3, this metric continued to improve to 3.1% from 3.7% in Q3 of FY '22 and 3.6% last quarter. We are pleased that this metric has now returned to pre-pandemic levels. The number of enterprise customers grew 14% year-over-year to approximately 209,300. Our trailing 12-month net dollar expansion rate for enterprise customers in Q3 came in at a healthy 117%. We saw 31% year-over-year growth in the upmarket as we ended the quarter with 3,286 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 27% of revenue, up from 22% in Q3 of FY '22. Our Americas revenue grew 11% year-over-year. EMEA continues to be impacted by the stronger dollar, the Russia-Ukraine war and online performance, which combined led to a decline of 9% year-over-year. APAC, which was also impacted by the stronger dollar, declined 3% year-over-year. Now turning to profitability. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities and all associated tax effects. Non-GAAP gross margin in Q3 was 79.5%, an improvement from 76% in Q3 of last year and 78.9% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co-located data centers. Given this, we expect our full year gross margin to be approximately 79%. Research and development expense grew by 59% year-over-year to approximately $108 million. As a percentage of total revenue, R&D expense increased to 9.8% from 6.4% in Q3 of last year. This reflects our ongoing investments in expanding Zoom's product portfolio and delivering on our customers' evolving needs. We expect to exit the year in the range of 10% to 12% of total revenue, consistent with our long-term target. Sales and marketing expense grew by 27% year-over-year to $301 million. This represented approximately 27.3% of total revenue, up from 22.6% in Q3 of last year. We continue to invest judiciously in sales capacity and channel partner expansion. G&A expense grew by 6% to $87 million or approximately 7.9% of total revenue, in line with 7.8% in Q3 of last year. Non-GAAP operating income was $381 million, exceeding the high end of our guidance of $330 million as we continue to thoughtfully prioritize investments. This translates to a 34.6% non-GAAP operating margin for Q3 as compared to 39.1% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.07, $0.24 above the high end of our guidance. Due to our share repurchase program, our Q3 weighted average share count has decreased year-over-year approximately 4 million shares to 302 million. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 14% year-over-year from $1.2 billion. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.2 billion, up 32% year-over-year from $2.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 67% in Q3 of last year, reflecting the trend towards longer-term contracts. As a reminder, our annual seasonality of renewals is front-end loaded and moderates over the rest of the year, reflecting the sequentially smaller renewal base. As such, we expect Q4 deferred revenue to grow at approximately 2% to 3% year-over-year. We ended the quarter with approximately $5.2 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Year-to-date, we have repurchased $991 million of our own stock, representing approximately 11 million shares. We had operating cash flow in the quarter of $295 million as compared to $395 million in Q3 of last year. Free cash flow was $273 million as compared to $375 million in Q3 of last year. Our margins for operating cash flow and free cash flow were 26.8% and 24.7%, respectively. As previously discussed, this year, we have seen larger cash outflows from an increase in cash taxes starting in Q2, which relates to the depletion of our NOLs and the lower tax deductions for stock-based compensation caused by the stock price decline. We now expect free cash flow to be at the high end of our range of $1 billion to $1.15 billion. As a reminder, our range assumes that the Section 174 tax legislation requiring capitalization of R&D expenses will be repealed or deferred by Congress by the end of this fiscal year. Now turning to guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow in the low to mid-20's, while our online business will decline approximately 8% for the year. For the fourth quarter of FY '23, we expect revenue to be in the range of $1.095 billion to $1.105 billion, which, at the midpoint, would represent approximately 3% year-over-year growth or 5% in constant currency. We expect non-GAAP operating income to be in the range of $316 million to $326 million. Our outlook for non-GAAP earnings per share is $0.75 to $0.78 based on approximately 301 million shares outstanding. For the full year of FY '23, we now expect revenue to be in the range of $4.37 billion to $4.38 billion, which at the midpoint represents approximately 7% year-over-year growth or 8.5% in constant currency. This represents a decrease of $15 million from our previous full year guidance, of which approximately $14 million is attributable to the FX pressure in Q3 and Q4. We now expect our non-GAAP operating income to be in the range of $1.49 billion to $1.5 billion, representing a non-GAAP operating margin of approximately 34%. This is an increase of $50 million or 1%, respectively, as compared to our Q2 guidance. Our tax rate is expected to approximate the blended U.S. federal and state rate. Our outlook for non-GAAP earnings per share is $3.91 to $3.94 based on approximately 304 million shares outstanding. Zoom remains focused on thoughtfully balancing growth and profitability through platform innovation, customer value creation and partner ecosystem expansion. Thank you to the Zoom team, our customers, our community and our investors. Kelsey, please queue up our first question.

[Operator Instructions] And of course, our first question is going to come from Meta Marshall with Morgan Stanley.

Great. Congrats on the quarter. Maybe just sticking with the online business for a second and kind of the stabilization of that business. Clearly, you saw the churn statistics improve. But just wanted to get a sense of how you guys are thinking about stabilization there, how you guys are thinking about just initiatives on new adds as well as free-to-pay conversion.

Yes. So as we shared at Analyst Day a few weeks ago, we're really happy with the continued improvement in the churn, first of all, and it improved even further in Q3. And the fact that now 70% of those cohorts have moved beyond that 16-month period in which we really see stabilization, and we continue to see that happen. Wendy and her team are really focused on continuing to look at initiatives for conversion. Those include things like adding local currencies, adding local payment types as well as looking at packages that make sense. So all of that is still in process and what we're thinking and we had talked about before is we expect online to stabilize from a dollar perspective in Q2 of next year. And based on our most recent forecast, that is still the case.

Moving on to Mark Murphy with JPMorgan.

Thank you very much. I'll add my congrats. A very nice free cash flow performance. I wanted to ask you, Eric, the pace of R&D activity is so rapid at the moment. To what extent do you anticipate that perhaps some of the new product innovations, and I'm thinking of Zoom Mail, Calendar, Zoom Spot and others could perhaps enhance the stickiness of the usage patterns, right, or drive engagement and collaboration higher in a way that could maybe benefit your -- either your dollar retention rates or maybe some of the premium plan adoption?

Yes. So Mark, that's a great question. That's the reason why we had a very successful Zoomtopia because we announced so many innovations, almost every innovation. When we look at that what we can do to either add value to the existing customer to focus on stickiness or maybe the potential revenue opportunity, right? Look at every features, I think we always follow that principle. Look at email and calendar, look at online paid users, the subscribers, and we do not offer the free users, right? For all those online, the pro buyers to give email calendar for free, they can use the e-mail calendar to serve, it's another great service, which is an improvement, right? Look at all other features like sports and all those features certainly can help our integrated customers, also make our services more sticky. Not only do they Zoom for schedule meetings, but also can use that to make the office environment. So for free users, right, for sure, like additional features for the client, right? So every feature in the mission, I think, for sure, we will add more value to our customers, either drive stickiness or drive potential revenue opportunity like a Zoom IQ, virtual agent and the Contact Center and what virtual agent like your coach and a lot of features like that. So we are very, very excited. And again, and the feedback from customers are very, very positive and they are very excited about adopting those new features and enhancements.

Crédit Suisse's Fred Lee has the next question.

I was wondering if you could talk a little bit about the macro impact on Phone adoption and maybe give us an update on Zoom for adoption overall as you have over the past couple of quarters?

Yes. So we continue to see strength in Zoom Phone. As a reminder, we announced on the last call that we had crossed over the 4 million seat mark. We also added 9 customers in Q3 that have purchased over 10,000 seats and that brings us to a total of 64 customers in that category. So I think it shows continued strength, especially in the up market even in these challenging economic times. So we're excited about the prospects that we continue to see there. And as we keep promising you all, we'll break it out when it gets 10% of revenue. So you'll be able to see that then a little more clearly.

Yes. Fred, to add on to what Kelly said, more and more customers are increasingly looking at our Zoom platform, Zoom UC platform used to be looking at the phone product, Phone or Meetings or Webinar or Team Chat. Now look at a full UC stack because that will give you a better experience in terms of the total ownership of cost is also much better. That's why more and more customers are moving towards our full Zoom platform, and I'm very excited about the opportunities there.

Now moving on to Michael Turrin with Wells Fargo.

On the front-end loaded renewal seasonality, you had a useful tidbit on the deferred revenue growth you're expecting in Q4. Can you just maybe walk through how you gear up for that as a company given it's a little bit outside the norm on general calendar cycles that we're used to seeing. What kind of visibility do you have into that cohort currently and is there anything you can do to shift that profile? Or is it just kind of gradual as this rolls forward and you've gotten just accustomed to it internally, thus far?

Yes. So as a reminder, this occurred, right, due to the significant increase of customers we had during Q1 in the early stages of the pandemic and what has happened is due to the practice that we have internally of making it easy for our customers, we co-term when they add on additional products or expand their seat count, for example. So it's continued to actually exacerbate, if you will, when we're upselling customers that front-end loaded phenomenon. So it will start to level out over time as we see customers in Q2 and Q4 being our largest seasonal quarters due to the 6-month quotas of our upmarket reps, but as you say, we are used to it now internally. Everybody knows this is how it works. We're coming into, I guess, our third renewal period and we've seen strength in each of the last 2 cycles. So we're able to accommodate. We know how it works. And it's just something we know that it's not aligned with most of the rest of the industry, which is why we keep reminding you and trying to give you as much color as possible around that.

And our next question will come from Kash Rangan with Goldman Sachs.

Happy Thanksgiving in advance. Good to see you, Eric and Kelly. I had a question on the enterprise business. I think most of us on the call, at least me, we're waiting for the tilt where the enterprise business will -- the strength of the enterprise business can offset the weakness in the online business. As we wait for that, I'm curious to get your take on the expansion rate. I think it came in at 117% or so. And the number of customer -- it used to be higher in prior quarters, the number of net new as enterprise still also not quite rebounding and recovering. Can you give us some perspective on how much of is macro versus maybe competition from the likes of Teams, et cetera? And Eric, how does this play out into your broader adoption thesis for the Zoom platform? When are we likely to see these metrics inflect the other way that could validate your overall thesis that Zoom is not just about video meetings, but a broader communication platform?

Eric, do you want to talk about Zoom One first, and then I'll talk about the metrics after that?

Yes, sure, absolutely. So Kash, that is a good question. And you look at the customer projects, right, as we move towards the Zoom One platform, right, so, and leverage our full UC stack, started from Meetings many years ago. We had the Phone, Webinar, Team Chat and so on and so forth. I think the problem was that previously when it comes to Zoom, everybody probably assume that is just video conferencing and that's not the case. That's why we are doubling down our Zoom One marketing awareness, also talk to the customers, make them understand, not only do we offer the best with content service, but also if you look at our other offerings, that's a full UC stack and also have Contact Center as well. I think that will take a little bit of time. But as long as customers realize, wow, Zoom has a full stack and plus also have a very flexible Team Chat, plus this is free, it works so well, integrated other UC solutions, I think customers are showing a great excitement about adopting the full UC platform. And more and more customers are moving towards our full UC stack, rather than just the Meetings or Phone. And that's why we are very excited because if you look at all those offerings working together seamlessly. And in terms of total orders costs much better because many times customers are trying to consolidate their full UC stack. UC stack in the platform different, but we might use a e-mail Calendar or SharePoint or the office from other vendors. But in terms of UC stack, we want to deploy the best service. That's why we are going to win on UC stack plus the CCaaS as well.

And Kash, just in terms of like your comment about renewals, I want to highlight, especially in the enterprise renewals remain very, very strong. We were actually slightly ahead of our internal forecast for Q3. So we continue to see -- we've talked about many metrics, growth and expansion in the enterprise. It's just -- as you say, we're waiting for that stabilization in online to -- because right now, it's really having a dampening effect on the overall growth rate of the company.

George Iwanyc with Oppenheimer has the next question.

Eric, maybe with all the enterprise progress you're showing. Can you give us an update on Contact Center and the adoption that you're seeing there?

Yes. So yes, again, the Contact Center is a new service, we're very excited in particular for those customers who deploy or the food service, they would like a console that you see the use cases together. And also, we found interesting use cases is, well, not only do those traditional customer interaction department started deploying the Zoom Contact Center, but also the internal IT desk as well, right? And again, the Contact Center use cycle a little bit longer like the Meetings. But however, the showcase -- our platform capability and the speed of innovation, customers are very excited. And plus, you look at our own business, right? And we used to deploying other cloud contact center solutions, after we set our own contact center solutions, our teams themselves are very, very excited. And a lot of potential pipelines and use right in the pipeline. And also we are doubling down on that. And again, the product side, we have higher companies, go-to-market side, we are gaining traction as quickly as possible because, again, it takes some time plus also leverage channel and internal go-to-market investment. And I think that's a future big revenue driver for us, especially customer like CCaaS and UC together, right, and with a much better experience and also the total ownership of costs also much better.

Moving on to Siti Panigrahi with Mizuho.

Just wanted to ask about macro pressure. You talked about last quarter sales elongation on the enterprise side. What kind of plans you are seeing, anything worsened, and also how does that impact your pipeline as well?

So we certainly have seen impact, as I mentioned, from FX of the reduced guidance of $15 million, $14 million of that is coming from FX pressure, and you saw that certainly in our year-over-year growth in Europe and in APAC. In the enterprise, again, renewals stay strong, excitement about the products. But as we discussed, it's continued in terms of additional deal scrutiny, I think all of my peer CFOs now are looking at deals, and that's just causing elongation in general not that things are losing rather that we're losing deals. They're just taking longer to get done and potentially some of them pushing over quarters. But we haven't seen that impact. It's just taking longer and longer, not that they're going anywhere else. It's just taking longer to get those done. Now the good news is, right, especially with all of the new products, the consolidation that we offer is a really great value story for our customers in terms of elimination of additional vendors, getting rid of on-prem servers and that continues to be a great story that our customers love.

SVB Moffett, Sterling Auty has the next question.

Kelly, maybe following on that. I want to understand -- the 20% growth in enterprise in the quarter versus the guidance of low to mid-20% for the full year, does that mean that there's a little bit of a back-end loaded hockey stick or a bump up that we'll see next quarter? And specifically, I think investors are really interested in trying to gauge how should that business react as we move into next fiscal year in light of the concern about layoffs across all industries and a lot of your Zoom meetings, et cetera, are based on per employee per seat pricing?

Yes. So we certainly -- and we've talked about this the last couple of quarters, have seen more and more of our deals shifting to the end of the quarter and taking on that more historically natural cycle that we didn't -- we haven't seen since really early in the pandemic, but that is absolutely the case for us. And we have adjusted our forecast for Q4 for some of that linearity as well. We have continued to see, as I keep saying, strength in our renewals. And I think that's because while there's concern about layoffs, there's this other phenomenon about flexible work. right? Everybody wants to continue to working in the way they become accustomed to. And as long as employers are supporting that and their employees it really means everybody needs a Zoom license. If you're out of the office, even 1 day a week, you need that Zoom license for Phone, for Meetings for, whatever, Zoom One. And so I think that is really compelling reasons for organizations to continue to renew with you.

Thank you, Sterling. Even for those businesses, right, after deploy before the full UC stack, look at the Zoom Chat is getting more and more popular. And also we found that those can be used for their personal use cases as well, right? Because there's free. That's why a lot of tractions for other parts of our entire UC platform.

Our next question will come from Michael Funk with Bank of America. Michael, if you can hear us, please go ahead, start your video and come off mute to ask your question. We'll go ahead and move on to William Power with Baird.

Right. probably for Kelly, a pretty notable increase in stock-based compensation expense. I know you talked about this at the Investor Day, too, that you expected given top-ups to be more elevated. Would be great to just get a little more perspective as to how you're thinking about that going forward. Is this closer to a peak level? Should -- it will stay at this level? Maybe over a longer-term time frame, how investors should expect that to trend. And I guess kind of tied to that, you've been aggressive on the stock buyback front, what are the plans there going forward? And how could that tie into how you think about stock-based compensation?

So first, we believe that the supplemental grant program is really important for the strategy of the company in terms of retaining our employees and keeping them focused and not having to worry about that. And the supplemental grants vest over the same period as the underlying grant that they're tied to. So you are going to see this level continue for a few years as those grants are vesting through. And many of them originally were 4-year grants, so they have 2 or 3 years left in which you're going to see that stock-based comp as those underlying shares are vesting. With the stock, once the stock stabilizes, then you will see less impact from that or less need for additional grants. So we're hoping that we're at that place and that you're going to not see additional supplemental grant in that same level. But until we get past probably another year's worth, we might have some more. In terms of the repurchase, as you heard, we purchased $991 million, so -- or 11 million shares. So we have a little bit of room with that. And once we've completed that, we'll evaluate whether or not we want to ask the Board for authorization. We haven't done that yet.

And we'll now hear from Matt Stotler with William Blair.

Maybe just one more on the online business. It'd be great to maybe get some color, some commentary on the economics of that business, the margin profile as it compares to the enterprise segment of the business and what the implication there is as that revenue mix continues to shift, specifically in the context of the updated long-term figures you gave us a couple of weeks ago.

Yes. So we've talked about this before, our online business is a higher-margin business as it's largely -- not completely, but largely untouched by any person from a sales organization. There are some online account executives that are there to answer questions. But it's minimal compared to our enterprise sales organization. So we certainly took -- we've done a lot of work on modeling what that looks like. And we've taken that into consideration as we laid out our long-term margins that we shared with you at Analyst Day, as we look forward for the next several years and how we think the mix could shift between the online -- sorry, online and enterprise businesses.

Moving on to Ryan MacWilliams with Barclays.

Follow up on Matt's question. Kelly, you previously noted a potential inflection in the online business early to mid- next year. With churn now right at around pre-pandemic levels, but we're still seeing revenue declines sequentially in this segment, any updates as potential inflection? And also, is there any impact from existing Zoom customers upselling to enterprise on this online business segment?

So yes, the answer is yes. There are customers that eventually upsell into enterprise, which is great, right, because that means they're expanding and they're becoming a bigger customer overall, which we love to see, but that does then -- I mean, it's not company churn, but it looks like it's moving out of the online business into the enterprise. And in terms of -- the way we're talking about it is a stabilization of online, and we expect that from a dollar perspective, to still happen in Q2 of next year based on our current forecast that we're seeing.

I'm moving on to Parker Lane with Stifel.

Kelly, you referenced thousands of customers that have signed up for Zoom One since it launched, I believe, about 5 months ago. Can you help me understand the profile of those customers a little bit better? The majority of them tend to be existing customers that have been migrated onto Zoom One new packaging or are you seeing a big net new cohort as well? And then two, is it skewing more enterprise for customers that are thinking about going with Zoom One? Or are you also seeing a pretty decent spread across all different size organizations?

So Eric, I know you love to talk about Zoom One. Do you want to talk about it for a second, just...

Absolutely. I think first of all, thank you, Parker. You look at our Zoom One, we launched several months ago, right? And I look at all those customers, minimum-sized enterprise, SMB, they all see the value, what we see and almost every market the second they are moved towards the Zoom One package, they do see the value. But you not see any test markets that the segment truly standing out from all the way from SMB to enterprise. And I think that's exactly what we anticipated.

Thank you, Eric. I would just add to that, that the key customer wins that we saw in Zoom One in Q3 were a pretty balanced mix of new as well as customers that are upselling as they're adding new products to the portfolio. So we're really happy about that, that we're seeing traction in both aspects of the business.

And we'll now hear from Shebly Seyrafi with FBN Security.

So I'd like to hear from you what you think your current visibility is compared to, say, 3 months ago. I noticed that your RPA grew by 32% year-to-year, which is impressive. But you also had a decline in your CRPO percentage over the past several quarters, your expansion rate has been declining. And with your guidance for deferred revenue to grow 2% to 3% with my model and getting billings down 10% year-to-year in Q4, and you've never really had a billings decline in my model. So just talk about the visibility you have right now versus 3 months ago, and when you think you might see this stabilize. Is it a few quarters or is it a few years?

Yes. So the current RPO pressure is largely related to the online customers and the decline that you're seeing in online as the long-term RPO really benefits from the direct and -- or the enterprise side of our business, which are managed by the direct business and have more annual and multiyear contracts. That's kind of why you see that shift in terms of the overall percentage. I would say, and then the other impact that we're having that we can't -- which is difficult to predict, of course, is FX, right? So you have to consider that, which is more concentrated online than an enterprise. But you heard we, in our guidance that we've reduced, we said about $14 million of that, we believe to be attributable to FX. In general, I would say the economics or the state of our business hasn't changed, meaning, our enterprise business and our enterprise sales organization is stable. They're continuing to operate in the same way. The online business with the improvement in churn as well as the way that the majority of it now has shifted out along beyond the 15 months is really helpful in terms of our ability to forecast that business. And so I think the visibility is the same. There's just some different reasons for all those different components that you're talking about. The deferred is -- again, the decline you're seeing in Q4 is really due to the front-end loaded nature of our business. And then remember, so the front-end billing -- sorry, the renewals happen at the front end of the year, that's where you're going to see the upswing in billings, the upswing in deferred and then that gets amortized over the years, so deferred's coming down. And then we have much lower renewals in Q4 as well. So the renewals that are filling up the bucket are much, much smaller. So it's -- you mentioned many factors and there's different reasons for all of those.

Our next question will come from Peter Levine with Evercore.

I think given some of your customers are pushing back on launch decisions, are you able to kind of toggle your sales force being focused more on those back-to-base opportunities. And then, Kelly, just a follow-up. Can you share how many of those 9 -- I think you said 9,000, 10,000 seat phone customers are net new to Zoom and then maybe just share were these legacy PBX replacements? Or are you going in and replacing another cloud provider?

Yes. So first of all, remember, our strategy for selling Zoom Phone is selling into the existing installed base. So I don't know actually a split between those 9, but I'm sure that the majority of those were existing Zoom customers. And I think I would say there's a focus on the company that, as Eric has talked about, of expanding not beyond -- not to just Phone, right, but expanding to the full platform. So that's really what we have our teams focusing on now. It's Zoom One, it's Contact Center, it's Zoom IQ for Sales. Now it's e-mail and Calendar and really thinking about that complete platform, including Zoom Chat and the adoption within organization. So for all the reasons we've been talking about in terms of retention, flexibility for organizations to reduce vendors, the cost savings, the total cost of ownership that they see by having that combined, that for all of those reasons, that's really becoming the focus of our enterprise sales organization.

And our next question will come from Matthew Niknam with Deutsche Bank.

I wanted to ask, you mentioned the greater value that customers are seeking out from the broader platform. I'm just wondering, are there specific areas where you see maybe more room to strengthen the platform and with the compression we've seen in market valuations, how are you thinking about potential inorganic opportunities?

So Eric, do you want to talk about the platform and the value they see?

Yes, sure, absolutely. I think for those customers, right, who deploy Zoom One platform, right, they really like it. The reason why you look at the when same client, the same interface, right, and if you have a scheduled meeting, you can use our Zoom Team Chat to communicate with your teammates and customers make a Zoom call, whiteboard there, now we added a Calendar fully integrated together. I think that's the whole value. And plus, if you look at the customer, we used to be deploying many other partners, always 1 platform, the full UC stack. That is value, a seamless experience. And that's why more and more customers, no matter which other cloud business solutions they deploy, for example, we deploy other cloud solutions now they realize the full value of the entire Zoom One platform. We see more and more and customers, they just reach out to us rather than we reach order to them to offset. Now they reach out to us to say, "Yes, I see the great value." And that's why more and more innovations will be built upon the Zoom One platform. And yes, consumers the recently announced and that's our focus to double down on our platform story.

And just in terms of inorganic opportunities, if you can elaborate on that?

Sure. So we continue every day to look at opportunities. And yes, the compression evaluation certainly is not lost on us. What we're always trying to balance, of course, is what would it bring to our customers, what would it bring or the impact potentially on our culture and then, of course, the value and the state of the technology, right? We have a high bar for both talent and technology here at Zoom. So it's been difficult, I would say, to date to find something that really meets all of those standards. Eric is a very hard judge, but that doesn't mean that we're stopping, and we continue to look for opportunities every day.

Also, in terms of the full platform experience that I mentioned, our customer, the #1 thing they like our experience. Let's say, if you look at the other biggest service provider, right, how to make sure you have a consistent experience, that's not easy. That's why we tend to look at all those greater technology companies like some we acquired many years ago, again, if you want to just the focus on the branded new service, we might think about the inorganic opportunity. But now look at the UC platform. We already every -- now we just focus on the go-to-market side, right? And we are -- we have a high confidence like we're getting more and more traction there.

Moving on to Alex Zukin with Wolfe Research.

Guys, just maybe I have one question that it's a bit forward, it's a bit hard. But -- if I look at the -- kind of to Shebly's point, the forward-looking metrics and the implicit guide for enterprise revenue next quarter is about 15% to maintain that low 20s for the full year. If you go forward a second, it does look like growth next year is going to be kind of in the low to mid-single digits, assuming the normalization or stabilization of the online business and assuming some further decel with the macro getting tougher. With OpEx growing nearly 30% this year, how are we thinking about a worsening environment? Like what's the recession playbook for Zoom? We've seen some companies take some pretty meaningful steps with respect to employees with respect to dialing up, if you will, the efficiency of the business. What's the plan, what's the recession plan here, maybe for both you and Eric?

Yes. So I think that your assessment in terms -- we're not giving -- we just maybe caveat first of all, we're not giving FY '24 guidance on this call. We will do that obviously at the Q4 call. But your assessment, in the way you're kind of thinking about the top line growth is right in line with kind of how we're thinking about it right now. And in terms of then from an operating margin perspective, the way we're thinking about it is, as we're working on our FY '24 plan, we are being very, very thoughtful about prioritization of investments. It's how I would say it. And as you noted, we have grown our expenses, and we've hired a lot this year. And so being very thoughtful about ensuring that they're focused on the right things that we are prioritized internally. We are committed to continuing on innovation and meeting our customers' needs as well as go-to-market expansion. Those are really the top priorities that we have and making sure that we have resources in the right areas for that. I guess that's what I would say.

Yes. So Alex, I think we're in a much better position. You look at the efficiency and the potential productivity improvements like cash flow profitability and, of course, we hired, as Kelly mentioned, we hired a lot of team mates this year. I think that they are going to reach full productivity next year. That's why I think -- yes, I think we can weather the storm, right? And for any either short term or long term or short or long recession, and yes, we feel very confident to drive efficiency and productivity.

And I guess maybe just as a follow-up. If I look at the buyback cadence given -- on the one side, Kelly, if you're talking about having to issue shares as long as the stock goes down, on the other side, you have $5 billion in cash on the balance sheet to buy back stock. So how do we -- because I get a lot of questions about dilution, particularly given the supplemental share buyback. So at least on that front, what's the right way to think about over the next year, over the next 2, 3 years, how -- ex M&A, how you're going to leverage that cash balance?

Yes. So we think based on the share repurchase program that we've had -- we currently have in place, we've done a good job of being able to offset the dilution from the supplemental shares. We want to be very thoughtful about our cash flows. We just talked about M&A for example. And so especially as we're focusing on our FY '24 plan, our balancing the opportunity for managing dilution as well as earnings on that cash and M&A opportunities. So all of those are being considered as we look forward for FY '24. And that's really what we have to say today. We'll have more to talk about when we come back for the Q4 call.

And we'll now hear from Ryan Koontz with Needham & Company.

Can unpack the strength in enterprise and how to think about that revenue growth across different product categories? If not quantitative, can you kind of give us an idea where Phone stacks up versus expanded meeting license and any other products look like they can become meaningful in the next 12 months as you look at that on the enterprise side?

Yes. So really happy with the progress we've seen with Zoom One, with Zoom Phones and the strength in Zoom Rooms in Q3. We also certainly see potential in contact center and sales like they're just so early that from a -- we're seeing progress there and excitement, but it's early stages. So in terms of what they're contributing overall to the dollar amount, it's minimal at this point. But we are seeing growth in terms of quarter-over-quarter expansion in those products. So that's really exciting to see.

And our next question will come from Catharine Trebnick with MKM.

One of mine is on your partner program. You brought in a new partner executive last July. Could you specify any particular areas that he's going to concentrate on to drive more revenue? He just interviewed in one of the CRM magazines and said he wants to get to 50% revenue through the channel. And can you just address some of the ideas that he has to implement?

So yes, Todd, Catharine is referring to Todd, who joined us, I think, a couple of quarters ago, he's great, at Zoomtopia. He hosted our first partner connect with over 400 partners were there. So that was super exciting to see. And while there are lots of opportunities, I think one of the biggest areas of opportunity is international partner expansion. We've done a good job over the last few years of building up Master Agents and carriers here in the U.S., but it's still relatively nascent outside the U.S. So that will be a big area of focus for sure.

And James Fish with Piper Sandler.

Most of mine have been asked, but I did actually want to ask on the enterprise sales investment that we've been talking about the last, like, a couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps who, over the last few years, really had the advantage of an easier sales cycle with Meetings especially? Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point?

Yes. So in terms of our reps, we are constantly looking at opportunities to help make them more productive. And as you -- we were just talking about we've hired a lot over the last few years. And as we look forward to FY '24, we'll be making many fewer hires. So we're really looking for how do we enable the reps, how do we make sure that we have the overlay teams in the right places to support them. As a reminder, that's -- we have specialists that are selling Contact Center and Phone. And that's a really important aspect of making sure that everybody is aligned on serving our customers in the best way possible. So that is a big focus. We also have a new President, Greg Tomb, that you all met last quarter. And he's been spending a lot of time helping us think about that, especially as we're moving up in the enterprise stack and that's his experience, where his background is. And then -- and really focusing on making sure that our comp plans aligned. That's another thing that we're taking a look at for FY '24 as well.

And James, another big point just to add on to what Kelly said. And also the Zoom IQ for Sales product certainly added value to drive our team's productivity, right, especially when reps that work remotely, right, how to manage their productivity, drive efficiency, take some actions, right, quickly. I think we deployed Zoom IQ for Sales by end of this month. Literally every rep will be fully trained on Zoom IQ for Sales. Not only do we have our sales productivity and also we'll create a lot of opportunity for us to sell more and more Zoom IQ for Sales. That's a future value or areas to drive productivity.

Moving on to Matthew VanVliet with BTIG.

I guess you highlighted Zoom Rooms. And curious how much of that uptick do you feel like has been sort of a return to office for a number of companies and really having that mixed modality of a conference room and still having remote workers in. And how much, I guess, sort of risk might that come under over the next several quarters of being a growth lever as we've seen layoffs, as we see a slower macro and maybe that's not an additive spend that the companies are going to want to undertake when they're already paying for the individual Zoom licenses?

Yes. I think it's very similar to Zoom Meeting licenses in the aspect of as long as you have a hybrid workforce, you need the right technology in your conference rooms, to ensure that you have this inclusive experience that we've all become so accustomed to. And we continue to listen to our customers, customers work on innovations to ensure that we provide that, but I don't think it's going to go away. I mean we'll see what happens, right? I think it's still yet to come to see what happens with like commercial real estate. However, Zoom Rooms and the importance of those in a hybrid workforce, I just -- I can't tell you how important that is. I can't stress enough the importance of that. And that's really what our customers are seeing as well as they're in some sort of state of a hybrid work environment.

And also, Matt, I'll add just quickly. So it used to be like you look at the conference room, right, most of the usage are used internally for internal cost. I look at the Zoom Rooms, that's not the case. A lot of customers are leveraging Zoom, to talk to the customers and their partners, right? That's one difference because that's the reason why customer like Zoom, right? When you talk with the customer partners, you want to make sure they have the best experience, right? And another thing even for those companies who might think about laying off employees and reduce number of the employees, guess what? Less taxes, but more common rooms. Then otherwise, what can you do, right, to double down our customer and partner, right? And that's why we still see the great opportunity ahead of us.

And we'll move on to Tyler Radke with Citi.

Kelly, in terms of the Q4 guide, I understand that currency was a bit of a factor there on the lower outlook. But can you just unpack kind of what you're assuming from a macro perspective? Is the Q4 guide relative to what was implied last quarter? Is it incorporating churn getting worse in SMB or weaker net adds? Or maybe you're seeing something on the enterprise side? Just help us understand the non-FX side in terms of what you're expecting for Q4.

Yes. So in the online segment of the business for Q4, we expect churn to be pretty much in line with Q3. I mean it's likely that number is going to bounce around a little bit quarter-to-quarter, and that's going to all be visible to you now as we report it, but we're not forecasting any dramatic changes there. And then in the online segment, I would say that the -- I mean, sorry, in the enterprise segment, I would say the biggest change that we're seeing is just this continued push to deals being at the back end of the quarter. And so that linearity -- over the last few years, we had a much more balanced linearity in our enterprise segment. And what that leads to, of course, is deals contributing to revenue in the quarter. And we're seeing much less of that as these deals are going back to the more traditional back end, really, really back end of the quarter. Now we have the benefit in Q4 of having kind of the 2 periods of December 31 close and then the January 31 close, but we are expecting the linearity more consistent like with what we've seen in Q3 than what we saw a year ago.

And we have time for one additional question from Karl Keirstead with UBS.

Kelly, I'd just love to ask you about the -- your perceived utility of the billings number. Traditionally, we look at that number as a decent proxy for business momentum. But obviously, minus 10% in 4Q and plus 1% for the full year. I'm guessing you would argue that, that's a poor proxy for Zoom's momentum. So can you opine on that a little bit? Because I think maybe there's some consternation about that negative 10 implied-percent billings.

Thank you, Karl. I should have said this earlier. So as a reminder, we don't guide to billings. We never have, because we don't think that they are a good indicator for us because of the large percentage of our customers that are, especially in the online segment of the business -- that are on monthly contracts. And so because they bill and they pay us monthly, they don't show up in that number. And so that's why it doesn't -- it isn't really a good proxy for you to use.

Okay. And as a follow-up, Kelly, is there anything else that's skewing that DR number? Is there any change to invoicing terms or maybe more flexible payment terms to customers that maybe on the margin are impacting DR as well?

Nothing significant. It's really more about the timing -- you're talking about the deferred revenue, specifically, right? Really about the seasonality of the renewals, I can't stress that enough for everybody. Remember, it's the 2 factors. It's the fact that they bill in Q1 and then so you're going to see an uptick in billings and deferred and collections and then that amortizes over time. And then the billings in Q4 are just a lot smaller. So you have this double impact, right? Now you've amortized a lot of the deferred that was picked up in Q1, so we're down at the lowest period in Q4 and the billings in Q4 are the lightest period to refill that bucket. So it's going to -- this is going to be a phenomenon that we're going to see for years to come, as I talked about until, over time, we start to see more and more of our bookings happening in Q4 but that's going to take a long time.

And again, that does conclude our Q&A session for today. I'll go ahead and turn things back over to Eric for any closing or additional remarks.

Thank you. First of all, thank you for every Zoom employees' great work. Thank you for every customer, partner and investors' great support. You all have wonderful holiday. Thank you again, see you in our Q4 meeting. Thank you.

Thank you, Eric. And again, this does conclude today's earnings release. We thank you all so much for your participation. And from our family to yours, may you have a safe and happy holiday season. Enjoy the rest of your day. And again, we'll see you next quarter.