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

All right. Thank you, everyone, for being here. We have Kelly Steckelberg, CFO at Zoom. My name is Matt Stotler. I'm the analyst here at William Blair who covers Zoom. For a complete list of disclosures, please visit our website at williamblair.com. Thank you all for being here. I think most people are familiar with Zoom, but maybe I'll just hand over to Kelly real quick and just give a couple minutes introduction history of the company, what kind of customers you serve and the type of problems you're trying to solve.

Sure. So hi, everybody. Nice to see you all. Zoom is probably a name that you became very well acquainted with over the last probably 3 years. And you may know us as a meetings company, but we've really expanded beyond that. We are a full communications platform that includes the most modern cloud-based products, including not only new Zoom Meetings but also Zoom Phone, which is our cloud PBX solution. Zoom Contact Center, which is a relatively new product, but we're really excited about the momentum we're seeing there. We have Zoom virtual agent that sits alongside that. We also have solutions for rooms, for events, and we gave guidance in our earnings call a few weeks ago of approximately $4.5 billion to give you an idea of scale, and we've grown tremendously over the last 3 years.

And Zoom is taking a platform approach, right, to a market that has historically been much more fragmented as demonstrated by the launch of Zoom One about a year ago. We'd love to just kind of get your thoughts on the differentiation of that platform approach and how that's resonating in the market with your customers and partners.

Yes. So first of all, our focus on our products are all that they are easy to use and reliable. And that's why I think why you've seen such tremendous growth in the company is because it is a product that is easy to understand, simple is at the heart of all of our design initiatives and yet also providing scale so that if you're having a large meeting or we have many customers that have employees and customers on a global basis, it can have that scale and reach. And what we've done is we continue to add services across this scalable infrastructure. So starting with Zoom Meetings. But when you layer in then Zoom Phone, it really leveraged. It was amazing, right, because what it did was it leveraged the voice component of Zoom Meetings by adding on telephone support, phone number support at the end. Now we have a fully natively built integrated cloud contact center solution. And all of these products have come as our customers have come to us and asked for us to help, as you say, solve their problems. And what they're looking for is the seamless interaction between all of these communication aspects that allow you to do simple things like if you're in a Zoom Chat, one click, launch a meeting with everybody that's in that chat channel. Or if you're -- if we were -- you and I are having a direct message, one click into a phone call for us, but also then take that and leverage that beyond it to collaboration through whiteboard through chat. As I mentioned, we have both a persistent chat and a meeting chat. You now have the ability, if you're in a meeting to chat, which has become a very valuable tool, especially we've heard during the pandemic. What the meeting chat did was it gave a voice to people that don't necessarily feel comfortable speaking up in a meeting. So I think that meeting chat has become much more widely used and incorporated. Now you have the ability to have that persist after a meeting is there's often very important records in there. And so when you look at it holistically, what it does is it, again, natively built, integrates and work seamlessly. We are also -- and we might talk about this more later, but we are also extremely price disruptive in all aspects of our product categories. And so we bring a very advantageous total cost of ownership, especially if you're moving from on-prem from phone or on-prem from contact center into the cloud. The savings that you get not only on a per seat license basis with Zoom compared to the competitors but also from eliminating the need for that on-prem hardware as well as the team to manage it makes it very, very cost competitive.

Right. Right. Absolutely. And obviously, you launched Zoom Phone many years ago and recently crossed the $5 million phone mark there. The adjacency after that has been contact center, right? That's been a key area of investment in the last couple of years. How do you think about Zoom's opportunity in the contact center? And what are you seeing in terms of adoption so far?

So Contact Center is about a year old, so it's still very early in its life. But we have been very pleased with the momentum we've seen, not only for companies to use internally, which, of course, is a use case for some smaller companies using it for their contact center. But also, we announced in Q4, we had a 2,000-seat international BPO, which I think starts to show, okay, we're seeing momentum even in those larger use cases. And it has native integrations today to voice to video and to SMS. There are a few aspects of the functionality we're still working on to really, I would say, launch it into that enterprise level. That includes integration to e-mail and social. And that means that we can -- you can have incoming inbound communications from your customers with e-mail and social. And then also, we need some API integrations as contact centers often integrate with several other solutions around, if you imagine a desktop agent, what they're seeing it integrates with things like the CRM solution to bring in the customer data. It integrates with a knowledge base to bring in the answers to the questions. We're working on building out those APIs. And all of those things are on the road map for later this year.

Right. Any -- I think in terms of use cases, obviously, there are some like sales, which make a lot of sense, then you can leverage the invoice or video technology in conjunction with that. Do you see the broad opportunity for some, including some of those that maybe haven't traditionally used as much video in the past?

Yes. So while Zoom Contact Center is absolutely a full omnichannel contact center, we are excited about really putting video front and center. So as you say, it could be around sales, but also imagine it could be around a repair. So think about something is broken in your house, maybe it's your washer rather than having them all the way to the house to diagnose it, taking your iPad to your washer, either showing what's happening or letting them listen to it so they can diagnose it and then come prepared to make that service call or having a designer, welcoming a designer into your house rather than trying to take your own measurements and then go and describe your style to someone in the store welcoming them into your space, again, via video to see what it is that you're envisioning and engaging with them in that way. So these are the use cases. I mean, we probably all in the last couple of years, engaged even with the doctor over video, right? These things that before, we didn't really probably even imagine as being possible and now are a normal part of our lives. Just think about how those use cases can continue to proliferate.

And almost expanding contact center functionality to personas that maybe wouldn't have traditionally been applicable.

Absolutely. Yes.

And in terms of the time line to get to that fully fledged enterprise contact center solution, obviously, you've continue to develop. You've got virtual agent. You announced the beta of Workforce Engagement Management. How do we think about the time line to get to that full fledged enterprise grade product?

So you mentioned 2 amazing features and functionality products that are out there. So Zoom virtual agent, if I may, for a minute, is a product. It's a stand-alone SKU that leverages the functionality we acquired from Solvvy about a year ago. And it is exactly it sounds. It's a virtual agent that sits beside a Zoom Contact Center. It can also sit beside other third-party contact centers to start to leverage AI to answer certain of customers' queries. And we have seen it have a tremendous impact. We're using it internally at Zoom for our -- the online segment of our business to answer questions. And just in the first few months, we've seen it be able to address almost 90% of the inbound queries from our customers. So that's a tremendous percentage when you think about what AI can start to leverage. And it is -- and there's a lot of consternation or concern in sort of the contact center space. What does that mean? It is priced differently. So agent seats are priced on a per seat basis, Zoom Virtual Agent is priced on a query basis. So it will be a usage based. So it's trying to find the right level of pricing to value that it's bringing there. And then workforce management, as you mentioned, workforce management is one of those areas we were talking about before that's usually an integration. There are third-party workforce management tools out there that could be integrated. We'll have an API for that eventually, but we also will have our own solution to offer. And the value there is it's not only scheduling, but it's also quality. It's workforce engagement. So how do you understand, how the -- these agents are engaging with the customers and leveraging Zoom IQ, which is another product that we have, which leverages AI to analyze that meeting interaction you can help use it to train agents, you could use -- we use it internally to train our sales force. So if it was an outbound or more of a sales-focused contact center, it can really help -- how many times are they saying Zoom Phone on those calls? How -- are they asking enough questions? Are they listening enough? And so it can be a very, very effective tool to help not only engage your sales team or your contact center team, but also drive them to be more productive and effective.

Right. You mentioned, obviously, virtual agent being an AI-driven product. And you spent most of the last earnings call talking about AI, but obviously, it's a key area of interest. How are you leveraging? You've got the investment in Anthropic, you have Zoom IQ for sales. How are you layering AI into your platform? And how do you think about the relative opportunities or risks, contact center specific, but also more broadly across the platform?

So first of all, we have relationships with both OpenAI and Anthropic. And I'm sure that there are many more exciting companies like that to come in the future. And in terms of leveraging AI, we are taking a federated approach which means our customers will have the opportunity to have the learnings from amazing companies like OpenAI and Anthropic and they're large language models, but also our learnings and our large language models. And then some of our own customers -- we have Fortune 10 customers. They're doing their whole own approach in development to AI as well. And so they're going to want to leverage their learning models. And so taking all of that and then applying it to use cases in our product suite to make us, all of our customers, our products more efficient. So the relationships like with OpenAI and Anthropic are really valuable because we get their learnings, but they are taking those learnings and applying them to our use cases. We're doing that, right? So we are also developing our own, of course, expertise in our engineering and development teams and our product teams around, okay, how do you now leverage these large language models across all aspects of the platform. And some of you, if I met with you one-on-one today, I don't keep using as an example, but I think this is so powerful to understand. So today, in our meetings platform, we had AI for a long time in our meetings platform, we have a transcription tool, that's the capability. If you take the transcription, I mean it's amazing, but it is word for word verbatim, what happened in the meeting, okay? We have in beta now something called meeting summarization, which leverages generative AI. It is like worlds apart from the transcript because transcripts can be very -- you've probably read our earnings call transcripts, right? They can be difficult to get through. You have to literally read the whole thing versus a meeting summary now takes context from what happened. Like I missed Eric staff meeting last week because of meetings, and I went through the -- and I saw it, and I was like, wow, this is incredible. Like it really gives you context because it understands who the speakers are. It takes it and puts it in a much more conversational format and those are the types of efficiencies you're going to see coming from Zoom by leveraging AI. Some of the other just easy examples, I think, are things like chat response, if you look at your chat meetings and can generate a suggestive response for you. We're going to have it for e-mail. If you have a long thread of chats like I will at the end of today, it could go through and give me a summary of some of those, so I don't have to read through them all, I can get to the core components. That's how we're going to start to see these use cases come to life.

Right. Got it. Yes. Very powerful. Something else you're doing is investing in departmental apps, right? And I think the acquisition of Workvivo is very emblematic of that. Could you just maybe dig into that part of your platform strategy going forward and how that kind of expands Zoom's presence within the enterprise?

Yes. So we have some of these already. Zoom IQ was originally marketed at Zoom IQ for Sales as that was a very specific departmental use case. Now we've seen expanded across the platform. But Workvivo is a great acquisition because what it brings to us is a centralized social Internet that can really sit at the core of a company's Zoom platform and start to -- many of you have seen the Zoom client, it's real estate that could be much more, I think, interesting and powerful, and that's what Workvivo is going to enable us to do. And then, yes, it starts to also bring opportunities for specific applications there to spread out amongst the departments in an organization.

Right. Switching gears a little bit to more of the, I guess, near-term things that you're seeing with the macroeconomic environment. Enterprise growth has been somewhat impacted by the slower macro by some internal changes. Can you just touch on kind of the dynamics that are impacting that business at this point? And how you're thinking about the potential to see stabilization to reaccelerate that business going forward?

Yes. So just as a quick reminder, we have 2 segments of our business. We have the online segment, which is largely self-service. And to give you perspective, as a reminder, before the pandemic, this is about 20% of our business. And then we have our direct sales organization, which are customers that are touched either by one of our direct sales reps or a partner's rep, either a reseller or an ISV partner. And during the pandemic, our online segment grew to almost 60% of our business at one point, it's a little under 50% today. So we think about these 2 channels now as both as significant opportunities and online has been contracting over the last several quarters. We were very happy that in Q1, we saw a stabilization on a dollar basis. So starting to see that -- and we can talk more about the reasons why, but starting to see some stabilization there. And then in the enterprise, there's a direct segment of our business, which where we have seen significant growth over the last year -- couple of years, and we expect to continue to see that over time. In Q1, we did have a significant number of changes in that segment of the business. So some of you may remember that we did have an overall company reduction in force in Q1 of 15%. The go-to-market teams were included in that. We also had a reorganization in our sales team. A few highlights of that or aspects of that, I should say, include we took our Zoom Phone overlay team, and they became quota-carrying reps. So it's like you have -- they're not completely ramping, but they are. They're new in their territories. We also had our President leave and our Chief Revenue Officer retired. So we have a new sales leader, Graeme Geddes. He's been at Zoom for about 2 years, very successfully leading Zoom Phone. But he's new, and his all -- he's great. He's amazing. He's very highly regarded in the company and within sales. That's going to take some time. We have a new leader in Europe. We have a new leader in ANZ, and we made some comp plan changes. So that was a lot for our sales organization to absorb in one quarter, and we knew that was going to be the case. We knew it was going to be a distraction. But we really wanted to kind of take it all at once rather than meter it out and sort of extend that process. So we did. And now as we look forward in Q2, the teams are in place. There might be some leadership changes that Graeme decides to make as he's settling into his role. But largely, I think the team is very well positioned and structured and the comp plans are in a good place to set us up very nicely to grow and scale for the rest of the year. And then it's back to we were discussing earlier, the products as well. The products really continuing to mature into themselves will be a growth driver.

Right. Yes, very helpful. And that online business, like you said, it's stabilized, I think, probably earlier than expected. I would love to dig into what's driven that? And then kind of longer term, how do you think about the strategic value of that online segment?

So yes, we had been predicting that online was going to stabilize from Q2 to Q3 this year on a dollar basis, and it happened from Q4 to Q1. And some of the major drivers of that stabilization were -- we did a price increase that was announced in Q4 and went into effect in Q1. So our monthly customers, the price increased [ $1 ] from $14.99 to $15.99. And the retention rates surrounding that price increase were better than we expected, which is amazing, right? That shows that customers see a lot of value in the product. We also saw is a very strong movement from monthly to annual in response to the price increase. We did not increase the price for our annual plans. So customers, I think, saw more value in that. So that was a -- both of those were very positive outcomes from the price increase and then, of course, the uplift in revenue because of that. And then the team has also been doing a lot of work around the website and the actual buy flow itself, call this buy flow optimization project and things like what does the pricing page actually look like? How has it laid out as well as the number of clicks to get from cart and tree -- well, actually landing page to cart completion went from 5 to 2, and that had a really big impact on our conversions. And so those 2 things really led to that stabilization occurring sooner than we expected. There are a lot of other positive aspects though, to the online business. The monthly churn rate has really stabilized over the last 3 quarters. Back to pre-pandemic levels during the pandemic, it more than doubled. So as it was growing very quickly, there was also a significant amount of churn and seeing that come back to stabilization is really helpful and helps with the overall when you think about this segment returning to growth, that's really important. And then increasing the top of the funnel because when you -- of course we have churn, you've got to keep filling the top of the funnel and -- some of the things that are on the road map for there are continuing to expand the market opportunity. And that this -- the online segment is much more internationally focused than our direct -- because it's not limited. It's not limited by where we have salespeople. And so continuing to add currencies in which we sell payment types, not everybody in the world is accustomed to credit cards as we are here in the U.S. So making sure that we are leveraging whatever payment types they like on a global basis. And then also pricing and packaging. There are many markets in the world where 15.99x an exchange rate doesn't work because they're much more price sensitive, especially if you think about Latin America and Asia. And so working on the right components that need to be included and then pricing it accordingly.

Got it. And maybe that's a good segue into just the international piece in general, right? Obviously, we saw that slow down a little bit more than the North American business in recent quarters. Probably because of that exposure is the FX issue some of that. How do you think about the trajectory to kind of get that business back to growth, whether that's building out more direct sales headcount, whether that's leveraging partnerships? What are the kind of the levers you have to be able to push that over time?

Yes. So it's absolutely accurate assessment. So if you all remember, we announced that in Q1, Europe was down 8% year-over-year, and Asia Pac was down 5%, unfortunately. So that's obviously having an impact on the growth rate. So Asia Pac is largely due to currencies. Without the currencies, it would have at least been flat for the quarter. So we're coming into, at least on a year-over-year comp basis, those start to get easier, Q1 was the last kind of hard quarter from a comp perspective. But we need to keep growing in absolute dollars, and that's where focusing on the sales leadership and making sure that these new products come to fruition. And then in Europe, that was a combination of currency as well as the war. I mean the war continues. The loss of revenue from both Russia and Ukraine is -- it's material for us. And then also the distraction. Because of the labor laws in Europe, the reductions took almost the whole quarter to complete in Q1. So that had an impact as well. So it's really getting those teams back focused again. And I think the good thing that we saw in Q1 was as we got to the back half of the quarter, we started to see momentum again in the mid-market segment of our direct team, which makes sense if you think about it, right? Those are the teams that have sales cycles that are kind of weeks to months. So even if a rep got a new territory, they probably had time to get leads moving and get some of those deals closed versus in the upmarket, those sales cycles takes months to quarters to years. So those reps with new territories are going to take a little bit longer, but we hope to see that productivity coming in Q2.

Right. Yes, it makes sense. Changing gears a little bit. Obviously, I think one of the big questions that we get about Zoom and the rest of the communications space is on Microsoft Teams, right, and the prevalence of teams in the business environment. What you have seen is, at least from the Okta report this year, the percentage of Microsoft 365 customers that also use Zoom has actually been expanding in recent years, I think it's now over 50%. Would love to just get your thoughts on the dynamics that are driving the adoption Zoom within that ecosystem? And then how Zoom was frequently positioned in Teams environment?

Yes. Yes. So we always think about things from our customers' perspective. And so from that viewpoint, Microsoft is a very important partner to us, and it's important to our customers while also our chief competitor. And so -- the reason that -- I just want to be really clear. I mean, this is an amazing report. The Okta report it went from like 42 to 45 to 48 or something. So it's continued to grow. These are Microsoft customers that are leveraging Zoom, and that is coming as we continue to see expansion across the platform of our products while they might be leveraging some Microsoft products at the same time. And we do integrate with them. There is the ability to one-click launch a Zoom meeting, or a Zoom Phone call from within the team's interface. And again, that's back to thinking about our customers, how do we make this easy for them so they can use the products that they love. Of course, we are always looking at making our products better and encouraging our customers to leverage all of our products. I think one of the things that Microsoft does well is fast follow. And so it's incumbent upon us to keep innovating. And that's exactly what we're doing. The pace of innovation at Zoom right now is something that I have never seen before, and we will continue to do that. We have some amazing leaders who have joined us recently for Microsoft, including both our Chief Product Officer and our Chief Development Officer; and they're both amazing on their own and great talents to bring to the company. But also they help us appropriately so understand where we have strength and where we have opportunity against competitors.

Right. That makes sense. And maybe the kind of coopetition relationship with Microsoft, the actual partnership that also exists there is a good segue into the broader kind of partner ecosystem. Obviously, the majority of the legacy seat base out there is maintained or has relationships with partners. How is Zoom leveraging the partner ecosystem at this point? And how are you thinking about incremental opportunities to expand that going forward?

Yes. Yes. So the partner -- our partner relationships continue to become more and more important when you think about the expansion of the platform with Zoom Phone, Zoom Contact Center. These are products that, historically, customers have turned to other experts in the area to make these decisions and help them evaluate it. And this is an area we see both as an opportunity for growth, but also an area that we've been investing in over the last couple of years. And we've made a lot of progress in the U.S. But there's still, I would say, our partner relationships internationally are still very nascent, but continuing to work on those. And they run the gamut from resellers to carriers to ISV partners. So this will be a growth driver for us. We aspire at some point for the channel to touch at least 50% of our leads and our deals. We're not there yet, but we'll get there.

Got it. That's helpful. And then maybe I think we may have time for one more. You mentioned pricing early on. We'd love to just kind of get your perspective on the overall pricing environment, how Zoom leverages pricing? And then given the platform approach, whether that plays an effect [indiscernible] factor there as well?

Yes. So you mentioned Zoom One, which is our bundle, which is -- puts together the core components of Zoom to make it really easy for our customers to buy what they need and also frankly, position us well against some competitors in this space. So that we see customers that are Meetings customers upgrading to Zoom One or we see customers that might have Zoom Meetings and Zoom Phone that upon renewal, we could talk to them about, hey, did you know there's a broader, maybe whiteboards, chat, other things they can leverage. We are, in general, very price disruptive. If you look at the list price for Meetings, Phone or Contact Center, we are anywhere from 1/2 to 1/3 of the others in this space on a list price basis. With that said, we're, I think, being more thoughtful now as we're going through renewals and negotiations. While we don't plan to increase prices just being thoughtful upon those opportunities around looking at discounts, looking at free periods and making sure that the value, I would say, is evenly distributed between the customer and Zoom.

Right, right. So I think we'll leave it there. Thank you, everyone, for joining. Thank you, Kelly, for being here. We do have a breakout in [indiscernible], I think, about 10 minutes with any follow-up questions. But thank you for coming by.

Thank you, everybody.