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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Okay. Hello, everyone, and welcome to Zoom's Q2 FY ’23 Earnings Release 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. Tom?
Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal 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.us. 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 third quarter 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 risks and other factors that could affect our performance and financial results, that we discuss in detail in our filings with the SEC, including the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today’s webinar.
And with that, let me turn the discussion over to Eric.
Hey. Thank you, Tom. Hey. Thank you everyone for joining us today. So before starting, I’d like to welcome Dr. Xuedong Huang as our CTO, who joins us after a successful career at Microsoft, where he most recently served as Azure AI CTO and Technical Fellow. Dr. XD joins us at an optimal moment in our AI journey. In the past few months, we brought several new AI innovations to the market and announced an aggressive roadmap aimed at empowering our customers to work smarter and serve their customers better.
And, as we develop and deploy AI solutions, we strongly believe that technology should advance trust. We are privileged to have countless customers rely on us for their communications needs. We don’t take that for granted. Earlier this month, we took the additional step in stating that Zoom does NOT use customer content to train our AI models or third-party AI models. I’m proud of the approach we are taking. By putting customers’ privacy needs first, Zoom is taking a leadership position in ensuring customers can use our AI features with confidence that their content is protected.
Now, let me share how we have advanced in our mission of: One Platform Delivering Limitless Human Connection. We launched Zoom Scheduler, which serves to reduce the hassle of scheduling with people outside your organization, and Intelligent Director, which uses AI and multiple cameras to provide the best image and angle of participants joining from a conference room. We also launched many new offerings like Zoom Clips, which enables asynchronous video conversations.
And more and more customers are getting on Zoom Team Chat, driven by increased adoption of Zoom One and new features like Continuous Meeting Chat, which connects the transient in-meeting chat feature to the persistent Zoom Team Chat product. Currently, we have two fortune 15 companies, one major consulting firm, a global F&B brand and a leading law firm using Zoom Team Chat as a core means of text-based communications.
Our Contact Center product has surpassed 500 customers and we are rolling out about 90 new features and enhancements per quarter. We launched Workforce Management in early July to help customers streamline customer communications, manage agent needs, and transform their customer experience all from a single, unified platform. WFM is already off to a great start and we look forward to adding additional products to this suite to expand our native customer experience capabilities and revenue streams.
We have progressed rapidly in our integration of Workvivo. After rolling it out internally, I could not be more impressed with the product and confident in the value it will bring to our customers in terms of building culture across a distributed workforce, ultimately delivering upon our strategic pillar of enabling hybrid work.
Speaking of which, a few weeks ago, we announced internally a structured hybrid approach -- asking our Zoomies that live within commuting distance to come into their local office twice a week. Zoom is purpose-built for hybrid work and it is on us to understand what our customers are experiencing in their hybrid journeys and what works and does not work for them. We believe that this approach will enable us to continue to innovate for our customers and deliver what they need to succeed.
Now moving on to some of our customer wins. First, we are excited to expand with the United States Postal Service. In Q2, the postal service added Zoom Team Chat for 21,500 users to their existing Zoom for Government deployment. Let me also thank Brookdale Senior Living, the largest operator of senior housing in the United States. Brookdale started as a Zoom Meetings customer in FY20. A year later, they began evaluating Zoom Phone. And in Q2 they went all-in on the cloud and upgraded to Zoom One, in order to unify their communication needs under one integrated product.
Let me also thank Perdue Farms. Like many of our customers’ journeys, Perdue’s started years ago with an initial Zoom Meetings deployment. Last fall, they went all-in with Zoom One Enterprise Plus. However, the story does not end there. In Q2, Perdue added Zoom Contact Center due to its native integration with their existing Zoom Phone deployment and our ambitious innovation roadmap.
Let me also thank Valmont Industries. Valmont came onboard as a Zoom customer a little over a year ago with Meetings and Phone and quickly became a major platform adopter, including Zoom One and Zoom Contact Center. And in Q2, with the goal of utilizing AI to better serve their customers and also their employees, they added Zoom Virtual Agent due to its accuracy of intent understanding, ability to route issues to the correct agent, ease of use and quality of analytics. We are so delighted to see our partnership with Valmont grow so quickly and are committed to innovating further to support their operations.
Finally, let me thank Dollar General, America’s general store, for choosing Zoom’s Workvivo to connect employees as the digital heartbeat for the company. Dollar General will rollout Workvivo’s employee engagement platform for its roughly 190,000 employees to enhance the employee experience at the individual, group and district levels, drive employee dialogue, and reinforce its strong culture. Again, we are so excited to welcome and expand with USPS, Brookdale, Perdue Farms, Valmont, Dollar General, and all of our customers worldwide.
And with that I’ll pass it over to Kelly. Thank you.
Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few milestones. First, operating cash flow grew 31% year-over-year to $336 million. Second, Zoom Phone reached roughly $0.5 billion in annualized run rate revenue. And finally, we are excited that Zoom Contact Center has surpassed 500 customers in only six quarters.
In Q2, total revenue grew 4% year-over-year to $1.139 billion, which includes $10 million of pressure from foreign exchange. This result was approximately $24 million above the high end of our guidance. Our Enterprise business grew 10% year-over-year and represented 58% of total revenue, up from 54% a year ago. We continue to see improvement in Online average monthly churn, which decreased to 3.2% from 3.6% in Q2 of FY '23.
The number of Enterprise customers grew 7% year-over-year to approximately 218,100. Our trailing 12-month net dollar expansion rate for Enterprise customers came in Q2 at 109%. We saw 18% year-over-year growth in the upmarket as we ended the quarter with 3,672 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 26% in Q2 of FY '23 and include some of the amazing names that Eric highlighted earlier. Our Americas revenue grew 6% year-over-year, while EMEA and APAC declined by 1% and 3%, respectively. Absent currency impact, both EMEA and APAC would have been approximately flat year-over-year. On a quarter-over-quarter basis, all regions grew 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, restructuring expenses and all associated tax effects. Non-GAAP gross margin in Q2 was 80.3%, an improvement from 78.9% in Q2 of last year. We are pleased with the strength of our gross margins as we continue to optimize usage across the public cloud and our co-located data centers for both existing and emerging technologies. For the full year, we expect non-GAAP gross margin to be approximately 79.7% as we make additional investments in new AI technologies.
Research and development expense grew by 6% year-over-year to approximately $104 million. As a percentage of total revenue, R&D expense increased to 9.1% from 8.9% in Q2 of last year, reflecting our investments in expanding our product portfolio, including Zoom Contact Center, AI and more. Looking ahead, investing in innovation will remain a top priority for Zoom. Sales and marketing expense decreased by 3% year-over-year to $276 million. This represented approximately 24.2% of total revenue, down from 26% in Q2 of last year. As a reminder, Zoomtopia will be held in Q3 of this year and will drive incremental marketing investment in the quarter.
G&A expense declined by 19% to $73 million or approximately 6.4% of total revenue, down from 8.2% in Q2 of last year, as we continue to achieve greater efficiencies and experienced onetime savings in the quarter. Non-GAAP operating income grew by 17% to $462 million, exceeding the high end of our guidance of $410 million. This translates to a 40.5% non-GAAP operating margin, a meaningful improvement from 35.8% in Q2 of last year. Our effective tax rate in Q2 was 18.5%. For the remainder of the year, our tax rate is expected to approximate the blended U.S. and federal state rate. Non-GAAP diluted earnings per share in Q2 was $1.34 on approximately 306 million non-GAAP diluted weighted average shares outstanding. This result was $0.28 above the high end of our guidance and $0.29 higher than Q2 of last year.
Turning to the balance sheet. Deferred revenue at the end of the period was $1.37 billion, down approximately 2% from Q2 of last year. This was in line with the high end of the expectations that we shared last quarter. For Q3, we expect deferred revenue to be down 4% to 5% 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 9% year-over-year to approximately $3.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 61% in Q2 of FY '23 indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year.
Operating cash flow in the quarter grew 31% year-over-year to $336 million. Free cash flow grew 26% year-over-year to $289 million. Both results include the approximately $60 million cash payment related to the legal settlement that we discussed last quarter. Our operating cash flow and free cash flow margins were 29.5% and 25.4%, respectively. We ended the quarter with approximately $6 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Given the strength in profitability and collections, we are increasing our cash flow outlook for FY '24. We now expect free cash flow to be in the range of $1.2 billion to $1.23 billion.
Turning to guidance. For Q3, we expect revenue to be in the range of $1.115 billion to $1.12 billion, which at the midpoint would represent approximately 1% year-over-year growth or 2% in constant currency. We expect non-GAAP operating income to be in the range of $400 million to $405 million. Our outlook for non-GAAP earnings per share is $1.07 to $1.09 based on approximately 309 million shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY '24. We now expect revenue to be in the range of $4.485 billion to $4.495 billion.
At the midpoint, this represents approximately 2% year-over-year growth or 3% in constant currency, which we expect to be neutral in the back half of the year. Our increased total revenue guidance reflects a consistent view on Enterprise, with tempered expectations for Online for the remainder of the year. We expect our non-GAAP operating income to be in the range of $1.685 billion to $1.695 billion, representing an operating margin of approximately 38%. Our outlook for non-GAAP earnings per share for FY '24 is $4.63 to $4.67 based on approximately 308 million shares outstanding.
Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support. Before opening up for Q&A, we are excited about our premier user conference, Zoomtopia. It will be in person in San Jose as well as on Zoom Events. We look forward to sharing more about our expanding platform, new innovations and customer testimonials. Please join us at Zoomtopia on October 3 and 4.
David, Please queue up our first question.
Thank you, Kelly. As Kelly mentioned, we will now move into the Q&A session. [Operator Instructions] Our question will come from Mark Murphy with JPMorgan.
Well, thank you so much and congrats on solid execution in the quarter. Curious, if you can comment on the Zoom Scheduler product. It looks like a very attractive add-on option and a clear efficiency gain. I understand that, that's going to be free for some period of time and that looks like $6 per month for certain users. I understand it's going to be included in some of the other bundles. But can you just comment on how that's going to work or maybe Eric, you can touch on the efficiency gains from that product? And Kelly, any type of a framework for the revenue potential out of that particular product?
Yes. So I can talk on the product side. Clearly, Kelly, feel free to tell on the revenue potential. I think, Mark, you're also right on. I guess probably you already tried it out is indeed very attractive. The reason why you look at the whole customers are -- including Zoomies, right, how we schedule the meeting. Let's see, Mark, I want to schedule a meeting with Zoom next week is so complicated, right? I need to [indiscernible] we think about calendar schedule is so hard, meaning across the company, scheduling is so complicated, right? How to have the customers and simplify that experience, that's why I decided to introduce Zoom Scheduler, right? And also, there are some other start-up solutions out there.
The customer, they would like to lever the Zoom platform because they already used Meeting and the Phone, Team Chat, one more click, they can schedule the meeting with somewhere from outside organization, really like that experience. That's why we decided to build that. And we already have a free trial and as a customer [indiscernible] customers already and also be part of the Zoom One as well down the road. And actually, it's doing very well and really simplify the way for you to schedule meetings with any other side of your organization. We're pretty excited about that opportunity.
Yeah. I think in terms of its overall contribution, Mark, it’s at a very attractive price point and will grow over time, certainly. But also, we think that what it does is make the product continue to be where you live and make, especially our larger enterprise customers that much more retentive as it continues to spread the platform and how you spend your day.
Thank you so much.
Thank you, Mark. Hopefully you try that. Thank you. Appreciate it.
Okay. Our next question comes from Meta Marshall with Morgan Stanley.
Meta, we can't hear you.
Because I'm on mute. So one of the questions that I had was just, what you're seeing in terms of the environment? I know that your upside kind of came from the Enterprise. Just wanted to get a sense of how the environment changed during the quarter, if there were any changes during the quarter? And just whether kind of that upside came as a result of kind of better upsells or just more deals kind of getting closing in shorter order? Thanks.
Yeah. Thank you, Meta. So I would say in terms of Q2 versus Q1, the environment has been pretty consistent. We continue to see momentum in Zoom One, in Zoom Phone. There are still, I would say, lengthen sales cycles out there and customers really making sure that they take advantage of doing their full due diligence. But we're really excited about the vision that we can take for them not only around, obviously, the existing platform but what's also coming from an AI perspective. And I think our customers are finding that very attractive, as you’ve heard from the customers that Eric talked about seeing a lot of momentum of customers that were originally Meetings customers really moving either into Zoom One or adding on Zoom Phone and considering Contact Center as well.
Great. Thanks.
David, next.
David, who is next?
Apologies. Our next question comes from Kash Rangan from Goldman Sachs.
Hi, Kash.
It looks like the Enterprise business is seeing stability with respect to attrition, et cetera. I'm curious to get your thoughts on the Online business. So it's still a substantial part of the revenue and anything that you have identified that could help stabilize the attrition levels? And also, just while we're at it, what is the pricing power of Zoom? Like you talked about customers worried about inflation and doing shorter-term contracts, that I guess on the flip side means that you could raise prices. So wondering how much leverage we have at that. Thank you so much.
Yeah. So in terms of the Online segment, we were really pleased with the continued improvement that we're seeing in the [indiscernible] rates or the churn rates. They are really at historic lows. And so that's really great to see. And when the interim team continue to innovate, we just saw a little more volatility, and that's what we indicated in sort of tempered expectations for the rest of the year, but really pleased with the ongoing progress that we're seeing in that segment of the business.
And then in terms of the pricing power -- I mean, Eric, feel free to chime in. But certainly, we continue to have a discussion with our customers when it comes up for renewals, looking for opportunities to potentially expand their usage of the portfolio, moving them from Zoom Meetings to Zoom One is a very common upsell mechanism or, I should say, movement that we're seeing with our customers today and considering, is there an opportunity potentially given the value that they're seeing in the platform potentially for a price increase at renewal as well?
Thank you.
Yeah. Just quickly, in terms of pricing power and most of the businesses, they still view employ experience as the number one priority, right? That’s why they really wanted to kind of give a customer the best service like a Zoom platform. Otherwise, probably they do not experience on price, that’s not the case, right? And most of the customers we talked with has really appreciated the value and ease of use and quality of Zoom service.
Thanks so much.
Thank you, Kash. Appreciate. You bet.
Our next question comes from Michael Funk with Bank of America.
Yeah. Hi. Thank you for taking the question today. So congratulations on new logo additions, good momentum there and the Phone adds as well. Just wondering, Kelly, I mean, what has to happen with some of the other metrics, it did decelerate during the quarter. India decelerated sequentially. Online churn up sequentially. Enterprise customer additions also slowed sequentially. So thinking about the acceleration in revenue growth we've been expecting or hoping for, which of those metrics is going to turn first? And how much visibility do you have into that turn?
Yeah. So a couple of things. Let me just comment on a couple of the metrics that you called out specifically. First of all, the Online term metric. As a reminder, we expect Q2 and Q4 to be seasonally higher than Q1 and Q3. So while it was up over Q1, it was down over Q4, and that's because of summer and winter holiday. So I think the 3.2 number is a really great number. And we are going to continue and continuing to focus on opportunities to improve that. In terms of the Enterprise, we're really focusing on some of the approach as we've talked about earlier.
Certainly, Zoom Phone is one of the key drivers in terms of expanding our customers use to the platform. That doesn't necessarily result in new customers, but you could see that in the Enterprise customer metric as that starts to expand also the success of Zoom One is going to drive that expansion of more customers in the $100,000. So I think those are the metrics that you should watch as great indicators as our Enterprise team continues to in Phones in One in Contact Center. And then, of course, as AI becomes more front and center, you'll get to see that as well.
So just quickly then, so the NDRR for Enterprise that should improve as we exit the year, is that expectations of 109 (ph) just should improve off that number?
You remember, it's a trailing 12-month number. It may come down a little bit more yet, but then start to inflect potentially at the back half of the year, but it might be into early of FY '25.
Okay. Thank you, Kelly. Thank you, Eric.
Thank you.
Our next question comes from James Fish from Piper Sandler.
Hey, guys. Thanks for the questions. Kelly, for you or Eric, are you seeing optimizations on your seats showing a slowdown or a similar pace to what you've seen more recently? Is there any way to talk about the linearity in general? And Eric, we get the investment behind AI, and it seems like it's causing gross margins to drop a couple of points and guide sequentially. I guess what can you say that gives confidence that this isn't just further price degradation or just a higher level of conservatism on the other side of the coin?
Kelly, you wanted to address the first one?
So in terms of the optimization of seats, what we've seen is, I think we talked about the sales motion before that our reps have the opportunity to really get in there and talk to our customers and they've done a great job about logo retention. And even if they are customers because they've had a dislocation in their employee base, taking that opportunity then to replace that revenue with an upsell of another product like Zoom Phone and showing them how overall we can drive such a great ROI for them and save them.
And our sales team has been incredibly successful at that. And so that's what we're seeing, even though there's still a little bit of shifting, I would say, of seats in there, we're seeing lots of momentum on those upsells at that renewal period. And I just want to highlight, we only -- in terms of gross margin, we had 80.3 this quarter, and we only guided to 79.7. So it's not even 100 basis points of degradation. So Eric can talk about the reasons and why that is and what we're investing in.
Yeah. Gross margin is very, very strong. Again, in terms of the impact, it's just a short term, not long term. The reason why -- when it comes to AI, it's becoming more and more important. Many of our customers told us, they rely on Zoom platform, like all the features today, like Meeting Summary. Someone can take a meeting manually, right? How to leverage AI improve the productivity and efficiency, right? For sure, we needed to invest more. The good news is we already invested two to three years ago, right? And that's why some of the feature are already ready. But how to further double down on that investment, right? We hired Dr. XD and also invested in a lot of the GPUs as well, our team, and we have a high confidence and those AI features will have a customer rock, right?
And also our strategy is very differentiated, right? First of all, have a federated AI approach. And also the way we look at those AI features, how to help a customer improve productivity, that's very important, right? And because the customer already like us, not like some others, right, who gave you a so-called free services and then your AI features price. That's not our case, right? We really care about the customer value and also add more and more innovations. At the same time, the way for us to look at innovations not only for incremental innovation in terms of revenue AI but also how to lever the AI due to some brand new services to innovate, to deliver more value than customer expected. That's where we can monetize to lever the AI technology. That's why we keep investing more. Again, the goal is about some brand new AI services like Zoom a lot of other services we are going to build it down the road. So stay tuned for the Zoomtopia.
Thanks, Eric. Thanks, Kelly.
Thank you.
Our next question comes from Matthew VanVliet, BTIG.
Good afternoon. Thanks for taking the question. I wanted to dig in a little bit more on the trends you're seeing in the Contact Center. Can you help us with what situations you're seeing the most success in or the most sort of Meetings and Phone? And then sort of within that, are you seeing more sort of internal help desk-type situations? Or are you seeing kind of higher volume customer-facing deployments as well?
Yeah, Matt. It's a great question. First of all, I can tell you, take a Zoom Phone for example. We already deployed the Contact Center Zoom since a year ago, right? And our support team are very happy about our own deployment. It works extremely well, right? Because all those innovations and integrations on customers, right, for sure a loss of innovations every quarter. But the brand recognition, right, it still -- will take some time. That's why quite often all the existing customers, they would likely deploy Zoom Contact Center integration very well with the Zoom Phone and also they a new use case like internal hyperdesk, IT hyperdesk as
At the same time, we also have some Contact Center customers no have a Zoom Phone, they don't have a Zoom Meetings. They like a Contact Center. I think given the speed of innovation, I think we have a higher confidence not only SMB but also more and more customer when realize the value of Zoom and Zoom Contact Center, I think something similar to what we did for Zoom Phone as well, right? When we started on existing customer realize, wow, there's a huge value and why not a try or tested out Zoom Contact Center as well, right? So that's the pass for our – to further grow our Contact Center business.
Great. Thank you.
Thank you.
Our next question comes from Ryan Koontz with Needham
Hi. Thanks for the question. I wanted to ask about the healthy growth we're seeing here in the $100,000 accounts. Is that primarily displacement of legacy vendors that we're still seeing or are these other kind of competitive wins, greenfield-type wins? And can you share anything about kind of the effective playbook you're using up market there to expand these big logo wins? Thanks.
Yeah. I think some of that, Ryan, points to the ongoing success we're seeing with Zoom One. Customers really like the ability to buy the bundle, which meets all of their needs. And it's a great opportunity to see the value, especially previously existing Meetings customers seeing that opportunity. We do continue to see greenfield, especially Eric just highlighted Contact Center. Sometimes it's a way that they're coming in the door now, which is amazing. And then also, we still have a lot of customers that are Meetings customers that are upgrading to Phone as well. So it's a combination of both new customers that come in at that level as well as customers that grow up to that level over time.
Got it. Any general changes in the pricing environment market?
No, especially from Q1 to Q2, there were won't really significant changes. As I mentioned, there's still think lots of scrutiny around the yields, but no other real changes in the environment.
Got it. Real helpful. Thank you.
Our next question comes from Siti Panigrahi with Mizuho.
All right. Thanks for taking my question. My question on Contact Center again. That is -- that's a huge opportunity considering like 80% legacy still here to move to cloud. And you are starting from a clean slate, just building yourself in-house. So Eric, how are you trying to differentiate, I mean, among other cloud vendors right now in the Contact Center space. And Kelly, should you think about this Contact Center next leg of growth? Is this adoption should be like Phone what we have seen in the last few years?
Yeah. So speaking of differentiation, first of all, we built the Contact Center service from ground up, right? This is the new architecture and also video is part of that as well. AI as AI components, we invested in AI and also, at the same time, a seamless integration with other products as well. That's why we have a high confidence, right? And all like some other vendors there for a long, long time, right? And the architecture may not be modern and the performance, the quality and so on and so forth, right?
However, how to make sure every Enterprise customer during their RV process, right? They do look at Zoom. When they look at Zoom, we have a higher confidence, we can't compete. And also, we just had a lot of innovations around the Workforce Management platform as well and essentially Zoom Content Center to become our full Contact Center suite. Not just one part, right? It's targeted SMB and Enterprise and also with AI, I think we are innovating very fast, right, to compete against any other cloud-based or on-prem based and Contact Center vendors.
And is that going to be similar like Phone kind of adoption? [Multiple Speakers]
Yes. Sorry, go ahead -- yes.
Only six quarters old today. So it's very relative, right, to the existing ARR base. It's small. It's growing very quickly, though. So it won't be visible to you probably for at least another four -- I don't know, four to five to six quarters, probably, but we’re really pleased with the growth. And then as Eric mentioned, when you start considering Workforce Management, of course, Zoom Virtual Agent, Quality Management, which is coming, it starts to be a platform itself that could really be a significant growth driver over time.
[indiscernible] Zoomtopia.
Thank you.
Our next question comes from Rishi Jaluria with RBC.
Wonderful. Hey, Eric. Hey, Kelly. Thanks so much for taking my question. Two quick ones. First, look, I appreciate a lot of the investments you're making around generative AI. And I know it's early, but I want to think about how do you think longer term about your strategy around monetizing generative AI? Is it around specific modules and discretionally charging for them? Is it about gatekeeping them behind higher tiers and using that to drive upgrades?
And maybe alongside that, you're starting to see better adoption, I think, of your noncore products, including Zoom Phone $0.5 billion in ARR. Eric, you called out some great customer wins on Zoom Chat. How do you think about using generative AI as kind of a connective tissue to drive more usage of noncore products and maybe even of the entire Zoom One pricing packaging? Thank you.
Yeah. That's a wonderful question. So look at the Zoom platform, right, so not only do we have Meetings, right? So some people still sort of we're just a Meeting company [indiscernible] of a full company, right? For those customers, we deployed like Team Chat, USPS deployed Zoom Team Chat. A lot of companies deployed the Zoom Phone and Whiteboard Zoom Contact Center as well Scheduler and also the Zoom Clips. As we build more and more services, right, and essentially, when we double on our platform, how to look at everything from a customer perspective, how to add more value?
Let's take a Zoom One, for example. Customers say, I really like Zoom, already paid a platform. A lot of features to take this generative features like Meeting summary and to leverage GenAI to Team Chat and meeting inquiry and let's say, you are late to the meeting, how to get a quick real-time summary about what had been discussed over the past 5 minutes. All those GenAI features can make the entire platform, not only sticky, but also more value, right? So quite often, some customers say, yes, you can charge and some other competitors do that.
We are taking a different approach. We think if you add more value to customers, and they are doing more -- were likely to move on to our entire platform, right? It does not mean we cannot monetize AI. How do you think about AI to build new services, right? [indiscernible] one example. Back to 1995, 1996, I mean Internet was sort of born, when every -- let's say, the stores, right, when they Internet, you do not want to increase the price, right? You buy online, why increase price?
However, you can have the Internet to build new services, right, new innovations. That's why we're taking a different approach, not as some other competitors. They gave us free service AI, oh my god, they charge you a crazy price. I do not think that’s fair to customers, right? And we are taking a different approach and more value to leverage GenAI to our existing customers focus on the future improvements to leverage GenAI.
At the same time, given our speed of innovation, how to leverage GenAI to build some brand new AI services to monetize. That’s our goal. That’s our direction. That’s our differentiated pricing strategy as well. Hopefully, my answer is clear. Otherwise, let’s talk more at Zoomtopia.
Yeah. Very helpful. I’m looking forward to it. Thank you.
Appreciate it. Thank you.
Our next question comes from Alex Zukin with Wolf Research.
Hey, guys. Thanks for taking the question. I guess, so when I sit back and look at the quarter, this quarter looks a little bit different than last quarter. You grew sequentially your revenue base on Enterprise and Online for the first time together in some time where both of those things happen. Your Enterprise billings actually grew as well. And so I look at the guidance, and it looks like we're taking a step back, and I appreciate the conservatism in the macroeconomic environment.
I appreciate the fact that you've got changes you're still working through in the go-to-market. But help us understand, if we look at the trends as they -- as churn stabilized to a point where we can expect, for instance, on the Online business that this is a new floor we can count on. Because if I look at the exit rate for Enterprise revenue, I don't think it's at the rate that any of us sitting here would be jumping up and down about you mentioned NRR on the Enterprise side starting to -- I think you said in but maybe go back up in the first half of next year, what's the right way to interpret the Enterprise growth exiting this year and into next year? And then I've got a quick follow-up.
Yeah. So in terms of Online, I would say that we are very pleased with the performance that we're seeing in the churn rate itself. And I do think we're stabilizing around a new level that is back to historic levels. And I think that's a reasonable assumption to make going forward. And then in terms of Enterprise, we're obviously not in a place that we're going to comment on FY '25 yet. We're not going to do that on this call. But Enterprise, when you look at it from -- I don't say this for you. When you look at it in terms of the growth rate that you're expecting, you've been back into, right, what it is. And we are, as you say, still considering no improvement from the macro at this point.
And as you said, continuing to have the sales force settle into our new structure. We're thrilled to have Graeme leading the organization. We -- some of the transitions took a little bit longer in EMEA and APAC than the rest of the world, as you've heard us talk about. But as we're coming into Q3, the pipeline is strong. It's stronger than it was as we were coming into Q2. So I think those are the factors you can take into consideration as you're looking for the growth rate for the rest of the year.
Okay. And then maybe, Eric, for you. Obviously, the evolution of Zoom from a point solution to a platform is nice to watch. You've talked about Zoom One. You've now given us that $500 million annualized number for Zoom Phone. What's the penetration today for Zoom One within the Enterprise base? And what's the penetration for the Phone product in the Enterprise base? And where does it go from here in your mind, like what does success look like for you?
Yeah. I think Zoom Phone penetration is doing relatively well. But Zoom One, I think still we had a huge opportunity, right? Zoom one is not only for Zoom Meetings, the Phone, right? Also the Team Chat, if the customer wanted to deploy our free Team Chat solution and Whiteboard and a lot of other services, right, I think a huge opportunity, especially for medium and larger-sized customers and we needed to kind of share them the value.
As I said earlier, about like GenAI features, all those kind of things is part of Zoom One, right? So leverage all those up, the cool features, right to penetrate more about Zoom One the market share, right? And Zoom Phone itself doing right at well, but a huge opportunity ahead of us for Zoom One penetration. And I will say we just started. I give one example. I take USPS, for example. When the reader is wow, you have a greater Team Chat solution is also part of Zoom One and also it's free. That's amazing, [indiscernible] why not deploy Zoom One, right? So many more customers when they realize the full potential of a Zoom One platform, I think that's the value, right? We need to do focus on.
Thank you, guys.
Thank you, Alex.
Our next question comes from Peter Weed with Bernstein.
Thank you. And maybe this kind of follows up a little bit of what Alex just getting at. But first off, I want to say it's really exciting to see the progress on Zoom Phone and Contact Center. It's been amazing to watch that and all the checks I do with folks are very positive on things that are going there. I think, Kelly, you commented a few minutes ago and were to think with Alex here, that NRR may come down a bit before it starts reaccelerating maybe by the end of this fiscal year and maybe the beginning of next year, we start to see some line of sight to some benefit there. I'd really love to kind of dig into like what will drive that improvement?
And kind of when split the customer base, you do a really nice job of reporting bolt-on greater than 100,000 and less than 100,000, like some quick math suggests where it's been really painful recently is on the greater than 100,000 customers. And I tried to figure out like on that reacceleration is it about kind of reigniting those greater than 100,000 is the opportunity with the less than $100,000, like growing them up because they're less mature. And like really what is it that you are going to be delivering with these customers to reignite that between those customer bases?
So one of the things I commented on is that we have seen some dislocation in our customers' own employee base and that our sales reps do a great job when they're talking to those customers about helping them potentially right size if they have downsize in their employee base, but upselling and retaining that revenue in other parts of our platform. So that -- as is there's still pressure in the macroeconomic environment, you're going to see that a little bit, right? So maintaining logos, even maintaining the same amount of revenue, but would have been an upsell, if not for a down sell due to seat. So part of it is just an ongoing potential change in the macro, which we have not factored into the guidance that we gave.
And then the continued acceleration of all these new products that we keep talking about, right? Phone is obviously doing really well. And it's well hit its stride. But remember, that's taken three to four years to accomplish. And so Contact Center that we expect to follow the same is just -- it just needs a little more time. And then you heard about all the additions into the Contact Center platform itself with ZDA, with Workforce Management and Quality Management that's coming, all of those will continue contribute to growth over time. And then Eric sort of hinted thinking about the ways that AI over time is going to help with both retention as well as potential opportunity to grow revenue. So it's just -- some of these things just have to grow a little bit or age a little bit and mature into the stage that they're contributing in a way that you can see them.
And how high do you anticipate NRR being able to get once all that stuff works out? I mean, obviously, you've seen some of those headwinds. So you kind of know how much you're like I lost this and it would have been so much better. Like if you're looking forward, like what should we aspire to be getting NRR back to? And like how soon do you think we can get there?
Yes. Peter, we'll talk about that more when we're ready to give FY '25 guidance, but not today.
Yeah, I can take a little bit more, Peter. So the question you asked was very similar to what about Zoom One. Actually, today, the problem is Zoom is a too strong brand on Meetings side, right, right? Many of the customers unfortunately, they even did not realize we have a lot of other services, not to mention a Zoom One platform, right? That's the number one challenge that we are facing. How to make sure all those – even existing – even for existing customers. They also think Zoom just a meeting, that’s not the case, right? When we and share a greater story, make sure most of our customers are publicly realize our Zoom not only just the meetings had a full platform, I think the inflection point will not happen until then.
Thank you.
Thank you.
Our next question comes from Taz Koujalgi with Wedbush.
Hey, guys. Thanks for taking my question. Two questions. First one for Kelly. I think you had a price increase for the Online business in Q1, and that was being phased out, I think, in different geos at different times. Has that been rolled out across the globe? And if you can comment on any tailwind you saw from that price increase in the Q2 Online business?
Yeah. So it has been very effective in general in terms of maintaining strong retention rates and moving customers from monthly to annual as they continue to see value when we rolled out this price increase. And given that it's been in effect for the full time now, we're not going to break out, but it break it out separately, but it certainly is overall having a great impact including in the momentum for our Online and it is -- I believe it's live in every market at this point.
Got it. And then one follow-up on Contact Center. I know it's just pretty early you've just started -- you've just had your first early customers. But any comments on price points you're seeing and attach rate of seats. So let's say a customer has 100 seats of Zoom Meeting, when customers buy a Contact Center, what is kind of the attach rate that you're seeing for these early customers?
Yeah. It's -- I mean it's very different, right, in terms of it's not anywhere near, like Phone, typically is near one to one and sometimes even more one to one attach rate. Contact Center is very different. It depends on the use case we're seeing of the customers. If it's an internal help desk, or if it's like -- one of our largest deals to date was a BPO, where it is their business, right, to drive Contact Center. So I don't think there's necessarily a standard ratio that you can look at because it varies so much based on use cases.
And then in terms of pricing, as a reminder, our list price for Contact Center is highly disruptive. It's $70 per seat. And given -- comparing that, it's -- given comparing it to the other competitors in the market, it's a really -- I think it brings a lot of value to our customers. So while Enterprise customers and large customers are going to get discounts, we've certainly been able to manage to maintain price points, given how disruptive and competitive it is compared to others in the market.
Guys, sneaking just one more clarification. Kelly, you mentioned that we won't have visibility into Contact Center revenues for another four to six quarters. It's still very early. Were you implying that it will be close to 10% of revenues in four to six quarters?
No. I don't mean to imply that at all. I just mean that I see laughing -- that over time, you started to see Zoom Phone and we talked about like more milestone metrics and how it was contributing, that's what I was saying. I mean that would be the best growth rate if that were to occur.
Got it. Thank you guys. Thanks a lot.
Thank you.
Our next question comes from Matt Stotler with William Blair.
Hey. Thank you for taking the question. Maybe just a follow-up on Zoom Phone. If I look at the disclosure this quarter, $500 million ARR and last quarter, Zoom Phone 10% of revenue. The implication would be something in the ballpark of, let's say, 10%, maybe a little more sequentially in terms of growth for Zoom Phone ARR. I'll just dig into -- or double-click on, I guess, what's driving that growth, right? Is that indicative of the success we're seeing is Zoom One? Is that evidence of go-to-market maturity there? Is it some large customers like the BPO you just mentioned kind of ramping up? Anything you'd like to call out there?
Yeah. I mean, actually, Matt, it's all of the above is what I would say. It's -- as we've taken -- as we are talking to our customers about renewals, taking the opportunity to talk to them about the value of Zoom One or talking about just helping them -- I think every CFO and CIO across the world today is trying to think about how do they drive more efficiencies in their organization and Zoom Phone is a great way to do that when you look at it compared to the ROI, especially of having an on-prem solution. And then also with Contact Center -- Contact Center is a driving force, Zoom Phone is a very natural adjacency to it. So I think it's a combination of all of that, and it's just going to continue to create more and more synergies as Zoom Contact Center especially continues to mature.
Yes. Just quickly, when we talk with our customers, they really like we have a both -- they deploy both Zoom Meeting and Zoom Phone together. The Contact Center, a new opportunity, in particular, for those customers I think they don't want to deploy a point of solution, right? If you just have a Phone business, it's really hard to build a sustainable business customer Phone and Meetings, some of – they’re very similarly integration, like you have a phone call, one more click and jump on the video meeting, right? So that’s – that kind of a similar experience really helped us further our Phone growth, right? If you just offer a point of solution, it’s really not scalable, not a sustainable. And down the road, more and more customers would like to move on platform play like a Zoom.
Got it. Thank you.
Thank you.
Our next question comes from Sterling Auty with Moffett Nathanson.
Hi, Sterling.
Hey, guys. All right. Kelly, for the Online outlook, how much of this is that -- because it seems like the Online guidance is a little bit worse than what we had before. How much of this is macro? How much of this is execution? And Eric, one for you. When we think about AI and all the innovation that you're driving, how much of that AI innovation is just going to be driving and differentiating the core Zoom products versus bringing a premium monetization kind of pricing model or specific AI SKUs?
Eric, do you want to go first?
Yeah. So first of all, in terms of Online study. I know you have an account. Hopefully, you still have account. And for sure, it can contribute to our Online growth. So speaking about AI, I think we are taking a different approach. As I said earlier, from an architecture perspective, it's different, federated AI. In terms of monetization, right, again, we look at it how to leverage GenAI to improve our core Meeting experience and deliver more value, make the services more sticky Zoom always offer more and more features values. And at the same time, we do not kind of charge price, increase the price a lot at all, right? That's right, we build a trust. They want to go to for Zoom Phone platform.
At the same time, GenAI does bring huge opportunity like in terms of monetization, in terms of the new service. As I said earlier, how to leverage GenAI to build some branded new service. You cannot only turn on low-hanging fruits. You already deployed this service. I have a GenAI feature now, you need to pay crazy price. I do not think that's sustainable. A customer do not like it. right? That's our approach, how to leverage GenAI to make sure existing customer happy and leverage GenAI to build new services focused on innovation, innovation and innovation. That's our approach.
Thank you, Eric. And Sterling, in terms of Online, I would say we're pleased with the execution and where you see that is the ongoing stabilization in the churn rate. That, I think, has been really, really well done and stabilized over the last 4 quarters now. And I think that's a really great indication of the ongoing improvements of the platform, the buy flow, the movement of customers from monthly to annual where we do see some ongoing headwinds is in the overall macro, which is driving more for the top of the funnel.
And that's where when the team continue to focus on new pricing packages, new payment currencies, things they can focus on to expand the top of the funnel so that over time and then eventually starting to add new products as well that can be sold online. That's what will eventually drive this. Ideally, we want it to not only be stable but to be a growth driver as well.
Makes sense.
Thank you, Sterling.
Okay. We have time for one more question. And that last question goes to William Power with Baird.
Okay. Great. Thanks for taking me in. Maybe one more question on Contact Center. Great to see the traction there. I wonder if perhaps, Eric, if you can update us on where you are with respect to go to market? I know that has been a big focus. How much more room and opportunity is there on that front? And then I guess the second part of that is it feels like there's a big opportunity with respect to AI Contact Center being a new entrant, how do you think about the opportunity for whether it's virtual or other capabilities to help you be even more disruptive in that market?
Yeah. Great question. So yes, speaking of go-to-market, I think on product front, we have a high, high confidence innovation speed, we have so many features and Workforce Management, a lot of other features are being introduced every quarter. In terms of go-to-market, I think not like what we did before for Meetings, right, by and large, more like primarily driven by [indiscernible] business, Contact Center is different. For sure, we need to double down, triple down on the indirect channel, right, embrace all the sort of partners and master agent and so on so forth. And we need to invest more on that front. And essentially, this is one of the things why not like Zoom Phone [indiscernible] accelerated revenue, but even have a greater Contact Center product. As you see the progress on go-to market front, I think that we will see the great result.
And in terms of AI, not like other vendors, right, they already have Contact Center solution for a long, long time. When you look at AI kind of architecture and flexible, right, how to add AI to that to all those existing leaders the Contact Center. We already realized the importance of AI, right? That's why we have a very flexible architecture. Not only do we build organic AI features but also acquired Solvvy and also the Virtual Agent and so on and so forth. Organic growth and also the acquisition certainly help us a lot in terms of product innovation. And AI is going to put a big look for the Contact Center. We have higher confidence we can do very well on that front.
Thank you.
Thank you.
Okay. This concludes our Q&A. I would now like to pass things back to Eric for closing comments.
Thank you all for joining us for the Q2 earnings call. I really appreciate for your great support and very, very beautiful. And thank you. Appreciate.
Thanks, everybody.
We thank you all for your participation, and we look forward to seeing you again. This concludes today's conference. Enjoy the rest of your day.
Thank you.
Good-bye.