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

Eric's contribution to the world cannot possibly be exaggerated. We all know what you've created. I mean, truly, you changed our lives. So thank you for this breakthrough. I mean, we don't see things like this happen in our life that often. So what a revolution. So congratulations. The company has created something truly special, which is going to be part of our work life for a long time. So Eric, great to have you at the Goldman Sachs conference.

My pleasure. Thank you, Kash. You still do not allow me to join over Zoom today. So...

Yes. We did about 2 years back, 2 or 3 years back. My colleague, Matt Martino is here with us as well. So we're going to be doing some Q&A session.

Eric, I just wanted to set the stage, where do you see the company going in the next 4 to 5 years. If I have asked you this question before the pandemic, we could not have predicted how successful the company is going to be. Right now, we're at the point where we're out of the pandemic, and we had a big adoption thing. How do you see the company 4 to 5 years from now? So it's probably going to be very different from where we are today. And so what are the things that you can see solving for customers? What are they asking you for that could present you opportunities 4 to 5 years from now.

Yes, great question. First of all, one thing for sure, I know actually 4 or 5 years later, Zoom will be 4, 5x better than today. So -- and overall, I think before answer to the other questions, I'd like to fix that back to share a little bit about how we started. When we started back to 2011, the goal was just to build a better solution in the buybacks, right, which is just to focus on video conference service. Over the past many years, in particular, over the past 3 years, not only did we focus on video collaboration, but also we built a greater collaboration platform, video and phone and team chat and whiteboard, meeting scheduler, email calendar, you name it, right? Ultimately, we would like any user to stay within the Zoom client can get most of the work done. Essentially, that's a collaboration platform, right? And also we can empower end user, right, to support their hybrid work and also leverage the AI to improve the productivity, and that's our goal. And a lot of new services will be added to our platform. So that's our -- the reason for the next several years. And also, given that we are building up an open platform, we also want to support a third-party developers and start-up companies to build all kinds of applications upon our platform as well. So that's our goal for the next 4 to 5 years. Again, I'm very, very excited. So probably more excited than when I started back to 2011.

That's amazing in just 12 years, 11 years, you're a $4.5 billion revenue company. It just happened so quickly, right?

We just started.

Yes, exactly. We think softer companies have a hard time going from $100 million to $500 million and then from $500 million to $1 billion is tough, and $1 billion or $2 billion, oh my God, that's really tough. Forget about it. You just blaze right through all this without even realizing, but I'm going from $1 billion to $2 billion, it just happened so quickly. So as you lay out your vision, what are the white space opportunities you see ahead for the company?

I think to look at the enterprise, right, quite often, a lot of enterprise customers, they deploy multiple vendor solution, a lot of on-prem solution, I think, in the next several years, it's very likely most of enterprise customers, they would like to consult it into -- at the most discrete solutions providers. I think Zoom for sure is one of them, right? That is one great opportunity. And also look at international growth, right, even to this world, right, given the sort of the challenge that we are facing. And you look at like the Middle East, Southeast Asia are still growing very well, right? So international growth, enterprise growth. If you look at our online business, like prior to COVID crisis, probably around 18%, 17%. Essentially, that's part of our marketing game, right? It's really to not focus on online business. Today, you look at our online business, I think especially during the COVID, it grew extremely well. Given the COVID crisis, now it's a little bit of change, now kind of online business is stabilizing, but also look at the revenue growth, I think that's the opportunity in the future as well. You essentially look at the online, look at enterprise, international, new services, right? I still see a lot of opportunity ahead of us.

So Eric, can you talk a little bit about the online business as we look out over the next few years? You talked about stabilization. What do you think it takes to get that business back to growth?

Yes. So first of all, as I said earlier, prior to COVID crisis, right, the online business was not our focus. However, during -- over the past 3 years, especially during the year 2020 and 2021, almost every family had paid account, right? I think after that, for sure, a lot of families, they probably can use our free service. That's why we see the churn over the past several quarters. Now it's going to stabilize, is getting better and better. I think the way for us to further grow our online business is to add more value. We had a whiteboard, meeting scheduler, we are going to add more and more like AI features as well, working to add more value. And essentially, those customers who -- I mean, the online buyers who like our service, they're going to stay with us. And also the new customers, new [Indiscernible] because of those all the newly added values, they are also going to become the paid customers. That's a way for us to grow our online business. So, yes.

So I want to go back to the 5-year old vision in the white space. And you talked about a platform that reminds me of a few other companies, including your prior employer Webex had this platform.

Webex don't have any platform. Webex is just a product. Foreign product.

There's a much, much more advanced platform. So how do you see this platform playing out? And what kind of opportunities are there for third parties to right enhancements that sit alongside the core Zoom product?

Yes. So if you look at the Zoom product, right, we also have a marketplace like if you use our team chat. By the way team chat is a great product. It's free. If you are the meeting subscribers, you just use our free team chat product, right, you do not use any other competitors' product. And within the team chat, right, like this morning, I got a notification, I need to go to Workday to approve something. I do not need to go to Workday, right? Just within a team chat, I get all those sort of part of application notification, right?

Karl is going to be coming here, in an hour, he's going to be here.

So -- and also like a [Indiscernible] ticket as well, right, essentially the good integration with the third-party apps, right, within the team chat within our meeting product as well. We also have a meeting apps as well. That is one way. Another way is we do have SDK. Quite often, we may not have enough bandwidth focus on, let's say, some vertical products like health care or education and third-party companies like EDU company called a class, right? They leverage our SDK to build a specific solution for the education market. They added quite a few specific EDU features, right? So a lot of opportunity, all is there, right, how to support those vertical markets to lever our SDK. I think that's also the opportunity for us.

Why would you not create those extensions yourself, I mean, if it's...

Yeah, right. I can write a code, and not everyone can write a code. So essentially, you do not have a lot of engineers. It's hard. Even you have engineers, you also need to invest into your go-to-market. It's very challenging as well. Ideally, we should do all, but I do not think that's a really [Indiscernible].

Got it. Got it. That makes sense. Zoom always had the super edge over functionality at one point. You were the only one despite competition is catching up on functionality. So at this stage, and this is the question I keep on you earnings conference calls, and I'll just ask it anyway again, where is the differentiation for Zoom. You still are higher in terms of quality and liability, there's no question about that, right? But in a market which seems to be mature-ish, and I'm sure that will change if your vision comes through the next 4 to 5 years, its SDK platform thing sounds very exciting. And as of now, how do you really -- in a market that's seemingly mature with there's more competition, what are the avenues for growth in the near term for the company?

I think, first of all, we really to look at everything from an end user perspective, make sure our mantras always build something customers truly love, right? Like recently I joined on a meeting, I received a link from a friend, their company use a different product. Before I say anything, my friend automation, "Oh, Eric, sorry, we do not use Zoom." I know I hit that experience, right? So make sure end user love the product, that's always number #1 opportunity. And at the same time, we wanted to focus on innovation. I think no matter how comparative this industry or our competitors, right, which really need to focus on innovation. Innovation not only for product innovation, but also for business model innovation as well. Otherwise, quite often, we have a huge competitors, right? Sometimes bundle everything together. We also need to focus on the business model innovation as well, right? So if you focus on innovation, make sure it's been [Indiscernible] maybe ahead of any of your competitors, spend as much time as possible with customers, you'll be the first one to understand the customer pinpoint. And to be the first one to release something, like this morning, just announced our Gen AI, all those cool features, right? We are the first one. Look at our...

Tell us more about that, yes.

Yes, because you look at -- good news, we already invest to have...

I woke up and Matt's e-mails there from 3:57 a.m. Pacific. "Hey, take a look at what Zoom did today." Okay. We need to ask this question. Charles sent me an email too, this morning. " Hey, make sure you got this."

You know like a meeting summary or maybe you're late to the meeting, you want to understand what has happened and so on and so forth, a lot of AI features. Again, that's not a free trial, not the beta or alpha. It was already [Indiscernible]. So many of you already invested in it before. And also, as part of our paid services, meaning at no extra cost, right, add more value to our customers, not like our competitors, essentially sort of give you a so-called free product. Guess what? They charge you accretive price per user. That's not the way to deliver happiness to our customers, right? Customers are pretty smart, they understand, wow, Zoom truly cares about us, right? That's the way to build a trust. Quite often recently, I talked to many enterprise customers. When we realized, we have very good scalable AI features, plus as part of a package, they really like our story. Otherwise, if you look at the total cost of ownership, it's much higher if you deploy other competitors' products. We also have a team we are going to work on monetize AI features to build a brand-new service. That's why AI does bring a lot of opportunity for us for our existing services or for the future new services as well.

Just give us a teaser. So what are the new things that are possible that could make your Zoom users life more productive, more exciting with generative AI? What are the things that we could be doing 2 years from now, a year from now.

So for now, if you did not get a chance to play around, so like today it's a feature already the meeting summary, meeting query. During the meeting time, you can ask any questions, right? So during meeting time. And also that you write a chat and can use Gen AI to help you compose the chat as well, right? Those are the future already available. But down the road there's a lot of new Gen AI features like [indiscernible] as well. Let's say, I want to schedule a meeting with you next week. Now I needed to talk with my EA, you talk with your EA to coordinate time. Down the road, I can just ask AI, I want to schedule a meeting with Kash next week. I'm done. I do not need to check with my EA. We can lever the AI into schedule a meeting on behalf of us, right? Those kind of Gen AI features can truly help us. And also, we build a lot of features like the whiteboard, a lot of the content-centric features, essentially, you can lever the AI, to essentially help you to either build a dock or wire board, all those cool features. You do not need to spend a lot of time to do that, right? So all those features will be empowered by AI. So...

So Eric, I think maybe pivoting gears a little bit to maybe one of your more promising growth vectors, which is Zoom Phone, recently crossed 5 million.

No, it's doing very well.

Yes, 5 million seats, 10% of revenue growing much faster than the overall base. So can you speak to maybe just kind of what's driving the success there? Maybe the verticals where you're finding the most traction, competitive displacements or greenfield opportunity? Kind of how do you think about this?

Yes. So before I talk about opportunity today, look at the end users from customer side versus a pinpoint. On one side, some customers still deploy on-prem solution. On other side, some customers already migrate to cross solutions, however, multiple solutions. Today, let's say, you are using Zoom as a videoconferencing solution, use different cloud solution for the phone, right? Essentially, on the phone call, right, I met you and I on the phone call. I also want to share contact with you. I want to talk to you, literally, monthly, I want to obligate the video call, right? Because 2 different products. It's really hard to have a similar experience. That's why a customer, they view video conferencing and phone as essentially one solution. They are called UCaaS solution, right? And the customer really like our video solution. And essentially, you paying off the video and with a phone number, right, that's the phone service, right? Customers really like that experience. That's the reason why more and more customers when they look at either microphone on-prem to the cloud or able to be deployed existing cloud solutions from other vendors, they look at Zoom as a future solution, either they already deployed the Zoom Phone or they are going to. That said earlier, I think 5 years old, very likely you look at UC, the space, probably only 2 vendors and so why? Because only 1 or 2 vendors can build a platform, the entire platform.

Yes. So maybe then let's just talk about just kind of what you think the key initiatives will be to kind of reaccelerate growth for the overall business, right? So we talked a lot about these different vectors, whether it be phone, contact center, even kind of core video conferencing, kind of where you see the green shoots in the market the most demand to kind of reignite the business and get back towards kind of double-digit growth?

Yes, for sure. Phone is still probably a very important opportunity. That's still a huge opportunity all there, that's the one. Look at the contact center, they are CCaaS, right? So we built the contact center from one off, right? For now, by and large, probably for some SMB customers, given the feature set, but we are innovating very rapidly, right? So you look at every quarter, how many officials we added, look at the workforce management, we also introduce the services as well, right? So essentially look at the phone, look at the contact center, look at all other new services like meeting scheduler. Last year, we announced email calendar and whiteboard. Essentially, if you look at our platform vision, so we are going to add more and more new services, right, essentially add more value and also we can leverage the platform capabilities to monetize. That's one area, for sure. At the same time, as I said earlier, we can also collaborate AI, to build some brand-new service to help us monetize. So that's another opportunity we are looking into as well. Overall, I think there's still opportunities all there in -- from an international perspective, right? So a lot of customers probably still use very on-prem solution or not the greater solution. I think that's the opportunity for us to further grow our international brand.

And you talked a lot about monetization, and you guys recently introduced the Zoom One bundle. So can you talk a little bit about that kind of the strategy there? How much runway you have, let's say, in the installed base to go after?

Yes, one thing I think we did not do well because of marketing and a lot of customers even for those customers who already deploy Zoom video solution for many years, they still do not realize we have a platform. We have Zoom One. Because Zoom brand, it was too strong, right? When it comes really convincing, they think that's Zoom. They come to Zoom, they think of that as really convincing. That's not a case anymore. How to mix to double our marketing side? Zoom One essentially, that's the platform -- part of the platform, right, give a customer all the capabilities. I think most of the customers -- I think just starting the 1.5 years ago, right, we just started that effort. I think there's a huge opportunity for us, especially for medium-sized integrated customers to migrate it to our Zoom One package. So back to the Zoom team chat, it's part of Zoom One. Customer do not realize that. They already paid the Zoom meeting customers. They really do not need to pay for other service provider for team chat, right? Zoom -- team chat is greater service. It's free. It works extremely well. Actually, better than any other team chat solutions out there.

And so thinking about kind of maybe the brand awareness for maybe more nascent products or bundles or product SKUs, you've got this contact center product, which has 600 customers today. This is a pretty fragmented market more broadly, and you have a number of competitors getting into the category, whether it be Twilio or RingCentral, and you have a lot of legacy incumbents in the category. So how do you think about your differentiation perhaps beyond the scope of just your platform play?

I think it's a great question. First of all, we built a new solution from ground up. That's why from an architecture perspective, with more architecture, right? You do not have a lot of legacy components. That's why cost-wise, for sure it's better. And also we leverage the existing components, right, where we already deployed for other services for many years, is very stable, mature components, right, back in the side. So the architecture is better and also the cost-wide also is very manageable. Plus, we also have a target integration with other Zoom services as well, right? I think those 3 things, I think, give us confidence, plus customers trust us. They know our innovation speed is pretty good, right, based on the positive track record. That's why assuming customer trust you, I think it's very likely down the road that either evaluate your service or they are going to deploy your services.

And I think one thing we've observed in the market for UCaaS and CCaaS is enterprises for liquidity towards kind of bundled UC, CC solutions, if you will. So in your own customer conversations, how topical is that in terms of having kind of that wholly integrated platform.

That's a great question. So like 2 to 3 years ago, if you talk about UC and SC bundle together, it's not a topic customer quite often share with you. But today, given the economic -- the situation, quite often the customers, they would likely to consult multiple windows into 1 or 2 to further save the cost, really look at the opportunities how to consolidate CC and UC together. Today, look at all the solutions order there. Who is standing out in this industry to build CC solution and also UC solutions with a multi-architecture formula ground up. I think we are the only one. We really do not see any other vendors to build added solution. They own both safety and a UC and also they build a solution by themselves. I think at this moment, I can probably tell you, I think Zoom is winning.

I had a question on that regard. For the customer, the advantage in deploying the whole platform, is there a cost of ownership benefit?

Total cost.

Total cost, it should. Can you talk a little bit more about people that have deployed the contact center and the rest of the Zoom platform? What does their life look like now productivity-wise, economics-wise versus where they were before, just curious.

Yes, you take Zoom for example, right? You look at our support team, previously deployed other contact center solutions. And still our team was not very happy about some of the features, and...

Who wants that? I am kidding.

So I'll tell you afterwards. So anyway, last summer, a year ago, right, our team migrate to our own contact center solution. And our -- I can tell you our support team, I just asked them to give me the very objective, the comment about our own contact center solutions after 1 year now, they were pretty happy. The reason why it's more than solution is very easy to use and also the integration with our other platform is much better. And plus, based on the customer -- based on the feedback, our team innovation speed is much faster, right? That's the reason why even there's still some feature missing, but every quarter, we quickly added those features, right? That's why a customer like our story, not like some on-prem solution, other contact center solutions. We already built that many years ago, it's really hard for them to have a rapid innovation, right? So that's the reason why we can [indiscernible] down the road. But again, that's more like the start of SMB because even though one feature missing, sometimes enterprise customer RRP process, probably, oh, they want to wait. But again, we are innovating very fast.

Got it. On Zoom, I just wanted to understand a little bit more. I know you captured the problem with this. People are not aware that we have all of the breadth of capabilities. What are you doing on the marketing side differently? Is there a new campaign to increase the awareness of what Zoom has to offer?

Yes. That is one of the top priorities. That's the one thing that keeps in night, right? So recently, I can share with you a little bit more. We just add marketing at all, right? I can tell you our brand and marketing team reported to me directly. That's why it has become more and more critical, how to make sure and the customer, and they user public perception, right, really understand Zoom is a collaboration platform company, not only do we have a greater videoconference service, but also overall platform, right? You will see a lot of marketing, continuous new marketing initiatives in the next several months, several quarters. So...

Got it. Boom for the advertising industry and digital marketing. What does go-to-market look like in this view of the world where you want Zoom One to be a successful widely deployed platform. What are the things you may need to do on a go-to-market perspective to achieve...

It used to be -- it's always by and large, more like a direct sales driven. But given that I've introduced the contact center, a lot of the new platform services, right? So for sure, we need to leverage channel partners more and more, in particular, for contact center, all other solutions about going to build down the road, right? So for very large enterprise customers when you might get from on-prem to cloud, you need to leverage the channel porters more and more. That's one added. Another thing is, as I said earlier, prior to COVID crisis, online is essentially not our key revenue driver. And given notice revenue-wise, it's not -- it's a pretty big chunk of revenue coming from online business. How to further leverage our online business to have more and more free users, and they can mold those free users to paid users and also they are important for us as well. So essentially how to double down embracing the channel partners as well as online the channels, that's something new for us.

Got it. Got it. I want to do a quick pulse check. I know it's a very large gathering here. If you have a question, just raise your hand, and yes, feel free if you have any questions. Yes, go ahead. So David, Paul, who?

Okay. So Eric, on the EU decision in July [indiscernible] teams. [indiscernible] and specifically, what type of uplift might you see from that unbundling in Europe?

Yes. That's a great question, Paul, the EU and this policy border, the Max sort of bondary. And I think we should -- you should ask this question from [Indiscernible] as well. So essentially, I think you look at it from a competition perspective, I said earlier, you focused on the product innovation and the business model innovation. But no matter what you do, you got to be fit, right, that's very important. And more likely we play sports right? And we have a better team. I think we can win. But if you have unfair competition, you may not win, because the rules might be different. You had a wonderful jump shot, 2 points. I made a jump shot, 2 point. If you made a nice jump shot, it's 3 points, it's hard for us to win, right? That's why I think, for sure, more and more customers extend that, right? That is one thing is good to understand, right? Sometimes the unfair competition. Another thing is if a customer -- now more and more custom realized, they got to look at the total cost of ownership, not like initially the so-called free service. The total cost of ownership, like support cost, if you use a competitor product, guess what, every meeting, every phone call is a lot of CPU problems like you need to call IT. That's one side. Also look at other on features like AI features, right? You deploy so-called free service, guess what? You have a new choice. I wanted to charge you $30, what it can do. You have to pay, right? That's why I say when it comes to total cost of ownership, I think we have a much better story. So that's the only way we can focus on. In terms of FDC design or EU disease, I hope we will help, right? So -- but customers are very smart. They understand what's going on. So, yes. It's a great question. Thank you.

Paul will continue in a second.

You announced a bunch of AI capabilities this morning, the AI companion had no additional cost. Will the inferencing costs degrade your gross margins materially? Or do you expect to be able to absorb that within the current gross margin profile? And then secondly, you talked about wanting to ForEx the size of the business. Can you do that organically? Or do you want to do large M&A?

I'm sorry, the second question?

The second one was whether you have aspirations to do material significant M&A to grow the business? Or can you do it organically?

Appreciate it. Thank you. Yes. So you look at our gross margin, for now, we are doing very well, right? So given the effort or investment, right, in particular, we started more than 2 years ago, right? I think we have a high confidence. Initially, for sure, there's a little bit of impact the gross margin, but down the road is very manageable because we have our own larger language model. We also use the federated -- our AI approach is a federated approach, right? Federated, and Llama 2 and also the opening eye on our own language model. I think cost wise, it's very sustainable. In the long run, it's very manageable, right? That's our hope for us. Our DevOps team is pretty good, very solid. They know where -- how to save the money. Every time -- our CFO, Kelly always praised our DevOps effort. That's why we have the confidence, right? We do not charge customers, add no extra cost for those Gen AI features. So in terms of your second question, so I think, yes, maybe you have some advice. For sure, we are open minded, right? So we are quite a few small startup companies, how to further grow our business, we're very open-minded. Every year, we generated a lot of free cash flow is very good. And so again, we're also very disciplined as well. If we do not see any good target, probably still focus on organic growth. If you and cash matter, wherever has any good otherwise, we are open minded. So, yes.

I'm just curious what the capital allocation strategy is? I just noticed you have $20 a share in net cash on the balance sheet. And it doesn't appear like there's any share repurchase or meaningful M&A. So maybe you could talk about that.

Yes. So I said earlier, so first of all, cash flow positive, that is the good news. However, we are very disciplined. We are indeed looking at some potential opportunities. Again, we're also disciplined, right? So whenever there's a good opportunity from a go-to-market perspective, from a team culture perspective, from a valuation perspective, we do it, right? However, if you do not see any good acquisition target, in terms of organic growth, we are also patient as well, right? Because we are very responsible from a shareholder perspective, right? Otherwise, you have you generate a lot of cash. You have a cash flow positive, the balance sheet very strong. It's just the acquisition -- for the sake of acquisition don't make any sense. We want to focus on sustainable growth. And again, we are not sitting there to say without looking at those opportunities, we are, but we want to make sure with a disciplined approach.

Yes. Right behind, please.

Can you please talk about the AI experts or talent that you have recruited from Azure or Microsoft? What like expertise or they are bringing to the Zoom organization?

Yes. So as I said earlier, we already invested into the AI quite a few years ago. And in like other competitors like Max, right, everything Asia or OpenAI. Our approach is the federated AI approach. And we build our own large language model and with our own the trained data as well. And we do not use the customer data to turn our AI, by the way. So -- and also sometimes also further leverage Anthropic or the Open AI. In some cases -- in some use cases, maybe the Anthropic model is better. Why not call Anthropic rather than call your own model, like essentially, that federated AI approach, I think it's probably a bit better. It's more sustainable from a cost perspective, from a quality perspective. That's our approach. So it's a very differentiated approach compared to other solutions.

Has there been any pushback on the change in terms of conditions that have followed for your trading models?

Long story short, we do not use any of our customers' data to turn our AI model or the third-party AI models, no matter free users or paid users, even if some customers really like our story really want to help us to share the data results to let other know, we don't use that data at all. We make it very clear, very simple.

I have one question as we end this conversation. As you talk to CIOs and decision-makers next year, Board members, CEO, CFOs, what is your early assessment of what calendar '24 budgets, it is not your forecast by the way, what are your customers generally saying about next year's budgets for IT?

Yes. I think early this year, I think I do not think any composition is a suite. So meaning every enterprise customer CIOs, CEOs really wanted to consolidate it, right? I mean you save the cost. It used to be the best bidder service be with because every CIO or CEO really wanted to deploy the best bidder service to make sure focus on employee engagement, focus on employee experience. However, I think over the past 8 or 9 months, that's not the case. But recently, I think the good news given there's no economic recession, given the AI investment, I think we see more and more customers either from a CIO or CEO, they are more open minded. They want to invest more. right, especially how to support the AI, they want to invest more, how to embrace the hybrid world, right? They want to make sure you invest more to those solutions that can support embrace the hybrid work. I think it is much better than 8 or 9 months ago. I think essentially, we are very optimistic now assuming there's no economic recession in the next...

That's the holosphere, by the way. John Hopkins is reduced its recession probability from 20% to 15% this morning, and it was a very bullish outlook, and I think that's -- you probably see economic indicators in our line of business anyway.

Yes.

So with that, why don't we give a round of applause for somebody who changed our life.

Thank you, appreciate it.

Literally a life changer.

Thank you.

Thank you, Bye-bye.