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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.
00:02 Hello everyone, and welcome to Zoom's third quarter fiscal year twenty twenty two earnings Release. I'd like to remind everyone this call is being recorded.
00:10 At this time, I'd like to turn it over to Tom McCallum, Head of Investor Relations.
00:14 Thank you, Matt. And let me welcome everyone as well to Zoom's earnings video webinar for the third quarter of fiscal twenty twenty two. I’m joined today by Zoom’s Founder and CEO, Eric Yuan and Zoom’s CFO, Kelly Steckelberg.
00:29 Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.com. 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.
00:49 During this call we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full fiscal year twenty twenty two; Zoom’s expectations regarding financial and business trends; Zoom’s growth strategy and business aspirations to help customers embrace change, enable hybrid workforces, and grow their businesses; product features and the expected benefits of such features; and Zoom continuing to fortify its position as a leading brand in its industry. 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, which we discuss in detail in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar.
01:44 And with that, let me turn the discussion over to Eric.
01:48 Thank you Tom. In the spirit of the upcoming holiday season, I want to recognize the hard work of Zoom’s global workforce and thank our customers, partners and investors for their steadfast trust and support. We continue to fortify our position as a leading brand in our industry. We are honored that Gartner named us a Leader in the twenty twenty one Magic Quadrant for Meeting Solutions for the sixth consecutive year and for Unified Communications as a Service for the second consecutive year.
02:28 Zoomtopia twenty twenty one was bigger and more successful than ever before. We hosted nearly thirty four thousand live virtual attendees on our platform and two seventy seven speakers, including customers like Choice Hotels, Ally, and Hubspot. And we did it on Zoom Events, our all-in-one solution for virtual and hybrid
events.
02:56 Zoom Events allowed us to streamline event preparation, enhance audience engagement, and conduct better post-event communication and analysis. Its multitrack functionality enabled us to roll our Analyst Day directly into the Zoomtopia agenda so that participants could move seamlessly across the Analyst Day track, other tracks of Zoomtopia, and the all-connecting lobby.
03:29 At Zoomtopia, customers shared how they use Zoom to enable flexible co-located workforces and grow their businesses. We demonstrated how Zoom Apps, which already has sixty seven apps after only a few months, has the potential to enhance meeting productivity and collaboration. More and more businesses are building products on our platform that connect interrelated work streams to the Zoom client, both inside and outside the meeting.
04:03 We were also super excited to unveil the Zoom Video Engagement Center, which enhances our customers’ ability to communicate with their customers through our omnichannel solution, and shows our broader commitment to the contact center space. It is expected to be generally available early next year.
04:28 Whether it’s the ability to virtually whiteboard in and around the meeting, or utilize AI to transcribe or translate a meeting live, Zoomtopia demonstrated that previously futuristic capabilities have arrived. We are working hard to develop and deploy the technologies of the future to address current business needs and reimagine how we communicate and work in a flexible hybrid world.
04:59 Now let me recognize a few big wins for the quarter. We are excited to have Carrier Global Corp, the leading global provider of healthy, safe, sustainable and intelligent building and cold chain solutions, as a long standing Zoom Meetings customer and now, a new Zoom Phone customer as well. Following several months of extensive vendor reviews of leading UCaaS vendors, Carrier selected Zoom Phone to modernize their phone systems for a large portion of their nearly fifty three thousand employees across one eighty countries. We are so thankful that Carrier choses Zoom to deliver an increasingly comprehensive, secure, innovative and integrated set of communications services
05:56 In addition to Carrier, we had many other upsells this quarter. For example, one of the world’s largest global retailers decided to add twenty thousand Zoom Phone licenses to their existing Meetings, Rooms, and Webinar footprint in order to better manage their global offices, distribution centers, and retail locations. This demonstrates our strong value add to the retail vertical and builds upon previous success stories like Tapestry and Target.
06:34 We also had several notable Zoom Meetings wins in Q3, including, a large expansion for a leading Federal System Integrator which puts them at forty five thousand users, demonstrating the security and reliability of our Zoom For Government Platform. A competitive win with a global technology firm for sixteen thousand five hundred meeting licenses to modernize the way their employees communicate, and expansion within our big four audit and big three consulting clients, which added more than thirty five thousand meetings licenses in the quarter to their existing strong meetings footprints.
07:25 Thanks to our customers, investors and the hard work of our approximately six thousand three hundred employees, we’ve grown over the past decade from a video conferencing solution to a communications platform that encompasses unified communications, as well as developer and event solutions. All these services provide an indispensable platform for individuals, enterprises and developers to connect, collaborate and build in the hybrid world.
8:00 And with that let me pass it over to Kelly.
08:05 Thank you, Eric, and hello, everyone. Let me start by reviewing our financial results for Q3 and then discuss our outlook for Q4.
08:16 In Q3, total revenue grew thirty five percent year over year to one point zero five billion dollars, exceeding the high end of our guidance of one point zero two billion dollars. The growth was primarily driven by strength in our direct and channel businesses, which grew at twice the rate of our online business, as well as improved churn in both online and direct segments.
08:39 From a product perspective, we saw strong demand for Zoom Video Webinars, Zoom Rooms, and Zoom Phone. Zoom Phone had year-over-year revenue growth in the triple-digits and reached thirty customers with over twn thousand paid seats. The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, with existing customers accounting for twenty six percent of the incremental revenue, up from nineteen percent a year ago.
09:11 Let’s take a look at the key customer metrics for the quarter. We saw ninety four percent year-over-year growth in the up-market as we ended the quarter with two thousand five hundred and seven customers generating more than one hundred thousand dollars in trailing twelve months revenue. These customers represented twenty two percent of revenue, up from eighteen percent in Q3 of last year. We exited the quarter with approximately five hundred and twelve thousand one hundred customers with more than ten employees, up eighteen percent year over year.
09:46 In Q3 customers with more than ten employees represented sixty six percent of revenue, up from six -- excuse me, sixty four percent last quarter, and sixty two percent in Q3 of last year. These trends suggest that our customers with more than ten employees are expanding their use of our platform and adding more products and seats, aligned with our go-to-market strategy.
10:12 Our net dollar expansion rate for customers with more than ten employees exceeded one hundred and thirty percent for the fourteenth consecutive quarter as existing customers increased their spend with Zoom and we saw strong upsells of Zoom Phone and Zoom Rooms. For Q4, we expect this metric to be modestly below one hundred and thirty percent mark as the denominator of this trailing twelve month metric reflects a significant growth in our customer base.
10:41 Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew thirty percent year over year. Our combined APAC and EMEA revenue grew forty seven percent year over year to be approximately thirty three percent of revenue, up from thirty one percent a year ago. On a quarter over quarter basis, Asia Pacific had another strong quarter driven by growth in Australia and Japan and bolstered by the investments we have made in our international team. However, as we discussed in Q2, we saw headwinds to our online business in EMEA, mainly related to summer seasonality.
11:23 Now, turning to profitability which was strong from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, acquisition-related expenses, net litigation settlements, net gains on strategic investments, and undistributed earnings attributable to participating securities.
11:51 Non-GAAP gross margin in Q3 was seventy six percent, an improvement from sixty eight point two percent in Q3 of last year and stable with Q2 of this year. We remain committed to our multi-year strategy of building out our data centers to support further improvements in gross margin.
12:12 Research and development expense grew by one hundred and sixty nine percent year over year to approximately sixty eight million dollars. On a sequential basis, we added over thirteen million dollars in R&D expense, primarily due to expansion within our engineering and product teams globally. As a percentage of total revenue, R&D expense doubled year over year to six point four percent demonstrating our commitment to innovation and product development.
12:40 Sales and marketing expense grew by sixty eight percent year over year to two thirty seven million dollars or approximately twenty two point six percent of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in global sales capacity and marketing across our core and new products.
13:03 G&A expense grew by twelve percent to eighty two million dollars or approximately seven point eight percent of total revenue. This was lower than Q3 of last year as we expanded our G&A functions prudently to meet our new sales.
13:19 The revenue upside in the quarter carried through to the bottom line, with non-GAAP operating income of four hundred and eleven million dollars exceeding the high end of our guidance of three forty five million dollars. This translates to a thirty nine point one non-GAAP operating margin for Q3 compared with thirty seven point four percent a year ago and forty one point six percent last quarter.
13:44 non-GAAP diluted earnings per share in Q3 was one point one one dollars on approximately three hundred and six million non-GAAP weighted average shares of outstanding. This result is zero point zero three dollars above the high end of our guidance and zero point one two dollars above Q3 of last year.
14:02 This result includes a seventy million dollars provision for income tax, a significant increase from last year, mainly due to fully utilizing our NOLs as well as a decrease in our stock-based compensation for tax purposes.
14:19 Turning to the balance sheet. Deferred revenue at the end of the period was one point two billion dollars, up thirty nine percent year over year from eight fifty five million dollars, and slightly up quarter over quarter. Looking at Q4, we expect the year-over-year growth rate in deferred revenue to be in the mid twenty. This is driven by the cyclical decline in the average remaining term of our annual customer contracts, which are front-half weighted.
14:50 Looking at both our billed and unbilled contracts, our RPO totaled approximately two point five billion dollars, up fifty one percent year over year from one point six billion dollars. We expect to recognize approximately sixty seven percent of the total RPO as revenue over the next twelve months, as compared to seventy two percent in Q3 of last year, reflecting a shift back towards longer term plans.
15:17 We ended the quarter with approximately five point four billion dollars in cash, cash equivalents and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of three hundred and ninety five million dollars, as compared to four hundred and eleven million dollars in Q3 of last year. Free cash flow was three seventy five million dollars, as compared to three eighty eight million dollars in Q3 of last year.
15:42 It’s important to note that as we progress beyond the initial phases of the pandemic growth and continue to invest to support our new scale, our working capital is normalizing. In Q4, we expect to incur a one-time eighty five million dollar cash outflow related to a legal settlement, which we disclosed and booked as a GAAP expense in Q1. As a reminder, due to the seasonality of renewals being front-end loaded and tapering through the year, our collections will follow the same trend. We also expand CapEx investments in building out our data centers to support future gross margin expansion.
16:26 Now, turning to guidance. We are pleased to raise our outlook for FY twenty twenty two. This outlook is based on our current assessment of the business environment. Specifically, it assumes that our direct and channel business will continue to grow, while our online business will be a headwind in the coming quarters as smaller customers and consumers adapt to the evolving environment.
16:49 For the fourth quarter of FY twenty twenty two, we expect revenue to be in the range of one point zero five one billion dollars to one point zero five three billion dollars. We expect non-GAAP operating income to be in the range of three sixty one million dollars to three hundred and sixty three million dollars. Our outlook for non-GAAP earnings per share is one point zero six dollar to one point zero seven dollar based on approximately three hundred and seven million shares outstanding and a tax rate of approximately ten percent.
17:20 Due to our multi-year history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the U.S. blended tax rate in FY twenty twenty three. For the full year of FY twenty twenty two, we expect revenue to be in the range of four point zero seven nine to four point zero eight one billion dollars, which would represent approximately fifty four percent year-over-year growth, up from our previous guidance of fifty one percent issued in August.
17:51 We expect non-GAAP operating income to be in the range of approximately one point five nine eight dollars to one point six billion dollars which would represent approximately sixty three percent year-over-year growth. Our outlook for the non-GAAP earnings per share is.
18:03 Our outlook for non-GAAP earnings per share is four point eight four dollars to four point eight five dollars based on approximately three hundred and six million shares outstanding. As always, Zoom is grateful to be a driving force enabling connection and collaboration worldwide with our high-quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors
18:34 Matt, please queue up our first question.
18:38 Our first question is from Sterling Auty with JP Morgan.
18:43 Yeah, thanks. Hi guys. Eric, you mentioned you kind of evolving into a communications company. And I'm wondering if you think about the over four hundred million business phone users that are on legacy technology. How do anticipate capitalizing on that opportunity? Meaning, do you expect a big portion of those will end up coming on to either a video platform like Zoom, Zoom Phone? Or will they start to just rely on their cell phones to make communication calls?
Yeah. Sterling. That's a great questions. As you see right in Q3 and a greater customer is like a carrier. And they expanded to deploy Zoom Phone and it’s not a hundred and thousand, tens of a thousand deployment, right? So you look at the phone industry, right? I mean, the [indiscernible] PBX industry, I think it's growing very well to replace legacy on-prem systems. Also, [indiscernible] those existing CloudX from providers, most of them develop a technologies stack many years ago. However, will those especially for large enterprise customers, when they migrate from on prem to cloud, they do not want to deploy another solution, because the video and voice those two are converted into one service. In particular for those customers who already deployed Zoom Video platforms essentially technically Zoom Cloud’s PBX system already there, we just need to enable and configure that. Otherwise, they are two fabulous solutions. That's why we have a high confidence that every time [indiscernible] customers, they look at all those cloud-based phone solutions, Zoom always is the best choice. That's why I think the huge growth opportunity for our unified communication platform, video and voice together and to capture the wave of this cloud migration from on-prem to cloud.
20:46 Got it. Thank you.
20:47 Thank you.
20:50 Our next question is from Parker Lane with Stifel.
20:54 Thanks for taking my question. I was hoping you could dive into the video engagement center a little bit. The initial reception that customers have had to that solution and who do you ultimately envision the target customer will be here? Is it going to be more of lightweight small business, medium sized business that are looking for context that you are offering or do you envision taking it stream over time?
21:15 Yeah. This is a good question. So we are very excited at Zoomtopia to announce our Zoom video engagement center. Because, the reason why we decided to invest resources on that is these are on our customers feedback. In terms of a gross trajectory, I would say it’s very similar to what we did before for our Zoom Phone, right? We built a greater solution to leverage the same platform, and you can start up on existing customers, SME customers soon afterwards you can [indiscernible] lot of enterprise customers less our content center vision, right? Essentially, I think this market -- that contact center market is growing very well. However, a lot of enterprise customers [indiscernible] on-prem solutions. For the next several years, I feel the opportunity is huge for us, right? Especially customers deployed Zoom Video and Phone together as an natural extension for our unified communication platform to help very significant and secure and the same platforms solution, which is our solution to the contact center space.
22:27 Got it. Thanks, Eric.
22:29 Well, by the way, we do have quite a few greater customers in the pipeline.
22:37 Next question is from Taz Koujalgi with Guggenheim.
22:44 Hey, guys. Can you hear me okay?
22:46 Yep.
22:46 I have a question for Kelly. Kelly can you can give us some more color on your mix of different products. We have had strong growth in Zoom Phone, Zoom Rooms for the last couple of quarters is the combination of phone plus rooms now, more than ten percent or that’s still below ten percent of the overall business?
23:03 Sorry, it’s a combination of Phone and Rooms.
23:06 For the non-meeting business is that less than ten or has it crossed ten percent threshold?
23:13 Well, none of our products segments on their own is greater than ten percent because it's likely that we would break that out if it were. If you add a few of them together, yes, there are a few of them, if we put them together, they would exceed greater than ten percent but on individual basis not any of them is greater than ten percent at this point.
23:33 Thanks. Thank you.
23:36 Next question is from Meta Marshall with Morgan Stanley.
23:41 Great. Thanks. I wanted to ask just about the traction of customer adds. We've seen the customer adds slow down a little bit. And just wondering how you think about kind of sales and marketing resources, directing them more towards upsells, which is clearly showing a lot of traction versus kind of new customer acquisition and just how you think about that in the budgeting practice and how we should think about that going forward?
24:11 Yeah. So it's exactly the strategy that we've been planning for and thinking about Meta when you think about Zoom Phone, for example, and Zoom Rooms, the strategy is to sell the existing install base, which by definition just means these customers are going to grow larger and larger and contribute more over time.
24:31 In the -- depending on which segment of our business, the up market business, the majors enterprise right, they work on account basis so they get to retain those accounts, which is great because they build these long term multi-year relationships with them, they understand their needs and they continue to grow those accounts as they continue to see what they need. And then in the lower, like, the mass market, we do have both expansion as well as acquisition teams have work really well, because that allows them to focus on growing. Certain teams to grow. But other teams to be really out there hunting and meeting add to our new logos. And then from a marketing perspective, we've grown so much as brand awareness, But now, we're really focusing on ensuring that everybody knows that every – meetings now also knows about phone and rooms and the other solutions we could we can bring to bear them.
25:23 Great. Thanks.
25:28 Next question is from Alex Zukin with Wolfe Research.
25:31 Hey guys. Thanks for taking myquestion. So two -- one question, but it's multi part Kelly, and it’s both for you, the question first is after the summer, how should we think about the visibility in the model, particularly around churn with the sub eleven cohort. And then if we look at the guidance that you gave implicitly for billings, it looks like it's about a six percent year over year growth. If I look at the guidance for revenue, it looks like nineteen percent growth, maybe there's some upside for that. Maybe it's over twenty. It's your toughest comp. But as investors start to look at next year, The street has you at seventeen percent So your implicit billings guide suggests potential for single digit growth. Is next quarter the trough that we start to build off of. I think that's a question. I'm getting at least from lot of investors.
26:25 So, in terms of -- let’s talk about the churn versus, the visibility. And as we talked about on the Q2 call, that historical trends that we've seen in our business have changed pretty dramatically, but what we saw as we came through kind of the second half of Q3, was that some of the churn that we were experiencing earlier in the quarter was really summer seasonality. And as we saw people move back towards vacations kind of in the back half of September, that we saw that strength in that usage returning. So these are all learning that we would use now to apply to our modeling for FY twenty three as well as the fact that if you remember we looked at we showed you some of those detailed aging of the ten years of the cohorts at Analyst Day and as those continuing to aid that adds a lot of stability in that underlying business. And by next year, over fifty percent of them are going to have moved beyond sort of that fifteen month mark, which is where that churn really, really stabilizes. So that's really good news. In terms of the volatility going to continue to decrease over time.
27:36 In terms of Fy twenty three, I know that's the big question on everybody's mind, but you're going to hold any comments in terms of FY twenty guidance until Q4, at which point, of course, we are ready to get Q1 and full twenty three guidance.
27:56 Who is next?
28:06 I’m, sorry. Matt Stotler with William Blair. I was on mute.
28:10 Hi Matt.
28:11 Hi, everybody. Good to see you. Thanks for taking the question. Maybe just one on the free user base. I know that you guys have always carried a number for free users and open that up during the pandemic. You've talked previously about thinking through monetizing the space of users, anything you can share in terms of I guess one one hand an update on the size of that base, potential opportunity and then updates on how you're thinking about the ability to monetize it over time.
28:40 Eric, you want to talk about monetization [indiscernible] ?
28:43 Yes sure. So Matt, first of all when we started free user base is always like a marketing platform to promote of brand and give us a network effectiveness of our service platform. So that's how we introduced the pre service premium and forty minutes limitation. I think for now, given the brand recognition and given what had happened in last year, I think we got to take a step back to look at our free user online business. Right? And essentially on the one hand we would like to double down our enterprise market, of course, that business is growing extremely well. On the other hand, we got to be very accretive to look at how [indiscernible] our huge free user installer dates. Right, All over the work. Right? We started like the advertisement program for free users from international market and downloading a work and look at that as well because not only do we fix on the kind of conversion rate, front trade to pay it and that's not of a traditional model. Right? We got be creating the huge opportunity and two thing about how to modify that free user base differently. I think that's -- I think a team have put a lot of efforts on that and that's something we are very excited.
30:09 Thank you.
30:10 Thank you, Matt.
30:10 Thanks, Matt.
30:12 Next question is from Siti Panigrahi with Mizuho.
30:17 Thanks for taking my question. Just want to ask about your investment on go to market side. So as you are coming off of this too strong renewal quarters, what are the areas you are investing right now? And as you're normalized growth rate. Is there certain vigilance or certain verticals so could you give some kind of color on that?
30:37 Yeah. We certainly are continuing to invest in sales organization, especially outside of the U.S. There you’ve seen strong growth in international, and we really have the opportunity to continue to leverage the brand awareness and grown significantly not only in the U. S, but also globally. And so that's a huge opportunity for us as well as ensuring that we have the right sales team to support Zoom Events, Zoom Phone and soon our video engagement center as well. So those are all the areas and that's what we are thinking about, especially for FY twenty three.
31:16 Thank you.
31:18 Thank you, Siti.
31:20 Next we have Ryan Mcwilliams with Barclays.
31:24 Hey, Good to see you guys again. Kelly, just on your existing customer growth. Anything to called out there maybe into the fourth quarter? And I would imagine meetings still makes up the bulk of your growth with existing customers, but anything to call out maybe in the changing mix between meetings versus phone and rooms with these existing customers? Thanks.
31:48 I mean, Zoom Phone continues to be a really strong growth driver in general, especially as organizations are thinking about what's going to be their future of work strategy and enabling their employees to work from anywhere over time. And then Zoom Rooms, of course, is also really important consideration now as companies are thinking about welcoming their employees back in the office. The conference room strategy has become even more important than it was pre-pandemic as we gets unlikely -- unlike we were all going to be sitting around in conference rooms together in the future. And so having any sort of a hybrid approach means that you need to make sure that it's inclusive and the best way to do that is through the Zoom Rooms technology, things like Smart Gallery, which are really some of the opportunities that we're helping our customers solve today.
32:41 So just quickly to add on what Kelly side, Ryan. If out look at hybrid work, the conference room is extremely important. That's why you can the Zoom Rooms, right? It’s uniquely positioned, it’s much better than any other solution in order to support a hybrid world. Not only -- not to mention the Zoom Events also can support the new hybrid events, the service as well. Right? That's why you know huge opportunity for us to support a hybrid work in paradigm shift.
33:12 Yes.
33:13 Thanks, Ryan.
33:15 Next question is from Tyler Radke with Citi.
33:20 Hey, everyone. Thanks for taking my question. Kelly, I wanted to ask you about just some of your comments on the churn rates. I guess, first, did they perform in line with your expectations this quarter? Just kind of giving the moving pieces with summer seasonality. And then as you think about Q4 would you expect churn rates to get better because of less kind of summer seasonality in Europe? And then I just wanted to clarify when you talked about the online business being a headwind, does that mean that you expect the online revenue to decline year over year? Does it just mean it's going to grow slower than the rest of the business?
33:59 So, in terms of how the online churn performed in Q3, it performed better than our expectations coming in at the beginning of the quarter. And we were happy to see that it was more seasonality aligned rather than true potential departures as people were making other choices of going back to meeting in person. The seasonality nature of that was good news to see and we are rebounding in the middle in -- kind of in the middle to the back half of September. And then we expect Q4 to be relatively consistent with Q3 in terms of churn. However, we do see some impact from the holidays towards the end of December. And those holidays vary by the global by global location, but we do see kind of slowdown based on that.
34:59 In terms of what we expect from online going forward. We do expect online revenue to grow more slowly than the direct and channel business as we look to the future, which is what we saw in Q3, for example, as well. But we'll give more specifics around that when we give guidance on the Q4 call.
35:18 Thank you.
35:21 Next question is from James Fish with Piper Sandler.
35:24 Hey, guys. Nice quarter. I just wanted to go back Matt's question on advertising, first, how would this actually work? Can you give more color there? Would it be kind of banner within the application pre or post video and be more display based advertising or performance based? And then also just wanted to understand how much of this is really to try prevent some of your more commercial and enterprise customers from lowering their number of meeting seats to free seats rather than just trying to monetize more that online consumer ebay. Thanks.
35:57 James. So, for now we're just focused on the pure free meetings. Right? Meaning that meaning halls, while we will have meeting all the free participant. Let’s say, if you and I joined the meeting because we already paid the enterprise customer or predecessor, we will not show that this at. Right? It is more like a post -- post meeting attentive page, right? Because we do have, in some plants, but we want to start step by step gradually right. For now I’m sure that these free ads that are posted in the page from international market is purely for the frame meetings, and they try to do learn and, some express. And again, we got to be creative that's so many areas where we can be creative. Right? Because you got a data meeting participant, you in a of a number of for you, this is pretty healthy. Even for those best users, right? Maybe if it's not pay for our service anymore. They still use our service. Right? That's why the meaning is, Zoom still offers for good to while of. We got do think about how to monetize it differently. Again, this is something you pass, and we would like to explore more in the next few quarters.
37:12 Thanks, Eric.
37:13 Thank you.
37:16 Next question is from Rishi Jaluria With RBC.
37:21 Hey, Eric and Kelly, good to see you both. Thanks for taking my question. I just wanted to ask about Zoom Chat. I was really excited to see that launched at Zoomtopia two months ago, really kind of sawing this vision of becoming this broader enterprise communication platform. I actually noticed that the Zoom Chat is live, it's something people can deploy. I know it's an add-on feature, can you give us any sense of color in terms of customers actually using it today, what that sort of usage within your existing customer base looks like? And what you're doing to actually drive usage of Zoom Chat among your customers to just make the whole platform more valuable to them? Thanks.
37:58 Yeah. Rishi, that’s a good question. First of all, I can tell you Zoom as a company, we're using our Chat for a long time and so many employees do enjoy that. And overall, this is a part of our overall platform vision because some customer I think do a good job to mission that and promote data because customer -- some customer even do not know that, right, before, But however, if we look at our chat usage, sorry, we did not publish that number yet, it’s pretty healthy not only for SMB individual users, but also enterprise customer [indiscernible] video and phone and also Zoom Chat is one platform. Right? And in terms of functionalities, scalability, I think we have a high confidence. On one hand, we do collaborate well with other chat solutions and we integrate very well, on the other hand for some customers they really want to deploy the solution for [indiscernible] video wars and chat. We do have this flexibility. I think also our team, we are innovating as well. Right? I know adding more and more very cool functionalities right, as are announced at Zoomtopia. Again, this is something important for our overall UC platform, and we are going to invest more.
39:12 Alright. Wonderful. Thank you.
39:13 Thank you.
39:16 Our next question is from Karl Keirstead with UBS.
39:21 Okay, Great. Maybe Kelly, metrics like deferred revenues and RPO are certainly not the most important to watch with Zoom, but they can be indicative of changes in the business, so it's still important to keep an eye on them. And you made some color about DR and RPO next quarter that I'd love if you could elaborate. I think on DR you mentioned that it'll grow mid-twenties due to a cyclical decline in average remaining term of annual contracts. I'm not sure I totally understand what that means. So I'd love to ask for a clarification. And then likely as well on RPO, you mentioned that we would see a shift back to long term plans. I'm wondering if you could elaborate on that as well. Thanks so much.
40:05 Yes. So for deferred revenue, there's two things to remember, which is the seasonality trend of our renewal is that Q1 is the largest quarter for renewals and Q4 is the lowest. So, in terms of new deferred coming on to the books, Q4 is the lowest quarter because of that, as well as the fact that Q1 is the largest quarter when deferred gets out of the balance sheet, but they are annual contracts, by the time you get to Q4 most of that has already been amortized and recognized. There is only twenty five percent of it in theory about left when you come into the quarter. So the combination of the fact that anything added in Q1 is almost fully amortized and will get refilled and renewed back in Q1. And the fact that Q4 is the lowest renewal quarter, those two things are what's driving this trend of renewals. -- Sorry, of deferred, which I know is probably counter intuitive to any other company that you see because of the seasonality that we have.
41:04 So if you remember at Analyst Day, we showed you an actual chart that shows how our renewals layout out for the year, and that's what that illustrates and so renewals, like deferred is kind of look the same, collection is going to look the same because they're all being built off of that trend. Does that makes sense?
41:25 Yes. And so the fact that DR growth would slow to mid-twenties is due to what?
41:30 It's due to the fact that Q4 is our lowest renewal period as well as all those annual renewals that came on in Q1, which is the biggest quarter are now almost fully amortized and recognized.
41:45 Okay? That's helpful. Thank you on DR. And one RPO Kelly?
41:49 And then this has a strong impact on billings and RPO as well, because the same thing like they are adding to the building of the collections are happening earlier in the quarter and the remaining term is being amortized throughout the year, so there is -- it's the short amount of contract left during Q4.
42:12 Okay. I think I got it. Thanks for the participation. I appreciate it.
42:16 Okay. You are very welcome.
42:18 The next question is from Shebly Seyrafi with FBN Securities.
42:23 Yeah. Thank you very much. So what is your latest thinking about possibly reviving the five million dollars deal sets us with a higher price and what you're current thinking about the build versus buy decision in the contact center market?
42:39 Shebly, that's a good question and unfortunately [indiscernible] is not in the call. Otherwise probably [indiscernible] is better for us to answer this question. But anyway, we look at everything form a customer perspective. Even this field did not go through forever, and we still have many mutual customers and we have a great integration with [indiscernible] . And also, I think from that perspective everything is same as before. Right? But in terms of the deal, actually nobody knows that and let's see, we do not know, but also as I mentioned earlier, right and we have a full stack to support unified communication [indiscernible] customer deployed the Zoom Video already, they may do have deploy in Zoom phone, we also ask [indiscernible] strategy about the content center solution. And this reason why know we're are doubling down out video engagement center, which is our answer to the contact center solution. Anyway, I think this is where we are now, but I'm so sorry, it’s really harder to know how to reengage or do the deal with [indiscernible] because it will probably compliment. And again -- and for now, we are doubling down on our video engagement center and also working to together with all other contact center solution providers [indiscernible] in order to offer a better integration, seamless express to our mutual customers.
44:06 Okay. Thanks.
44:07 Thank you.
44:10 Next question is from Matthew VanVliet with BTIG.
44:16 Yeah. Thanks for taking the question. I guess pertaining to the channel and especially with Zoom Phone, are you seeing much traction in terms of potential net new customers coming in where Zoom Phone is sort of the entree into that customer? Or even as a part of initial deal, especially at the sort of mid-market enterprise level? Thanks.
44:41 Yes. Go ahead, Kelly.
44:47 So, yes, we have absolutely seen the channel be a really important part and a really important growth driver for Zoom Phone, especially. This is why focusing on the channel both in the U.S and growing that internationally is really an important aspect of our growth strategy for the long term here as well. And then we do have the ability and we have seen customers that want to start to sell and start with Zoom Phone first and that has been a great opportunity, it’s a small percentage of our customers that are starting that way but it’s a great opportunity for them if that's what they're interested in to get them in and get them used to Zoom and then expand over time in terms of understanding the full platform offering that we have.
45:31 Thank you.
45:34 Next question is from Matthew Niknam with Deutsche Bank.
45:39 Hey, thanks for taking the question. I want to go back to the question before that was asked. Not necessarily related to 59, but having moved past that acquisition, maybe Eric how you're thinking about inorganic opportunities on either the UCaaS or the CCaaS front to really consolidate the market and expand your platform inorganically relative to some of the organic investments the company’s talked about? Thanks.
46:04 Matt, again, actually, [indiscernible] is still a great partner, [indiscernible] the team is great, they still have a [indiscernible] right. So we still working together right, you to talk the mutual customer. That's for sure. Regarding our gross strategy for consolidate UCaaS and CCaaS, first of all, I think we are doing very well on UCaaS. In terms of CCaaS the reason why we're announced the video engagement center, because of that, right? Because for some customer, they want to consolidate it together, and we do have a offering also how to accelerate our growth in addition to allocating our own resources to grow [indiscernible] organically for sure, right, if there's any good, let's say, technology platform for next generation functionalities very accretive features, well we're open minded, right?
46:52 And Kelly has a big budget to support that effort. Again if you know of any other cool technology companies that can't help us for the beef up of investment on that front we're open minded.
47:12 Great. Thank you.
47:12 Thank you.
47:16 Next question is from Will Power with Baird.
47:20 Great. Good afternoon. So, Eric, you referenced a number of new customer wins, you really called out Terry, I guess, in particular, and you suggested it was an extensive process, so really just love to better understand the importance of the bundle video and Zoom Phone foe carrier and what your estimation really kind of set you apart the other vendors they were considering?
47:44 That's a good question. So, first of all, I'd like to take a step back to share how we grow our platforms, it’s not like some other cloud vendors, probably we targeted those traditional on prem solutions. Our Zoom Phone growth comes from not only for on-prem, the gross, but also for other existing cloud is the from solutions the problem also [indiscernible] . Right? And we have both -- those customers coming from both side. And inside of that [indiscernible] large enterprise customers in particular for our existing Zoom Video customers, we need look at the phone, this is very enterprise customer so very complex environment, probably they have multiple on premise solutions. They want to be very careful. They wanted to, you know, partner with a company with a vision, with reliability, security plus they also want to make sure video and voice those two can be converged and already test our service and realized and based on the criteria, Zoom is the only solution [indiscernible] truly satisfy their needs. But however, the process is pretty long, because again, enterprise phone deployment is very complex. And it may [indiscernible] our existing customers, we want to be very careful, but after we through the [indiscernible] process, Zoom is best positioned. Right? I think we see that very often over the past several quarters. I think that will be probably the pattern for the future, and growth as well. Because we have a high confidence as long as enterprise customers nobody saw complex they're existing on prem phone systems now, as long as the process embedded solutions. I think we have high confidence they are going to go with [indiscernible].
49:29 Okay. Thank you.
49:31 Thank you.
49:33 Next question is from Patrick Walravens with JMP.
49:37 Oh, great. Thank you. Hey, Eric, what would you say was your primary source of competitive differentiation as a video conferencing solution a while ago. And what would you say it is today is a communications platform?
49:54 So, Patrick, that's a good question. When it comes to conferencing it itself, I would say, it sounds very easy, but however it’s really hard. Because it just works, right? And that's reason why our customer lack on platform. Even if some of the competitors try to edit features, [indiscernible] , And you thought to make it work anytime any device. Take this earning call for example. How many of our competitors dare to host earning call on this platform. We're free, right? The reason why we have a confidence is not only only Zoom, but also some of our customers like my greater friend [indiscernible] they also hosted earnings cast on Zoom platform because of very reliable greater video, audio quality, a lot of other -- video features like early next year we are going announce [indiscernible] Patrick, you can show up as your digital [indiscernible] if you want to. Right? I think on the one hand, I think reliability, it works anywhere anytime and plus, always be the first window to come up with innovation. That's the reason why we are winning on that space. I think in the future, I would see more and more innovations and prices supported by development platform, the way you see platform also will keep us maybe leapfrog our competitors. Because again, as -- it's not like you have a fifty or one hundred percent UC, you can develop something similar. It’s not like that, a huge investment to be on par with our platform.
51:28 It just works?
51:29 It just works, it's just three words, [indiscernible] it's pretty hard.
51:38 Next question is from Steve Andrews with Keybanc.
51:43 Okay, great. Thanks for taking the question here. I just want to check back on the carrier deal and how that came together. It sounds like on the front portion it got a large portion of the seat base there. But I guess, what would it take for Zoom Phone to be deployed within that customer. And I guess, what are kind of the learnings of that as you apply that to other customers that are considering Zoom Phone?
52:08 I think first of all, for very a large enterprise customers, in particular for those customers who deployed and multiple, very complex on prem solutions, there is still cycle for [indiscernible] it is not just on prem to cloud. Right? There's a lot of solutions, not to mention we need the support of the global participant, right? However, I think that Zoom solution is much better positioned, I think it normally a little longer time competed to Zoom meeting platform from deployed. I think we just need to focus on our product innovation and adopting our go to market and then actually more, more very complex enterprise deployment like carrier. They are going to migrate to Zoom platform. Again, I think it'll takes some time, interested enough, that some of our customers that even do not know Zoom Phone platform. Right. And however, after they know and test our platform, Zoom solution did much better than any other cloud solutions. You know, we have very, very high confidence. Because again it is not [indiscernible] those are ten of a thousand, very complex global footprint. it does demonstrate our Zoom Phone capability.
53:27 Great. Thanks for taking the question here.
53:29 Thank you, Steve.
53:32 Next question is from Ittai Kidron with Oppenheimer.
53:40 Yeah. Hey, guys. I good to see you. I guess I was hoping to focus on the Global two thousand. Clearly, that was a big part of your focus going forward. And that's where a lot of the sales resources have been investing in over the past year. Maybe you can give us an update on how penetrated are you at this point with the Global two thousand? And has the competition change within in that category and the reason I'm asking that [indiscernible] has made a lot of progress in the past year with Webex and they've felt to be even more aggressive in protecting that perfectly. That is mainly their focus there. How do you feel about the competitive landscape there? What have changed and what you can say about progress today with global two thousands?
54:32 [Multiple Speaker] Yeah. You address the Global two thousand. Yeah.
54:36 So in terms of the progress that we're making, we continue to make progress there as we talked about earlier. devoting resources to international expansion and focus on this is still an opportunity, we are at still slightly under twenty percent of the global 2K that are spending more than one hundred thousand dollars a year with us, which just means that there's a huge opportunity ahead for us.
55:02 So, Ittai, in terms of our competitive landscape. It's just purely look at video conferencing service. I think Zoom is a go to platform. And I think I really did not see any other vendors, even for the platform we mentioned IPOed before. I do not think that there is any competitor even, close to what we can offer. But in terms of the unified communication as a platform not only for meeting – video conferencing [indiscernible] I think for now we have a huge opportunity if you look at our phone growth, right? And essentially, especially for our enterprise customs, they are not going to deploy multiple solutions for multiple vendors, very likely two vendors, right, probably for enterprise customers. It's a sort of a standard.
55:54 This zoom is very well positioned compared to any other -- the competitors. We do not see anything changed because, again, it's not like you can hold all features here and it's there and you know, underlying new technology by [indiscernible] effort. Right? And it’s totally a different architecture, reliability and security, and also all those innovations. That's reason why I think Zoom is much better positioned. I really do not see any other competitor, and that's – coming in business space over the past two years.
56:30 Very good. Thanks, guys.
56:32 Thank you.
56:35 Next question is from Ryan Koontz with Needham.
56:40 Thanks. One for Eric if i could. With regards to the Ericson acquisition of [indiscernible] bring APIs to the 5G network. Do you see this as disruptive to the CPaaS industry, and how do Zoom think about the evolution of video APIs with programmable 5G phone.
56:56 Yeah. I saw that news last night, and I’m not still digesting that news. First of all, I would say, congratulations to [indiscernible] and the team, and the hard work is very well [indiscernible] great company. I think probably this is greater acquisition. And again, we are still digesting this news, but from our perspective, and I think our vision is very, very clear, right? We are focused on enterprise for use of stack, video, voice, CCaaS, events, Zoom Rooms through fully supportive hybrid work. Right? And Ericson is a great company and probably this will help us them solidify their position for 5G and also help for their cloud vision as well. And that's -- pretty much, what I think about it.
57:45 Thank you. Eric.
57:47 Thank you.
57:49 Next question is from Chaim Siegel with Elazar Advisors.
57:57 You are on mute. There we go.
57:56 Sorry about that. I wanted to just talk to you about -- you started talking about sequential growth a couple of quarters ago, and you talked about it last quarter and just how you're thinking about that because this quarter was a little bit slower, but I don't know how much seasonality plays into it and I know you said you're not talking about next year, but since we have these crazy comparisons, I just wanted to know how to think about sequential growth and what's driving it?
58:38 Yeah. So, we will reiterate what we said earlier in the prepared remarks is that, we continue to see strong growth in the direct and the channel business. And that grew it twice the rate of the online business what we saw in Q3. And the online business will expect to be a headwind as we're still having these online customers which are the most volatile, many of them are still on monthly contracts. And as they are adjusting to the environment and figuring out how the future of work is going to be for them individually, We expect that to be the challenging headwind, then in Q4 you'll see a little bit of holiday seasonality as we talked about too.
59:30 Thank you.
59:33 Next question is from Michael Turrin with Wells Fargo.
59:37 Hey there. Thanks for squeezing me in. Nice to see everyone. I like the first backgrounds. No one's known tonight have but they're nice? Clearly extended period of impressive growth. I wanted to just ask around what's next and how you balance staying efficient while staying aggressive, you're still spending around six point five percent in R&D five point five billion dollars in cash in the balance sheet. So what's that profile, how do you balance staying on offense given all the market opportunities you have in front of you. And does the mindset shift at all as some of the growth rates moderate? Thank you.
60:09 Yeah. I mean, I can tell you that in terms of investing in areas like R&D and products specifically, we are still not even spending at the level we would like to be, our target for that is approximately ten percent so they still have a ways to go. They've come a long way in terms of hiring and investing there, but we still have more opportunity to expand both the products and the engineering team. And then sales as well, sales and marketing, we still see opportunity to continue add sales capacity on a global basis. The areas that were very, very thoughtful about adding additional investments and then wanting to do that in a very efficient way, of course, is COGS, we work very closely with Tommy and his team to make sure that we're adding capacity – we want to make sure that we have the right capacity for our customers, but doing that as efficiently as possible. And then, of course, G&A we want to do everything we can within our G&A functions to support our internal and external customers, but to do that also as efficient as we can. So that's kind of how we think about investing. So operating for grow still in R&D and sales, but trying to drive efficiency through COGS and G&A.
61:22 Helpful. Thank you.
61:26 Our last question today is from Matthew Harrigan with Benchmark.
61:31 Well, thank you. You pretty much elucidated the block and tackling you saw. I have one more expansive question for you. I know you're pretty constructive on AR and DR in the longer term, while recognizing all the way limiting steps for consumer adoption. We if all talk about the [indiscernible] all the buzz and it really feels sometimes when people have no concepts, even what it is. Can you add any thoughts on that and what the potential opportunity for Zoom is over say three five year period. Thank you.
62:05 Matt, that’s a great question. First of all, we like [indiscernible] because our team already worked on that for a while. The reason why our vision is to deliver a better video conference, even than a face to face in-person meeting. Right? And AR and DR is part of that. Our team already work on that. Right? You know, how to get it, that will probably take many years effort, for now this is where the [indiscernible] going to start. Right? And like a digital avatar, right? We know we demonstrated that functionality at Zoomtopia, next year we are going to have something like that. I think the we will step by step get there. Again we already are started it before, right? But we are not going to offer a hardware platform, we're going to partner with other vendors, like Facebook and any others, and we offer the software layer, because does fit very well to our vision. In the future with that AR we are [indiscernible] future matter worse. You and I can shake hands remotely. Seriously right? I talked about it three years ago, and we already adding resources before. That's why we're very excited, finally the word as our matter was. But guess what, we already started working on them for a while. Vision wise, it's very well. That's why we're very excited back into macro questions. Right where we are in the invest. We already invested that. We are just going to double down on that. Because, again, it fits very well to our company vision and a matter where we play a big it will follow-up future innovation.
63:35 Thank you.
63:36 Thank you.
63:40 Eric, that was our last question. So back to you.
63:43 Oh! Thank you all. Really appreciate you time, and I’d like to take this opportunity to thank all Zoom employees, all the customers, partners and investors. Wish you all have a wonderful [indiscernible] happy Thanksgiving. Thank you all for your time, I’m so grateful. Thank you.
64:00 Hi everybody. Thank you.
64:03 Thanks everybody.