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

Thanks for joining us for this session, we have the CFO of Zoom, Kelly Steckelberg, Kelly, thank you so much for joining us. How are you doing today?

Great. How's everybody here? Good. Good.

I think they're all excited to see you in person because I was joking with you. This is the first time that I've actually met you in person despite this maybe being like our seventh fireside chat. So I'm glad we're off Zoom, even though I love using it.

Thank you. Thank you. Me too. It's nice to see everybody.

I'll maybe kick off with that as kind of the first question, right, where Zoom has been such a powerful force over the last several years, helped us all work when we can't meet in person. So how are you thinking about Zoom now in an open world, hybrid work environment? How is Zoom positioned to win in this type of environment?

So we're really excited about the future of the platform. And when you think about we have this amazing love from our customers. We have this amazing brand. And we also have an incredible innovation engine that is producing products that are really meant to serve as being the desktop or the operating system for where you spend your day. And that includes, of course, Zoom Meetings that everybody knows, which -- and then also includes Zoom Chat, our persistent chat product. And then Zoom Phone , which has incredible momentum. We're excited about Zoom Contact Center. We have a Zoom Virtual Agent. Zoom IQ, which was previously branded at Zoom IQ for Sales, but is now being expanded across the whole platform. And then all of those components, of course, AI is being integrated into them, and we can talk as much as you want about that. But we also recently did an acquisition of Workvivo, which brings into the context employee communication and like a social Internet. So really continuing to build on this vision of being the communications platform where you spend your day.

So that -- I think that was very helpful, and it helps lead into this. We all think about it as the video conferencing tool. You've clearly become a platform. And everybody in the organization uses Zoom already, but how is having, expanding from just one solution to a full platform change? Maybe the utilization of each employee inside of the system? How many people are touching more of the apps beyond just the core video conferencing tool?

So first of all, we love it when our customers expand because it makes them much more retentive, but they also love it because the benefit, one of the many benefits you get from Zoom is all of our products are natively integrated so it's a seamless connection across. And what we're really focused on is helping reduce this toggle tax that you have from moving in and out of different applications because when you sit in the Zoom client, what you see across the top are all of the icons that you have there, whether it's Phone or Contact Center. I mean I didn't even talk about, right, we have an e-mail and a calendar client that overlays your third party. And that's what starts to make it really efficient, that you can either click from meeting to meeting or you can click from meeting with that -- you can have the Chat. So now we have a Chat in a meeting that will persist after the meeting, so you can have a record of it. There are all kinds of really cool features that are in beta right now, including things like Meeting Summary. And Meeting Summary leverages AI to really give you a document so you don't have to take notes in your meeting and it's -- we have transcription, we've always had transcription, but this is a level above. I saw it yesterday, and it's like, Kelly suggested blah, blah, blah, and I was like, that's way better than actually just trying to discern through those words, what was happening in the meeting. And this is what you're going to start to experience in the leveraging all of this really -- it changes -- it doesn't matter what your role is, you're going to have the opportunity to spend your day on Zoom. We say it that way.

Kelly, that transcription makes -- it makes me a little bit nervous, because maybe people don't want to talk to me anymore if the tool is doing it. So maybe delay it up, please.

You're going to love it. It's great. You don't have to take meeting notes anymore.

So I think that's a good way to transition into AI. So you mentioned it, you're required to ask it at a software conference these days, otherwise, it wouldn't be a software conference. So how is Zoom thinking about it? It affects the Meeting Solution you just talked about, but just more broadly across the platform, how do you guys think about applying it and monetizing it?

Yes. So first of all, AI is not new to Zoom. As I mentioned, we've had things like transcription and translation that have been embedded in our products since the early days. We have certainly accelerated our focus and our investment over the last few quarters. We have collaboration with and investments with both OpenAI and Anthropic. And in terms of AI and our approach to it, we are taking a federated approach, which allows our customers to leverage our language models to leverage those partners like OpenAI and Anthropic and also to leverage theirs, and to do it, of course, in a very thoughtful way that keeps always the customer data and the privacy and security of that front-end center. And then the benefits that you start to see because of that is, for example, we have a product called Zoom Virtual Agent. It is a SKU, a separate SKU that can be purchased alongside our Contact Center. It can also be purchased to be used with third-party contact centers. And it can -- this was accelerated through our acquisition of Solvvy. And we've seen internally, it can add on the online -- for the online help desk, it can handle 90%, over 90% of the incoming queries. And we estimated saving over 400,000 hours of our own internal team's time, so per month. So I mean that shows you how powerful these products can be. And in terms of the U.S. about monetization, that, that product is going to be monetized or is monetized based on usage. It's not an individual seat price like Contact Center's, for example. But Zoom IQ is -- was previously Zoom IQ for Sales, but that's going to be leveraged across the platform as well. And it starts to bring intelligence to your meeting, so you can look back and see how many filler words you've used, how you could be -- I use to threaten my team. I'm like, we could all be using it, right, to see how we could communicate better? How often are you talking about a product suite? So these are just a few of the examples. I mean, there are a million of them, Chat Compose, E-mail Compose, these things that are focused on leveraging AI to make you more efficient. And what we keep saying is what that does is it frees up your time to have a deeper human connection. That's really the point.

Very helpful. I want to transition. You just reported -- Zoom reported last week, so we're fresh off the press with earnings. You saw revenue growth, you saw NRR be very healthy. Maybe you could talk about what are you hearing from customers? You've talked about all the products you've released. What NRR trends are you seeing and what's driving it?

Yes. So we continue to be very pleased with the momentum of Zoom Phone, so this is our cloud PBX solution. We announced on the call that it's crossed over the 10% of revenue threshold. And what's great about Zoom Phone is again, not only is it the most modern phone system that's out there today, but it's very price disruptive. And when you think about helping customers move from on-prem to the cloud, especially their savings not only in that seat license, but also from getting rid of that on-prem hardware and move it to cloud. And in these times, when everybody is thinking about every dollar that they're investing, it's a really -- it's a very beneficial total cost of ownership. And then Zoom Contact Center is similar. We are similar. We're seeing early momentum. That product is only about a year old, but really excited about the momentum we're seeing there, and same thing. Very price disruptive, helping people move from on-prem to the cloud. And again, all in that natively integrated so that you can one click move between Meetings and Phone Call, Contact Center, et cetera.

And you mentioned that you're benefiting from Phone and the integration, and then also just it lowers the TCO. Are you seeing any belt tightening out of customers, right? There's -- in the news, obviously, within some verticals, that have been layoffs, but overall it's a really resilient employment environment. Just what are you seeing in terms of customer behavior? And on the other side of that, if you're seeing any belt-tightening?

So we've been talking about this for, I would say, the last 3 or 4 quarters. We certainly have seen changes in buying cycles. So elongated sales cycles, much more scrutiny, CFOs getting involved much more so than they did, back-end loaded quarter linearity, similar to how it was pre-pandemic. We benefited greatly from the pandemic where the buying cycles, we're much more evenly spread through the quarter, and we've really gone back to them being back-end loaded. And then where I would say we've seen some impact of other reductions is in our mid-market when we've seen renewals, sometimes customers reducing their seat count due to their own retraction in their employee numbers. Our team has done a really amazing job though in those opportunities or in those situations, trying to work with the customer on how to redeploy those dollars, so maintaining the logo and maintaining the dollars and redeploy it towards Zoom Phone or Contact Center, helping them really understand that customer. How we can help save them across other areas of spend, and helping them redeploy that.

Great. And I think to that end, your online business saw some stabilization, which is encouraging. What actions is the company taking to drive improvements there? And how are the price increases that you introduced being received by customers?

Yes. So our online segment, we had previously expected it to stabilize later this year, and we did announce that when you adjust for the days in the quarter, it stabilized in Q1. So that was really great to see. As a reminder, we did a price increase on the monthly skew. It went from $14.99 to $15.99 last quarter, and that has been positively received in the perspective of -- we've seen a couple responses to that. We have seen an increase in our annual plans, which is great. We did not increase the price there. But what that shows is customers really see a lot of value and they're willing to commit for longer, in response, they get a discount for that. And also, the churn rates in response to the price increase were lower than we actually had modeled. So that's also very, very positive. And the other thing that I just want to highlight around the online business has also been very positive is the stabilization of the churn rates. So if you go back to Q3, they were 3.1%. This is average monthly churn in Q4, it was 3.4% and in Q1, it came back to a 3.1% again. Those are rates that are similar to where they were pre-pandemic. During the pandemic, they had doubled compared to that, so seeing them come back down to pre-pandemic levels and stabilize is very positive.

Very helpful. Maybe just last question on the demand side or the recent results. How are you thinking about the geographic dispersion, right? How are you approaching the different geographies? Are you seeing different trends? And how should we think about that maybe going forward?

Yes. So we have seen headwinds outside of the U.S. When you look at the Q1 results, EMEA was impacted by both the dollars, so currency headwind as well as ongoing year-over-year impact, when you look at the year-over-year reduction due to loss of revenue directly related to the war in Russia and Ukraine. And then also, we did have a reduction in force in -- across the company in Q1. And due to the local regulations in Europe, those just are protracted experiences, and it took almost a full quarter to get that done. And so that was a big distraction in Q1. And then in Asia Pac, we also saw a year-over-year decline, unfortunately, in Q1 largely. That means, if absent the currency impact, it would have been flat. So we're -- I mean, the currency, there's not a lot we can do about that other than -- the comps are going to get easier. The year-over-year comps are going to get easier as we go through the rest of the year because the dollar Q1 was really the last quarter from last year, where the dollar hadn't really started to move yet. Now it's still in absolute dollars, it's an impact. But year-over-year, it's going to improve. We have also hired a new EMEA leader. I'm really excited about. We haven't had an EMEA leader before. We had an international leader, and he's going to be great. He comes from the industry, so he's going to be really great. So that will be a really important because we have to get both those regions back to growing again to contribute to the top line growth of the enterprise team.

Perfect. Let's maybe dig into the different products a little bit more. So Zoom Phone reaching 10% of revenues. That's a pretty significant milestone. I think you guys are probably the fastest ever to get to the number of seats that you have and the speed that you have. It's really impressive. Can you talk to us about, maybe generally, I should think about growth there and just maybe what the durability of that looks like over time?

So yes, we are very pleased with the momentum of Zoom Phone. We announced we had crossed over 5.5 million seats in Q4, and yes, I think we've exceeded. I think we did that in a little under 4 years, and it took one of our competitors about 20 to do that. So certainly an accelerated pace, very excited about that. And you should expect to see continued momentum in that space. Absolutely. For all the reasons we talked about, the total cost of ownership, the features and functionality, it's a very modern product and continuing to expand internationally is a really important perspective in that growth driver as well.

And are you seeing more customers adopt the bundle of video conferencing and phone together upfront? And maybe how is that changing the nature of the lands that you're seeing?

Yes. So Zoom One is our product bundle, and there's a few different variations of that. But certainly, upon renewal, especially taking the opportunity to talk to our customers about how they can move from if they're just a Meetings' customer, how they can expand to Zoom One, and that has been a very important contributor to the overall growth of Zoom Phone as well.

Great. And then just if I round out the different pieces that an individual employee might touch, Chat, I think we're all using it. Everybody in this room has probably used either [ Ivy ], Zoom, there's a couple of other options out there. How should we think about Chat fitting into the overall comm stack? And how important is that for Zoom?

So Chat comes embedded for free with our Meetings product, and this has become a much more strategically -- strategic important asset for us. We have invested a lot in the features and functionality of Zoom Chat recently, and the goal there is that it really -- Chat is a very, very retentive product. Nobody wants to change out their chat product, right? And so we have actually worked on tools to help transition from any of the other competitive tools out there. And it has become now, I would say, a product that features and functionality are comparable to those that are there in the market space. It wasn't before. A year ago, it wouldn't have stood up against some of our competitors, but it can today. And the goal is that you shouldn't be paying for another chat product. If you're buying Zoom Meetings, you don't need it. You should be leveraging Zoom Chat. And then the integration that you get there to transition quickly from a meeting to -- from -- sorry, I should say, from a chat to a meeting, or to have a -- again, the Meetings, Chat. Now if you use the Chat in Zoom Meetings, you can now have that persist into our persistent Chat, which is really helpful because a lot of times, context of what's happening in the meeting is happening in chat. And so if you want that record after the fact, it can now persist, which is a great way to also encourage customers to expose customers to the benefits of Zoom Chat.

Very helpful. Maybe you mentioned Contact Center earlier. There's a fair bit of at-scale players already in it. Maybe help us understand what Zoom's approach to Contact Center is and where you see Zoom fitting into that contact center landscape?

So our Contact Center, of course, is recently built and natively integrated. So it has the benefits of the scale of the Zoom platform and the reliability that comes with. And we've also taken the approach of keep it simple, which we've done across all of our products. And so when you see the desktop agent, it looks very familiar if you're already a Zoom Meetings user. And so the approach has been to build something that, again, is natively integrated with Phone, with Video. Some of the road map that's coming will be integrations with e-mail and social. It already has SMS built into it because we had that with Zoom Phone. And it's really to be an enterprise-grade cloud contact center. And it's really there except for a few little things, which is like the e-mail integration and social integration, which are coming later this year. And then around that, we just recently announced in beta a workforce management as well. And this will have not only the ability to manage the workforce, but also to enable a quality management as well that's leveraging Zoom IQ. So it starts to all come together, and you can see how nicely it all flows, and it is highly price disruptive. It's about 1/3 of the cost of a seat agent compared to those that are in the market. And because we have such an efficient platform, we're able to offer a great product at a very great attractive price.

Okay. So you're taking a similar price disruptive approach as you've done on the -- on other sides of the business. And maybe tying that, I know we got, by AI, in terms of how you're thinking about features, but there's a question about if we go from more human seats to more virtual agents or more AI-powered seats, how do you think about pricing in that context? And how do you still -- how do you price when it's based on a nonhuman seat that's there?

So we have Zoom Virtual Agent, which is a separate SKU, and it is priced based on the number of queries that are coming in. So to the extent that it's taking a lot of the volume, it's not necessarily cannibalizing what's on the contact center side because the volume itself will be priced into that Zoom Virtual Agent.

I want to maybe transition to the bottom line. Zoom has always done a good job of balancing growth and having really good margins and profitability. Can you maybe just help us think about where we are right now on that growth versus profitability balance? And then I have a couple of follow-ups.

Yes. So we made the decision earlier this year to make a reduction, to do a reduction in force. And that was to ensure that we have all of our investments aligned to reaccelerating growth. Everything we're doing at the company today is focused on how do we reaccelerate growth, and our current guidance for the year is 2% year-over-year growth. And certainly, we would aspire to have a growth rate higher than that, and that's really what we're focused on. And in the meantime, what we've committed to is while we're at this stage of growth, while making room for reinvestments, we're being very thoughtful about ensuring that we have, I would say, responsible margins on the bottom, and that's the balance that we're constantly making.

Maybe what are those kind of -- the most important investment areas for the company right now? Is it more on the distribution side for enterprise? Is it on the product side? How should we think about maybe the 2 or 3 top priorities?

Absolutely. So the answer is it's both. So continuing to invest around innovation. As you can imagine, our investment in R&D, specifically around AI, has accelerated over the last couple of quarters. We recently did an acquisition around Workvivo, which is not necessarily AI, but also just shows how we're continuing to invest in innovation in general. And then on the go-to-market teams, really investing in contact centers, so creating a contact center overlay team. So these are specialists that we're hiring from the industry that will really be the technical ninjas that will help our account executive sell contact center, also devoting marketing dollars there so that we can really make sure the awareness for the full platform, but very specifically, contact center is there. And so those are the types of investments that we're prioritizing.

Great. You've mentioned a few of the acquisitions that Zoom has done over the years, and I'm curious if you can maybe help us understand the build versus buy versus partner philosophy?

So we have an amazing innovation team, as I've talked about, in R&D and a product team. And because we have this platform that's been built, it enables the ability to build services on top of it very quickly. That's how Zoom Phone was built within a year. Contact Center a little bit longer, but not much. And so in opportunities where we see something that we really believe would benefit from being natively integrated, that's the approach that we've taken. The acquisitions of Solvvy and Workvivo were tech tuck-ins that have accelerated aspects of our development in certain areas. We continue to look, though, for larger potential acquisitions that could expand, I think, the offering. That's how we would probably think about it is where there are areas that would expand and sit beside what we have today, and continue to maintain the flexibility in our balance sheet to do something larger like that if we saw something that was great.

Great. Just with the -- maybe the interest of time, we'll end with a partner ecosystem question. I think Zoom, both from a technology standpoint, integrates with a lot of key technology players, also from a distribution standpoint. How should we think about maybe the key partnership right now that you're investing in? And how are you're nurturing those?

Yes. So channel distribution is a really important growth driver for Zoom. It's -- I mean, the company is fairly young, but the channel alignment is relatively new for us because when we were a Meetings company, we were largely direct-led. So this has been an area of significant investment for us. We've done a good job, I would say, over the last 3 years of building out those ecosystems in the U.S. in terms of like our master agent and referral and resellers. But there's still an opportunity in the U.S., and there's a significant opportunity outside the U.S. for those. Relationships are very, very nascent. And then as you start to get into contact center, there's a whole opportunity with the ISVs and the consultants, which we haven't really -- we're -- I would say we're early in developing those relationships and partnerships as well.

Great. Well, Kelly, we'll leave it there. Thank you so much for joining us, and it's great to hear more about Zoom today, but in person.

Yes. Thank you all. Good to see you.

Great.