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

All right. I think we're good to get started than ever. Delighted to have Michelle from Zoom, Zoom CFO, here with us today. Thank you so much for coming.

My pleasure.

We'll get right into it. As Zoom combines its conversational context with data from customers' other applications, how does the platform evolve into a more strategic orchestration layer?

Yes. This is an important step for Zoom. And look, I think everyone is kind of reinventing themselves in an AI era, and it's certainly true for Zoom, not only in terms of just how we even reinvent our core in our meetings business, but we've broadened so much out of our meetings business, which I know we'll talk about today, and it's about reinventing that. So what Zoom talks about is there's going to be systems of engagement and systems of record. We're obviously coming at it from an engagement perspective. But really what matters to the customer is getting them to action because when we know there's action, then there's business value. And the good news is when we can deliver business value to our customers, it drives revenue. So what we're really focused on within that is we sit at the context of so many conversations. The differential for Zoom in terms of an AI era and why we win is the shift to platform that you were mentioning is because there's so much that happens in human-to-human conversations that just gets lost. It never sits in a system of record. It never sits -- and even today, it is sort of just dispersed pre-AI world in a system of engagement. So we're really excited about this and think there's a real differentiator for Zoom both in the context that we have in the AI, obviously, our quality and all of that, but also in the context that we can see not only inside the company, but outside the company. So I know we'll get to unpacking that more as we get.

Yes. And on that point, I guess, the strategic case for Zoom increasingly rests on the idea that conversational context is a differentiated asset. So what does Zoom know because it sits inside live conversations that another enterprise software company can't easily recreate?

Yes. It is that context, right? And I'll give you sort of an example because that context is so hard to capture anywhere. And yet it's really a lot of where the value for a lot of companies sits is in that human-to-human connection. So Eric talks about this, our CEO talks about this as human-to-human connections will always persist. It's the ingenuity, the creativity of humans. That's where that will reside and humans to systems and systems to system, those are going to change as we get into an AI world. But really, there's a deep belief at Zoom that, that human connection prevails. And so let me give a couple of examples of that of what we talk about when we talk about system of action and why we think Zoom has a unique differential. Let's say I'm an engineer. I sit through a Monday morning meeting to review specs and whatever. We're sitting there talking the conversation goes all over. I have now a database of all the conversations, but I take that conversation intelligence and I update it into Jira without even leaving the Zoom platform. That's what we're talking about when we talk about system of action. Let's say, I'm selling you something, right? Conversation goes all over the place. We make decisions. But it's that -- taking that conversation, updating automatically without a seller having to spend more cycles into Salesforce and be able to take action off of it that really creates a system of action. And Zoom is excited about this because when we can do that, there's such value for the customer. When there's value for the customer, there's revenue per se.

Yes. And you framed Zoom's growth inflection around product diversification, AI monetization, focusing upmarket channel expansion and then also lowering churn. Which of these have kind of progressed the furthest, I'd say, over the last kind of 6 to 12 months? And where do you feel like you have the largest execution gap to come?

So look, our growth story, I guess, first before I kind of get to parsing it out is won in an enterprise. Our online business, we've been working to stabilize. That represents about 38% of our business. Our growth, our growth inflection, which is all what Zoom is about these days, is all in the enterprise side. And I would say it's a bit interrelated to some of the dynamics that you said. So we've been moving from just being a meetings company to much more diversified product set. A lot of that diversified product set sits in an AI world, and a lot of it is underscored with channel and moving up market. So those things kind of all begin to intertwined, but those are really the dynamics that are driving that inflection in growth. And look, in terms of execution and all of that. Look, I think we've seen tremendous pace of innovation from our engineering. It's really just the sharpening of our portfolio. And I think you're going to see that. You've seen it come in, faster innovation, sharpening portfolio. And on the sales side, it's a lot of just ongoing operational excellence.

We often get the question from investors whenever we see kind of a period where fundamentals improve, is this structural or cyclical? And so on the enterprise business specifically, what gives you kind of confidence that this represents a structural improvement in the growth rate of that business rather than just a period.

Yes. So let me maybe then unpack our enterprise growth story with -- I thought it was very important when I came on as CFO to really hone for investors what are the things that will drive durable growth. How can -- I would get the question all the time. How can you get to double-digit growth? And look, it's not just important to talk about investors, and I got to turn around and talk to all of Zoom about it. And so we landed on our 3 priorities that now we use every time we talk to investors, it frames our earnings scripts every time, but it also frames where we make our investments internally and where we think the growth comes from. First and most mature, you've got to infuse AI into our core in our meetings business, in our phone business, which we call Workplace, we've got to continually reinvent those because they represent great launching pads. And the thing that gives me confidence that this isn't just a one-off, if you will, is we're seeing churn go down year-over-year, multi-quarter year trend. Phone, strong grower for us, clearly taking share, growth in the teens. Then go to the next one, which is we know we have strength in customer experience. We know there's a convergence and a nice synergy, in particular for Zoom with UCaaS and CCaaS. And so we've got to figure out the scale there, and you're seeing proof of durability in quarter in and quarter out. It's driven by AI. It's high double digit, meaning just south of 100% growth like quarter in and quarter out. And we're just getting started in terms of our product portfolio, and we can come back to that. And then you go to that innovation of AI and then the other pieces we can monetize in ZoomMate that I'm sure we'll talk about and then things like our Common Room and ZRA product with sales AI. And I'm like -- think about where we are in those stages, and that gives me a ton of confidence for durability.

Yes. So starting a little bit higher level on the AI strategy, and then we'll go into the specific products. Zoom's Federated AI architecture lets you kind of route workloads across different models and your own smaller models. How do you think about the benefits of that approach for both product quality and unit economics?

Yes. Look, I think that Zoom is -- was an early adopter of the Federated. In a time when a lot of people were going all in with one model, I think Zoom took a very differentiated approach. Now it's become more norm, but it's essential for quality and cost. So to your question. And what it means for Zoom is, hey, we're going to have an SLM that's going to be where we take all of our high-volume stuff and we grind cost out and we get super good at quality in a way that others just can't match, and you're seeing that. And we're going to have LLM where they're sort of the cutting edge, and we want to use those and test and we'll use them opportunistically, and we won't just be linked to one provider. And then look, it's going to also be an open source play for Zoom as well. And look, this combination of things as well as flexibility in how customers deploy on-prem, how they want to, we see it as winning in large deals. There are deals that we mentioned a multimillion dollar ARR in the last quarter alone, and Zoom's approach to AI was a key differential in the deal, not only churn, but upselling as well.

Yes. And when you're putting new products out into markets that have that kind of like AI functionality built in. How do you think about whether to just add those to your core offerings and not necessarily directly monetize versus when you directly monetize?

Yes. This is another one. I'll give Zoom credit when I came in. They had put AI value in their meetings paid SKUs at no additional cost. And I have to say, first, that was like, wow, but it made sense the more you began to think about customers will expect a certain amount of AI value just as part of it. Similar analogy like cars just have seat belts, right? And so what we tend to think about is really focusing maniacally on customer value. And that's where we believe we'll monetize. And look, as part of it, there'll be some like meeting summaries or capturing notes that people will just expect that as part of the meetings experience. But look, we're also going to hold ourselves to ROI there. We ought to expect reduction in churn. We ought to expect bringing in new customers, maybe some competitive wins. But then we'll reserve sort of the side of the paywall, things where we feel like we have unique value and things like ZoomMate and our sales AI and obviously, customer experience, where the customer then can very clearly see the ROI of their AI deployment.

Yes. And then on customer experience specifically, currently, Zoom, I'd say the cleanest source of direct AI monetization. So as virtual agents automate more interactions, how does that expand Zoom's revenue opportunity rather than just creating pressure, I'd say, on like existing seats?

Yes. This is such a good one, and I love the question because I think it's -- some people that are maybe more looking at this as traditional players in contact center, maybe don't understand the chapter that Zoom entered in, right? So Zoom entered as sort of an AI-first customer experience with a differentiated approach that I'm going to talk about. But before I go to it, why it's important is we kind of came in with a modern fresh approach. We don't have the tech debt and the business model transition that a lot of the more traditional players that started in customer experience are grappling with. But look, it's not enough just to be that. We really embrace the AI first. And I think Zoom is really unique on 2 particular fronts. We've approached our customer experience as sort of a holistic approach. We're going to be there in traditional contact center. We're going to be there when agents need to be assisted with AI, and we're going to be there in virtual agents, which is also opening up new markets. But Zoom differentiates by stitching that together with intelligence and being able to hand off seamlessly to that within contact center and then across to UCaaS as well. And so I think that's a lot of what is driving. If you look at the underlying signals in our customer experience business, that's what's driving the formula of success.

Yes. And then ZoomMate kind of expands the monetization, I'd say, opportunity outside of customer experience. But it's kind of much earlier in that adoption curve. So what have you learned from initial customers about their willingness to pay for something that's more of the horizontal AI?

Yes. So first, for those that may be less familiar with ZoomMate, think of this as that behind the paywall AI value for meetings business primarily. And so look, there's 3 value props, and then I'll talk about maybe what we're seeing in enterprise customers versus more small customers. The value prop is the ability once you have that virality of AI usage in the meeting space, in the phone base to be able to search even if it's not a Zoom meeting, even if it's not Zoom e-mail. So Microsoft Teams, Google Mail, Slack chat, the ability to search across all of the customer's assets as well as their enterprise systems, those integrations. So that's value prop number one from ZoomMate. Second one is the ability then to take that intelligence and move it into agentic orchestration, simple tasks and actions. And the third one is the ability to turn it into creation at the end. A simple example, I'd say just in case that sounds like a bunch of tech words. Let's say we're in a sales meeting. I can take all of those sales calls no matter where they happen, have a base of knowledge, marry that with Salesforce data and e-mails with the customer. I can query on it and learn. I have a base that just keeps getting smarter with me, turn it into simple actions of updating Salesforce and then turn it into a custom RFP at the end. So look at enterprise customers, very different conversations. It starts with governance, trust, integration, search. With SMB, it's far more, I want to be out of the box, simple to deploy, help me with this problem that I have. And so look, a lot of our big wins that we shared with investors have been on the enterprise side. We put some big names that have done wall-to-wall deployment like MongoDB, Oracle, Salesforce, and we're proud of those. And it's also about bringing that value to our SMB and online audiences as well.

Yes. As you see customers shift out of the seat-based pricing model and kind of go more towards a hybrid consumption outcome-based pricing model, how are you seeing them adapt in those sales processes? And how has that kind of evolved over the past year or 2?

Yes. So first, I think it's worth noting kind of where Zoom is in that journey. Look, we have hybrid in ZoomMate. We have full consumptive in things like ZRA. Still as a percentage for Zoom, it's small. Look, this is a lot of where the market is going. And together with our customers, we are working through it. A lot of it is visibility, understanding, walking customers through it. They may have been burned before in terms of large surprises not by us, but it's a lot of helping them understand, getting comfort and then making sure that our sellers -- we tend to not pivot our sellers by consumption or per user, but we pivot them on adding value to the customer and think that's the right answer for our sales side.

Yes. And as you're seeing AI become larger from a usage perspective within your customer base, how are you kind of thinking about the different margin levers that you can look at in order to maintain consistent gross margins over the next couple of quarters, acknowledging that I think usage is the most important thing for a lot of companies right now.

Yes. Look, I'd say it starts with the top line. When you focus on business value, that brings the top line in. I think where people get sideways is where they forget that you owe the customer business value at the end of the day. So I think it starts there. Look, Zoom has best-in-class margins. And our AI usage has gone up somewhere in the 100% to 200% growth year-over-year for quite some time, and we've been able to do that and still with an expanding portfolio, hold to gross margins. Well, the formula for that, I would say, is the Federated stuff that we talked about before as well as it is just efficiencies in our core. And then look, staying true to that monetization piece. And then look, we have to work that SLM to LLM and now open source gives us a great new lever to go after.