Zoom Video Communications Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 20, 2023

There are 23 speakers on the call.

Operator

Well, hello, everyone, and welcome to Zoom's Q3 FY 'twenty four Earnings Release Webinar. As a reminder, today's webinar is being recorded. And now I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.

Speaker 1

Thank you, Kelsey. Hello, everyone, and welcome to Zoom's Earnings video webinar for the Q3 of fiscal year 2024. I'm joined today by Zoom's Founder and CEO, Eric Yuan and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors. Zoom dot us.

Speaker 1

Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that along with our earnings release, including a reconciliation of GAAP to non GAAP financial results. During this call, we will make forward looking Including statements regarding our financial outlook for the Q4 and full fiscal year 2024, our expectations regarding financial and business trends, Impacts from the macroeconomic environment, our market position, opportunities, go to market initiatives, growth strategy and business aspirations, and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including the annual report on Form 10 ks and quarterly reports on Form 10 Q. Zoom assumes no obligation to update any forward looking statements we may make on today's webinar.

Speaker 1

And with that, let me turn the discussion over to Eric.

Speaker 2

Hey, thank you, Tom. Thank you, everyone, for joining us today. In early October, we hosted a Zoomtopia, Our yearly customer and innovation focused event and it was awesome. Like last year, We run a hybrid on Zoom events. So, they join us in person and in many multiples of that virtually.

Speaker 2

Among the in person attendees were 40 customer presenters such as JP Morgan, MIT, Boston Consulting Group, HubSpot and Kohl's, who spoke about their amazing experiences on Zoom and excitement about the future. We also showcased newly released innovations like Zoom AI Companion as well as Zoom AI expert assist and quality management for the contact center. Zoom AI companion is Especially noteworthy for being included at no additional cost to our paid plans and has fared tremendously well with over 220,000 accounts in the building aid and 2,800,000 meeting summaries created as of today. Remarkable growth in less than 3 months. At Zoomtopia, I also had the pleasure of sharing the stage with the FLAX, a global manufacturing and who spoke about how they use Zoom to connect their large distributed workforce of 170,000 employees across 30 countries.

Speaker 2

Flex started using Zoom meetings in 2017, quickly followed by Zoom Rooms and Zoom Team Chat. Since then, Flex increased Team Chat users by 200% and the Zoom rooms by 2 45%. They also became power users of Zoom whiteboard, creating over 13,000 wireboards and moving to Zumfeng allowed them to eliminate 50% to 70% of circuits and infrastructure across the globe and a reduced total cost of ownership. We were so happy to have FLAX share their journey at Zoomtopia and I cannot wait for what is installed for our partnership next. Now moving on to some of our customer wins in Q3.

Speaker 2

1st, Let me thank Dropbox, who has been an amazing customer for many years, starting with meetings and then extending to Zoom Rooms, for phone and events. In Q3, they selected Zoom, a virtual agent, and a Zoom contact center to provide world class AI enabled support to their global user base. Let me also thank Amanta Group, a premier insurance services company, who initially adopted Zoom Phone and the Zoom contact center on a limited scale in Q1 of this year. Seeing how our modern solution offered superior agility, Customization for CX Blows and Administrative Functionality. In Q3, they decided to standardize There are customer facing sales support on the Zoom stack and at workforce management, leading to a nearly 5 times increase in their monthly spend with us.

Speaker 2

I'd also like to congratulate the Virgin Group On their launch of WorkWiggle to bring together 60,000 employees across almost 40 Virgin Companies on one platform. The Virgin family workable platform is helping to drive social connection, encourage collaboration and boost the brand knowledge. It's inspiring to see how the Virgin Group is bringing the platform to life and a strengthening culture with Zoom's work available. These wins are a testament to the investment we are making in our customer experience offering with a rapid pace of new innovations like workforce management, quality management, Zoom virtual agent and AI expert assist. We also highlight our progress with employee experience, especially with integrating WorkWeaver into the Zoom client.

Speaker 2

Thank you so much to Dropbox, Arminta and Virgin Group. I love you all. And with that, I'll pass it over to Kelly. Thank you.

Speaker 3

Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q3. Here are a few milestones. 1st, Zoom Phone reached approximately 7,000,000 paid seats. 2nd, Zoom contact center reached approximately 700 customers as of quarter end, while Zoom virtual agent customers nearly doubled quarter over quarter.

Speaker 3

And finally, the number of customers on Zoom 1 bundles that include Zoom Phone grew approximately 330% year over year. These proof points demonstrate our customers' willingness to entrust us with their critical CX and EX processes and their commitment to grow with us as we expand our platform. In Q3, total revenue came in at $1,137,000,000 up 3% year over year and 4% in constant currency. This result was approximately $17,000,000 above the high end of our guidance. Our enterprise business Grew 8% year over year and represented 58% of total revenue, up from 56% a year ago.

Speaker 3

We continue to see improvement in online average monthly churn, which decreased to 3.0% from 3.1% in Q3 of FY23. This is the lowest churn rate we have ever reported. The number of enterprise customers grew 5% year over year to approximately 219,700. Our trailing 12 month net dollar expansion rate for enterprise customers in Q3 came in at 105%. We saw 14% year over year growth in the upmarket as we ended the quarter with 3,731 customers contributing more than $100,000 in trailing 12 months revenue.

Speaker 3

These customers represent 29% of revenue, up from 27% in Q3 of FY23. Our Americas revenue grew 5% year over year, while EMEA and APAC declined by 2% each. On a constant currency basis, APAC grew slightly year over year. Moving to our non GAAP results, which exclude stock based compensation expense and associated payroll taxes, Acquisition related expenses, net gains or losses on strategic investments, and all associated tax effects. Non GAAP gross margin in Q3 was 79.7%, an improvement from 79.5% in Q3 of last year, but slightly lower than the first half of this year.

Speaker 3

The strong performance in gross margin was primarily driven by the optimization of usage across the public cloud and our co located data centers, partially offset by our additional investments in new AI technologies. For the full year, we expect non GAAP gross margin to be approximately 80%. Non GAAP operating income grew by 17 percent to $447,000,000 exceeding the high end of our guidance of $405,000,000 This translates to a 39.3 percent non GAAP operating margin, a meaningful improvement from 34.6% in Q3 of last year. Non GAAP diluted earnings per share in Q3 was $1.29 on approximately 310,000,000 and non GAAP diluted weighted average shares outstanding. This result was $0.20 above the high end of our guidance and $0.22 higher than Q3 of last year.

Speaker 3

Turning to the balance sheet. Deferred revenue at the end of the period was $1,320,000,000 down approximately 3% from Q3 of last year. This was roughly 1 percentage point better than the high end of our guidance we provided last quarter. For Q4, we expect deferred revenue to be down 6% to 8% year over year, partially driven by shorter billing frequencies on enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, Our RPO increased 10% year over year to approximately $3,600,000,000 We expect to recognize approximately 50 percent of the total RPO as revenue over the next 12 months as compared to 59% in Q3 of last year, indicating lengthening contract durations on a year over year basis.

Speaker 3

As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year. Operating cash flow in the quarter grew 67% year over year to $493,000,000 Free cash flow grew 66 percent year over year to $453,000,000 The sharp increase in our cash flow metrics was due to stronger collections, Targeted expense management and higher interest income. Our operating cash flow and free cash flow margins expanded to 43.4% and 39.9 percent respectively. We ended the quarter with approximately $6,500,000,000 in cash, Given the strength and profitability in collections, we are increasing our free cash flow outlook FY24. We now expect free cash flow to be in the range of $1,340,000,000 to $1,350,000,000 which at the midpoint would represent 13% year over year growth.

Speaker 3

Turning to guidance. For Q4, we expect revenue to be in the range of $1,125,000,000 to $1,130,000,000 which at the midpoint would represent approximately 1% year over year Adjusting for currency impact, this projection is slightly higher than the previously implied guidance from our Q2 call. We expect non GAAP operating income to be in the range of $409,000,000 to $414,000,000 Our outlook for non GAAP earnings per share is $1.13 to $1.15 based on approximately 312,000,000 shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY24. We now expect revenue to be in the range of $4,506,000,000 to $4,511,000,000 which at the midpoint represents approximately 3% year over year growth.

Speaker 3

We expect our non GAAP operating income to be in the range of $1,740,000,000 to $1,745,000,000 representing an operating margin of approximately 39%. Our outlook for non GAAP earnings per share for FY 2024 It's $4.93 to $4.95 based on approximately 308,000,000 shares outstanding. Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support. Kelsey, please queue up the first question.

Operator

Thank you, Kelly. And as Kelly mentioned, we will now move into the Q and A session. So when I call your name, please turn on your video and unmute. And as a reminder, in an effort to hear from everyone, please limit yourself to one question and we thank you in advance for your consideration. Our first question will come from Ryan McWilliams with Barclays.

Speaker 4

Hey, guys. Thanks for taking the question. Just to start with Kelly, do you see any changes In the overall macro environment in the Q3 compared to the Q2. And could you touch on how linearity did throughout the quarter for new bookings? Thanks.

Speaker 3

Yeah. Hi, Ryan. So the macro has been pretty consistent from Q2 to Q3. We continue to see Similar trends in terms of deal scrutiny, back end loaded. So, the quarter from a direct perspective It was fairly back end loaded.

Speaker 3

As a reminder, the online segment of the business is typically pretty linear throughout the quarter. I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac. That was a Fairly significant headwind for us, whereas, Asia Pac would have at least been flat year over year if not for that impact.

Speaker 5

Thanks, guys.

Operator

Moving on to Meta Marshall with Morgan Stanley.

Speaker 6

Great. Thanks. Maybe just a question on kind of what feedback you're getting on the AI companion and that's a pretty big jump and kind of customers using it. So just What features are they really liking? And is it kind of helping with some of the free to pay conversion that you guys were hoping for?

Speaker 6

Thanks.

Speaker 2

Yes, it's a great question. I think we are very, very proud of our team's progress since we launched the Zoom AI company. You know, as I mentioned earlier, right, a lot of accounts enabled that. Remember, this is no additional cost to our credit customers. You know, a lot of features of what, you know, one feature of that is like a take a meeting summary, for example.

Speaker 2

Amazingly, it's very accurate And it really saved a meeting host a lot of time. And also, you know, our federated AI approach really contributed to that success Because we do not count on a single AI model and in terms of latency, accuracy and, you know, and also the, You know, the response, you know, the speed and so on and so forth, I think really helped our AI company again and for the even for the online pre users and also is no additional cost for sure for free users. You know, they do not We cannot enjoy this combining, you know, for sure it's, daily help, you know, for those of free, you know, to approve for online upgrade. So Anyway, so we are, you know, innovating on AI companion. We have a high confidence.

Speaker 2

That's a true differentiation compared to any other, You know, features, functionalities offered by some of our competitors.

Speaker 6

Great. Thanks so much.

Speaker 2

Thank you.

Operator

Our next question will come from Kash Rangan with Goldman Sachs.

Speaker 7

Hi. Thank you very much. Good to see the results and happy Thanksgiving. I just had one question if I could restrict myself to 1. The SMB online churn, 3%, I know it came down from 3.1%.

Speaker 7

Any initiatives that you are undertaking that could bring that number even down more significantly? Because I would assume that That would have big implications for your growth rate and margins, which are already quite good. Thank you so much.

Speaker 3

Well, Wendy and her team are always working on initiatives, but I think what Eric was just mentioning about AI is probably Really going to be a key differentiator and a retention tool in the future because as a reminder, All of the AI companion features come included for our free sorry, for our paid users. So we're seeing it not only help with conversion, But we really believe that for the long term, it will help with retention as well. And, you know, Gaj, I've gotten this question many times and I would say, This is the lowest we've ever seen, but also our platform is so much better. It's infinitely better than where it was on a pre pandemic basis for our online users. And so I think we will this is how we're modeling is at this level.

Speaker 3

But I think over time, you should continue to see Retention just continue to improve.

Speaker 7

Thank you so much.

Speaker 2

By the way, to add on the water credit side, also the happy science given to you as well. So in the more and more customers realize, wow, Zoom, even for online users, it's not only for Zoom meeting, a lot of other features, right? And like I take a Zoom team chat, for example, this is greater precision chat solution. It's a part of offering, even for free users as well, right? For the PD user, for sure, a lot of other features, the more they spend their time on Zoom platform realize, wow, this is pretty powerful, not only just for meetings, the entire platform.

Speaker 7

Thanks so much, Eric. And Kathy. Thank you.

Operator

Yep. Wells Fargo's Michael Turrin. Please go ahead with your question.

Speaker 8

Hey, great. Thanks. Nice to see everyone. I guess as a compliment to Kash's question, you're showing stabilization here on Some of the major metrics, the enterprise expansion metric took a step down to 105%. And so just wondering what it takes for that metric to Similarly shows stabilization.

Speaker 8

Is it going to that Q1 renewal cohort and kind of walking through that? Anything on the product side for us to consider or just Any other comments right there is helpful. Thank you.

Speaker 3

Well, as a reminder, it's a trailing 12 month metric. So, as we've We're seeing our growth rates come down this year that's following behind it. But absolutely, we believe that AI Companion in general, As well as the success that we are seeing in Zoom Phone, in Zoom Contact Center, Zoom Virtual Agent, all of those We'll be key contributors to seeing that metric start to reaccelerate again as we see our growth rate starting to reaccelerate as well.

Speaker 8

Thank you.

Operator

Our next question will come from Michael Funk with Bank of America.

Speaker 5

Yeah. Hi. Thank you for the question tonight. So just on the deferred revenue guidance for 4Q, Kelly, and the commentary on the macro and the rates affecting that, How should we think about growth rate in calendar year 'twenty four given the decline in deferred revenue and impact on new deals from enterprise?

Speaker 3

Yes. So, I mean, what's very interesting, if you look at, right, you see growth in RPO, but you're seeing a decline in deferred revenue, which Referring to pay in shorter term increments to keep their cash and take advantage of the interest rate environment. So the other thing, As a reminder, right, we're going to have a big renewal cycle in Q1, and then that's the peak and it's going to come down. And we believe that in FY24 that we're currently in. We had the majority of our customers had some sort of renewal During FY24, which means that we believe that we've moved through a lot of our customers that were impacted themselves by a reduction.

Speaker 3

And we've talked in the past about how our team has been doing a great job of preserving that spend. But to the extent we're helping them right size or transition from Zoom meetings to say a Zoom 1 bundle. We think the majority of our customers, we know the majority of our customers have gone through that renewal Period in FY24, so that by the time we get into FY25, hopefully we're in a little more normalized renewal cycle.

Speaker 5

Great. Thank you.

Operator

Yeah. And moving on to Karl Keirstead with UBS.

Speaker 9

Okay. Great. Thank you. Hey, Kelly. The phone business has been a big part of the Zoom growth algorithm lately.

Speaker 9

So, I'm wondering if you could elaborate on how that part of the business did in the quarter. On the surface, and I know that you round that seat number, but it looks like the Sequential phone seat adds might have been a lot less than the last several quarters. Maybe that's rounding, but I wanted to give you a platform maybe to elaborate about that part of the business.

Speaker 3

Thank you. So Q3, cyclically, just as a reminder, Q1 and Q3, cyclically, are our lower Orders given that our enterprise reps, some of our enterprise reps are on 6 month quotas. So we've historically seen the big Zoom phone Yes, addition to ad quarters being Q2 and Q4. What we did see in Q3 was that Customers in the upper segment. So customers with greater 10,000 seats grew almost 9% quarter over quarter.

Speaker 3

So we're seeing a lot of strength in that upper end of Zoom phone. So really happy with that. I mean, that's the largest increase we've had so far this year. And then as a reminder, We haven't always given that metric honestly at the exact same period. So it's a little bit hard for you to tell exactly how it's trending every single quarter.

Speaker 3

And as just in the past, we'll continue to update you on future milestones as they make sense.

Speaker 2

Okay. Thank you.

Operator

George Iwanyc with Oppenheimer has the next question.

Speaker 10

All right. Well, thank you for I'll take my question. So, Kelly, maybe following up on Zoom phones, can you give us a bit of extra color on contact center and the customer traction you're seeing there?

Speaker 3

Yeah. So as we mentioned, we're up to over 700 customers on Zoom contact center And we saw our Zoom virtual agent product double the number of customers quarter over quarter. So Really excited there. I mean, maybe Eric can talk about some of the features and functionality, but, we're thrilled with the progress that we're making there so far.

Speaker 2

Yeah. So we are extremely excited about our content center opportunity. And it feels like back to a few years ago When we announced the Zoom phone, right, quite often a lot of people mentioned, wow, it would take you guys many years to get recognized, deploy by large customers And, you know, look at what we have today in terms of number of P2C for FUM. I feel like, you know, if we ask it well, I think we're going to follow a similar journey and maybe even better because you look at our content center, you know, and modern architecture, Stream is scalable and plus a lot of AI features and innovation speed. I think whenever customer really take a Zoom contact center seriously, Evaluate the Zoom call center.

Speaker 2

The feedback is very consistent. Wow. I did not realize you guys have a super powerful calling center. It's just amazing. Right?

Speaker 2

I think that this further boosted our team is confident. Let's double down, triple down our own contact center. Again, it's modern architecture, very scalable. I also shared quite a few customer, you know, cases, right, during this call. And, we are very, very excited.

Speaker 2

A lot of, you know, new AI features, you know, virtual agent And the workforce management and so on and so forth. And this is something very, very exciting.

Speaker 7

Thank you.

Speaker 3

Thank you.

Operator

We'll now hear from Peter Levine with Evercore.

Speaker 5

Great. Thank you for taking my question here. Maybe for Kelly, as I look at gross margins, how sustainable is it keeping at these levels? I know AI companions being given away from, you know, as Part of the package, I guess, for paying users. But if you think about the costs from these models, the margin profile of contact center and phone, how durable is it to kind of And then second, as you think it's the next year, you have the guidance.

Speaker 5

But what's the best way to think about stock based comp and valuation as you kind of manage through that?

Speaker 3

Yeah. So in terms of our gross margins, we'll obviously give FY 'twenty five guidance on our call next quarter. But as we are working on our planning, you know, our DevOps team is doing an amazing job of continuing to optimize around the data centers And being very thoughtful about leveraging capacity to its highest and best use and making room for all of this AI innovation. So While we are going to invest and we're actually, we're going to invest to the extent that XED and the team really believe that we need to And that for the long term, it's an amazing ROI when you look at what it's going to do for our customers, for our growth and for our retention. But we do expect there's going to be some impact on gross margins.

Speaker 3

I mean, I don't think it's going to be significant because the team will continue to operate in the very efficient manner that they do and run our close that way, but we do expect there's going to be some impact to our gross margins as we move forward. You want to add anything, Eric?

Speaker 2

Yes. So you are sort of right on just to echo on Watercaddy's side, you know, led by our CTO XT and his team. You know, our federated AI approach, as I mentioned earlier, really contribute a lot. So, you know, for sure, you know, and as a cost impact, but Super manageable. Right?

Speaker 2

And our team really, really, you know, I think that, you know, I had a very smart, you know, federated AI, you know, architecture. That's why I think in terms of cost, very manageable, but also the quality is pretty good. So and we are keep innovating on that.

Speaker 5

Thank you very much.

Speaker 3

Thanks, Eric. Peter, regarding stock based comp, about a third of our expense this year It is related to the supplemental grants. So as a reminder, those that vest along with how the underlying grants So there's a couple more years for that to just start to bleed off, if you will. But you can model that out.

Speaker 5

Thank you.

Speaker 3

Yep.

Operator

And we will now hear from Patrick Walravens with JMP Securities.

Speaker 11

Oh, great. Thank you. Hi. So Eric, what is your ideal customer profile on the contact center side of the business?

Speaker 2

That's great question. I think, you know, first of all, again, this is based on architecture and AI features. I think for now the medium size, because the reason why for very, very large customers, even if our architecture, everything, ever ready, But sometimes they just want to look at, hey, you know, you are still so early, but even our product fully ready. That's why reason why sometimes even we do not reach out to them, Very large, less tens of a 1000 Asian customers if they take our solution serious.

Speaker 3

Did Eric freeze or did I freeze?

Speaker 5

I think Eric

Operator

I think Eric I think Eric Okay.

Speaker 3

Okay. Let me Yeah. Yeah.

Speaker 2

Sorry for that.

Speaker 3

You're back. Okay. Eric, we lost you for a minute there.

Speaker 2

Yeah, I'm sorry. So given the new solution, right, sort of a modern architecture And all the new AI features, my point is if those are, you know, let's say, like, 20,000 or 10,000 agent customers, if they look at our solution seriously, they have a confidence. Because of that, you know, we want to be a little bit proactive, you know, focus on medium sized companies. I go from hundreds of agents to thousands of agents. That's our sweetest spot.

Speaker 2

But not only are we going to stop here. As I mentioned earlier, any of the very big, large companies, when you look at our Counter standard solution seriously. We have a confidence about going to win. But however, to get there, we are focused on the the minimum size companies.

Speaker 11

Great.

Speaker 3

Thank you. I could give you a quick example, Patrick. We have a customer called Venture, which they provide like Payroll and HR services. And they became in the last year, they doubled their Zoom phone seats. They've doubled their contact center seats into 4 digits now.

Speaker 3

They also have deployed workforce management as well as quality management and ZBA. So really taking advantage of the full suite of Zoom products, not only the contact center and its extensions, but the full suite of Zoom. And I think when they start to deploy like that, they really see the power and it's been very exciting to see them grow.

Speaker 11

Great. Thank you both.

Speaker 2

Thank you.

Operator

Our next question comes from Arjun Bhatia with William Blair.

Speaker 12

Perfect. Thank you. Can you just touch on the international business a little bit? It seems like it's certainly trailing the U. S, But, what gets that business to turn around and maybe talk about some of your new growth drivers and how they're faring there with Zoom Phone and Contact center.

Speaker 12

Thank you.

Speaker 3

Yeah. So, unfortunately, both EMEA and APAC over the last have been impacted both by currency and then, EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New Zealand, so we're very excited about the team. And since we did the reorganization earlier this Those regions have just taken a little bit longer than the U. S, but we're starting to see that momentum build again and really Excited about what they're going to contribute and watching their success in the future.

Speaker 7

All right. Thank you.

Speaker 3

Yep.

Operator

Our next question will come from Alex Zukin with Wolfe Research. His video is not on, so he may just be audio only.

Speaker 3

Hi, Alex.

Operator

Alex, did you want to go ahead?

Speaker 11

This is Ethan Brock on for Alex. He's in transit now. Thank you guys for taking my question. I just had two quick questions. Just How do we think at what level should we expect or when for the NRR of the enterprise cohort to trough?

Speaker 11

And just any kind of puts and takes around enterprise revenue in the quarter, right, it came in above your expectations, it increased sequentially. And it was positive like RPO, CRPO, CRPO bookings, those all accelerated. I guess, is it fair to think that for next year's enterprise growth rate would be above what's implied in the 4Q Q guide and just if you can give any more kind of color around the 4Q numbers and kind of what you're expecting online churn, that would be helpful. Thank you.

Speaker 3

Yeah. So, we did see strength in the Direct bookings, they were very back end loaded in Q3, which just continues this theme that we've been talking about in terms of the overall macro. And as we look forward to Q4, typically we have the benefit of having year end where customers are having their year end on twelvethirty one and then we have our year end on January 31st. And of course, we have our 6 month Quota carrying reps that are coming to the end of their quota cycle, so hopefully taking advantage of their accelerators. But we are expecting similar behavior in terms of even if we have a twelvethirty one sort of bump, we're expecting that to be back end loaded And then January 31 as well.

Speaker 3

In terms of your question around net dollar expansion, We're not going to give I mean, we don't guide on that. I expect that given your growth rates You have it come down a little bit more, that there might be a little bit more room for that to come down even further until it starts to stabilize and probably reaccelerate sometime next year.

Speaker 11

Okay, thank you. And then just a quick follow-up. Just on the comment you made in your prepared remarks around the shorter billings duration, I guess, is there just any way to qualitatively think relative The 3Q, if there's any change, just how to think about, obviously, people moving to maybe more different shorter payment terms, just how we think about that in terms of what's implied in the F4Q guide. Thank you.

Speaker 3

Yes. So we commented first time we started seeing this trend was in Q2. If you remember, we Also talked about this in our prepared remarks as we saw this happening. And given the interest rates are high, I don't expect it's going to change anytime soon. I think The good news is from the health of the underlying business, right, customers are committing to longer term duration contracts.

Speaker 3

They just are preferring to pay on shorter term. And yet, we obviously had very strong cash flow in the period. So I don't think it's something you should be worried about.

Speaker 11

Got it. Thank you very much and congrats on the NEST results.

Speaker 3

Thanks.

Operator

And our next question is going to come from Mark Murphy with JPMorgan. Mark will be audio only.

Speaker 3

Hi, Mark.

Speaker 13

Hey, Gaili. This is Arti Vu on for Mark Murphy. Thanks for taking the question and congrats on the quarter. You guys called out the Virgin Group and their launch of Workvivo across, I think, 60,000 employees and the number of the workforce related innovations you've launched recently. Can you just speak to the adoption of those products,

Speaker 3

Yeah. I mean, we're really excited about Workvivo. They, you know, first of all, in terms of operating, they're continuing to run as an operating unit, which We're making sure that we support them and their continued momentum. And we've already talked about we talked about Dollar General on the call last quarter and their amazing adoption. So, We're really excited about that team.

Speaker 3

When they joined us, we said welcome to the family and gave them and accelerated bookings target and they are running and achieving against that. So really thrilled to have them and watching them continue to succeed. Great. Thank you.

Operator

Our next question is going to come from Catherine Trebnick with Rosenblatt.

Speaker 3

Well, thanks for taking my question. Nice quarter. Has your appetite for M and A changed at all in the last year? You know all day long on CNBC they kept saying, oh, you know we're looking for growth, reacceleration to growth. So I'm just wondering if you're looking at the 6,500,000,000 And your attitude towards M and A.

Speaker 3

Thank you. Yes. Thank you, Catherine. M and A is something that we Evaluate and think about for as a potential strategy all the time. I have a corp dev team that looks at opportunities on a daily basis.

Speaker 3

And we have a very strong lens that we look through in terms of the value we need. That is, first of all, the technology and what does it bring to our Customers, we would always want to make sure that our customers continue to enjoy a really high quality product like they do with Zoom today. We look at the culture to make sure that it's something that we think would work well with Zoom. It's usually a really good indicator of the success of integrating 2 companies. And then, of course, we look at the lens of valuation.

Speaker 3

And does it make sense? Is it a price that we are willing to pay? And Because we have such a high bar, it honestly has been hard to find companies that we love that makes it through all three of those tests. It doesn't mean that we wouldn't love to find someone that did. There are some really great companies out there.

Speaker 3

And for one reason or the other, to date, we just Haven't found the right match, but it doesn't mean that we won't. And that is why we have Purposely retained, I should say, the flexibility of having that cash on our balance sheet so that if we do see something interesting, we're able to You know, act on

Operator

it. Moving on to KeyBanc's Tom Blakey.

Speaker 14

Thank you very much. Good to see Eric and hi, Kelly.

Operator

Nice to have

Speaker 14

you. Just wondering quickly on the Stability that we were talking about a couple quarters ago in online. It's pretty impressive that we went back and forth on that a little bit here and it's Very stable. I mean, obviously, you talked about the record churn. Can you maybe update us that on that in terms of, you know,

Speaker 2

do we expect the same type

Speaker 14

of stability in online into fiscal 4Q and maybe even similarly into fiscal 'twenty five. That'd be helpful. Thank you.

Speaker 3

Yeah. So the team has We've done a lot of work this year on many fronts around online. First of all, stabilizing retention, which you're seeing The benefits of that today, as well as focusing on free to paid conversion because it's really important We're continuing to fill the top of the funnel, and those are things like force breaks. And As Eric mentioned earlier, also being able to procure additional products online, things like Whiteboard and Scheduler Are very well aligned with the strategy of our online buyers. So those are all of the initiatives that Wendy and her Team are continuing to focus on, in terms I mean, we hold ourselves to a very high standard when we see stabilization.

Speaker 3

What we really want to see is dollar stabilization quarter over quarter. And while it's very, very close, it's not quite there. And I expect it will be slightly down, just very, very slightly down again in Q4. But as we're working on FY 'twenty five planning with the team Really looking forward to initiatives that drive stabilization and if not, some growth into FY 'twenty five.

Speaker 14

Very helpful. Thank you, Kelly. Yeah.

Operator

The next question is from Shebly Seyrafi with FBN Securities.

Speaker 15

Yes. Thank you very much. You guided deferred revenue to decline 6% to 8% in Q4, Due to shorter billing frequencies with enterprise customers, the question I have is What kind of decline would that have been without that billing frequency change? And Related to this, you're going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up Meaningfully in Q1?

Speaker 3

Yes. So as a reminder, the way the deferred revenue trends throughout the year It's always the highest in Q1 and then it declines throughout the year. And there's 2 things that are happening. First of all, Q1 is the largest renewal period. So the bucket gets filled up and then that's getting amortized through the rest of the year.

Speaker 3

But also the subsequent renewal cycles are lower than Q1. So, it's the inverse of probably every other SaaS company in the world where usually you're adding higher renewals every single quarter. We are actually adding a lower number, a lower dollar amount of renewals every single quarter. So as Q1 is getting advertised down, what's coming in to refill the top of that bucket is coming down every single quarter. And that's why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter over quarter.

Speaker 15

Okay. Thanks.

Speaker 3

Yes.

Operator

We'll now hear from James Fish with Piper Sandler.

Speaker 16

Hey, guys. Thanks for the questions here. Appreciate all the details Around some of the product lines, but building off of a few prior questions with that contact center customer count up to about 700 versus the 500, last quarter. If my math's right, given kind of what you guys have talked about with price points, kind of Seems like we're nearing 100,000,000 of ARR now or how should we think about that average seat count at this point? And then Eric for you, Look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of Penetration with the contact center installed basis, is that acting as sort of a consolidation function underneath for especially that small mid market?

Speaker 16

Thanks guys.

Speaker 3

No, you go ahead. Go ahead first.

Speaker 2

I think you look at a contact center, right? So not only just All for us to offer the core content center of capabilities, we want to offer a full, you know, platform, right, including workforce management, right? This is the The modern based on modern architecture, not something like, hey, you have on prem solution for a long time. You just put it into the, in the cloud. That's not a case.

Speaker 2

We build everything from the ground up is a title integrated, but with our core contact center solutions. That's the reason why, you know, you look at our, You know, customers, right, from SMB, medium sized all the way to large enterprise. I think we are ready. And however, as I mentioned earlier, Swedish, Swedish partners should be You know, the the, you know, middle, right? However, we one thing is we realized customer, they won't have one seamless experience For every contact center workforce management, the virtual agent AI features call engine, right?

Speaker 2

So we are trying to offer off them, you know, so that's the kind of, you know, our strategy. In terms of workers workforce management contribution, it really helped because we tell customer, hey, we offer everything to you. We are not going to, a, let you, you know, deploy other third party workforce management solutions. We offer all the services, all the functionality to you with one platform.

Speaker 3

Yes. And James, in terms of your ability to kind of understand how those Products are progressing themselves. We'll do as we've done with others and announce milestone metrics as we start to see them emerge. They're just so new right now. That doesn't really make sense, but we will do that over time.

Speaker 16

Understood. Thanks, Kelly. Thanks, Art.

Speaker 3

Yeah. Yeah.

Speaker 2

We are not ready to share with a number, exact number yet about how many customers deploy to workforce management. So stay tuned in the future quarters.

Operator

And our next question will come from Matt Van Fleet with BTIG.

Speaker 17

Ed, good afternoon. Thanks for taking the question. I I guess following up one more on sort of the contact center and Zoom phone. In terms of overall customer mix, you're well below 1% penetration On customer or on contact center here. Is there a target you think is sort of the next Few years of the customers you're going to go after.

Speaker 17

How high do you think of the roughly 200,000 customers you have Have an existing contact center that you've maybe identified and comparably worked your way into. And then Sort of following up on that, what percentage, if you can share of the over 100,000 customers, 100,000 revenue customers have Zoom phone or Zoom contact center as an attachment there.

Speaker 3

So I guess the way that I Think about contact center and its progress is that it's so far is very Following a very similar, you know, roadmap, if you will, than that Zoom phone did. So if you think about, you know, we can see the visibility internally just as we could with Zoom Phone. But in terms of ARR as a metric, for example. It's going to take a little while for that to be something that's visible to you. But so far, It's tracking in a very, very similar way that Zoom Phone did, which I think is very encouraging and that we need a couple more years and then it starts to be a really significant growth contributor.

Speaker 3

It just, you know, start small and then grows quickly. And that's what we're seeing.

Speaker 2

And also, if you look at opportunity, You know, very similar as well. Many years ago, a lot of enterprise customers, their phone, you know, UC deployments go on prem. Today, look at most of Brad's customer contact center is still on prem. So, you know, that's why, you know, a lot of opportunity ahead of us, in particular given our, you know, modern architecture is very scalable, so.

Speaker 18

Great. Thank you.

Operator

Thanks. Beadams, Ryan Coontz has the next question. Ryan, please go ahead.

Speaker 18

Hi, and happy Thanksgiving. Good morning. From Zoomtopia. Yeah. I came really impressed with Zoom Rooms and what you're doing there.

Speaker 18

The innovation really seems years ahead of the market. And I wondered how you what's your updated view on the room's opportunity for the company? Do you think it's strong enough that you can use that as a lead, as almost a standalone product? And do you see the market opportunity more promising for With that product, do you have any go to market initiatives, these sort of questions? Thank you.

Speaker 2

So, yes, Ryan, so speaking of the opportunity, you're so right. You know, whenever a customer, you know, for many years ago, right, they deployed Zoom rooms for more and more customers. When they try to embrace hybrid work, You have a modern solution for their conference rooms. You know, they evaluate multiple solutions. Zoom rooms indeed, you know, stands out is indeed You know, years ahead of any other competitors.

Speaker 2

However, you know, sometimes, you know, you know, for customers, when they try to support a hybrid work For now, they are in the middle of embracing hybrid work, right? What's the new layout of the entire workplace and how many companies they needed to Support and so on and so forth. Right? That's why a lot of opportunities at the same time, you know, we need us working together with customers Not only for Confluent Innovation, but also entire work, a workplace, you know, the management was the newly all. So once was, think a lot of opportunities, not only for Confluent itself, like how to reserve a reserve a desk.

Speaker 2

Right? You know, all those we ought to build in as a part of Zoom rooms like one example, like a digital signage and also part of Zoom rooms as well as the full, you know, the conference room or workplace, You know, the solution and that's why, you know, we needed to make sure we focus on marketing side to share with customer. Again, Zoom Rooms It's not only just for your Confluence solution, but it's also for hybrid work and also for entire workplace, you know, as well.

Speaker 18

That's great, Eric. Thank you.

Speaker 2

Thank you, Matt.

Speaker 3

Thanks, Fran.

Operator

I will move on to Peter Weed with Berenstain.

Speaker 18

Thank you.

Speaker 19

I think for the first time, at least as far as I can look at in the model, It looks like the kind of larger enterprises greater than $100,000 enterprise customers were roughly flat quarter over quarter. But we're hearing the great stories about customer expansions and the number of those customers has continued to increase, which Would imply there's a whole another set of customers that are either shrinking or churning, and it appears that got more pronounced to this quarter That perhaps we've seen recently, how should we think about those effects? And is that more churn or is it downgrades? And when customers are churning or downgrading, where are they going? And is this something that is Kind of temporary and you see it kind of ending or is it something where we may have some pain for a bit of time before we get through some effects?

Speaker 3

Yeah. So, I think we've talked about this the last couple of quarters. We certainly have seen impact in our customers having in their own businesses and in their own employee count. So, if that's the situation, then we are working with them. The good news is we have not seen a lot of logo churn.

Speaker 3

It has been more down selling in terms of rightsizing their meeting license numbers. And yet, even in that situation, our team is doing a great job of taking the opportunity to transition them from potentially meetings to one of our Zoom 1 bundles that includes phone. We talked about in our prepared remarks, we saw that grow over 300% year over year in terms of the number of customers that are using those bundles, and that's great for many reasons, right, in terms of retention and having more than one product deployed, we see is very advantageous to So we certainly have worked with many, many, many of our customers this year on ensuring that they have the right And but I also talked about earlier this earlier in the call that we know that the majority of our customers Have had some sort of renewal period in FY24, meaning that we hope, we anticipate As we've got we get through the end of this year, we've moved through most of those transitions where organizations have done their own reductions and are lining their licenses to that.

Speaker 19

But it sounds like you're not seeing an uptick in churn. This is mostly just that kind of reduction in And once we're through that, then you set a floor in so that the expansions can kind of work going forward on all the great things people are buying, which Even us at Bernstein, we're great customers that love the product.

Speaker 3

Yeah. I mean, that's We're not giving FY 25 guidance, just to be clear. But, yeah, but that's in general what we anticipate, just knowing that we've worked through most of our customer renewals this year and assume that they've gotten through There are reductions. Now, it depends on what happens overall with the macro, but that's what we believe to be the case. Yes.

Speaker 20

Thank you. Yep.

Operator

Our next question will come from Tas Qushelgi with Wedbush.

Speaker 3

Oops, you're on mute.

Speaker 20

I'm sorry. Can you guys hear me now? Yeah.

Speaker 11

Thanks. Hi.

Speaker 20

Christian on Zoom Phone. So can you give us the ARR last quarter? We have the Zoom Phone seat this quarter.

Speaker 5

If I

Speaker 20

do a rough math on the ASP, it comes down to like $7 to $8 something per month, which seems like almost half or even more of the list price. If you can just confirm that and has that Yeah. This country gone down, gone up?

Speaker 3

So as a reminder, you can buy Zoom Phone either for dollars 10 per license per month if you have metered calling on top or $15 if you get unlimited long distance. So The ASP is going to depend on which version of that, which of the SKU the customers are buying and how they come together. And then if you think about some of our largest enterprise customers, we do discount not just for, obviously, for Zoom Phone, but the overall Value of their purchases or their value of being a customer for longevity in terms of length of cycles, willingness to pay upfront. So All of those things contribute, but it sounds like you're right in you're right in sort of the ballpark. We have not seen a dramatic shift

Speaker 20

And just one follow-up, is that similar to what you're seeing in the contact center versus your, I think, the list price was 70 for contact center. Any comment on how the discounting in contact center compares to what you've seen in Zoom phone?

Speaker 3

Yeah. No. I don't think you can correlate them. They're very different products with a very different sales cycle and approach. So, I don't think you can try to take a percentage discount necessarily from one product and expect it to apply to a different one.

Speaker 20

Thank you.

Speaker 3

Yeah.

Operator

And we will now hear from Tyler Radke with Citi.

Speaker 3

Hi, Tyler.

Speaker 21

Yeah. Hi. Hi, good evening. So Kelly, if I look at the midpoint of your guidance For Q4, it's about 1% growth, and I know there's some currency in there, but, how should we be thinking about that as a jumping off Point for fiscal year 25. What are kind of the the puts and takes that would would cause growth to be higher than that and also lower.

Speaker 21

It does sound like you're starting to see some stabilizations in parts of the business, but just help us frame for how we should be thinking about That trajectory beyond Q4.

Speaker 3

Yeah. So we will obviously give FY 'twenty five guidance on the Q4 call. However, I do think that the Q4 implied extra rate and Considerations around the macro and if it is stabilizing or improving over time are important considerations. Yeah. We do see we've talked about many great aspects of our business today, growth in phone, growth in contact center, stabilization in all online.

Speaker 3

All could be contributors that could drive growth in FY 'twenty five to be slightly higher than the implied Q4 exit rate. But right now, I think you should look at the X-ray, consider the macro and take all of that into account as you're modeling.

Speaker 7

Thank you.

Operator

We'll move on to William Power with Baird.

Speaker 22

Great, thanks. Make a quick couple of quick follow ups. I guess, Eric, to an earlier question on AI companion, can you just talk about, you know, where you're seeing the greatest usage? I What are customers most focused on and what's the early feedback look like? And what are customers asking for in AI?

Speaker 22

Where can you continue to add more value there?

Speaker 2

Yeah, it's a great question. First of all, AI combining includes a lot of features like, hey, if you are related to the call, You want to understand what's going on, you know, what kind of, you know, the point I missed and so on and so forth. You can quickly ask, Right. You know, all those kind of features and also, you know, use our, you know, team chat. It can help you compose a chat solution And a lot of features are built up upon that.

Speaker 2

Right? So and one of the key features customer really like is very for sure straightforward is a meeting summary. Right? And after meeting Zoom, we not only need to be generated, you know, sometimes you record a meeting. Some for now, you do not even record a meeting anymore.

Speaker 2

You just recorded a summary, And that feature works extremely well. We do see among a lot of other features, customer already started in the building. I think this one probably one of the highlights. You know, it's very easy, you know, to use and you see the the the very, very, you know, obvious in our way, right, to enable that feature. So again, it's a lot of other features as well.

Speaker 2

And, you know, like for me, I also use, you know, the our the the client, the HemeRoo client. You may connect to any other services. You you can, right, you can help you compose email as well. Right? This is a lot of features.

Speaker 2

Right? You know, and down the road, very soon we support a whiteboard with, you know, AI companion as well. Almost every service entire platform Welcome to leverage AI combined. So, and a lot of features, so, you know, and and the AI combined.

Speaker 22

Great. Thank you.

Speaker 2

Make sure actually you enable, you know, meaning summary and explore so many features. I'm pretty sure you'll love that. So we got a lot of very positive feedback from those early adopters.

Operator

And our last question is going to come from Steven Barrisi with HSBC. Steven, if you want to go ahead. Oh, I believe Steven just disconnected. Steven, are you still out there? If you are not, I don't

Speaker 3

You had a call.

Operator

Is no longer with us. So you know what, Eric, I'll just turn it back to you for closing remarks.

Speaker 2

Yeah. So first of all, thank you all for your time to join our Q3 earning call. I really appreciate it. Wish you all and your families have a wonderful holiday season. You again for your greatest support.

Speaker 2

Thank you.

Operator

Thank you so much, Eric. And again, everyone oh, I apologize, Kelly. Again, everyone, this concludes today's earnings release. As Eric and Kelly mentioned, we thank you all for your participation. And from our family to yours, may you and yours have a safe and happy holiday season.

Operator

Enjoy the rest of your day.

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