Zoom Video Communications Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2024

There are 22 speakers on the call.

Operator

Hello, everyone, and welcome to Zoom's Q4 FY24 earnings webinar. As a reminder, today's webinar is being recorded. And now, I would like to hand things over to Tom McCallum, Head of Investor Relations.

Speaker 1

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q4 and full 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 include a reconciliation of GAAP to non GAAP financial results. During this call, we will make forward looking statements, including statements regarding our financial outlook for the Q1 and full year 2025, 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 financial performance and financial results, which we discuss in detail in our filings with the SEC, including our 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 just turn the discussion over to Eric.

Speaker 2

Thank you, Tom. Thank you, everyone, for joining us today. In FY 'twenty four, we made a tremendous amount of progress towards our mission of 1 platform delivering limitless human connection. As generative AI began to take the world by storm, we listened carefully to customers in order to deliver AI that can best serve their needs with innovation that is responsible, empowering and built from the ground up in a way that commits and unifies our entire platform. Zoom AI Companion, our generative AI assistant, empowers customers and employees with enhanced productivity, team effectiveness and skills.

Speaker 2

Since its launch moving 5 months ago, we expanded the AI company to 6 Zoom products, all included at no additional cost to license the users. But our world is far from down. Our future roadmap to AI is 100% guided by driving customer value. We are hard at work developing new AI capabilities to help customers achieve their unique business objectives and we will have more to share in months and Enterprise Connect. We hope to see you all there.

Speaker 2

Our expanding Connect Center Suite is a unified AI first solution that offers tremendous value to companies of all sizes seeking to strengthen customer relationships and deliver better outcomes. The base product includes AI combining and our newly launched tiered pricing allows customers to add specialized CS capabilities such as AI expert assist, workforce management, quality management, virtual agent, and omnichannel support. Hosted by its expanding features, our ConnectCenter Suite is beginning to win in head to head competition with the legacy incumbents. Beyond that, it is competing on its own merits with customers completely new to Zoom, broadening the funnel to the Zoom platform. As Zoom becomes a full workplace solution, we are seeing customers migrate from other chat products onto Zoom Team Chat.

Speaker 2

Very excited. Over the past year, Zoom Team Chat usage has increased 130% across our paid accounts. And our migration tool designed to simplify the transition has seen a 4x increase in downloads in the last 6 months. Customers across industries are moving to Zoom Team Chat, including a global supply chain leader who has migrated over 1200 users, a major law firm who has migrated 1500 users, and also a financial payments leader who has moved over 2,000 users. Customers appreciated the improved user experiences and enhanced collaboration driven by our Zoom team chat product as well as the cost efficiencies realized by consolidating their communications and collaboration solutions onto Zoom.

Speaker 2

Last April, we acquired WorkWeivo and its integration into the Zoom interface has strengthened its market position. In Q4, we opposite a Fortune 10 company and a long standing Zoom customer on WorkWeibo, making it WorkWeibo's biggest customer to date. And on the flip side, we also saw a global tech who started as a WorkWeivo customer adopted the broader Zoom platform. As you can see, adding new products both organically and inorganically creates a virtuous cycle, allowing us to sell more product into our large place. We were very pleased to see work of Weibo recognized as a leader by Magic Quadrant in its first report on intranet packaged solutions.

Speaker 2

Similarly, Zoom Revenue Accelerator was recognized as a strong performer in the 1st wave in its 1st year of being covered, an amazing testament to its value as a powerful AI enabled tool drawing value to sales teams. FY24 was a difficult year from a macro perspective and we faced those challenges head on. We became more disciplined and focused while continuing to prioritize those opportunities. As a result, we are much better positioned than we were 1 year ago. Our platform moat is deeper, our content offering is robust and our go to market teams are primed with defining goals and sharpened expertise to drive growth and empower our customers.

Speaker 2

Now, let's talk about some of our amazing customers. First, I'm so excited to welcome Broadcom, a global infrastructure technology leader to the Xumu family. Recognizing the simplicity and ease of use of our expanding platform, we opted for the Zumwah Enterprise Bundle to modernize the way they communicate and collaborate. Let me also thank Diageo, a leading global beverage company for doubling down on Zoom. Seeing strong value from their existing meetings, phone and rooms deployment, in Q4, they expanded to Zoom Cognitive Center and Zoom Virtual Agent.

Speaker 2

Let me also thank Community Financial Credit Union, a full service financial cooperative for investing in our broader ZoomOne platform. They have chosen to modernize member engagement with the Zoom Accounting Center. Community Financial for the Zoom because of our one platform video first approach to solving all their communication needs. Zoom's integrations with key banking solutions through our APIs and partnerships were core to their decision making process. Finally, let me thank Kinvara, the world's FX payments leader.

Speaker 2

Zoom Phone was the foundation of their Zoom engagement. And from there, they adopted the wider Zoom 1 platform in less than 2 years. Seeing the benefits of the tight integration of our products underpinned by AI companion, they recently began to deeply leverage Zoom team chat in order to streamline the pre-, during-, and post meeting communication all within the Zoom platform. Everything we do here is rooted in our culture of delivering happiness. This is why our employees, this is why the customer employees, this is why even more than IT departments are our biggest champions.

Speaker 2

And of course, happy employees are the most productive, so choosing Zoom becomes a win for everyone. We are laser focused on our mission and could not be more optimistic about our future. The best is yet to come. And with that, I'll pass it over to Kelly. Thank you.

Speaker 3

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY 'twenty four. We were pleased with our strong finish to the year with enterprise revenue growing 9% and free cash flow up 24%. We also achieved a non GAAP operating margin of 39.2%, up 326 basis points from 35.9% in FY2023. In Q4, we saw traction in our emerging products, including a nearly 3x increase in Zoom contact center licenses as we not only added a significant number of new customers but also expanded average deal size.

Speaker 3

Zoom Phone customers with 10,000 or more seats grew 27% year over year to 95. And Zoom AI Companion has grown tremendously in just 5 months with over 510,000 accounts enabled and 7 point 2,000,000 meeting summaries created as of the close of FY 'twenty four. We are excited about the strong growth across these new products and the benefits they drive for our customers. Now let's dive into the financial results. In Q4, total revenue came in at $1,146,000,000 up 3% year over year.

Speaker 3

This result was approximately $16,000,000 above the high end of our guidance. Our enterprise revenue grew 5% year over year and represented 58% of total revenue, up from 57% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3% from 3.4% in Q4 of FY2023. This is consistent with the previous quarter and the lowest churn we have ever reported. The number of enterprise customers grew 3% year over year to approximately 220,400.

Speaker 3

Our trailing 12 month net dollar expansion rate for enterprise customers in Q4 came in at 101%. We saw 10% year over year growth in the up market as we ended the quarter with 3,810 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 30% of revenue, up from 28% in Q4 of FY2023. Our Americas revenue grew 4% year over year, while EMEA was flat and APAC declined by 3%. The international performance was partially due to the FX headwinds in APAC as well as the impact from our sales reorganization in early FY 2024 that took longer to complete internationally than domestically.

Speaker 3

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, income tax benefits from discrete activities, and all associated tax effects. Non GAAP gross margin in Q4 was 79.2%, which was slightly lower than 79.8% in Q4 of last year, mainly due to our investment in AI Companion. In FY 2025, we expect our gross margin to be approximately 79%, reflecting focused investments in our AI features. Over the course of FY2025, we expect to directionally improve gross margin towards our long term target of 80% as we continue to optimize our data center strategy and grow some of our higher ASP products like Zoom Contact Center. Non GAAP income from operations grew by 10% year over year to $444,000,000 exceeding by end of our guidance of $414,000,000 This translates to a 38.7% non GAAP operating margin for Q4, an improvement from 36.2 percent in Q4 of last year.

Speaker 3

Non GAAP diluted net income per share in Q4 was $1.42 on an approximately 313,000,000 non GAAP diluted weighted average shares outstanding. This result was $0.27 above the high end of our guidance and $0.20 higher than Q4 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1,270,000,000 down approximately 3 percent from Q4 last year. This was roughly 3 percentage points better than the high end of the range we provided last quarter.

Speaker 3

For Q1, we expect deferred revenue to be down 4% to 5% year over year. Looking at both our billed and unbilled contracts, our RPO increased 4% year over year to approximately $3,570,000,000 We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months as compared to 56% in Q4 of last year. Operating cash flow in the quarter grew 66% year over year to $351,000,000 Free cash flow grew 81% year over year to $333,000,000 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 30.6% and 29% respectively. We ended the quarter with approximately $7,000,000,000 in cash, cash equivalents and marketable securities excluding restricted cash.

Speaker 3

Turning to guidance. As we consider our view for Q1 FY 'twenty five, we have not assumed any changes in the macroeconomic outlook. For Q1, we expect revenue to be approximately $1,125,000,000 This incorporates 2 fewer days in Q1 and would represent approximately 1.8% year over year growth. We expect non GAAP operating income to be in the range of $410,000,000 to $415,000,000 Our outlook for non GAAP earnings per share is $1.18 to $1.20 based on approximately 316,000,000 shares outstanding. For the full year of FY 2025, we expect revenue to be approximately $4,600,000,000 which represents approximately 1.6% year over year growth.

Speaker 3

We expect Q2 to be the low point from a year over year growth perspective and to accelerate from there. We expect our non GAAP operating income to be in the range of $1,720,000,000 to $1,730,000,000 representing an operating margin of approximately 37.5 percent. Our outlook for non GAAP earnings per share for FY 'twenty five is $4.85 to $4.88 based on approximately 321,000,000 shares outstanding. For FY 2025, we expect free cash flow to be in the range of $1,400,000,000 to $1,480,000,000 We believe that our strong cash flow generation and financial discipline coupled with responsible capital allocation is a powerful combination. As indicated in our earnings press release today, our Board has authorized a $1,500,000,000 share repurchase program that we will start executing this quarter.

Speaker 3

This not only underscores the confidence our board and management team have in the future of Zoom, but also allows us to leverage our strong profitability, cash flow and balance sheet to drive shareholder returns, while also allowing us the flexibility to consider M and A options to accelerate growth and deliver for our customers. As a note, the share count and EPS metrics in our guide do not account for the impacts from the shareholder repurchase program. To echo what Eric said, we are optimistic about where we are now and where we are going. Our competitive position, innovation engine, and customer base set us up for success in FY 'twenty five and beyond. Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support.

Speaker 3

Before closing, I would like to thank just one more person for their support over the years. Our head of IR, Tom McCallum, has decided to retire this summer after a seasoned 25 year IR career. Tom, it's been an honor and a pleasure to work with you. You have contributed tremendously to Zoom's success since even before the IPO and will be dearly missed. Thank you so much for all you have done and congratulations.

Speaker 3

I am pleased to announce that Charles Evislaj, who has worked with Tom and me for several years now, will assume the role. With Charles at the helm, we are confident that the investment community will continue to receive a high level of service from our IR team. Please hold your goodbyes for Tom for now as he will be with us until midyear to ensure a smooth transition. With that, David, please queue up the first question.

Operator

Thank you, Kelly. As Kelly mentioned, we will now move into the Q and A session. When I call your name, please turn on your video and unmute. As a reminder, in an effort to hear from everyone, please limit yourself to one question. And our first question comes from William Power with Baird.

Speaker 4

Okay. Great. Thanks. I guess, well, Kelly, you said a hold of this for Tom, but Tom wanted to just say thanks for all your help over the years. Kelly, maybe to kick it off with you, as we look at guidance, maybe just talk about what's providing confidence that the year over year growth should trough in Q2, if I heard you right?

Speaker 5

Yes.

Speaker 4

And how do we think about the key drivers then to perhaps accelerate year over year growth in the back half of the year and perhaps into fiscal 'twenty six? And how do we think about that trajectory over the ensuing 18 months maybe as we get past that?

Speaker 3

Yeah. So when you think about coming down in Q2, but then accelerating the back half, this is the culmination of what we've been talking about for a while, which is the growth being driven by Zoom phone, by Zoom contact center, which we've seen continue to mature by the effect that AI and adoption of team chat are having on the overall retention metrics of the company. So all of those factors is what gives us that confidence that we're going to see it come down in Q2 but then start to reaccelerate after that. And then, I mean, it's very early to comment on FY 'twenty six, but that will be an indicator that exit rate for FY 'twenty five would be an indicator for FY 'twenty six.

Speaker 6

Okay. Thank you.

Operator

Thank you. Our next question comes from Meta Marshall with Morgan Stanley.

Speaker 7

Thanks. Just wanted to ask maybe just in terms of on the deferred revenue, in the past quarter you mentioned that deferred revenue would kind of be down quarter or we saw it come down. And just wondering, last quarter, you had talked about the terms that you were seeing of people extending their deals come in a little bit. Just any trends that you're seeing just in terms of renewals, and what you're kind of seeing in terms of renewals either in terms of products that they're adding, but just also maybe term compression they might be seeing? Thanks.

Speaker 3

So we've continued to see strength in renewals. Our huge thanks to our renewals team in Q4 actually did an amazing job of exceeding their target, which was great to see. And what we have seen is the continued trend of our customers wanting shorter payment terms. They're hanging on to their cash. Remember we talked about this in Q3 that that's really what contributes to the decrease in deferred.

Speaker 3

And then the other thing is the timing of renewals. We are seeing customers not necessarily wait to their renewal period to start these discussions. For example, I renewed a proposal today for a customer that's not going to renew for 6 months. So customers are really thinking ahead about their contracts and being very thoughtful about this. And what that does, it creates some variability in both the RPO and the deferred because it's very sensitive to the timing of these things.

Speaker 7

Great. Thank you.

Operator

Thank you. Our next question comes from Ethan Bruck from Wolfe Research.

Speaker 8

Hey, guys. Congrats on the results. And I'm asked a question on behalf of Alex here. So I guess my question would just be a little bit back on the guidance for fiscal 'twenty five. If you can give some puts and takes.

Speaker 8

I know you said you're not factoring macro improvement, but how should we think about both the enterprise and online piece? I know you guys are rolling out some pricing increases, so maybe how to factor that going into numbers for next year? And just also, you know, the NRR piece, maybe roughly when you're expecting that to trough? Just any color on that would be

Speaker 5

great.

Speaker 3

Yeah. So in terms of the enterprise or the direct sales organization, we kind of touched on this in the prepared remarks, but they're off to a fast start this year. We're really excited about that. If you remember last year, we had not only the overall reduction in the company, but the sales reorganization, which took a lot of time for the organization to recover from, frankly. And so seeing them well positioned to start off this year strong is really exciting to see.

Speaker 3

And that's certainly going to contribute to the overall growth that we're expecting to see, especially in the back half of the year. And then from an online perspective, really pleased, for example, with the Q3 churn metric. I think considering that we typically see seasonally higher churn in Q2 and Q4, that churn rate holding from Q3 to Q4 at that lowest rate of 3.0 is really indicative of all the improvements that team has made to the platform, the ongoing initiatives they've put in place. And so all of those considerations are is what gives us confidence around the FY 'twenty five guide.

Speaker 8

Got it. That makes sense. And just a quick follow-up. It's just around some of the AI, like you're successfully embedding it across the platform. I'm just curious as we think about kind of the monetization angles over the next few years, I mean, if you were to StackRank where you think the combination of maybe moving users to higher SKUs, matching price to value, which you guys are obviously already doing or getting folks to adopt, you know, more products on the upsell side into contact center, for example.

Speaker 8

Just here's how you guys are thinking about that right now.

Speaker 5

Yes. Sure.

Speaker 2

I can take it. So and we are monetizing AI on many fronts. You look at our Zoom AI company, right? So first of all, for our existing customers, because they all like the value we created, right, to generate a meeting summary, meeting query and so on and so forth. Because of that, we really do not want because customers are also trying to reduce the cost.

Speaker 2

That's why we do not charge the customers for those features. However, a lot of areas we can monetize. You know, take our AI combining, for example, enterprise customers, how to leverage enterprise customer directionally, the sole source data and also to build a, you know, tailored, you know, the Zoom AI companion for those customers, sort of like a customized Zoom AI companion, and we can monetize. And also look at all the services, maybe I'll just take a contact center, for example. We are offering a Zoom virtual agent and that's the one we to monetize.

Speaker 2

And recently we announced 3 tiers of Zoom mechanics and a product. The last one is, you know, is per agent per month as we charge $149 The reason why the a few features. One of the feature is Zoom Expert Assist. Right? All those features are empowered by AI features.

Speaker 2

Not to mention, you know, we are also going to build new services and are driven by Zoom AI company as well. I think this year, I mean, we are going to doubling down on Zoom AI company customization and also focus on monetization. That's our effort. So Thank

Speaker 8

you guys and congrats on the results.

Speaker 2

Appreciate. Say hello to Alex.

Operator

Our next question comes from Tyler Radke with Citi.

Speaker 9

Thank you for taking the question and apologies for the quality in transit at the moment. I wanted to ask you about the recently announced buyback $1,500,000,000 is impressive 7% of your shares outstanding. But I guess what how did you kind of come up with that number? And does that signal anything about the size of potential M and A that you're hoping to do? Anything that you could just share in terms of why now and the decision process would be helpful?

Speaker 9

Thank you.

Speaker 3

Yes. So we've talked about this many times in the past. Every quarter, we have this discussion about capital allocation with our Board, of course, with Eric. And with $7,000,000,000 sitting on our balance sheet today and the string of our cash flow outlook for FY 'twenty five, we feel confident that having an authorization in place does not preclude us and still provides us plenty of flexibility to do M and A transactions that we might see as exciting in the future. And we continue to look for any opportunities that make sense to bring another organization to the Zoom portfolio.

Speaker 3

And we were targeting an amount that would approximately offset potentially most of the dilution for FY 'twenty five, and that's how we were thinking about it. Of course, you just did that quick calculation of math, but there's always variability in the execution of these programs. And we will be looking the way that we executed is we set an approximate amount we want to acquire every single quarter. So we'll be evaluating this as we move through the year this year.

Operator

Okay. Our next question comes from Tom Blakey from KeyBanc.

Speaker 6

Thanks, everyone. Good to see you, Eric and Kelly. And congratulations on the, I'll say, early retirement, Tom. Just point of clarification first, Kelly, on. I think Meta was asking about 2Q in the guide and you mentioned something about being down.

Speaker 6

Were you implying, just point of clarification, that fiscal 2Q would be down quarter on quarter from fiscal 1Q?

Speaker 3

We're saying that the year over year growth rate in Q2 will decline as compared to the year over year growth rate in Q1. Yes. It will be positive. It won't be it's not going to go negative based on our current outlook, but it will be lower than the year over year growth rate in Q1.

Speaker 6

Sorry for the hand holding there.

Speaker 3

No, no, it's okay.

Speaker 6

My key question would be on the CCaaS. It sounds like you're off to a great start. There's a lot of demand out there hearing from your peers. I'd love to just, you know, give you the opportunity to talk about pricing, uptake of some of the, you know, the virtual agent, agent assist, you know, functionality and maybe any type of, you know, what you baked into fiscal 'twenty five in terms of visibility here, as you've come out very strong here in the 4th quarter into fiscal 'twenty five. Thank you.

Speaker 3

Eric, do you want to talk about contact center in general for a minute first?

Speaker 2

Sure. Absolutely. I think, Tom, you may not know actually. Recently, I got a new job here at Zoom. I become the contact center general manager or the product management team engineers and go to marketing team, sales marketing, they all report to me directly.

Speaker 2

That means huge opportunity ahead of us. Why I want to wear another head of GM or contact center? Seriously. But anyway, so based on customer feedback, very, very positive. We're doing extremely well every quarter.

Speaker 2

In q4, the number is amazing. And plus the reason why we have a confidence introduced like a 3 tiers of pricing because a lot of our customers right. They probably needed a very basic contract solutions. You know, the $6969 per month per agent, very competitive, all the cool features. Or if they want some, you know, social channel, maybe, you know, Autobahn dialer, they can, you know, pay $30 more per agent.

Speaker 2

And for a huge enterprise customer, 1 by 1,000 agents and we give them a Zoom, you know, expert assist and also workforce management, quality management, all the features. You can see Zoom has become a full suite of contact center offering. We can compete head to head to any legacy incumbents. I'll give you one example. Zoom, we internally, we deployed, you know, our virtual agent.

Speaker 2

Guess what? Every month we received 400,000 agent hours and more than 90% inbound inquiries can be done by our virtual agent driven by the the AI technology. Very excited about everything we are doing, and, the feedback is very positive. You know, again, we are going to doubling down, tripling down our content and offering because that's a modern solution, AI empowered, video first and also we build a full suite. That's why we're so excited.

Speaker 3

Based on your enthusiasm, Eric, I'm going to raise your quota.

Speaker 2

Yeah. I raise the quota to a system every day, so that's no difference. So

Speaker 6

And Kelly, what kind of, you know, where what kind of outlook are you baking in in terms of the strength there and the visibility commentary about fiscal 'twenty five? And then is that, this is just enterprise right now, right? This is a there's no self-service online here, right?

Speaker 2

Correct. Not yet, but now it's just yeah, You're still right on. See? Thank you for for help us to monetize, you know, contact center in another way. So

Speaker 3

Yeah. So, Tom, we looked at the trends that we've been seeing, the number of customers, the growth rate, the size of the deals, which have been expanding over the last several quarters and just and of course, sales capacity and taking all of that in consideration, including the new pricing tiers, that's how we built our outlook for FY20 5.

Speaker 6

Thank you.

Operator

Okay. Thank you. Our next question comes from James Fish with Piper Sandler.

Speaker 10

Hey, guys. Thanks for the question here. Tom, congrats on the announcement. And Eric, good luck with the increased quota from Kelly now. Kelly, just going back to a couple of questions ago on how to think about the quantitative approach here on past or future price increases on the guide for this year?

Speaker 10

And for Eric, what's causing customers to move over to the Zoom chat function and off your main competitor, like Teams, just further consolidation on the one platform, or is it AI companion playing a larger role here, especially as you guys are concluding it as opposed to, you know, dollars 30, dollars 35 a month? Thanks guys.

Speaker 2

Kelly, you want to take the first one?

Speaker 3

No, you go ahead. You go ahead first.

Speaker 2

Sure, sure. So, James, one thing I think we did not do well, as I mentioned even before, is we did not do well on marketing front. A lot of customers, users, they do not know Zoom has a great persistent team chat functionality at no additional cost. And it works extremely well. All the key features, any other competitors product they have also have that as well.

Speaker 2

Very well integrated with Zoom, you know, product. And plus, as you said, you are so right on. Your customers, they see using their Chatter solution, they want to use AI. Like I said, you know, I send you a Jamsi, I send you a message. I want to leverage AI, send a long message.

Speaker 2

However, you know, if you use other solutions, sometimes other solutions itself, even without AI is not free, Right? And in our case, not only our core functionalities, but also AI companion building also at a new additional cost. I can use it for for any users, customers, you already have a meeting license, Zoom team team chat already built in. Right? All the cool features, you can use a Zoom ad company and also let the AI write a chat message and so on and so forth.

Speaker 2

It works so well at no additional cost. The total cost of ownership of Zoom with Team China is much better than any other Team Chat solutions. And also we build a native client, not like some other, you know, competitors, the web based client sometimes, you know, like I'm using Mac and performance so on and so forth is really not good in a clunky experience. That's the reason why more and more customers, they discover the Zoom team chat capability. So, wow, why not move to Zoom platform?

Speaker 2

They give it a team chat from Sanathletes at a no additional cost. Right? That's the reason why we have a confidence. I hope more and more customers are going to move to Zoom Team Chat. We also get a very similar migration tools as well to have a customer migrated to Zoom Team Chat.

Speaker 3

And thank you, Eric. In terms of the price increases, James, so certainly the online price increases that we talked about last call and that were implemented in Q4 are in all of our forward looking guidance. And then the renewals team as they're talking to our customer about renewals where there are opportunities for price increases, we've seen those trends over the last few quarters of doing that. And that would also show up in the pipeline that the team has out there. So in that context, it's also been considered.

Speaker 2

Yeah. By the way, Jim and all all the allies are here. You know? If you are log in with with the Zoom client, you know my email address. We can't create a Zoom team chat group and let's get a firsthand experience.

Speaker 2

You know how powerful it is. So it's very easy.

Speaker 5

You can

Speaker 3

have 1 on 1 access to Eric, James.

Speaker 2

Yeah. Sounds good, Eric.

Speaker 10

Don't worry.

Speaker 11

I won't annoy you too much.

Speaker 2

Awesome. Thank you, James.

Operator

Thank you. Our next question comes from Matthew VanVleet with BTIG.

Speaker 12

Hey, good afternoon. Thanks for taking the question. I guess one more on the contact center. Curious in terms of how the mix is maybe different with channel involvement and partners being involved in those deals over the last couple of months as you've really invested in the channel program? And then secondarily, what is the mix of, I guess, the contact center sales into existing customers, especially existing Zoom Phone customers?

Speaker 12

Is that any different than the early days of Zoom Phone in terms of mix? Thanks.

Speaker 2

Yes. So, Kelly, feel free to chime in. I think, for the call meeting product, by and large, is directly driven and the Zoom phone is mixed, right, direct and those channel driven. You look at the contact center product, for sure, we have a Zoom contact center specialist here. But I think primarily driven by a lot of and very well established you know, the the 3rd party, you know, agents, right, and those are channel partners.

Speaker 2

Because they already have a greater relationship. We have to invest into that area. So, you know, and that's the reason why a lot of deals are abroad, you know, to us by those, you know, the channel partners. Some of some of them even never used they are not Zoom meeting customers, but also they have become the 1st Zoom contact center customers. So that's kind of channel and also the Zoom contact center specialist.

Speaker 2

Also at the same time, because Zoom phone and Zoom contact center, we integrate very well and also we are training all those Zoom phone specialists also to become Zoom Cognizant specialist, right, to further have our internal sales capacity as well. And I think that overall and you look at the revenue trajectory and Kelly correct me if I'm wrong, it's very similar to our Zoom phone growth. And hopefully, after I become GM, maybe we can beat that as well. So and anyway, so that's where we are now.

Speaker 3

The only thing that I would add to that is, you know, we're very excited. We hired Chris Morrissey in November. He is, you know, a veteran in this space, so really excited to have his talents here at Zoom. And then one other thing to note, which has been interesting about contact centers, we actually have seen customers, new customers coming for Zoom contact center. So it's also an opportunity to start to you know, expose the platform to new prospects and customers as they're really excited about, you know, this really modern technology that we have in Zoom contact center.

Speaker 2

Yes. By the way, Chris reports me directly. It came from NICE, so NICE eContact.

Speaker 12

All right. Great. Thanks.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from C. T. Panagrahi with Mizuho.

Speaker 3

Hi, Siti.

Speaker 5

So I want to ask the other growth driver you have, phone, on the phone side. So help us understand like what's your penetration right now within the install base on the phone side and any update in terms of whether the number of states or revenue you have by end of this fiscal year?

Speaker 3

Yes. So we are really excited about the ongoing strength and growth in Zoom Phone. In terms of the opportunity ahead, even internally, the penetration rate for deal attach is still under, I think, 20%. So that just highlights there's also a greenfield even within our existing Zoom customer base. And the metric that we gave this quarter was that customers with greater than 10,000 seats increased 11% year over year or 27% sorry, 11% was like quarter over quarter, 27% year over year to 95%.

Speaker 3

So seeing lots of strength in that high end of the customer base, which we're really excited about. And we didn't give a seat count metric this quarter. It's probably something that we'll do in the next quarter or

Speaker 5

2. Okay.

Operator

Thank you. Okay. Thank you.

Speaker 13

Thank you. Maybe going back to the contact center piece and trying to loop in the AI Expert Assist side. When you're seeing customers come in, are they adopting the premium tiers off the bat? And do you have a sense of whether the usage of Expert Assist is ticking up as a result? Or is this something that we should think of as a future upsell driver as customers kind of land maybe at the low end and then expand over time?

Speaker 2

Yeah, that's a great question. The reason why we introduced the multi tier semiconductor center because we really look at it from a customer perspective. Each customer, they have a totally different demands or requirements. And sometimes, you know, this they do not care about, you know, and the super media channel, right? It's just a new call, you know, functionalities, right?

Speaker 2

Just a few 100 assists and then migrate from all the cloud based to 100 centers solution, really do not need to work force management or quality management. Right? That's the reason why, you know, we have a street here now. Right? And quite often for, you know, the SMB customer, I think the Zoom content is essential.

Speaker 2

It's good enough, right? And we talk with the customers with more than 1,000 agents, for sure they would like to have those AI experts assist in a workforce management or quality management and so on and so forth. Right. That's the reason why because in a customer demand, we have multiple tiers, you know, and our contact center specialist and also partners, kind of partners working together. Right?

Speaker 2

Based on customer demand, we offer different tiers. We might introduce more in the future. We do not know. But again, we look at everything from a customer perspective. That's the reason why based on those multi tier packages, you can see that the demand coming from and every segment, SMB customers, a lot of enterprise customers and it's very healthy.

Speaker 2

So

Speaker 3

And to just to further what Eric said, the the packages are off to a really great start. We've had approximately 3,700 licenses sold in those upper tiers. And the ASP for those is double what our existing ASP was before we introduced those additional tiers. So it really shows you how this is going to not only address a broader market but also accelerate our revenue growth here.

Speaker 2

Yes. Used to be a little bit over 50. Now it is 100. This is a great result.

Speaker 13

Great to hear. Awesome. Thank you. Thank you.

Operator

Okay. Our next question comes from Taz Koujaghi with Wedbush.

Speaker 14

Hi, Taz.

Speaker 15

Hi, how are you?

Speaker 11

Thanks for taking my question. I have a question on the guide for next year. Kelly, how do we think about the breakdown between enterprise growth and online for next year? Should we see online start growing year over year in 'twenty five?

Speaker 3

Yes. We aren't going to give specific guidance for the segments, but we are really focused on continuing to have stabilization in the online segment, which you saw happen again this quarter as actually both segments were slightly up in Q4, which was great to see. And really focusing on the initiatives to drive basically stabilization is how I would think about it for FY 'twenty five in the online segment.

Speaker 9

Got it. Thanks.

Speaker 11

And then one follow-up for Eric. Eric, you mentioned increasing deal sizes for contact center. Can you compare when a customer buys Zoom phone and buys Zoom contact center, are the deal sizes a lot different, similar because the ASP is a lot higher for contact center, but I'm guessing the seat count is lower. How does the seat the deal values the pay between phone and contact center?

Speaker 2

I think that's a great question. I think for sure, I do not think I can compare that with the Zoom phone. As Zoom contact center, as we started, you know, normally, we have a lot of costs, but every deal size is rather smaller. Now, we see that every size of a deal is bigger and greater and greater, right? This is much better than before.

Speaker 2

And from that perspective, it's very different compared to Zoom Fung, right? That's the reason why you look at our, you know, the Zoom and the S3 package, right? And the Elliot package is 100, I think is 49 per user per month, per agent per month. It's much, you know, and bigger than the Zoom phone, right? That's the reason why I think in terms of pricing is very different.

Speaker 2

We see that more and more medium, a lot of enterprise customers adopt Zoom content center. You can see that every deal size is much bigger. And we do not focus on number of seats, number of customers, but focus on the size of customers. That's very healthy.

Operator

Thank you.

Speaker 2

Thank you.

Operator

Okay. Our next question comes from Matthew Bullock with Bank of America.

Speaker 16

Hi, Eric and Kelly. Thanks for the question. I'll be asking on behalf of Mike Funk today, regarding Zoom's progress and roadmap for contact center product development. Can you provide an update on the company's near term priorities in terms of functionality improvement? And then in the longer term, where is the company's focus to better position the offering for larger scale enterprise deployments?

Speaker 16

Thanks.

Speaker 2

Yes, this is great. So first of all, I want to tell you from an architecture perspective, we are ready already for big, very, very big Lightning customers into most of number of concrete agents. And we did a test. It works very well. For now, we just focus on the feature set.

Speaker 2

Again, we already have a lot of features. Most of the customers, they can deploy Zoom contact center without any problem, either migrate from legacy contact center solution providers or migrate from the other, you know, cloud solution providers. In terms of new feature, you know, for the time, you know, I think in next few quarters, you know, like one big feature is, you know, PCI compliance. Right? We need to support that.

Speaker 2

Right? And also how to support a channel partners. Right? You know, and also all those features may not be the core features, but also like PCI compliance and also the support of channel partners, right? All those features, you know, sort of like enterprise related.

Speaker 2

So and we're also working on that. And also some like workforce management and queue management further enhance that and also add a lot of AI features as well. I think as you can see, you know, core feature set already there. You just need to add a few here and there and think, well, almost 100% ready. You know, like, even for the, you know, social media channel, we already support, you know, and the the the, you know, other, you know, like, in the social media channel, how to support more, you know, the the channels like WhatsApp.

Speaker 2

Right? How to add WhatsApp there? Is it just some, you know, corner feature here and is there, you know, in the next few quarters? And, yeah, this team working very hard on that. So

Speaker 16

Super helpful. Thank you.

Speaker 2

Appreciate it. Thank you.

Operator

Okay. Our next question comes from Mark Murphy with JPMorgan. Mark, are you there? Okay. We'll move ahead.

Operator

Hey, sorry.

Speaker 17

He just

Speaker 3

came off mute. There you go.

Operator

Hi, Mark.

Speaker 18

Sorry about that. This is Arty on for Mark Murphy. Thanks for taking the question and congrats on all the milestones. You mentioned in your prepared remarks about how AI Companion is integrated into your contact center suite of solutions. In our discussions with industry contact, those sort of applications for GenAI have been pretty scaled, pretty strong in a lot of customer interest.

Speaker 18

Are you guys seeing a similar pattern with customers that an area where you're seeing kind of an outsized interest or utilization of the AI tool? Thanks.

Speaker 2

Yes. I think it's very similar. You look at our Zoom meeting product, right, and customers discover the, you know, Zoom, you know, AI company, you know, to help you with a meeting summary. And, you know, after they discover that feature, they would like to adopt that. Right?

Speaker 2

Contact us on exactly the same thing. And like virtual agent, Zoom expert assist. Right? Leverage those AI features. Manager can understand what's going on in real time and also, and agent, right, can have the AI to get a real time notary base and any update about these customers.

Speaker 2

All those AI features can dramatically improve the agent efficiency. Right? That's the reason why it's kind of we will not take a much longer time for those agent realizes the value of the AI features because, you know, it's kind of very easy to use. And I think the in terms of adoption rate, I feel like a contact center AI, you know, adopts rate even probably, you know, faster than the other, you know, the core features. So core services.

Speaker 18

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

Okay. Our next question comes from Matthew Harrigan with Benchmark.

Speaker 19

Oh, I'm sorry, I actually wasn't didn't have my hand up, but since you asked, do you have any thoughts on the relative macro strength you're seeing in different markets, Pacific Rim, Japan? Obviously, Buffett was just extolling the virtues of Japan as an investment area right now, Europe, U. S, etcetera. Thank you.

Speaker 3

Yeah. We agree. We see Japan as certainly a very important market for us. And it is a core focus FY 'twenty five is reinvesting and reinvigorating our go to market teams in both EMEA and APAC. We have new leadership in some of those markets and are really excited again about the quick start, the teams being in market and, and we're ready to go and look forward to great things from them this year.

Speaker 19

Great. I'm very fast on that mute button since I wasn't even expecting to be called on. So I probably actually get brownie points for that. Thank you.

Speaker 3

Good job. Good to see you, Matthew. Thank you.

Speaker 19

Thanks.

Operator

Thank you. Our next question comes from Peter Weed with Bernstein.

Speaker 15

Thank you very much. I really appreciate all the detail and it's obviously pretty exciting news see all the expansion opportunities going on with the enterprise customers along with kind of maybe a floor coming in with the online customer group. I guess 2 follow ups I've got around the enterprise customers. I don't think you commented on how churn is evolving with those customers. And obviously with continued tailing in NRR, I'm trying to unpack what portion of that's coming from churn versus what portion of that's coming from the kind of continued refresh cycle you have with long tenure customers that are still coming down on seats.

Speaker 15

And then the second part is kind of you look through on that NRR and you're talking about some acceleration going on later this year, and I think that's starting to mix in customers that no longer are those long tenure that have seats coming down and it's really being replaced by those that the expansion is really in functionality is coming in. If you look at those customers that are kind of past their seat readjustment, how expansive are those customers that we can maybe look forward to out a year or so being a greater portion of the mix?

Speaker 3

Yes. So it's a really good point, Peter. So we've talked about this a few times, but in FY 'twenty four, we know we saw that the majority of our customers had a renewal event. So they had the opportunity to work with us as they needed to potentially right size their seat count. Again, our renewals team has done an amazing job of taking the opportunity to talk to them about the opportunity to upgrade to Zoom 1 to potentially add in Zoom Phone or additional products, so maintaining that spend.

Speaker 3

So we've seen some shifting around in terms of the overall portfolio, but really focused on maintaining that spend. And what that does is it really situates us very well as those customers start to grow again that the customers are now sitting in different SKUs that potentially are more retentive and also at a higher price point, honestly, that they can grow into as they start adding seats again. We do see there's going to be a much lower percentage of our customers that are up for renewal this year that didn't have a renewal event last year. So we've seen again the majority of our customers if they had something to work through in terms of rightsizing, we've seen the majority of them have the opportunity to do that in FY 'twenty four. So we expect that to have a much lower impact in FY 'twenty

Speaker 15

five. And the churn side of it, how much of the roll off in NRR is because churn has gone up? Or is it continuing to be what it has always been on the enterprise side pretty stable?

Speaker 3

It's been pretty stable. We did we've talked about these customers that we're rightsizing. You saw given the reductions that we saw across our customer base and you saw generally in organizations last year, there was some impact for that. But the churn rates themselves have been pretty stable. And you remember that our net IRR number is a trailing 12 month metric.

Speaker 3

So you're likely going to see a little more decline in that metric before it starts to reaccelerate again along with our revenue that we're expecting to see at the back half of this year.

Operator

Our next question comes from Shelby Sairafi with FBN Securities.

Speaker 20

Yes. Thank you very much. So adjusted for the 2 fewer days in Q1, you're guiding for 3.6%, say 4% growth in Q1. And for the year, you're guiding for about 1.5% growth. I know you bought them in Q2, but it seems like with a reasonable projection, there's still going to be like 2% growth, roughly half the 4% growth in Q1 in the back half of the year.

Speaker 20

Yet, you're going to have these new products ramping, the phone, the contact center, AI, etcetera. I'm trying to understand why you don't expect an adjusted revenue growth acceleration in the back half instead of the implied deceleration, again, in my model.

Speaker 3

We do we are guiding to 1.8% in Q1. So that's the outlook that we are giving. If you're backing into something different, but the guidance that we're giving as a reminder is 1.8% and then 1.6% for the full year with the decline that we are expecting from a year over year growth perspective in Q2.

Speaker 20

Let me be clear. But Q1 has a 1.8% hit from the 2 fewer days. So adjusted for that is 3.6% growth in Q1, right? So apples to apples, 3.6% goes down to something like 1% to 2% in the back half of the year and you have new products ramping in the back half of the year. So I'm trying to understand that.

Speaker 3

So as I mentioned in the prepared remarks, we are not assuming any improvement in the overall macroeconomic outlook and or changes significantly in terms of our international contribution. So all of that combined, we're taking what we believe to be an appropriately prudent outlook for the year.

Speaker 12

Okay. Thanks.

Operator

Okay. Our next question comes from Catherine Trebnick with Roseblatt Securities.

Speaker 14

Hi. Thanks for taking my question. Much appreciated. So back to the contact center to beat a dead horse. It seems like there's this a lot of the information I gathered was there's a big push for light contact centers and it seems that Zoom fits that quite well with your pricing model.

Speaker 14

And when I say light, I mean those are non agents versus agents. So do you have like a split for the quarter that you are willing to share that would be agent versus non agent? I'm just trying to get a good handle on that growth outside the traditional agents for license because there seems to be a good opportunity there.

Speaker 2

I think direction wise, you're so right. And on the one hand, for the real human agent, they still need a modern content center solution while working hard on that, replace legacy Windows solutions or other cloud business solutions. On the other hand, and it was more and more demand, I think our customers, they do not going to deploy a human agent anymore, right, kind of a virtual agent. I think that's the reason I also sell Zoom virtual agent as well. I think maybe in the next few quarters and maybe are ready to disclose that.

Speaker 2

For now, I do not think I'm ready to disclose that number. I can but we focus on both side. And either you do not have more agent, you can have the AI, this is good. Or you can buy more agent, that's okay too. So and, yeah, that's our plan.

Speaker 14

All right. Thank you.

Speaker 2

Thank you.

Speaker 19

Okay.

Operator

Our next question comes from Peter Leving with Evercore.

Speaker 21

Great. Thanks for squeezing me in. I'll just keep it quick. Kelly, your comments on M and A, can you share with us what you're thinking in terms of inorganic contributions? I mean, inorganic contributions, but what area would you consider?

Speaker 21

Is it CCaaS? Is it like workflow collaboration? But any sense on kind of where you're thinking or how you're thinking about adding to the portfolio? Thank you.

Speaker 3

Yeah. We've been exploring opportunities actually across all of those areas, Peter. We look for opportunities to either accelerate what we already have, which would obviously be in the CCaaS space. And a good example is what we did in the with Solvay around our virtual agent product or something that sits a little bit next to it, which Work Vivo is a great example of that as well. So, we are continuing to look in areas both within our current portfolio as well as around us with things like productivity tools.

Speaker 3

So, that's how we're thinking about it. Eric, is there anything you want to add?

Speaker 2

Yes. You're right on. Just either technology driven or just expand our tab or maybe double down our existing services. So pretty much those three things. We are very interested on all 3.

Speaker 2

So

Speaker 12

Thank you.

Operator

Okay. We only have time for one more question and that comes from George Iwanyc with Oppenheimer.

Speaker 17

Thanks for getting me in. Kelly, maybe expanding on your comments on the sales side and the reorg, how do you feel about your productivity in North America and internationally? And when you look at investing this year, like where are you putting the most effort?

Speaker 3

Yeah. So, you saw in our results for Q3 and Q4 that we had reacceleration and sales productivity in the back half of FY 'twenty four. And again, off to a really fast start for FY 'twenty five, so excited about that. We are investing in both direct and channel on a global basis as it's really important that we keep fueling the growth driver that we have here in North America, but also reinvesting and reinvigorating our international markets as well.

Speaker 2

Thank you.

Operator

Okay. Thank you, everyone. This concludes our Q and A. And I would now like to pass things back to Eric for closing comments.

Speaker 2

Well, thank you all for your support. Thank you all for your time. Really appreciate and see you next quarter. Thank you.

Operator

Again, this concludes today's release. We thank you all for your participation from our family to yours. Thank you.

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