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

We're just delighted to have Kelly joining us from Zoom. And selfishly -- so we'll do the house business and all that. Selfishly, I was thinking that we would use today to really drill down on some of the products, I don't understand that well. I think it a -- cut of these meetings, right? So at the end of the day like actually truly understand we'll do contact center a little bit, but I think people kind of get that one, right? But then like IQ for Sale, right -- so we'll just go through some of the newer things.

Sure.

And then also, I want to talk about what you could do with online because I felt like there was this whole thing around consumer for online. There's this whole marketplace thing, and I kind of wonder where it went. So starting at the top, how's business, Kelly? What would you say?

So I'm sure you all -- I hope most of you at least watched earnings last Monday, so you've got a view of the outlook for this year. And I think what you probably gathered from that is we've taken feedback from a lot of you around questions that we had around where -- I think the three questions I kept getting from investors were around online, when is that going to stabilize? When are the margins going to stabilize? And what's the sustainable growth rate? And we've made a lot of progress in online. One of the new disclosures we gave, of course, is the monthly churn number for online, which is stabilized now in the 3.1% in Q3, 3.4% in Q4. So really happy about that. And we made a concerted effort in Q4 to reduce expenses. That was a big focus on kind of third-party expenses one time and then unfortunately, we made the very difficult decision to do a reduction in Q1 but we overachieved against our operating margin in Q4 by 20% at 36% and guided full year to -- in that same range. So I think we've really made a lot of progress in those areas. And then, of course, focusing on reinvesting where there are opportunities to improve top line growth.

The bottom line is house business? Is it good? Great? Okay?

Yes, I would say it's good. We have some things internally that we are focused on, which is ramping these new products, which we're going to talk more about I think Phone is doing phenomenally well. We announced in Q4, 5.5 million seats, which is super exciting and meetings doing well internationally. We had some -- our largest deal in Q4 was international, largest Contact Center deal was international, so lots of opportunity there. The challenges we're facing internationally, certainly are currency. That's been hard for us. And Europe certainly is having its own issues as well.

Yes. So things internally are focused on one was Phone over other ones?

Phone, I would say we are doing -- the executing on the go-to-market teams. That's what I would also say, we -- in addition to the restructuring -- sorry, the reduction we are doing a restructuring of the sales organization at the same time. And this is really to prioritize our resources and focus them up market. So our Zoom Phone overlay team, which has been a great team helping sales Zoom Phone for the last couple of years are now fully quota carrying. So what that gives us is really seasoned reps that have a little bit of a ramp, much less if they were coming from outside. And we are also working on, right, today, the line size for where we encourage customers to self-serve is 1 to 10 employees. We are moving that up to 50, so customers..

That's interesting.

Yes, with 1 to 50 employees, really encouraging them to self-serve online, which I think makes total sense. The platform has really improved. It's gotten much easier for them to self-serve. And many times, customers prefer it. They'd rather just be able to go online and take care of what they want rather than having to talk to a sales person.

I do, I mean as long as it works, as long as it's easy, for sure.

Yes, exactly.

For sure. So I do think that maybe we should drill down a little bit or explain a little bit, you're talking about the Zoom Phone was an overlay team, but now they have full quota, okay, what does that mean? What's an overlay team, for starter?

Yes. So this has been the plan all along. So the Zoom Phone team started probably 4 years ago when the product was launched as experts that were hired with experience in selling phone -- hired from our competitors to come in and really help the account executive sells on phone. And the reason for that was because it's a much more technical product, much more technical sale than Meetings, Webinars or Rooms. And they have done that very, very well. They've gotten us to this point. But the expectation now is that the -- over the last few years, the account executives have had the chance to get certified in selling Zoom Phone as well. And so now rather than having another layer that's there to be the Zoom Phone Ninjas, they're going to carry quota. They're going to have territories, they're going to have named accounts. And that's great because it does 2 things. It immediately increases the sales capacity, and it also eliminates a layer of expense that we're pumping them on for deals where they assisted.

Is Ryan Roskovensky in here? So do you know Ryan, Kelly?

No.

So his recruiting from all they do is software sales, let's say, in 20 years, he used to work here. What is the challenge Ryan, when you take your overlay reps, and you make them real reps?

[indiscernible] hunters, typically.

Yes. I mean I think -- I hear you. That's fair. What I would counter with is they were hunters before they came to us. So they were selling...

Wherever the ever.

Wherever they were. They were quota-carrying. And this has always been the plan. But I don't know we can check in the year, Ryan and see who is right in this situation.

And are they selling more than the Phone? Are they expected to sell...

Yes, they are expected to sell everything.

So that's the other challenge, right? They might -- they'll know Phone really well, but they don't know whatever the other -- okay, you guys think you got it.

Yes. Again, this is not a surprise. This has been the plan forever and for last 4 years. So it's not something that anybody in the organization wasn't expected to them.

Okay. So I'm trying to divide $400 million by 5.5 million. [indiscernible] So if he did $4.4 billion in revenue last year, let's assume -- you said you're getting close to having to break out performance. So let's just say it's $400 million of Phone and there are 5.5 million phone lines, what's it per month? Do you have that at top of your head, or do you to do the math?

I don't know of the top of my head, but it's going to be around $7 -- $6, $7 like that.

So if $400 million divided by 5.5 divided by 12. That can't be right.

The list price is 15. For unlimited calling, 10, if you have metered. And then, of course, there are standard discounts in place for volume, for willingness to commit to multiple months, pay upfront, et cetera.

Yes. 6 months. That's what it works out to. So is that enough? Or do you need to find way to charge more? Because 5.5 million seems like a lot of phone numbers, right? And $400 million is a lot, but you guys are a big company. So can it really move the needle? Or do you need to do more?

It absolutely can move the needle. So there's a couple of things. We are really focused on taking market share, which is what we want. Phone for us is very strategic because it's much more retentive than just having meetings alone. And so we're selling into existing installed base. So you're layering that on top. And there is going to, at some point, be a little bit of a step-up for any customer that has free periods attached to it, which is getting -- remember the way that the rev rec works if you have 3 months attached is that the revenue gets -- the revenue for the paid period gets amortized over the free and paid periods combined. So if you give 1 month free, 3 months paid, you take that 3 months of revenue and you amortize it over 4 months. So when those customers as they come up for renewal, you don't have that -- yes, exactly.

When does that start happening?

It's probably already happening now because we have customers that probably signed 1-year agreements and had a few months free and that just keep depending on their term. So over time, what I think you're going to -- it's not going to be like a massive step function because it's not going to all happen at once. But over time, you're going to see that start to increment.

So the $6 will be going up and the -- but you'll just have some natural growth of the $400 million?

Yes.

That's cool. What we do first. Can we do Zoom IQ for Sales?

Sure.

All right. So what is the history of this product?

Yes. So Zoom IQ...

Actually let me ask you this first. Can it move the needle? Is it worth talking about? Or can it not really move the needle?

I think Zoom IQ for Sales is -- it absolutely will be a top line contributor, absolutely. And there are competitive products in this space that you probably all know, someone said to me recently, "Hey, you know so and so just build a whole business based on your data, right?" And they don't mean our data, but they mean the data of existing Zoom customers. Why aren't you doing that? I'm like we are. We have Zoom IQ for Sales. That's what we have. And what you're going to see -- the reason that the use case is focused on sales first is because it's the space that is already known. But what it does is it analyzes the data of a meeting. You can do it in real time, you can do it after the fact. And it helps -- we use it internally for our training reps, for example, to say, did you say Zoom Contact Center enough? Are you listening enough? Did you ask enough questions? Are you using too many filler words? And so it's very, very powerful to have that analytics after the fact or even during the meeting to help train your sales team. I mean I could use it on our earnings calls. There are many opportunities for that. And I think what you're going to see is it starts to expand into, say, Contact Center. And that's where you'll have more and more of these use cases that extend beyond because it could just be called Zoom IQ for any meeting that you're using, we all probably could benefit on the ability to communicate better. And that's what it can do for us.

Really Zoom IQ for Meetings just as we're starting the sales. So the idea is it's transcribing, right? And then all that goes into some repository and then you run...

You run analytics against it, yes, it's exactly right.

Yes. And I don't know what's like the best use case for it? And how much can you charge?

Yes. I mean the way -- the best use case for it like is, I think, is the one we're using right now, but it's training. So again, we're using it for sales reps that you could easily use it for contact center reps, and we're charging $79 per license per month. So it's a very differentiated price point than Meetings or Phone.

How much is Meetings?

Meetings' list price is $15 per license per month, and Contact Center is $70 per license per month. So you start to see these value add...

Wow, it basically doubles the Contact Center. And of your -- so you did like -- you guys -- you had a Contact Center deal last where you were really happy with like a 2,000 seats -- did they -- oh, do you have it? Is it out yet for Contact Center?

We don't. No.

How far away are we from [indiscernible]

It's not even officially, I don't think on the road map, but I wouldn't -- it's really...

It's really not to be that hard.

It's not really a road mapping. It's more of a positioning and go-to-market approach than even a product thing.

Yes. So how long do you think we have to wait for Zoom IQ for Contact Center?

I wouldn't be surprised -- I don't -- actually don't even know where it is on the road map, but I wouldn't be surprised if it's sometime this year. But don't quote me because I don't own the product road map.

Sometime this year, we're on the webcast, but don't quote her. Okay. All right. So how do we think about the entire Zoom IQ area and what it can do for a $4 billion company?

Well, certainly, as we continue to expand more and more, it can have some contribution to revenue. I mean we'll have some contribution to revenue. Just you're not going to see that in FY'24, think it will start to move the needle a little bit in FY'25. But equally important is how it helps retention. It really becomes one of those value add that organizations see and don't want to move off of.

Yes. That makes a lot harder to switch to something else [indiscernible] I can totally see that. Okay. What are you most excited about in terms of new products?

I'm really excited about Contact Center. And I know you said everybody knows what it's about, but if I can, just talk about the deal in Q4 for a minute. We won this 2,000-seat deal. First of all, it was international, which is really exciting to see -- and it was a competitive situation against a very well-known, well-established cloud Contact Center provider.

Did you Just meet the Chairman?

No. I did not. Another one. So now you have 50-50 odds guessing which one. So it was really exciting. And the reason that Zoom Contact Center [ won ] is because not only do they get the reliability and the ease of use, they come to expect on the Zoom platform, but it would came to the configuration of the voice response system and the agent flows they realized that it was simple enough for them to do it themselves rather than having to pay for expensive third-party services, which is what the other provider was going to have to have. So when you think about, again, Zoom's approach of being price disruptive. We just talked about all those price points that are 1/3 to 1/2 of what everybody else in this space is charging. And then the fact that when you look at the cost to configure and maintain these systems is even cheaper. That total cost of ownership value proposition just continues to become that much greater for Zoom.

Just so I get the words right, because telecom is not my strength. It is costs could figure what?

The IVRs and the agent flows.

What does that mean?

So the voice response -- so when you call any Contact Center, and it's like press 1 for to talk to Pat, Press 2 to talk to his lovely wife, Samantha. That's how you do it.

Okay. So that's the IVR part. The agent flow is what?

The agent flow is what -- like what do they see on their screens? Like when they open up, which is varying depending on the customer themselves like what do they want to see? And like how does that then pull in customer data or interface with the knowledge base. Those are the types of flows that we're talking about.

Okay. And that's -- is self-serve? I mean self-serve sounds a little strong for...

It's self-serve. I mean, I think I'm sure that it's an IT organization or someone with some expertise in this, but they still felt confident they could do it in-house rather than having to pay third parties.

That's a big TAM, right? And there's still a lot of growth there. Like I was reading the Gartner report for Unified Communications. Did you see what Gartner is projecting for Unified Communications growth for this year?

No, haven't seen it.

1.5%.

How can that be? That seems very, very small. That seems crazy. So I don't know. I mean, unless they're somehow configuring in or figuring in contraction because of reductions I don't know. That doesn't make sense to me.

Yes. Okay. So Contact Center, big TAM, products differentiated, what do you guys need to do to make it so it can move the needle?

Yes. So there's a couple of things. So out of the box today, Zoom Contact Center is integrated with voice, video and SMS. The things that we need to do to really get it, I would say, enterprise grade ready is needs to interface with e-mail and social, and that's coming. That's on the road map for the first half of this year. And then the other thing...

So right now, it's voice. SMS, what was the third.

Video.

Video.

And it needs e-mail and social.

And when you say integrated with, does that mean that it's integrated with third-party vendors in that space? What do you mean?

Yes, well -- obviously Zoom, but also other third-party vendors, yes.

And so for e-mail and social, it's like Microsoft and Gmail?

It will.

How hard is that to do that? That doesn't seem like it should be so hard to do.

They're not hard. But it's just -- remember, this product is really brand new. It hasn't been out for a year. And so part of this is launching the product, so everybody knows it's out there and that it's ready and then having the features and functionality you very, very quickly follow. And then the other area along those same lines are the API integration. So an average agent desktop has integrations with 4 to 5 other systems, some of the things we just talked about, right, the CRM, where all the customer data is housed, the knowledge database where answers to all the questions are, the workforce management that manages all the Qs. And so any Contact Center solution needs to have ideally out of the box integrations with all of those so that as they're doing the implementation, they don't have to do a bunch of customizations. And that's also in the road map for the first half of this year. And then also, we just, in January, announced we launched Zoom Virtual Agent, which is another party that then you can buy to coincide with contact center, which is -- this was accelerated as a result of our Solvvy acquisition. This is our AI chatbot. And we already have some customers using this for really simple cases like resetting passwords where you can just talk to a chatbot and get it done really simply.

The whole ChatGPT large language models [indiscernible]. So one of our kids is data scientists, right? And so we're at dinner. And [ GG], the freshman was asking, why are all the teachers at Redwood High School freaking out about this ChatGPT thing? One of the kids got standing -- one of the teachers saw, in one of our classes teachers saw one of the kids was using ChatGPT and send him to the principal's offices, [ GG ] is like why? and [ Zach ] goes [ GG ] what do you -- what is something you're studying right now? Is that a global warming. He goes, no, he had heard it. He says, type in, write me five paragraph for essay on global warming -- and this is the key part. That is appropriate for a tenth grader, right? So not too good, right? Good, but not too good. And it comes out and she's like, oh, my God. This is great. I could not write this because it was really good. It was like intro, what causes global warming, how we can fix it, something else, conclusion. It was great. Then even better, he goes next. So Samantha -- so my wife teaches a class and Kelly has been a guest on it a couple of times, right? And she had the female founder of a video game company as our next guest. And [ Zach ] goes, create a set of interview questions for the woman's name, right? It gets even better, in the tone of Samantha Parent Walravens because she's had enough stuff written on the web that ChatGPT can imitate her tone. And then you read the questions, and she has a pretty strong point of view on all this. And so the strong point of view comes out, and you're like this is freaking incredible, right? So what can this do if anything for you guys?

Yes. So we have been developing and using AI for a long time at Zoom. So if you think about some of the early features of functionality we had in with meetings like transcription and translation, that leverages our own models that we have built internally. There are also some newer capabilities that have been built on meetings, including something called smart recordings, which breaks the recordings into chapters. So if you're -- if you haven't been participating the meeting but you want to go back and look at it, you can start to get some context around what is most applicable to what you're looking for that specific capability, was actually developed in partnership with ChatGPT. So we have been working with open AI for a while. And I think what you're going to see, and you're probably going to see this across all different industries. It's a balance of areas that we're leveraging our models and areas that we partner with them. And we get a lot of questions about PII and what makes sense. And we do collect data with consent from our customers that is anonymized, and that's what leverage -- gets leveraged in our machine learning models.

Yes. It says at the bottom, this is being recorded, right? So I want to understand those chapters thing. So what does it do?

So it takes a meeting and then it summarizes it like into chapters so that what -- if you think about a meeting, an hour meeting, like here we are having a meeting, we've covered...

Going on forever [indiscernible].

Five different topics. And if you only want to hear the part that talked about Zoom Virtual Agent, it helps you give you that context so you can go right to where you need to be.

And does it take it from different parts or tries its best to summarize this, like you know what I mean?

I think it's tries to -- I don't know very specifically, but I think what it's trying to do is summarize and bring it together in context that makes sense.

Super cool. We have 1 minute 47 seconds. I should get more time. Any questions from our audience?

A price increase for monthly customers in the price increase [indiscernible], can you remind us what percentage of the online [indiscernible] versus annual [indiscernible]

So we...

Can you repeat it?

The question is about a price increase? So we did a price increase. We announced at 30 days in advance, but it was effective March 1. The monthly customers who buy online went from $14.99 to $15.99. And the question was how many of our online customers are monthly versus annual? And it's about half of them split pretty evenly. And what do we expect the impact on churn to be? So when we announced the price increase, what we saw was a step-up in annual contracts, which is great because we did not raise the price there. And so customers are locking in their value by buying annual contracts, which we love because the lifetime value of those customers is much greater. And then even whenever the first was that it went into place, we saw a similar reaction. We have seen an uptick in churn, which is to be expected. And remodeled as such. So I think we'll see when we get to the end of Q1, what impact that have, but it hasn't been out of bounds of what we were expecting.

That's basically a 7% increase on $1 billion of revenue, rough numbers. Is there really an uptick in churn from going from $14.99 to $15.99?

I mean, there is, right? There are people that are very highly price sensitive. And I mean, the other thing that could happen, they haven't paid attention like, oh, I forgot about that whatever, but we don't want people, of course, paying for a subscription, they're not using it. I think the more interesting aspect of that is the uptick in annual, which just shows they value it and their -- if it's a momentum to get a motivation rather to get them to sign it for a year, that's great. We love it.

All right. Kelly, it's always great to have you here. Thank you so much.

Thank you, Pat. Good to see you. Thank you, everybody.