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

Great. Why don't we go ahead and get started? So look, we're just delighted to have Zoom Video Communications joining us at the Citizens JMP Technology Conference.

Thank you. It's great to be here.

Kelly, thank you for joining us. You've done this a bunch of times, and we really appreciate you.

Of course.

We do. We appreciate you. All right. So let's let people learn a little bit about you before I ask how is business and go into more things. So where are you from?

Well, currently, I live in Texas. I went to high school and college there. Then I moved to the Bay Area for 30 years, and then I went back.

And what did you...

Putting Zoom to the test.

You are putting Zoom to the test for sure. And what did you do before Zoom?

Before Zoom immediately, I was the CEO of an online dating site called Zoosk.

That's right. I forgot. I totally forgot.

But I met Eric at WebEx. I was a Chief Accounting Officer and Controller at WebEx when Eric was Head of Engineering. And that's how we came together again at Zoom.

Yes. So how many years did you guys work together at WebEx?

Three-ish years together at WebEx. I was at Cisco for 2 years after that, but he stayed within the WebEx division. I moved over.

And so you joined Zoom in what year?

I joined Zoom in 2017. So I'm coming up on my 7-year anniversary this fall.

I can't believe it's been that long.

I know. Amazing.

I can't believe that's -- wow! And the IPO was in...

2019. So we're almost at our 5-year anniversary of being a public company.

Yes. And then in -- we'll do this quickly, but in -- when did the pandemic start? Was it 2020?

In 2020, March of 2020.

Were you here, do you remember.

I was in San Jose because we had our earnings call on March. We sent everybody home on March 3. We had our earnings call on March 4, and Tom and I and Eric were the only 3 in the office with our tech team in the studio. And then there was like the week in between where I think everybody in the Bay Area was sort of trying to figure out what's happening. And the following Monday was when the whole world changed.

Yes. Because we had -- so we were -- we had this conference going. And I remember -- on Monday, Dan Springer at the time of DocuSign was sitting in that chair and he's like, yes, something is going on. He goes, my -- I was supposed to go to Japan this week and my Japanese team just told me don't come. And they said that it would be very bad managers if I were -- like the last thing they wanted me to do was to -- the last thing the Japan team wanted their CEO of DocuSign to do was to go to Japan and shake a bunch of people's hands, right? And that was the first and we were like -- and then by the end of the day, on Tuesday, it was clear that something is going on. And then your company basically helps save our society. May get a little tiered up. So thank you very much.

Thank you. It was really...

It wasn't great -- the pandemic wasn't great, but it would have been a lot worse without Zoom.

It's interesting because I was having discussion with somebody recently about how we took it very, very seriously during that time. And it was a weird [ jest ]position of how busy we were and watching what else was happening in the world, even some of our employees like their spouses or significant others being out of work and having to deal with deaths, like it was a really trying time, but we took it very seriously and felt very honored to keep the world connected.

Yes. And I mean, probably the fastest-growing fastest revenue trajectory of all time, right? And then all of a sudden, your $4 billion business. And then you kind of paid a price, honestly, for -- right? You paid a price for what you did for everyone, right? Because you guys poured so many resources into meeting the needs that we had during the pandemic, right? And then the pandemic came to an end, and then what?

So we're really in an amazing transition for this company...

Let's talk about the bad part first because I think we're in a new stage. We'll get to the good part.

So what then was we have an amazing platform that everyone came to know and love us for meetings. We have -- the segments of our business are Online and Direct. Just to remind everybody, before the pandemic, our Online segment of the business was about 20% of revenue, and it was really a funnel for the direct segment of the business. During the pandemic, our online segment grew to be over 60% of the revenue and was exploded in terms of its international coverage because it was just so easily accessible. As people started coming back together again in person, we have seen that segment of the business, people start doing Zoom happy. I was right there want to do those in person, which is great. We're happy to see people connected like that. But that segment of the business has been declining over the last several quarters. We are happy to -- we've been very focused on getting it stabilized, and we can talk about the specifics and churn rates, et cetera. But Q3 to Q4, we started to see that stabilization really taking hold. So that's been really good. And as you said, during the pandemic, we were so focused on building capacity, making our products trustworthy and reliable for everyone no matter whether you're kindergartner or a Fortune 10 company, and focusing on making sure that everybody had access to it, especially -- and even schools, okay, 1 through 12 that we gave it for free to for many years, that our second act was a little delayed because of that. I think we're firmly in Act 2, maybe Act 3 now, and we can talk about that, but that's what's caused some of the deceleration of growth over the last couple of years. We are very firmly planted now in a place that I think we're ready to reaccelerate growth in a much better way than we've been over the last couple of years. So we can talk about all the exciting stuff there.

Act 1, we all know, we all lived through it. What was -- you said Act 2 maybe there is that -- what's Act 2?

Act 2 is really phone and expanding into more of a collaboration suite. And phone has been a really an amazing growth story for us. We -- the metrics that we've announced is it's over 10% of revenue, over 7 million seats. And really, we have some Fortune 10 customers using that product. So it's showing that it has now emerged into that place where it can support the most sophisticated users. To me, Act 3 now, and Eric might call it Zoom 2.0. So -- but it's like really now emerging into a full collaboration and communication platform. And of course, some of those emerging products include Zoom Contact Center, Zoom Team Chat, which is a product we've had for a while, but it's really been reinvented recently to really compete with the leaders in that space. Zoom Docs, which we announced at Zoomtopia last year. And then, of course, all of that being underpinned by Zoom AI Companion.

Okay. So now we're going to go back a little bit. All right. So everybody has used Zoom, right? How many people in here, just out of curiosity, have used Zoom Phone. Really just 1, 2...

3, 4.

How is it? Is it? What's it like....

Easy to use.

Easy to use, right? Easy to use, reliable, all this seamless if you're using Zoom meetings, like it's all.

And so when you use them -- you're just using it from your -- your desktop and with a headset...

75% to 80% of our users use a soft phone. So they're using a headset directed to -- is that how you use it? Yes. So gone are the days of having to pay $1,000 for a very expensive phone to sit on your desk, right? You can buy a $100 headset and it's much easier to use. You can also have -- of course, if you have to Zoom Client...

How much did those -- those stupid wire phones cost?

$1,000.

Really?

Yes. And they all became...

Paper weights.

Rocks in offices. You can also -- if you have the Zoom Client on your cell phone, then you can have access to Zoom phone there. So -- that's what I think became very obvious during the pandemic was the need for portability of phone lines. To the extent people are using phone lines still, they want them with them. They're not in their office anymore tethered to that desk.

And how is the user experience when you're using the Zoom Phone app on the phone, phone?

It's great. It's the same. Like it brings through, you can see, like I can see on my notifications, Zoom that it's coming from Zoom Phone and then the phone number. So it has Caller ID. It has voice mail. It has everything that you would expect from a phone system.

Well, this saved me a ton of money? So I don't know if he's in here. I had a conversation with one of my London accounts the other day. They charge me $100 in long distance for the stupid conversation.

Yes.

I know.

It would be $15 a month with included...

My distance.

Including London.

Okay. So that's effective? Where -- so your 10% now we're going to go realistically?

We've set the goal for Zoom Phone is that it will get to 25% of our revenue.

Okay.

And then some of the emerging products that we're really focused on now, of course, is Zoom Contact Center. That's been out for a couple of quarters. We're really excited. But that product, when it came out, just like Zoom Phone, it had features and functionality best suited for SMB, or smaller businesses, but we are very rapidly developing. We're doing about 100 features are being added at a quarter, and this is represented by the fact that we just announced new pricing tiers. So when the Contact Center was released, it was -- there was 1 price. It was $69 per seat per month. We now have 2 additional tiers above that, which are $99 and $149 and that -- they have different tiered capabilities included the top one, including some of the premium AI features, including Agent Assist, which you can imagine after a call documentation, it can take care of a lot of the administrative type work that agents have to work on. So that's been really great. What we've seen is it's still early days, but there has been very positive reception from customers as well as partners around this. I mean we -- it's the most modern built Contact Center out there. And imagine this is the only contact center available that is being reimagined with AI front and center and everything. Everybody else is trying to -- I mean on-prem tech centers probably won't even be able to address the possibility of AI. The cloud providers are trying to figure out how they put it on top. And then I know there's been a lot of discussion. I've got a lot of questions about this about, well, what's going to happen with contact centers anyway? Isn't AI just going to displace all those agents? And I don't think that agents are ever going to be completely displaced. I think that they are going to become more and more efficient and be able to focus on top-tier customers. But for Zoom, we have not only -- the contact center agent license you can buy, but we also have Zoom Virtual Agent, which is a virtual chatbot agent. This was accelerated through our acquisition of Solvvy, which was a great company. And so we are happy to support our customer. We're not trying to defend an existing installed base. We're happy to support our customers or prospects in whichever solution works best for them. And we think we're very well positioned in regards to that.

It's really helpful to not have to defend an existing install base.

it's nice.

You can lower price and it doesn't hurt you and hurt your competitors.

Yes.

I love this space. I love the contact center space. And it's remarkable because if you just go look at Gartner, right? I mean great research there, right?

Yes.

But I mean, Gartner's research is great. It's not great research by me just go look at Gartner...

Yes.

But the contact center plus the conversational AI stuff is going from $19 billion in 2023, these are just Gartner estimates to $39 billion in '27. That's insane.

Yes. it's amazing.

It's amazing. It's amazing. So you're adding almost $20 billion even for a company as big as you, that's big enough right, so they're adding almost $20 billion of TAM in 4 years, $5 billion a year.

Yes. We are...

Why? how on earth can this market be growing that fast?

Because I think that everybody is trying to figure out how do they help customers self-serve. That's where the conversational AI is really important. And there's a lot of legacy systems sitting out there that need to get converted and need to get pushed to the cloud.

Yes. Okay. So usually, I start with this, but how's business, Kelly? How are things going?

So thank you for asking. We had earnings last week, and we were very pleased we had a strong finish to FY '24. Q4 revenue was above our guidance. We had very strong free cash flow. We ended the year with $7 billion in cash. And saw stabilization, as I mentioned earlier, in both Online and Direct, which was really good, great. They were both up quarter-over-quarter. So that was really nice to see. And we announced an authorization from our Board to do a $1.5 billion buyback in FY '25 so...

So the sales team, generally Eric was happy with the production of the sales team in Q4?

Yes. So if you remember, we had, as a company, we made the very difficult decision a year ago to do a reduction in force and a pretty significant reorganization of our sales team, including several members of the leadership team. And that was a significant disruption for our sales organization. And because of international labor laws, it took about 2 quarters to get that all worked through in some of the international teams. So it was really nice to see the teams regain their footing and start producing in Q3 and then finish Q4 strong.

Okay. Yes, it sounded good. You guys sounded good, but they're a little confused on the guidance. So why was the guidance not more reflective of sort of the tone?

Yes. So I think we feel like we're in a really good place starting this year in terms of like the sales teams being ready. They were off to a fast start for us, which means that territories and quotas and everybody was -- had their book very early in the quarter than 12 days, which is a really great way to start the year. Platform is amazing, Contact Center evolving. The 1 -- I guess, there's a couple of areas that we're continuing to monitor and keep an eye on. One of those is international. International was definitely a headwind for us. Last year, if you remember, both EMEA and APAC were flat to down. And so really need those teams -- it's about 30% of our revenue. So we need those teams to start producing again. We have new leadership in both arenas. So I think be a little cautious about that to get them moving in the right direction again. And then there are companies very similar to Zoom that went through their own reductions. And of course, we never want our customers to have seats that they don't need, or we paying something to use. So we work with them on their renewal time frame. And we know that the majority of our customers had a renewal opportunity in FY '24, but not all of them. And what happens in those discussions, typically, the team has done a really good job of, first of all, of course, maintaining the customer. And then secondly, really focusing on maintaining the spend, meaning if they are down -- if they want to rightsize or downsell some of their Meeting license count, upselling them into like a Zoom One bundle or adding in Zoom Phone. So really focused on preserving the dollar spend. And that sets us up well for future growth as they start to hire again, that we're in these higher dollar SKUs. But that's not an upsell, right? That's just sort of a negotiation to keep the spend where it is. And we know that we have a percentage of our customers, that's much less than last year that have a renewal event in FY '25 that did not renew in FY '24, meaning we have more of this ahead. And so that's why we talked about it on the call that we expect the low point in terms of year-over-year growth to be in Q2 and then to start to see reacceleration in the back half. And that's a combination of continued maturity of contact center, working through the most significant renewals we have, which are in Q1 and Q2. As a reminder, we're starting probably the inverse of any other SaaS company you know, which is Q1 is the largest renewal period for us than Q2 than Q3 than Q4. This [ harkins ] all the way back to the pandemic era, but we got to get through those. And then hopefully, we leave the year at a more accelerated growth rate than we're coming in with.

All right. Awesome. One more for me. So your long-term operating margin growth rate is 28% to 32%, and [indiscernible] 39%. And someone was like that can't be ready go. I think it is right. And they're like, Why? And I go, she explained at 1 point, but I don't remember. So I can ask a -- so you just did 39% and your long-term rate is 28% to 32%. What do we...

The reason -- remember, the #1 priority at Zoom is investing for reaccelerating growth. And the reason that we've kept our long-term margin at those levels is because we reserve the right to the extent that we see organic or inorganic opportunities to reaccelerate growth that we could potentially do that at the expense of margin. Now you all know and would trust that we're a very disciplined company. So if we were to do an acquisition, we would always focus on how do we drive efficiency through that? But that's really why that's there. We -- to the extent we see significant opportunities in the market, we just wanted to be able to act on that.

Okay. Right. Cool. Yes. Any questions from our audience?

Yes. I mean I guess I used to come, Ms. Kelly, so I think you know what we're talking about. I guess going back to the sell side, I was on the management you're talking on the side of things. I always hear people the second half is going to be better than first half. What analysis have you done to make you feel like that's the case? And then what could make you feel more comfortable to put a number on [indiscernible]?

We got to repeat the question.

Okay. So why do we feel that second half growth is going to be better? Yes. Yes. So the way that we've planned for FY '25, which is how we do it is, of course, it's capacity model as well as what do we expect products to contribute. And this is where contact center is continuing to add functionality throughout the year. There are some very specific features that we know we need to be able to compete at the upper echelon of those enterprise opportunities. And these are things like PCI compliance, which is the ability to safely take credit cards. There's still some channels and some integrations that we need, and those are coming in the first half of the year. So that's part of it. I think more impactful from a modeling perspective is the renewals that I just talked about. The renewals are so front-end loaded and knowing what we learned in FY '25 in terms of the rate of renewal, not on a local basis, but on a seat count basis, modeling that in, there's going to be some impact early in the year from that still as customers are getting rightsized from reductions they've taken earlier, probably last year. Yes.

We actually have a mic, look at that, hold on.

Great presentation. Here's my question. Zoom has an unusually high brand awareness effect like Netflix. What new features and products are you doing that are industry agnostic that can leverage all the time in the world versus contact center and a few that honestly are very limited in scope. What are you doing in that area if any?

Yes, it's a really good point. And I think phone, we think extends across all aspects of it. We are looking for -- this is back to the discussion about organic versus inorganic, especially in our online segment. We've really started to think about a mechanism for online growth is adding more products to the portfolio that they can sell and thinking about what products lend themselves well to self-service. So these are individual proprietor, sole proprietors or small business owners, what do they use every day. In addition to their phone and their meetings, they use chat. They use some sort of a marketing tool probably. They have a website, they use productivity tools. So those are the things that we're thinking about, okay, how do you -- that's the best way all-line is going to grow, honestly, is through portfolio expansion.

Easy way to charge your customers and get paid, particularly when you're delivering your service over Zoom. Yes, that's a big one. And you know what I'm talking about. That is a big one. 40 seconds for 1 more. It's definitely weird. I really like doing this.

That's awesome. How many of these conferences have you done?

We need to count it up. We didn't -- it used to be the JMP Conference and then it became the tech. I think we might be coming up on -- this might be 20.

Happy anniversary. Congratulations.

I don't know what it is, but I'll take it anyways.

That's awesome.

All right. Kelly, thank you so much for coming. It's great to see you, again.