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

Welcome to Needham's Growth Conference. I'm Ryan Koontz. I'm really pleased to have Zoom with us today. In our fireside chat, we've got CFO, Kelly Steckelberg. Welcome, Kelly. How are you doing?

Doing great. Thanks for having us today.

Excellent. So yes, if any of the audience has questions, you can submit them via the online tool, and I'll do my best to get those in at the end. We're starting a few minutes late, but we've got a hard stop at about 40 minutes after the hour. So thanks for joining us.

Let's start, Kelly. We kind of got here looking at last calendar year through your October quarter results. You may be summarize some of the key drivers you saw in '23 for the business and kind of shifts that played out during the year.

Yes. So you -- we've had a really interesting year, I would say, in terms of rounding out. We were on a January year-end, as you all know. So coming to the end of fiscal FY '24. And very excited about the trends that we've seen in Zoom Phone. It continues to be a growth driver for sure. Also really interesting shift in our business to the overall platform and adoption. That's really exciting. As a reminder, we talked about this on the call, where we've seen a year-over-year growth of 330% of customers that are on a Zoom One bundle, including Zoom Phone. So that really highlights all the investments we've continued to make in the platform and the customer adoption there. And that's really important because we know that customers, with more than one product, are more retentive. So really looking to the future of them adopting and leveraging more of our products. And then the other -- so that's mostly on the direct side. On the online side, where we've seen progress this year is certainly in the overall -- in the churn numbers, really getting back to historic lows that we saw before the pandemic, really focusing on getting that segment of the business stabilized on a dollar basis. And we're not quite there, but we're very, very close. And lots of great initiatives on that side of the business, including new features and functionality, improvement in the website and the buy flow and then, of course, some price increases a year ago, and then also some that were more recently announced.

Well, great. So maybe unpacking that a bit on the enterprise side, so you're seeing more traction with the bundle that includes Zoom Phone, meeting collaboration. What else is included there in that bundle, Kelly?

Yes. So we have different bundles, different levels depending on the features of functionality that are right for the organization, but they can include things like whiteboard, which is our answer to some of these other products that became very, very popular and common during the pandemic, especially. We also have some scheduler, which is our version of Calendly, which is really helpful to be embedded into the platform itself. And then, of course, a product we don't talk about nearly enough, but Zoom Team Chat. And that is our chat product, which comes included with our Meetings product. And this has been a really important strategic focus for us over the last year or so, especially with the growth of phone. And also when you think about being highly retentive, right, chat is one of those products where people have a lot of data, things that they store and feel very attached to and that really could help for the long-term retention rates as well.

If I recall, there were some new features came out to make the chat more resident, right? The right word that it's if you don't lose it, when you end the meeting?

Yes. So what you're talking about -- so we have 2 kind of -- when you talk about Chat for Zoom, we have our in-meeting chat, which like exists here, okay? There's a chat that all the attendees of the meeting can access. So what you're talking about is we created something now called persistent meeting chat. So that when you leverage your chat during a meeting, it can it be a very useful way to interact in a meeting, to do [indiscernible] or just to ask people questions and do not lose that rich content now. It can persist after the meeting. And it rolls into our persistent chat, which is the never-ending chat that we also have. So what it does is, it becomes a channel in there based on the meeting title, and then it lives there. And that's been a really great way to help people maintain and preserve this rich content, of course, during meetings, but also to expose them to our persistent chat product that we also leverage.

I'm sure you can plug that into workflows and things. For companies, they define different jobs and processes, and you can be a bigger part of that and obviously...

It's interesting you bring that up because I did FY '25 planning with my team yesterday, and we're helping, without naming names, but you can probably guess, we are taking -- as a finance team taking an active role in ensuring that Zoom Chat is integrated into some workflows with some of the vendors that we work with very closely because there is an opportunity for back and forth. There's a couple of different vendors that we're working with this on, and that we get the finance team.

Right. Finance. Yes.

Yes.

Makes a lot of sense. And that's great. And then on the online side, what were some of the tactics that you're using to try to reduce churn there without giving us any secrets, but maybe just approach to how you improve that?

Yes. I mean, first of all, we -- at the beginning of the year, if you remember, we increased the price for Pro monthly. And what that did was drive adoption of more of our annual plans, which is great. We love that. And -- so that always obviously helps you preserve and improve retention. We also have made just countless -- honestly, countless improvements to the website itself and how we interact with customers, improving the buy flow so that the completion rate is better. And then even when customers do come to cancel, we make it very easy for our customers to cancel. They can do it on the website. We don't hide it because we want them to come and go as they need it. But we do now prompt them and ask them why do they want to cancel. And doing very natural tactics, which is talking to them about is it value, is it price and exposing potential other opportunities for them, depending on what their response is. And we've seen that have a very positive impact on retention as well.

Yes. It sounds like it's important data to collect, obviously, to be back in. And I recall you're also doing something a while back around local currencies. Could you -- have you seen -- have you implemented that the work as well?

Yes. So we've not only added the number of currencies in which we offer our plans, but also the payment types, including now in-app purchases, which is a very streamlined approach and let people purchase in Google or Apple. And all of those we've seen have improvements on our conversion rates.

Great. Excellent. That's great progress. On the gross margin front, continue to make some nice progress there, up another 100 bps, on what's pretty massive amount of business you guys are doing. Is that entirely from the kind of the cloud infrastructure optimization or other parts of COGS, like telecom, PSCN interface, what's -- what are your levers there that you're working on, on driving margin?

Yes. So COGS is a constant area that we are working on to seek optimization. And what we saw mainly in FY '24 that contributed to that is continued movement from traffic from the cloud to our own co-located data centers. This -- if you've been following the story for a while, you remember that pre-pandemic, we were 95% probably in our own colos of our traffic. Probably the only thing that was sitting in the cloud at that point was Zoom for Government. And then during the pandemic, we went -- we flipped to like 99% of our traffic was in the cloud for a period of time. And we've worked very -- the DevOps team has done an amazing job working very diligently on now bringing that traffic as they can in a reasonable manner time line back into our colos, and they're doing that very effectively. Also looking around what's the capacity in our colos and making sure that it's being optimized. Now we have indicated that we do -- when we look forward, I'm not giving guidance today, but just as a reminder, going forward, we are investing very heavily in AI, both in terms of compute capacity as well as headcount. And that is potentially going to have some impact on our gross margins. The team is doing everything they can to build capacity in our colos to ensure that the capacity we're using for meetings is as efficient as possible to make more room for compute, AI. And we're -- so the way the approach we're taking is we start with any new AI features, generally any new features that get introduced. They typically go to the cloud first because we are not sure of the capacity it's going to take. And we want to make sure there's enough room, right, so that we can support it eventually.

Developer flexibility.

Yes. Exactly.

It's been late, right? Yes.

Yes, exactly. But as we start to understand then the scope of that, then the team works very quickly to start bringing that in-house. And that's actually happening already, for example, with some -- with meeting summary, which is probably our most popular AI feature today. Some of that traffic is starting some of that compute, I should say, is coming back into our own colos. So that's great.

So you're looking -- you're getting in the GPU customer as well with everybody else.

Yes. Yes. Yes.

And lastly, on the OpEx side, you guys have been able to bring down OpEx. I think you've maintained without -- you haven't touched R&D much, but you've seen some optimization on the sales and marketing and G&A front. Is that right?

Yes. Yes. So I think this week, as Zoom has brought back a lot of memories, which was a year ago, we were having -- going to the process of making that very difficult decision of having our own reduction in force. And we made the decision at that time, as you remember, to reduce our headcount by 15%. And that, while very difficult, was obviously the right decision for the company. We've managed to continue to execute. And we chose to cut to 15%, with the idea that we could then reprioritize some of that spend. And with the goal of coming back to around a 10% decrease by the end of the year, and that's almost exactly where we're going to end up by the time we get to FY '24. So that's the benefit that you've seen rolling through our operating expenses, as you said, in the areas of G&A. G&A and COGS, we always track to be as efficient as possible. And then on the sales and marketing side, also see that we have continued to reinvest in R&D as we believe that's really important for the longevity and the future growth of this company to maintain that level of commitment to increasing our platform, and we will continue to do that. But yes, we really think it's the reduction and the decision there. And it's not just a reduction in headcount. We also had a very concentrated effort to focus on program spend, looking at ROI of marketing events to spend just across all areas of the business.

Yes. And your premium product is a big part of your marketing engine, I imagine as far as [indiscernible] selling. And so...

Yes. Well -- and even more than on marketing, we've enjoyed such the immense benefit of brand awareness during the pandemic that would have taken us years and millions upon millions of dollars to acquire had we not had that. And so now focusing in more on product marketing, on ensuring that customers and prospects understand the breadth of our platform, they often know Zoom, but making sure they know that Zoom is more than just video communications. We have this full platform of phone, of contact center, whiteboard events, et cetera. And that's how we've been able to focus in and really be thoughtful about how we're investing those dollars.

Yes. And so I know you're not guiding you said. And with respect to 24, you've said you're making great progress on stabilizing online. And what have you commented on the enterprise growth rate you generally think you can try to achieve here in the near and medium term?

Yes. We haven't commented on that. The only indication that we've given at all on the previous -- I'm just going to restate what I said on the last call, which was in looking for FY '25, right now, probably the best indicator -- or one of the indicators we think you should take into account is our exit growth rate for the year. So looking at the Q4 FY '24, this quarter, exit growth rate, what does that look like? And we are not assuming at this point in time that the economy is improving. I don't necessarily -- sitting here today think that the economy is worsening from what we're seeing, but I don't think it's improving either and continuing to experience back-end loaded linearity and deals -- high levels of deal scrutiny, all of those things, we do not expect to change in the near future. And then the other thing, as a reminder, is we had a lot of interactions with our customers this year, their own reductions in force and getting them rightsized in their spend. And the team did a really good job of, first of all, maintaining logos and focusing as much as possible on maintaining spend. Meaning if a customer had reduced headcount and didn't need potentially all the meetings licenses that they have, taking that and taking the opportunity to upsell them into the bundles as we talked about earlier. And that -- I think the team has done a really good job because that gets us situated that even though -- if they were just moving from meetings to bundle, that would typically be an upsell, at least we're preserving the spend. And getting us situated with a more retentive SKU because there's more products as well as a higher dollar SKU to the extent that those customers eventually start to grow again, they're growing in a higher SKU. Now we know that the majority of our customers had the opportunity for a renewal event during this past year, in FY '24, but not all of them. So I do expect that in FY '25, we are going to see more discussions with our customers about getting rightsized, and that that's going to continue to work its way through the system in FY '25.

Yes. And how are these contracts typically, remind me?

So our -- anywhere from 1 just kind of 5 years. So average ends up being around 3. So I mean the reality is we know that the majority had the opportunity to renew in FY '24, which is good, meaning we've addressed the majority of them. However, it does indicate that for an average of a 3-year, with an out -- 5 to 7, we could see this trickle through in FY '25 and even into FY '26 to a lesser extent.

Yes, interesting clock. And regarding go-to-market, as you think about the strategy for '24 and upselling, are you making any changes in the go-to-market motion, channels, these sort of things? Are you guys pretty much where you're thinking it to be on GTM?

Yes. Yes, it's a really good point. So we -- as a reminder, we did it in conjunction with the reduction earlier this year, we did a pretty significant reorganization in the sales team. Graeme stepped into being our Chief Sales Officer. And we have a new leader in Europe and a new leader in ANZ. So I think that from a personnel perspective, we're in really great shape. We do have -- and are planning to continue to invest more in channel. That certainly is an opportunity for us. And we've made progress, I would say, in the U.S. around our phone channels. But as we move into contact center, that's a whole different set of relationships that are needed with the SIs, for example. And working on building those -- and then building on both of those tenants internationally is really important for us. So that is, I think, probably the -- we will continue to add sales capacity. We're continuing to add sales specialists in the area of contact center, especially is important for us. So those are probably the primary areas that we'll be continuing to add. I wouldn't say we're readjusting or reorganizing the way that we did this year, but just more of the same for next year now.

So those channels can take on more of the Pro services, the heavy lifting that are required on contact center like even for...

Yes. And it's not even just the Proserve, it's the actually expertise that -- when people are -- CIOs or heads of IT are making a decision around a very technical system like phone and contact center, they will often turn to someone who has expertise in the area. And these SIs are often helping, especially large organizations, go through their digital transformation journey. And so this -- Deloitte, PWC, organizations like that, really have big practices built around this. And we historically have not -- I mean we work with all of them. We work with them on a customer basis. We work with them on other services, but we haven't really engaged with them in this way because meetings is a different thing, right? Meeting is a much more straightforward decision that they typically aren't engaged on, but we've seen the value they can bring, and so are really working on building out those relationships.