Zoom Video Communications Inc. (NASDAQ:ZM) reported a revenue increase of 4% year-over-year in its third-quarter fiscal year 2025 earnings call, reaching $1.178 billion. The company's focus on becoming an AI-first work platform has been met with a positive response, as reflected by the growth in enterprise revenues and the lowest churn rate in the company's history. Zoom's strategic partnerships and market expansion efforts, alongside a raised revenue guidance and a significant share repurchase plan, indicate a confident outlook for the future.
Key Takeaways
- Zoom's total revenue grew to $1.178 billion, a 4% increase year-over-year.
- Enterprise revenues saw a 6% growth.
- Non-GAAP operating income was reported at $458 million.
- Nearly 4,000 enterprise customers contributed over $100,000 in revenue.
- The company achieved its lowest ever churn rate at 2.7%.
Company Outlook
- Full-year revenue guidance has been raised to between $4.656 billion and $4.661 billion.
- An additional $1.2 billion has been authorized for share repurchase.
- Zoom plans to continue expanding its platform and integrating AI capabilities.
Bearish Highlights
- Despite positive growth, the overall revenue increase is modest at 4%.
- The APAC region's growth remained flat.
Bullish Highlights
- Zoom has seen a 59% quarter-over-quarter growth in AI Companion monthly active users.
- The company has secured its largest-ever Contact Center customer with 20,000 seats.
- Strong partnerships, like the one with Meta (NASDAQ:META) for WorkVivo, are contributing to Zoom's market expansion.
Misses
- No specific misses were highlighted in the earnings call summary provided.
Q&A Highlights
- CEO Eric Yuan emphasized the quality and ease of use of the Zoom AI Companion, which is offered at no additional cost.
- CFO Michelle Chang highlighted investments in AI, emerging growth businesses, and the overall platform.
- Yuan also outlined the company's goal to empower customers to navigate work challenges and make smarter use of time through streamlined information and prioritized tasks.
Zoom's pivot towards an AI-focused platform seems to be paying off, with the launch of Zoom AI Companion 2.0 and other product innovations driving user growth and customer satisfaction. The company's rebranding to Zoom Communications Inc. reflects its evolution from a video conferencing service to a comprehensive work platform. With a clear strategy and continued investment in AI, Zoom is positioning itself as a leader in the future of work technology.
Full transcript - Zoom Video Communications Inc (ZM) Q3 2025:
Kelsey, Moderator/Host, Zoom: Well, hello everyone and welcome to Zoom's Q3 FY25 earnings release webinar. As a reminder, today's webinar is being recorded. And now, I will hand things over to Charles Efeslage, Head of Investor Relations. Charles, over to you.
Charles Efeslage, Head of Investor Relations, Zoom: Charles Efeslage, Head of Investor Relations. Charles, over to you. Charles Efeslage, Head of Investor Relations. Charles, over to you. Charles Efeslage, Head of Investor Relations.
Charles, over to you.
Charles Efeslage, Head of Investor Relations, Zoom: Thank you, Kelsey. Hello, everyone, and welcome to Zoom's earnings video webinar for the Q3 of fiscal year 2025. I'm joined today by Zoom's Founder and CEO, Eric Yuan and Zoom's CFO, Michelle Chang. Our earnings release was issued today after the market closed and may be downloaded from the Investor Relations page at investors. Zoom dot 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. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. During this call, we will make forward looking statements, including statements regarding our financial outlook for the Q4 and full fiscal year 2025, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, stock repurchase program, opportunities, go to market initiatives, growth strategy and business aspirations and product initiatives, including future product and feature releases 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 our financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q.
Zoom assumes no obligation to update any forward looking statements we may make on today's webinar. And with that, let me turn the discussion over to Eric.
Eric Yuan, Founder and CEO, Zoom: Thank you, Charles. Thank you, everyone, for joining us today. In early October, we hosted Zoomtopia, our annual customer and innovation event, and it was an amazing opportunity to showcase all that we've been working on for our customers. We had record breaking virtual attendance and unveiled our new vision AI First work platform for human connection. This opportunity marks an exciting milestone as we extend our strength as a unified communication and collaboration platform into becoming an AI first work platform.
Our goal is to empower customers to navigate today's work challenges, streamline information, prioritizing tasks and making smarter use of time. At Erusentopia, we took meaningful steps towards that vision with the release of AI company 2.0, further showcasing all the things that customers have come to expect from Zoom. A breakneck pace of innovation, customer obsession and reliable, easy to use products. This release builds upon the awesome quality of Zoom AI Company 1.0 across features like meeting summary, meeting query, and Smart Compose and brings it together in a way that evolves beyond task specific AI towards agentic AI. This major update allows the AI company to see a broad window of context, synthesize information from internal and external sources, and orchestrate action across the platform.
AI combining 2.0 raises the bar for AI and demonstrates to customers that they understand their needs. They want AI to enhance their existing workflows, not disrupt them. They want AI to deliver exceptional results for their entire teams. And they want to experience the value first hand before incurring additional spend. We highlighted many customers at Zoomtopia.
Pranity Laquara, CIO of Zscaler (NASDAQ:ZS), provided a great example of how Zoom AI combining helped democratize AI and enhance productivity across the organization, without sacrificing security and privacy. And it wasn't just this scaler. The RealReal (NASDAQ:REAL), HSBC, ExxonMobil (NYSE:XOM), and Lake Flato architects shared similar stories about Zoom's secure, easy to use solutions, helping Zoom thrive in the age of AI and flexible work. Building on our vision for democratizing AI, we introduced a roadmap of time expanding AI products that create additional business value through customization, personalization and alignment to specific industries or use cases. Customer AI combining add on, which will be released in the first half of next year, aims to meet our customers where they are in their AI journey by plugging into an audio basis, integrating with third party apps, and personalizing experiences like customer AI avatars and AI coaching.
Additionally, we announced that we will also have customer AI combining paid add ons for healthcare and education, available as early as Q1 of next year. These AI first industry tailored solutions will build upon the remarkable traction and customer love we have in these industries and allow us to deliver AI solutions that meet their customers' unique needs from the lecture hall to the doctor's office. We also announced Zoom Workplace for frontline workers, available in the first half of twenty twenty five, with a goal of extending our success in Zoom Workplace further into the extremely large but underserved frontline worker market. We will first target frontline rich industries where we have a strong installed base and have gained substantial learnings, such as retail, healthcare and manufacturing. This mobile centric solution will address the unique work style of frontline workers with features like data combining generated, shift summaries, unshifted communications, work management, insights, and more.
Content center and WorkWeaver are key pillars of our strategy to extend from our core strengths into natural adjacencies. And I am very pleased to share that both had amazing holders. We secured our largest ever contact center customer at over 20,000 seats, demonstrating our ability to compete at the high end, expand further into the EMEA market and win with the channel. In fact, our top 4 cognaccent deals in the quarter came from the channel, which speaks to our progress leveraging this amazing resource to extend our success across geographies and industries. We also saw incredible traction with WorkWeibo as we landed 3 net new WorkWeibo customers with over $1,000,000 in ARR, including the largest deal to date with a Fortune 10 company.
We are very happy to see that both contact center and WorkWeibo benefit as a natural upsell to our massive base of Zoom workplace customers. And we are encouraged to see these products bring in brand new customers to Zoom and become beachheads for Zoom Workplace to expand. The success of this bidirectional land and expand motion demonstrates our Better Together platform vision is resonating well, with customers looking for a full AI first work platform, bridging the worth of customers and employee experience. Now let me recognize some of our amazing customers. Thank you, Ahincia Tubularia, Spinach National Revenue Service, for their extraordinary expansion in q3.
Over 2 years ago, Ahnensia, like many other customers, became convinced of the constraints of their on prem phone system and deployed 30,000 Zoom Phone Sets. After Zoom Phone rapidly delivered value and scale to enhance efficiency and service quality during a demanding tax season in 2022, we moved to consider our total experience. Omnichannel solutions to further elevate their taxpayer services. This resulted in an incredible record setting Zoom Economic Center deal with over 20,000 seats. In conjunction with Zoom Workplace, delivering a complete Zoom experience for both employees and taxpayers.
Thank you, Ahincia, for your trust and partnership. Thank you for ServiceNow (NYSE:NOW), the AI platform for business transformation, for expanding its relationship with Zoom. Already a power user of Zoom Workplace, in q3, ServiceNow adopted Workvivo and expanded its Zoom Phone footprint. As announced at Zoomtopia, we are deepening the integration of ServiceNow's Now Assist with Zoom AI company to boost our generative AI product offerings and deliver advanced workflow synergies for our customers. It was an honor having Chairman and CEO Bill McDermott, who is also a member of Zoom's Board of Directors.
Join us at Zoomtopia. Thanks, Bill. We look forward to continuing our strong partnership. Let me also thank Red Pin, a leading international fintech and proper tech company, for choosing Zoom. They keep to us as a brand new customer through a trusted channel partner and identified Zoom as the best solution to transform the way we engage customers with their innovative property payments software and services.
RedBean opted for the Zoom total experience including Zoom Cognacenter Elite, Zoom Revenue Accelerator and Zoom Workplace Business Plus in order to enhance customer experience, elevate agent productivity happiness, and realize major cost efficiencies from streaming line operations. Finally, let me thank Athena Health, a leading provider of network enabled software and services for medical practice and health systems, for integrating Zoom's meeting SDK into their AthenaOne electronic health record. By leveraging Zoom's cutting edge video technology, Athenahealth is empowering its network of over 160,000 providers to deliver seamless virtual care through telehealth. We are so pleased to see more customers adopting our Zumba Workplace and Business Services products in order to reap the benefits of our modern natively integrated AI powered technologies. Before handing it over to Michelle, I am very excited to share that earlier today we announced our new corporate name, Zoom Communications Inc.
This change reflects our evolution into an AI first work platform for human connection and our vision for long term growth. Now, over to our new CFO, Michelle Chang. Thank you.
Michelle Chang, CFO, Zoom: Thank you, Eric, and hello everyone. It was great to meet many of you at Zymptopia. I'm excited to be taking you through earnings for the first time, and I look forward to partnering with you all going forward. To kick us off, I'm pleased to announce that we beat our top line and profitability guidance in Q3. In line with our previous statements, year over year revenue growth troughed in Q2 and showed improvement in Q3, driven by positive trends in both enterprise and online.
Here are a few highlights from our quarter. We saw progress towards our AI first vision, with Zoom AI companion monthly active users growing 59% quarter over quarter. And as Eric mentioned, we saw great traction expanding into adjacent markets with growth in Work Vivo and Contact Center. A number of Work Vivo customers grew 72% year over year, driven in part by the strength of our Meta partnership. And the number of Zoom contact center customers surpassed 1250, up more than 82% year over year.
Now let's dive into the financial results. In Q3, total revenue grew approximately 4% year over year to $1,178,000,000 This result was $13,000,000 above the high end of our guidance. Our enterprise revenues grew approximately 6% year over year, reflecting a continued shift to enterprise, which now makes up 59% of our total revenue, up 1 point year over year. We're pleased with this continued stabilization in online amidst ongoing macro conditions. In Q3, we saw improvement in average monthly term, which decreased to 2.7%, down 30 basis points year over year.
This is our lowest ever reported churn. In our enterprise business, we saw 7% year over year customer growth in the upmarket as we ended the quarter with just shy of 4,000 customers contributing more than $100,000 in trailing 12 month revenue. These customers now make up 31% of our revenue, up two points year over year. Our trailing 12 month net dollar expansion rate for Enterprise customers in Q3 came in at 98%. The number of Enterprise customers at the end of Q3 was approximately 192,400.
As we've mentioned in prior quarters, the number of enterprise customers distinguishes between our 2 go to market motions and will fluctuate with shifts in our focus, and as such has become a less valuable measurement of company performance over time. Pivoting to our growth internationally. Our Americas revenue grew 4% year over year, EMEA grew 5%, and APAC was flat. On a constant currency basis, EMEA grew 3%, and APAC grew 2% year over year. Moving to our non GAAP results, which as a reminder, excludes stock based compensation expense and associated payroll taxes, acquisition related expenses, net gains on strategic investments, net litigation settlements, and associated tax effects.
Non GAAP gross margin in Q3 was 78.9%, as compared to 79.7% in Q3 of last year. The year over year reduction was primarily due to investments in AI. For the full year of FY25, we continue to expect our gross margin will be approximately 79%. Non GAAP income from operations came in at $458,000,000 exceeding the high end of our guidance of $443,000,000 as we continue to make progress managing expenses while investing in AI, our platform, and emerging products. This translates to 38.9 percent non GAAP operating margin for Q3 as compared to 39.3% in Q3 of last year.
Non GAAP diluted net income per share in Q3 was $1.38 on approximately 314,000,000 non GAAP diluted weighted average shares outstanding. This result was $0.07 above the high end of our guidance and $0.09 higher than Q3 of last year. Turning to the balance sheet. Deferred revenue at the end of the period grew 5% year over year to $1,380,000,000 driven by the continued refinement of discounting practices, as well as lengthening billing terms. In Q4, we expect deferred revenue to be up 5% to 6% year over year.
Looking at both our billed and unbilled contracts, our RPO increased 5% year over year to approximately $3,740,000,000 We expect to recognize 61% of the total RPO as revenue over the next 12 months, up from 58% in Q3 of last year. Operating cash flow in the quarter decreased 2% year over year to $483,000,000 Free cash flow grew 1% year over year to $458,000,000 Operating cash flow and free cash flow margins in the quarter were 41% 38.9%, respectively. We ended the quarter with approximately $7,700,000,000 in cash, cash equivalents, and marketable securities, excluding restricted cash. Under the pre existing $1,500,000,000 share buyback plan, in Q3, we purchased 4,400,000 shares for $302,000,000 increasing our repurchases quarter over quarter by $14,000,000 And at the end of Q3, we repurchased 11,600,000 shares for $739,000,000 Turning to guidance. In Q4, we expect revenue to be in the range of $1,175,000,000 to $1,180,000,000 which at the midpoint represents approximately 2.7 percent year over year growth.
We expect non GAAP operating income to be in the range of 443 dollars to $448,000,000 representing an operating margin of 37.8 percent at the midpoint as we continue to prioritize efficiencies across our operations. Our outlook for non GAAP earnings per share is $1.29 to $1.30 based on approximately 315,000,000 shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY 'twenty five. We now expect revenue to be in the range of $4,656,000,000 to $4,661,000,000 which at the midpoint represents approximately 2.9 percent year over year growth. Our total revenue guidance assumes a continuation of mixed macroeconomic environment.
We expect our non GAAP operating income to be in the range of $1,813,000,000 to $1,818,000,000 representing an operating margin of 39% at the midpoint. Our outlook for non GAAP earnings per share for FY 'twenty five is $5.41 to $5.43 based on approximately 315,000,000 shares outstanding. With the free cash flow results in Q3 and the increased outlook for operating income in FY 'twenty five, we now expect free cash flow to be towards the high end of our previously provided range of $1,580,000,000 to $1,620,000,000 for the full year. As indicated in the earnings press release today, we are also excited to announce our Board has authorized an incremental $1,200,000,000 share repurchase. This reinforces our board and management team's confidence in Zoom and enables us to further leverage our strong cash flow and balance sheet to drive shareholder returns.
The incremental authorization brings our total unexecuted buyback to approximately $2,000,000,000 which we expect to execute by the end of fiscal 'twenty 6. In conclusion, we believe our results and our guidance underscore the progress that we've made driving top line growth, strong financial management, and shareholder returns. We're excited about our differentiated AI platform vision to deliver value for our customers and incredibly grateful for the trust and support of the entire Zoom team, our customers and our investors. Kelsey, please queue the first question.
Kelsey, Moderator/Host, Zoom: Thank you so much, Michelle. And as Michelle mentioned, we will now move into the Q and A session. So when I call your name, please turn on your video and unmute yourselves. And as a reminder, in an effort to hear from everyone, we please ask that you limit yourself to one question. And our first question will come from Meta Marshall with Morgan Stanley (NYSE:MS).
Meta Marshall, Analyst, Morgan Stanley: Great. Thanks so much. Congrats on the quarter. Maybe for you, Eric, I just wanted to get a sense coming out of Zoomtopia, what you were hearing from customers just about where their strongest interest is on AI and kind of where they're looking for you to kind of take the roadmap to address kind of some of their needs.
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. So media is just great questions. That's our the theme of Zoomtopia this year read about AI. You know, we launched the AI combining 1 dot o last year. And with more and more customers, they enable AI.
And also at Zoomtopia, we mentioned that there are there are over 4,000,000 accounts who are already enabled AI company. Given the the quality, ease of use at a no additional cost, the customer really like Zoom AI company. However, after 1 year later, they also want to understand what's the direction? Are there any new things, you know, and for Mars? So and the feedback from our customers as Zoom Topia about, you know, Zoom Air Companion 2 rado were extremely positive because, you know, 1st of all, they look at our innovation, you know, the speed.
Right. And, you know, the lot of features are built into the air combination 2.0 again at a new at a new additional cost. Right. At the same time, enterprise customer also wanted to have some flexibility. That's why we also introduced a customized air company and also a company studio.
And that'll be available first half of next year, and also we can monetize. Overall, the customers really trust Zoom. Right? As we continue, you know, improving the AI quality like a meeting summary compared to Zoom meeting summary quality versus any other competitors. I have a higher confidence customer like our solution, like our quality and also a lot of new innovative features and customers really enjoy AI combining 2.0.
And by the way, you look at the last 3 months, look at our AI, you know, look at our monthly active active users. It's already up, you know, almost 60%. Right. And so that's very, very, very, you know, the positive side. So overall, the customer really like Zoom AI companion.
And also, they really appreciate us. We see we are not immune to try to customer for AI company. I had to do this at a new additional cost. So that's a very good news for us.
Meta Marshall, Analyst, Morgan Stanley: Great. Thanks.
Charles Efeslage, Head of Investor Relations, Zoom: Thank you.
Kelsey, Moderator/Host, Zoom: We will now hear from Kash Rangan with Goldman Sachs.
Kash Rangan, Analyst, Goldman Sachs: Hi. Thank you very much. I'll echo the congratulations and congrats to you, Vishal, on your first earnings conference call with Zoom. Eric, we had the pleasure of attending Zoomtopia as well. I'm curious where are the budgets for AI coming from?
Is it from a separate pool from your customers, or are they taking the budgets out of budgets or AI money out of budgets that were designed for Zoom? And also a follow-up question on the macro. A tone of customer conversations post the elections, do you sense that there is slightly higher animal spirits, better appetite to spend in tech on tech and on Zoom's products in particular? Thank you so much.
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. Keju, thank you. And looks like you are driving. So I think, look at AI, the cost. Right?
So every company, I think now they are thinking about where it should allocate, you know, the budget. Right. Where is this? Should it get more money or fund right to support AI? I think every company is different and some internal customers and they have a new budget.
Some customers, they consolidated into the field vendors and some customers, they just want to say, hey, you know, maybe actually saving money from other, you know, areas, you know, and to, you know, to shift the budget towards embracing AI. And given our strengths on the quality plus at a no additional cost, Zoom is much better positioned. In particular, customer look at all the vendors when they try to consolidate. Look at it. Again, AI cost is not a small, right?
You look at some of the competitors, you know, per user per month $30 right? And look at Zoom, better quality at a new additional cost. You know, that's the reason why it comes to total cost of ownership. Customer look at Zoom, I think, much better position. You're so right.
Otherwise, customers say if they are going again, almost every businesses, they subscribe to multiple software services. If each software service vendors, they are going to they are going to charge a customer with with AI. Guess (NYSE:GES) what? Every business is they have to spend more. That's the reason why they charge Zoom, and I think we're much better position.
And back to the second question, I think it's too early to tell. And every company they look at, you know, the macroeconomic, I think, as we all know, is getting better. And also in terms of regulation of AI and also also also is is a bit too early to tell. But overall, I think every company, they are very optimistic about doubling down embracing AI. They look at the windows who who they trust with a better quality also is a better, you know, total cost of ownership.
I think that's the reason why I truly believe Zoom is much better positioned.
Michelle Chang, CFO, Zoom: And maybe if I can add in, cash, maybe unasked, but an important note is our forecast sort of assumes like macro conditions and like spending conditions relative to what we saw in Q3.
Charles Efeslage, Head of Investor Relations, Zoom: Yes.
Kelsey, Moderator/Host, Zoom: All right. We'll go ahead and move on to Arjun Bhatia with William Blair.
Arjun Bhatia, Analyst, William Blair: Perfect. Thank you and congrats on the reacceleration here. Eric, maybe if we can switch gears a little bit to contact center. You have that 20,000 seat deal with the Spanish revenue service, I believe, this quarter. That's a very large deal, very impressive.
Can you just maybe elaborate a little bit on what were some of the major factors that drove Zoom to win a deal like that? What was the process like? How competitive what it was it? And, what were some of the maybe differentiating factors that you saw, in that that you can maybe replicate in other contact center deals?
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. Yeah. Greater question. So and given that I still wear the head of Zoom contact center general manager, I really like your question. I think a few things.
You know, first of all, they are already of a customer. They deploy, I think, if I recall correctly, more than 30,000 Zoom phone seats, you know, before, you know, in a very busy tax season, you know, Zoom deliver a greater performance. You know, they they really trust Zoom. And when they look at Zoom economy center, you know, they know actually, you know, our back end architecture were scalable. Right?
And also, they look at our all the features that, right, as I mentioned, you know, all the, you know, past, you know, a few quarters, you know, we support a PCI, you know, federal app and the workforce management, the quality management and also social channel. They know our pace of innovation is amazing. And because of architecture, because of a trust, because of the the features and also look at our stability And we we have no problem from very beginning. Can support, you know, very large, you know, contact center agent and, you know, deployment. Because, again, we build architecture from Taiwan, not like other vendors, but they had to they had to have a surgery right to support up to the 10,000 or 20,000 from Devon.
Our architecture already very skittable. That's the reason why there's a customer. They are very, very happy, you know, to deploy the Zoom iconic center. Again, from all the side of perspective, feel like, wow, that's a large deal of 20,000 agents. But you're talking with our product engineer team and say, hey, we already support that deal, you know, from an architect perspective on the one.
Right? So, you know, given more and more customers recognize the potential of Zoom and, you know, look at our piece of innovation, I think especially the AI, I think we're very well positioned to win more deals like that.
Eric Yuan, Founder and CEO, Zoom: Correct. Thank you. Thank you.
Kelsey, Moderator/Host, Zoom: Our next question is going to come from Patrick Walravens with JMP Securities.
Charles Efeslage, Head of Investor Relations, Zoom: Patrick, you are muted.
Patrick Walravens, Analyst, JMP Securities: Hopefully, I'm unmuted now. Can you hear me?
Eric Yuan, Founder and CEO, Zoom: Yes.
Patrick Walravens, Analyst, JMP Securities: Okay, great. Congratulations. Michel, I think I'm going to focus on you, if that's all right. So can you just tell us again why you I asked you this question at the Analyst Day, but I think bigger venue would be helpful. Why you took this job?
What you found so far? And then maybe you obviously haven't guided for next year yet, and you're early in your tenure, but maybe any points that you would share with us in terms of how to think about next year?
Michelle Chang, CFO, Zoom: Yeah. Great. Thanks, Pat, for the question. Let me kind of go back and just remind people. I came to Zoom, I think in part beginning because of the iconic brand and the established leadership in meetings.
But as Eric and I began our conversations over the interview process, I got more and more excited about where I saw Zoom going to an AI first platform company and could see a lot of the seeds, if you will, of growth being planted and starting to come to fruition. So got very excited about that. And maybe my learning sense has been delightful, honestly, to see the customer love and the pace of innovation. I think you'd heard about it before, but to be amongst it, I think, has been a delight. And so my focus as a CFO is really going to be on top line, as you noted, getting the top line revenue growth further accelerating, certainly continuing to manage margins and expenses as Kelly has.
And then maybe the last part I'd say that I think you saw us re up here today is capital allocation with our buyback. And in terms of how to guide for FY 26, look, we will officially guide as we always have in the next guidance period. So I'll take my comments until then.
Patrick Walravens, Analyst, JMP Securities: Okay. Great. Thank you.
Kelsey, Moderator/Host, Zoom: Yeah. James Fish with Piper Sandler has the next question.
James Fish, Analyst, Piper Sandler: Hey, guys. Thanks for the question. Maybe, Eric, for you, on the AI side, you guys are talking about AI investments, obviously impacting the gross margins. You talked about that last quarter. But is this where do we think about the AI investments actually going into?
Is it sort of the back end infrastructure or thinking about it more on companion side and more modules? How are you feeling about the AI portfolio for contact center generally? And then just Michelle for you, on the you talked about lengthening billing terms. We're starting to see though a difference between on RPO and billings for sure, but a big divergence really on the current and non current RPO trends this quarter. Can you just kind of walk us through what happened there despite the comment on lengthening billing terms?
Thanks.
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. Yeah. Jim, it's a great question. I can address your first one. So look at AI, right?
So we have to invest more, right? And I think a few areas, right? And one is look at our Zoom workplace platform, right? You know, we have to invest more talents, you know, deploy invite more talents, you know, deploy more GPUs and also use more of the cloud based on the GPUs as well as we keep improving the AI quality and innovate on AI features. That's for workplace.
And at the same time, we are going to introduce the customized AI company. Also AI studio and next year, not only do we offer the free service for AI company, but those enterprise customization certainly can help us in terms of monetization. At the same time, we leverage the technology we build for the workplace, apply that to the contact center, you know, like a virtual Zoom virtual agent, right? And also some other, you know, the the accountants and features. We can share the same AI infrastructure and also a lot of technology component and also can be shared Zoom contact center where AI company is not free.
The contact center is different, right? We also can monetize. Essentially, we build the the the same common AI infrastructure architecture and workplace customized work. Yeah. Companion we can monetize.
Content center also can monetize. I think more and more, you know, not like today, but you see you keep investing more and more and soon we can also monetize more as well. That's why I think we do not worry about the cost in the long run at all. I mean, the AI investment because, you know, with the monetization, you know, coming in certainly can help us more. So, so far, we feel very comfortable.
Michelle Chang, CFO, Zoom: And James, maybe to answer your question, on RPO and specifically why we see the current piece go up. We are seeing just to confirm lengthening billing terms. So we're encouraged by that of an indicator both in online and enterprise of our customers' dedication to Zoom. In particular, current, as you know, went up 10%. And the way that I would have you think about that is when we have coterminous contracts, we tend to see as we sell outside of that expiry cycle, that current volume go up temporarily before it goes to long term.
So net net, a positive thing is to expanding portfolio with our customers.
Kelsey, Moderator/Host, Zoom: And we will now hear from Alex Zukin with Wolfe Research.
Patrick Walravens, Analyst, JMP Securities: Hey, guys.
Charles Efeslage, Head of Investor Relations, Zoom0: Congratulations on a solid quarter. Maybe just I'll say 1.5 questions. On the monetization side, Eric, as you're starting to see AI companion additions and interactions start to scale as you think about the kind of ultimate monetization opportunity of AI in terms of the broader portfolio. How, when, where should we see it? Is it through selling contact center that's more AI native into the overall base?
Is it the verticalization of the AI companion 2.0? Is it better AI Companion expanding? Just give us a flavor for the how and the when. And Michelle, if I look at from a kind of forward KPIs, I see enterprise billings growing double digits again. I see CRPO growing double digits again.
I see churn for the online business basically getting lower every quarter by 20 to 30 basis points. Why shouldn't we kind of extrapolate that as the online business stable flat enterprise business accelerating from here?
Michelle Chang, CFO, Zoom: Yeah. Eric, do you want to go on the monetization? Or I'm happy to tag into on the
Charles Efeslage, Head of Investor Relations, Zoom: AI front. I think you can address the second one because it's just asking this. Then I can address the first one later.
Michelle Chang, CFO, Zoom: Yeah. So to to answer your question, and, Alex, obviously, we're not gonna guide to 26 until February. But I would say we feel good about the beat to forecast. We feel good about the implied raise to Q4. And we feel good about the overall acceleration.
If you look at our H2 growth, it's above H1. So net net, in terms of what we've said and what we've guided, it's delivering on what we said. And then you kind of go to the underlying KPIs and you look at it. And I think there's a lot of strong fundamentals. So look, I'm not going to confirm the numbers that you gave.
But I think maybe one way to think about the models for revenue is we've given a q4 revenue growth guide. I believe the midpoint of that growth rate is probably represents a reasonable proxy for how to think about revenue growth into FY 20 6.
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. Alex, by the way, you know, we will share more in detail in Q4 earnings call. You will see the FY26. By the way, you mentioned online, remember, you know, 2 years ago, FY you know, 'twenty three, right, look at online business, it declined by 80%. A year ago, the 4%.
Now this year, you know, flat, right? You see the trend is very positive. So back to your question of AI monetization, we already monetize AI today, but not for the workplace product, for our building the services like a contact center, like Zoom revenue accelerator, right? And like, you know, the new newly coming services like Zoom Workplace for frontline workers, for educators, for healthcare, those, you know, the product tailored for vertical industries. At the same time, we're also focused on enterprise.
You know, I think some, you know, maybe, you know, second half next year. And as you know, for the because the customized AI companion and AI companion studio will not be available in the first half of next calendar year, right. I think a lot of monetization opportunities, but also at the same time, you know, not only do we monetize AI company, but also we leverage AI company to further build a relationship with the customer. You know, like a customer look at today the Zoom platform, you know, on the one hand, ease of use is stable, secure, but plus AI, you know, a greater performance quality at a new additional cost. Right?
I think more and more we do see some customer last 2 quarters, you know, they switched to Zoom platform. Right? I'll give one example. Right? Why, you know, in q3, we won a very large insurance company.
And if I recall correctly, around 20,000 seats. Right? They switched to Zoom workplace workplace platform. You know, for sure, there's some big competitor there, you know, so called for free. But when they analyze their employee like our Zoom service, they analyze the total cost.
Zoom Air combining also added to added at a new additional cost. That's one of the key reasons why, you know, they selected Zoom as their collaboration platform. So that's a very big win in Q3. So.
Patrick Walravens, Analyst, JMP Securities: Perfect. Thank you, guys.
Eric Yuan, Founder and CEO, Zoom: Thank you, Alex.
Michelle Chang, CFO, Zoom: And then Oh. Back, sorry, to your question. In online, kind of the way that I would think about the q four is sort of flat to slightly down. And then certainly, because I get this question a lot, the ambition for online is growth. Just want to make sure I answered your online questions.
Kelsey, Moderator/Host, Zoom: Thanks again, Alex. And we will move on to C. D. Panigrahi with Mizuho (NYSE:MFG).
Charles Efeslage, Head of Investor Relations, Zoom1: Great. Thank you. Michel, congrats on your first earnings call, and you talked about your focus to reaccelerate top line growth. Can you guys hear me?
Eric Yuan, Founder and CEO, Zoom: Yeah. Okay.
Charles Efeslage, Head of Investor Relations, Zoom1: So good. It's good to see the platform, mostly your NR stabilizing. And now you talk about multiple products like phone, contact center, WorkVivo, customer AI, companion, lot of different products you are talking about that will layer in growth. So as you look forward to next year, we which products you are more excited about, and how do you rack order these products when it comes to layering the growth to the core platform?
Michelle Chang, CFO, Zoom: Yeah. It's it's such a great question. I guess I would start with just sort of the foundation of Zoom, and then I'll kind of build out, in my answer. So, look, the foundation of Zoom was obviously the meetings. We're working very hard to move that to platform.
And we're excited by the deceleration of seat down sells that we're seeing. We're excited by the competitive wins that we're seeing. We're excited by the online churn rate. So kind of in our foundation, as we bring in AI, as Eric has said many times, at no additional cost or we bring, you know, we build out the portfolio of Workplace, we're excited at sort of what that could mean to the foundation of our business. And then certainly, as we think about growth vectors from there, part of that Workplace platform is a shift to phone, which has been a significant growth driver to us.
We'll certainly that will certainly continue. And then I would say the products that we're seeing the momentum in today, we call them or I call them our emerging products in contact center and Workvivo. You know, I think we'll continue to be durable elements, for product growth going forward. And then over time, I think you'll see more of that, AI monetization and some of the things that we announced at Zoomtopia. But like any, products, those will come in with time.
And you you asked a lot about product growth, but I guess I would also call out, that I think there's a lot of growth vectors that we still can grow from in terms of our international growth or our channel expansion or continuing to go up market. There's a lot of really great proof points of when we get customers in on the workplace, it decreases churn, that accelerates revenue growth with our land and expand. So I think there's a lot of beyond sort of the traditional product levers of growth, a lot more we can do.
Charles Efeslage, Head of Investor Relations, Zoom1: Thank you. Thanks for that color.
Kelsey, Moderator/Host, Zoom: Alan Verkhovsky with Scotiabank (TSX:BNS) has the next question.
Charles Efeslage, Head of Investor Relations, Zoom2: Hey, guys. Thanks for taking the questions here, and I'll echo the congrats on a strong quarter. Michelle, it looks like the deferred revenue growth in the quarter came in right as you guys were expecting, which is a slight change of pace from the beats we've seen there. There are a number of large deals you highlighted in the quarter, like the contact center deal with over 20,000 seats, can you just walk us through the puts and takes there in the quarter and perhaps give us a refresh about the level of conservatism you're embedding in your Q4 guide of deferred revenue growth being 5% to 6%?
Michelle Chang, CFO, Zoom: Yeah. So, first of all, I would say, you know, we guided that it'll be 5 to or that it grew 5% in q3 and we guided to 5% to 6%. So just to reorient everyone, The dynamics of what's driving that are tightening of discounting and lengthening of billing terms, and we expect those to obviously continue into q4. So in terms of what may be, you know, how to think about it in terms of our guidance philosophy, I would say it has very much the same. So I've continued a guidance philosophy similar, to to what has been had historically at Zoom.
James Fish, Analyst, Piper Sandler: Okay. Thanks, guys. Congrats.
Michelle Chang, CFO, Zoom: The other thing that I would mention, nothing different to what Zoom has said historically is that revenue is ultimately, the better measure and indicator for our business, given some fluctuations that you'll see from quarter to quarter in deferred revenue. So that's really what I would point people to.
Kelsey, Moderator/Host, Zoom: And Bank of America's Michael Funk has the next question.
Charles Efeslage, Head of Investor Relations, Zoom3: Yes, great. Thank you all for the time. One for you, Eric. So you really created an iconic brand with Zoom Video, owned that point solution space and have now expanded in other areas. The new names, Zoom communication not captures at all.
You have phone now, you have contact center, adding AI on top, arguably even edging into work management with some of the products that you're rolling out. So the delineation is less clear now between yourself and competitors in other areas. So how do you think about attacking the market? Is it purely based on product? Or how important is price as you try to win new business?
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. So it's a great question. I think, you know, our philosophy, you know, from day 1, always a better product, a better price, and a better service. Right? You know, first of all, you know, our core strengths read about a product experience and make sure that, you know, the customer like us, you know, look at it recently Gartner (NYSE:IT) peer peer inside the report.
Right? The Zoom is a only one in the leader section. You know, that's the reason why the customer like us and because they truly like our product because of that, you know, we introduced a lot of other new product, essentially give a customer suite and we call that, you know, workplace, you know, the the AI first to work a platform. At the same time, we look at the price, you know, a year ago, if I recall correct correctly, right, is maybe more than that now. We increased price for online, and we do not see any issues, you know, and the users really like our product product.
Now actually used to be, you know, customers, they bought other point of solutions like many years ago, meetings and phone and also the invite board allows also point of product. Now they prefer our platform approach, right, and you got an entire platform, you know, they can leverage more services from Zoom. And at the same time, and with the AI at no additional cost, the customer tries to have Zoom brand more sticky and down the road with the customer AI companion of other innovations for sure. And, you know, we can monetize more. Essentially, we do not want to do something similar to, you know, some competitors.
Why? They kind of stuck with your competitors. They call that for free. And then every year, the increased price increase price. We don't want to do that.
We want to build a long term trust. Given some time, the customer realized Zoom not only very stable ease of use. And also we introduced more and more services they would like to consolidate into the Zoom platform. From that perspective, I think more opportunities for us to monetize as a platform player and in order to mention AI as well. So that's our strategy.
Charles Efeslage, Head of Investor Relations, Zoom3: Great. Thank you, Eric.
Charles Efeslage, Head of Investor Relations, Zoom: Thank you, Michael. Appreciate it.
Kelsey, Moderator/Host, Zoom: We will now hear from Samad Samana with Jefferies.
Charles Efeslage, Head of Investor Relations, Zoom4: Hi, good evening. And I'll echo the congrats on the next quarter. Maybe on WorkVivo, I know Meta announced that it would be sunsetting the Meta Workplace product and it would be in stages over 2526 and it steer customers toward WorkVivo. Can you have us think about how you're thinking about that ramp? You've had good momentum there.
Customers grew 72% year over year. Can you quantify maybe how much of the growth is coming from Meta and how we should think about that momentum going forward?
Charles Efeslage, Head of Investor Relations, Zoom: Yeah, great question. So, Michelle, feel free to chime in. I think, you know, we acquired WorkWeivo, I think, 2 years ago. And because, you know, you look at the employee engagement, that's very important as you part of a Zoom work platform. I think that a company that a team is much better positioned.
They have very scalable, very cool, you know, the the product. That's the reason why I acquired them. And also, you know, a few quarters ago, right, and Meta, you know, screwed, you know, focus on the AI, a lot of other things. They decided to, you know, and, you know, retire, you know, Workplace product. For sure, there are some other vendors out there as well.
But, you know, based on the customer feedback because the product maturity, right, they decided to go with Zoom as a partnership. Right? So meaning, you know, WorkWeivo is an exclusive partner. Right? They also build a migration tools, right, to have a customer who deployed Workplace, you know, the product for Meta and replace that with WorkPeople.
You look at our top deals, I think almost all of those deals and because of Meta migration. And also I think we have also very strong pipeline as well. Again, that's not a small company. We do not focus on, you know, SMB. This is a very large integrated customer.
Some of the Zoom Workplace customer already, some even not a Zoom Workplace customer, but they also deployed Zoom WorkWeibo. I think the pipeline is very strong and very promising. And also we also wanted to innovate more on WorkWeibo. Double down on that, I think give us more opportunity and to further grow that business. You know, I think you look at the, you know, the growth rate and a quarter over quarter, year over year is pretty exciting.
And I think that, you know, business can contribute more to our business down the road.
Michelle Chang, CFO, Zoom: Maybe just to add in from my standpoint, yes, the Meta partnership is driving the growth. We're not going to quantify it or speak to it. But I think if you look at a lot of the underlying metrics that we said in our prepared remarks, they tell a more holistic story for Work Vivo growth. And a lot of the things that we've been focused on from geo expansion to partner dynamics to getting those large customers as well as breadth. And they build up a lot of the natural things that Zoom has strength in certain industries, like retail as well as frontline.
So I think, yes, the the meta partnership is part of that. And there are some durable dynamics to under lower or underscore a lot of the things that Eric talked about.
Charles Efeslage, Head of Investor Relations, Zoom4: Great. Thank you both so much for the time.
Charles Efeslage, Head of Investor Relations, Zoom: Thank you.
Kelsey, Moderator/Host, Zoom: The next question will come from Tyler Radke with Citi.
Charles Efeslage, Head of Investor Relations, Zoom5: Thank you. Hey, Eric. Hey, Michelle. I wanted to direct my question to Michelle. Congrats again on the first earnings call here as CFO of Zoom.
I wanted to ask how you think about margins. So if we look at Q3, the operating margins were down very slightly year over year. I think Q4, they're guided to be down about 1 point year over year if you round up. How should we think about the path to long term operating margins? I think you're still a couple of points above the high end of that long term guide that you put out at Analyst Day.
Should we expect to get back to that long term operating margins next year? Just give us a sense for the path there. And then maybe just if you could give your own philosophy too around how you evaluate expenses, what are some of the things that you look for just in terms of ROI in case your framework is maybe different than how things were done at Zoom before? Thank you.
Michelle Chang, CFO, Zoom: Perfect. Great question. And thank you very much, Tyler. So I would say, I think it's important just to reemphasize what we're investing in. We're investing in AI.
We're investing in our emerging growth businesses, and we're investing in the platform. As I think it sort of sets up the frame that I'll have, I don't think it's that different than maybe the frame that Kelly and Eric had before, which is we're going to invest for top line growth and we're going to invest for our strategy going forward. And so look, our our guidance, approach remains the same. I said that before. We gave, as you noted, long term guidance that had that operating margin lower than where we are today because of those investments.
I just want to emphasize that as a long term margin scenario and so not something that you should take for fy 26. And again, we'll come back in fy 26 and or we'll come back in February and give FY 26 guidance. But in terms of my philosophy, I think it's going to be a lot of where Eric and I are going to spend our time is how do we really make sure that every dollar that zoom is spending is going towards those things that I mentioned and going towards top line growth. And so, look, we'll employ other ways of capital allocation, but in terms of internal capital allocation, I think it's going through each thing, questioning the return, questioning the alignment to strategic value and making sure that as a culture, you know, we have the disciplined approach of really looking at our expenses and having a culture of driving savings to offset the investments that we know we're going to need to make.
Charles Efeslage, Head of Investor Relations, Zoom: Yeah. Just quickly add on to water, Michelle side of Taylor. I think you look at our company to check a record, especially as you know the way for us to manage the cost is very disciplined approach. It gave you know even 1 or 2 quarters you see like a more investment you know on let's say on COGS side. You know I'm very very you know proud of our world class DevOps team led by led by our President of Product Bill Chan.
You know, he and his team, they always know how to automate further optimize, you know, a lot of cost savings. You know, I that's one area. I normally I do not spend any time because I have a high confidence that a team, they can always come up with some ways and to further reduce the the the COGS. Right? And even for AI, in in the nowhere to open the eyes, I think I have a very high confidence, you know, even 1 or 2 quarters more investment or something like that.
I personally feel like the team can come up with some better ideas, you know, further reduce the cost.
Eric Yuan, Founder and CEO, Zoom: Thank you.
Charles Efeslage, Head of Investor Relations, Zoom: Thank you, Tyler.
Kelsey, Moderator/Host, Zoom: Michelle and Eric, we have time for one additional question. It's going to come from Mark Murphy with JPMorgan.
Charles Efeslage, Head of Investor Relations, Zoom6: Thank you so much. Great to see you. Eric, I was wondering if you can perhaps speak to the customer interest that you're seeing to integrate data from their own internal repositories into AI Companion because I believe that triggers the $12 per user per month monetization or it's one of the important triggers. I would think that that is also going to drive some real product stickiness and value that would ratchet higher. So, I'm just curious how many customers are showing that interest?
What kind of scenarios they can design? And therefore, maybe how to think through the monetization potential at that price point?
Charles Efeslage, Head of Investor Relations, Zoom: Yes. So, Mark, it's a great, great question. So that's the reason why we introduced the you know, customized AI companion or AI companion studio because, you know, a few quarters ago and, you know, we talked to many enterprise customers. They share with us a feedback. Right.
So they like AI company. Also, they want to make sure, hey, you know, the some customers, they already build their own, you know, AI large language model, you know, how to federate that into our federated approach. And some customers, they have very large content, you know, like a notary base, you know, how to connect with that. You know, some customers they have was, you know, the with, you know, other business systems, right, you know, like ServiceNow, Atlassian (NASDAQ:TEAM) and Workday (NASDAQ:WDAY), a lot of Box and HubSpot (NYSE:HUBS), like how to connect with those data sources, right. And also even from employee perspective, right, you know, they won't have, you know, a customized avatar in the leverage AI, you know, to as a personal coach as well.
So meaning those customers, they have a customized requirements. To support those customer requirements. We need to make sure we have AI infrastructure and a technology technology ready. Right? That's the reason why, you know, we introduced the AI company, you know, a customized AI company.
The goal is really to work together with enterprise customers to tailor for each enterprise customer. That's the reason why it's not free. I think the the feedback from Zoomtopia is very positive because, again, those features are not, you know, not a build by our, you know, just this is several product managers, engineers. Think about let's build that. We already solicited feedback from our from our enterprise content before.
You know, those features that I think can truly satisfy their needs.
Michelle Chang, CFO, Zoom: And maybe, Mark, if I could add in. I think that Zoom has some really powerful differentials here, in terms of our approach, the democratization of AI and kind of the core SKUs and letting people kind of try it and get to experience it. I think we'll we'll provide an important on ramp. And then I would say our open platform approach, you know, when you start looking at bringing in custom things or connecting with other data sources, I think that in addition to a price point, which is very, which is more reachable, if you will, for customers are going to be important competitive differentiators for us going forward.
Charles Efeslage, Head of Investor Relations, Zoom6: Excellent. Thank you so much.
Charles Efeslage, Head of Investor Relations, Zoom: So Kelsey, is this the last question?
Kelsey, Moderator/Host, Zoom: That was the last question, Eric. I'll turn it back to you for closing if you'd like.
Charles Efeslage, Head of Investor Relations, Zoom: I think, first of all, thank you all for your time. This is the first earning call. I'm Michelle's first earning call. I think it's very similar in the, you know, the transition from, Kylie and to Michelle. And I feel Michelle, this feel like it's not your first earnings call.
Feel like you already joined a Zoom meeting call for many times before. Right? So thank you, you know, for Kylie's great work over the past many years. Michelle, thank you. And again, thank you for all the investors.
I really appreciate your time. See you all at the next earning call in February. Thank you.
Kelsey, Moderator/Host, Zoom: Thanks, Eric and Michelle. And again, everyone, that concludes today's earnings release. We always thank you all for your participation. And again, from our family to yours, may you and yours have a safe and happy holiday season. Take care until next quarter.
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