Zoom Communications, Inc. ($ZM)

All right. We'll go ahead and get started. Thank you, everyone, for joining us. Thank you, Michelle, for being here, Michelle's CFO of Zoom. Before we get started, some disclosures. My name is Arjun Bhatia. I am the research analyst here at William Blair, who covers Zoom for a full list of disclosures and conflicts go to our website at williamblair.com.

All right. Let's get started. So Zoom, I think you've been on quite a journey as a company. I think maybe a lot of investors here that still think Zoom is just a meetings company. There's a kind of maybe an updated version of what you do. But just talk about how the company has changed since the initial sort of hockey stick in 2020? What's different about the platform and how it's sort of broadened out from just meetings to everything that you do today.

Okay. So it's such a good question, such a good way to kind of start the day because, look, it's a blessing and I guess a little bit of a curse when you have such a strong brand that everybody associates with with the meetings. And so really, if you think about it, a Zoom went through just enormous growth in the pandemic and then went through years of what I would call reinvention and differentiation, really diversifying our product set, taking a moment to say where are natural adjacencies that we can go and really, what you're seeing, I would say, in the last year, 1.5 years is us fully stepping into and the rest of the world getting to see a little bit of all that we've become -- and so this picture kind of describes it, but let me maybe breathe a little bit more life into it. So if you think about like have this core in meetings. We moved naturally into phone, which is another big business for us. And there were natural adjacencies of sort of webinar. And then came sort of this AI era and we've moved more into contact center and new AI revenue streams. But all of this sort of a way to say, if you think about all the exams can see of what happens inside the organization. when you're on that meeting, you're having the conversation, you get a sales call, internal call to try and make some decisions. There's so much unstructured data and so much context and decisions that can be easy to get lost. And so it's the power of sort of all the Zoom nodes about what happens inside an organization as well as now a much more diversified product portfolio that also expands beyond the boundaries of an organization and products like customer experience, and really, if you think about it, where we are going is about reinventing the mono workplace into a system of that right. We used to be just about conversations and having a great quality conversation. But for us now, the journey going forward is far more about that context of what we can see inside and outside the organization and how we can help bring together really into meaningful action. So we call it conversation to completion for our customers because ultimately, completion is what drives business value. So I'm sure we'll get into different pieces of that, but at a high level, moving far more from the meeting to more of a platform, diversified product set all in service to this concept of reinventing the Marketplace into a system of act.

Is there like a like real-world sort of practical example of what this system of action looks like once implemented?

Yes. We were, sometimes these things are like corporate words so let me give 2 tangible examples of what I mean. Maybe I'll give an inside organization 1 and then outside or manage so think about inside the organization. You're a seller, right? You're having to meet with the customer, but you meet with customers all day. So you don't remember last time when you met with the last customer, what the heck you talked about. Well, all of us in with AI, you can query all your meetings, you've had various conversations with them over the year. Maybe other people in your organization have had conversations. So all of a sudden, you're preparing for the meeting with far more context and richness of information than you've ever had before. Then you go to the meeting, right? It goes in all sorts of different directions, right, conversation, wonders, customer has various needs. And all of a sudden, you have a very easy package summary of what happened in the meeting. It can just automatically be sent off in the way that you want to recap what the meeting happened. So let's say you're a seller who hates updating the sales force towards you can just -- it's listening to your entire conversation on your meeting and it's updating sales force in the background. Let's say, you decided that you wanted to have a follow-up meeting. it's listening in the background. It's matching your 2 calendars and it's figuring out when you can meet next. Well, let's say, the conversation was a long one, and there's a lot going on with the customers. And there's 1 million tasks that you need to follow up on. It's capturing all of those in the background that can go into the meeting summary or it can just be for you in your personal context so that you don't forget because you've got by more customer meetings afterwards. And so that whole concept is then you can begin to get a sense of how that meetings life cycle gets a lot more rich and becomes much more of a system of action, where you're taking that action in the context of kind of where the work is getting done. Let me give you another 1 inside or across -- outside the organization, and it will go into inside as well. So let's say you're an agent in a contact center, right? You get a call from a customer, let's say, it goes even to a virtual agent before. They have some quick simple means that just get addressed without even having to involve an agent. Let's say there's a more complex problem. It goes to an agent the agent is new agent, I think there's a lot of turnover in contact center has never dealt with this problem. But all of a sudden, AI is assisting them in solving the problem and using the richness of all the things that have happened before and it knows how to solve the problem, even though the agent might not have been aware previously, let's see the third problem that the customer had when they called in this extra complex, right? And they need to detect to manufacturing or they need to talk to engineering let's say even as complex where they need to like show them the problem with video. All of us sending you have the richness of being able to turn on a camera, show the problem, route the call back into the inside of the organization to get it resolved to go back and serve the customer. Let's even take it a step further with AI because all of a sudden, you can see how the system of action that we're talking about is already delivering much more value for the customer let's say, now with a product that we just released in the spring, let's say you're the head of engineering. And you don't want to just know about that single customer. You want to know what are the top problems that people are calling and let's say, you're the CEO who wants to know what are the top 3 things? And are they changing? And let's say you just want to get this update daily. You can essentially have an agent that is looking across the richness of your contact center organization, feeding it up to you and you have that richness that system of action and intelligence in new and cool ways that we think are really frankly going to develop new value for our customer, like on are the days where we just have excitement for AI for AI's sake. It's about can approve real life business value. So we're excited about it.

Very interesting and in that first example, you're essentially taking all this unstructured data that from conversations that are happening on Zoom. In some cases, you're even feeding into third-party systems and those systems can then take action based on conversation that you.

Yes. And it's such a good point because, look, those conversations don't just have to be on them. They can be on meat, they can be on teams, they can be in person. So with -- we have a new product called, where it's basically a virtual personal note taker. So you can just turn it on. So in any scenario, we're there to meet the customer and have that conversation so that you can kind of experience that and you don't just have to be on.

Yes. Okay. Very interesting. And I think yesterday, you announced sort of...

Yes, that's right.

And product which is insulated to.

Okay. I got you. Okay. Perfect. So what -- how do those sort of add on to this value proposition sort of your own personal assistant or maybe you can talk a little bit about that, yes. So for those you guys are all busy that may have missed the headline. Basically, you know how I talked about this concept of a conversation to completion. Zoom made is really this completion partner. So if you think about where am started their AI journey. It was a lot of conversation and recording the conversation, summarizing it, capturing the key decisions, the actions and stuff. And so what we announced in Zoom, we've been working our way there, but this is sort of the regrounding and the big moment of completion is really our paid AI office sort of horizontal of our meetings and 1 business. So Zoom, just as background, took kind of a differentiated position, where we decided that AI value should be in the core of our median suite in our phone suite to our paid customers at no additional cost. So Zoom in is sort of the paid tranche of that, the higher value, and you basically get 3 things in Zoom. One, the ability to search the ability to search over third-party data, the ability to search over your own company's assets, the ability to start a course over web and then also your personal notes and stuff like that. So a really powerful search engine, how many times a day to we all try and find something. Second piece of value is really about orchestration. And in this, it's that multitier, you need to take an action, writing back to a greater ticket, writing back to the sales force ticket, being able to, in the flow of your work, take action and go in multi-steps. Sometimes that can be creating tests and executing them, scheduling to mean like the example that I talked about, is also a third-party like rewriting to sales for a -- the third part is really about this concept of completion, and it's where you get back into the AI productivity suite. And so look, we announced things that would be sort of like a document rider spreadsheet and sort of slides concept. And this is really not about productivity suite for productivity suites sake because I think we're in a different and with the AI where again, everything in an AI world is kind of getting rethought and so this is about in the flow of the work, take that meeting example with the sales that we talked about earlier. We went in different directions. I heard things unique to the customer and I have some kind of can decks that I like to share after the fact about how we can meet their problem. And now all of a sudden, I can say, if I have Zoom, create a personalized PowerPoint for my customer that's an RFP, right? And so look, you're always going to want to have a human in the loop and all those things, but all of a sudden, I can walk out of that meeting, take action not just to summarize the meeting and do the actions like we talked about before, but actually to turn it into like a customized presentation that you can leave the customer with in case there were other people that weren't able to attend or they want to think further about it. So it's really that completion of the circulation.

And it becomes like very end-to-end versus just.

Yes.

And maybe let's talk about monetization. So some will be monetized? And maybe talk about like where you are just generally on the AI monetization journey today and because this is an evolution, right, of things that you've had. So talk about that and then like how you see that sort of changing in the future? So Zoom in particular? Or is it at large?

Zoom in particular, I start with that and then we can go other directions in. So look, I guess, broadly, and we'll get back to this, like, to me, AI monetization, the true barometer has to be, does it impact your revenue growth all up, right? These concepts are just putting out big stats, I think, are a little data, they can be good for flashy stuff. But like ultimately, what matters is does it inflect the overall revenue growth of the company. And so that's how we think about it. And so to answer the headline at a high level, yes, it's already impacting our revenue growth. It's an important point of what's driving sort of Zoom's revenue growth inflection. I talked about how we put AI companion to think about that as that's the summary of the conversations and the meetings. That's stuff that's included in our paid us at no additional cost. So that's our indirect monetization. So made is the horizontal play on top of that. And it's a $20 SKU with some AI credits in it, meaning you have a per user per month. So you get that predictability with a certain amount of consumption to experience it, and then you'll have packs on top of it.

Okay. Interesting. And then I think your point on just it has to inflect the revenue growth, like that's the barometer for success. I think it's an important one. And you have been -- AI companion has been included in your replans. Like what has that done just from a competitive perspective? Like is it driving more customers to the platform? Is it reducing churn? Like what are the positives that you see from adding that value to customers.

Yes.

I mean I think, look, we think about it on a couple of different lenses, and then I'll maybe talk about the competitive well, I mean it hit the competitive and then get back to why the.

Look, I think at the time, Jim took a differentiated position and putting them in our paid SKUs at no additional cost. That's things like meeting summaries capture my at and send the notes sold afterwards. Those kind of -- I joined a meeting late. I can't join a meeting. I have access to be able to query with AI, all the sorts of things that I would want to know. And look out is differentiated at the time with the intent of really Zoom is a very customer-focused company, like wanting our customers to really get in and understand what AI and a median scenario would look like. And so we're pleased with our results, but I think competitively, let me hit that. But you've seen some in the market move to that, try to monetize and the move. And then I think there's others that have large CapEx bills that are hanging on more so trying to monetize from step 1 and look, from our standpoint, we've taken much more like we want to get that virality of use in our customer base. We want them to be out there experiencing it. We want to start to create that meeting's life cycle. -- in part because of some of the indirect monetization elements that you talked about, like it will bring in new customers. It will bring in, we have quite a large free base at am. We'll have some of that, that may come into a monetization SKU. So there's sort of the free conversion certainly creates more sticky and reducing churn. And then we've certainly seen a lot of this AI value bring in new customers. So for us, we look at as barometers to success indirect monetization, but also just getting that virality of usage. And in our last earnings, we announced that our MAU was up 184%, been up 2 to 3x for many years or quarters since we've had it out. So something that we're excited about. And then we also announced this concept of my notes. So think of this as like your personal node ticker, granola is, you can have it even if the host doesn't want to turn on notetaking capability, you have the ability to take notes at the same time when we announced that my notes even months into its introduction has hit 1 million -- or 1.5 million.

Interesting. We're excited about a lot of the new scenarios coming to.

And it all becomes like searchable under 1 sort of umbrella which is, I think, a challenge I personally have a lot with my -- we have this concept of we call it Canvas, right? Think of it as again, third-party meetings, in person with and I were just having a conversation I could turn on my notes, have it listened to the full context of our meeting. teams, Google, Zoom, no matter how or where you may because a lot of our customers need on various platforms even in the context of a day. And then all of a sudden, it's writing back to Canvas and you have literally every meeting that you've ever participated in. You have the meeting summaries as well as you have other things. And all of us having you have the richness of an data set to be able to search over. I'm sure you meet with oodles of investors and clients and think about the power of what that kind of I think that sounds very valuable.

Okay. I want to touch on monetization of now sort of the upgrade path, right? Customers come in, you're saying AI, sort of what you've embedded into the platform is driving new customers that's driving a free to paid sort of conversion? And then you have this premium SKU with Zoom. What is getting customers to sort of upgrade? And I would love to hear just maybe I hear about this, like customers are very -- they're dealing with a lot of AI from a lot of directions, and they're trying to figure out how to implement AI to get sort of practical value. So where are customers sort of in that readiness journey to upgrade from the free embedded ZoomAI capabilities to then a premium due -- are we still early on? Or is this sort of I think the AI journey is still at a metal level early on.

Look, there are some customers that are that are all in and embracing it and fully into that. And then there's others that are maybe more like, okay, I want to try the my note SKU. I want to try the summaries. I want to try that. And so really our whole land and expand is about kind of providing an entry point no matter where you are in sort of the maturity, if you want to go all in and we haven't talked a lot about contact center, but that's another huge AI inflection point for us. We have that full platform suite, and then we have everything down to. I just want to turn on note taker. And so I think at a meta industry level, we're early on. But look, it is to just reemphasize my point earlier, it is inflecting our revenue growth already.

Okay. Let's talk about some of the other drivers because you have also broadened out the platform quite a bit from just meetings to in contact center, even internal sort of employee experience type use cases. So maybe we'll start with phones because I think it's the biggest. You've announced its past million seats, it's sort of sustaining growth in the mid-teens. Where are we in the journey of sort of penetrating the Zoom phone TAM? And how much more runway is there left for growth in that product because it seems like a big contributor.

Yes. So our phone business, you gave all the stats I want but it's a great area of growth for us in mid-teens and 1 where we're clearly taking share. So let me talk a little bit -- I mean, I could give you the market stats, right? Like our cloud seats, they estimated something like $130 million plus on-prem, $150 million plus, we're winning on both fronts, right? So let me maybe talk a little bit about why I think we're winning and seeing such continued share -- there's all the traditional am a fast pace of innovation, strong quality, security, kind of all the customer ethos and innovation. So setting those aside even the gray. I think increasingly, what you're seeing in phone is winning on kind of 3 vectors. And I think you see this in a lot of the customer examples in our earnings remarks, but we spent a lot of time doing kind of last-mile engineering to open -- opening up some verticals, right, which is really just you've got those scenarios. There are unique for those that maybe don't spend all their day on the phone, there are verticals where this is a critical component. So we've done some last mile vertical engineering that's really opening up new markets. Second 1 is AI you can imagine if and maybe for us to spend our day and find a big computer, it's a little hard to realize that there's a ton of people that spend all day on the phone, right, imagine having to summarize that with AI and all the voice mails and so there's some really powerful AI examples that are turning out to be big wins for customers. And then the third factor is we're one of the only players in the market that have scale and UC and CC. And so this concept of the system of action is better together and having that is a clear win. So we're seeing a lot of our large phone wins print and our largest contact center and vice versa.

Okay. And contact center.

You're actually -- I think it was a year ago that you announced you've passed $100 million in ARR. We were actually seeing sort of displacements I think you're seeing legacy but also modern sort of CCaaS players. And so what's the sort of the edge there you have, it's UC and CC together, but I'm sure there's others from like a product perspective, yes. So you gave the chat about crossing $100 million we've also continued over several quarters to grow at high double digits, meaning closer to 100, right? And even in the last orders inflecting further so what is driving that? It's this concept of AI. Unlike a legacy player, this is I think one of the things that may be we're continually out there talking to investors that because they look at like an is genesis and they say, "Well, aren't you going to lose seats with agents. And Zoom is coming out in a very different chapter with a fresh modern AI perspective, where we don't have either the legacy tech debt or the legacy business models and we come at it where it's, in essence, all accretive. And that's why we're taking share. So like if you look at our top 10 deals, 8 of 10 and it varies, it's usually like somewhere between 8 and 10 per quarter. our legacy SAS providers, you tend to not have the modern in the top 10s, but we're winning in both. And we're winning, as you said, on the sort of the UCaaS and CCaS strength and that's really a differentiator look, we also win on just the fullness and the strength of our platform. Our customers constantly say, you can what we put on the list and ask like a legacy player to provide, they tell us will be ready in a year or 2, and you're able to deliver in 3 to 6 months. So that fast pace of innovation as well as that full concept of, we've got a virtual agent. That virtual agent for Zoom is a relatively new entrant. It's an area where we spend a lot more time. So that's part of what is inflecting that high double-digit growth. So we got a virtual agent, an AI-assisted agent SKU. And now we've got this intelligence layer that I referenced earlier. -- across the top. And so look, we think it's that fullness of that platform as well as the UCaaS, CCaaS -- as well as just strength in the product in general, that's really a differentiator for them.

Okay. I want to sort of bring it all together a little bit because you have all these like different growth vectors that are driving the business. You've said growth is already inflecting. I think in the past, it was low single digits. Now it's getting closer to mid-single digits. And so what is -- what are your kind of aspirations for the business over time? Like what can the growth rate be? What do you aspire to get the business to operate at.

Maybe I'll do a little bit because we haven't really hit on this before, but just in grounding and kind of Zane's business, 40% of our business is our online business. Think of that as selepreneur, SMB, 60% does enterprise think about it, that's going to be all the way up to full Fortune 10 -- we've really been -- and I separate this in our growth story as I think they have 2 different stories of growth. In online, this is the area where post-pandemic, we were declining. -- right? And so we've worked very hard on stabilization, right? And we've taken it from declining 8% to flat to now last year, we took it to growth. Brian, I think that's a lot of that platform value. Some of it is just sheer distance from the pandemic , close to 75% of our customers have been with us for over 16 months. So just -- it's a very different base. And now I'm getting super excited, and we'll start talking to investors more, but I think that path to land and expand in online is getting there. bringing down products that might -- that already exists in enterprise and bringing them to online. We made a cool acquisition in Bone that's sort of like an all-in-one package for solar proneurs to get started on that CRM and billing and things like that. And so adding with acquisition, stabilizing the base and then bringing in AI value, things like my notes. When was the last time beyond meeting limits that we had something kind of new and differentiated to sell up freebase. So I'm getting excited about a lot of the routes that we'll see in online. But for right now, it's like moderate kind of low single-digit growth that we're kind of that's how I'd think about that. And look, if our enterprise business is really going to be the differentiator for growth. And that's where that full suite, if you will, product differentiation comes in. And that's where the fullness of our AI platform, the fullness of this vision that we talk about comes in. And growth really comes from product diversification, AI monetization and new routes to market. So we haven't talked as much about channel, but Sam's been working very much to build out a channel essential when you're in sort of phone and contact center businesses, and I think we're seeing great fruits of labor there.

So -- all right. All right. And is all the time we have. Michelle, thank you so much conversations. Thank you, everyone, for joining. RECONNECT