Zoom Communications, Inc. Q1 FY2025 Earnings Call

FY’25 earnings webinar. As a reminder, today's webinar is being recorded, and I will now hand things over to Charles Eveslage, incoming Head of Investor Relations. Charles, over to you.

Thank you, Kelcey. Hello everyone and welcome to Zoom's earnings video webinar for the First Quarter of Fiscal Year 2025. I’m joined today by Zoom’s Founder and CEO, Eric Yuan, and Zoom’s CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also, on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the second quarter and full fiscal year 2025; our expectations regarding financial and business trends; impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations; and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to 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. And with that, let me turn the discussion over to Eric.

Thank you, Charles. Thank you everyone for joining us today. Our rapid innovation over the years has taken us far beyond video conferencing. Every step of the way has been guided by our mission to solve customer problems and enable greater productivity. In the process, we have very deliberately created a communication and collaboration powerhouse with AI infused natively across the platform. Time and time again we are recognized as a leader by Gartner, G2, TrustRadius and many others. And we are so pleased that in March, Fast Company added Zoom to their prestigious list of the World’s Most Innovative Companies of 2024, further validating our dedication to providing our customers with a high-quality, open collaboration platform powered by AI that just works. In March we announced Zoom Workplace, our AI-powered collaboration platform designed to help our customers streamline communications, improve productivity, increase employee engagement, and optimize in-person time. Within the launch of Zoom Workplace are new enhancements and capabilities like multi-speaker view, document collaboration, AI-powered portrait lighting, along with upcoming features and products like Ask AI Companion, which will work across the platform to help employees make the most of their time. The Workplace launch also boosts Zoom Phone, Team Chat, Events and Whiteboard with many more AI Companion capabilities to help make customers more productive. One of the core pillars of Zoom Workplace is optimizing in-person time and embracing flexible work. Our Spaces portfolio has expanded from Zoom Rooms into integrated adjacencies like Workplace Reservation, Visitor Management, and Digital Signage. As of the end of Q1, the cumulative number of Zoom Rooms licenses purchased was over 2 million. And in the last 12 months, we provisioned over 100,000 desks in Workspace Reservations to support in-office work. Leading financial services and legal firms such as Capital One and Cooley use Zoom Rooms to support their globally dispersed hybrid workforce, and others like Flex and BAYADA Home Health Care have expanded from Zoom Rooms to Workspace Reservation in order to optimize in-office time. Zoom Workplace is also designed to increase employee engagement through the integration of Workvivo into our platform. In Q1, we landed a major telecom customer on Workvivo, who bought approximately 100,000 seats, and Workvivo was named Meta’s only preferred migration partner for its customers as it retires Workplace from Meta. Our success in employee experience represents an important beachhead for us in upselling customers on the full suite. Zoom Workplace exists alongside and is designed to seamlessly integrate with our business services, including Zoom Events, Revenue Accelerator, Contact Center, Virtual Agent and others. Zoom Contact Center, launched only two years ago, is ready for prime time. We now support PCI Compliance, opening the door for customers that have payment processing in their workflows. We also received Fedramp Moderate authorization for our Essentials and Premium SKUs, allowing US government agencies and entities doing business with them to leverage Zoom Contact Center. We have launched all key social channels, including Facebook Messenger, WhatsApp and Gmail; and have enabled direct transfers between contact center agents and other departments via Zoom Phone, helping to further bridge the employee and customer experiences. As a result of how far the product has come, we have seen strong growth in the number of deals where we have beaten or displaced a Gartner top four CCaaS player. We have also strengthened our Channel partnerships, leading to a significant increase in our Channel wins and ability to compete for larger deals. ASPs are heading north buoyed by the popularity of our higher tier packages that allow agents and managers to lean further into AI with AI Expert Assist, Workforce Management, Quality Management, and more. Now, let me recognize some of our amazing customers. First, let me thank Expedia, who needs no introduction, for becoming a Lighthouse Zoom Revenue Accelerator customer in the quarter, leaning heavily into our AI products to drive revenue. A power user of Zoom Phone for years, they wanted to better automate workflows, coach sellers and drive efficiencies. We partnered with them on an initial quadruple-digit Zoom Revenue Accelerator deal, which includes working directly with their team to improve and tailor the product based on their business model and industry-specific use case. We are so excited about this AI-centric partnership to drive value for Expedia and continuously improve our platform based on customer feedback. Let me also thank Major League Baseball. A year ago, MLB made a highly strategic decision to adopt Zoom Contact Center. In Q1, they chose to expand our successful partnership by integrating Zoom Quality Management into their Zoom Contact Center deployment. This enhancement further strengthens their fan engagement strategy and streamlines business operations. MLB was particularly impressed by the interactive features, enhanced accessibility, and the ability of Zoom Quality Management to support virtual fan engagement. Let me also thank Centerstone, a non-profit health system specializing in mental health and substance use disorder treatments for individuals, families, and veterans, for doubling down on Zoom. Seeing strong value from their existing Zoom Meetings, Zoom Phone and Rooms deployment, in Q1, they expanded Zoom Phone and added Zoom Contact Center in order to leverage AI to provide better care, and Zoom Team Chat in order to streamline communications all from a single platform. I am also very excited to share that we greatly expanded our footprint with a leading global financial services firm, who doubled their Zoom Phone seats to over 100,000. We are so pleased to see more customers adopting our Zoom Workplace and Business Services products in order to reap the benefits of our modern, natively integrated, AI-powered technologies. And with that I’ll pass it over to Kelly. Thank you.

Thank you Eric and hello everyone. Let’s start with some exciting milestones for our emerging products in Q1. We saw additional traction in Zoom Contact Center, as we reached 90 customers with over $100,000 in ARR, representing 246% year-over-year growth. This was driven by our recently launched higher pricing tiers as well as our success in larger deals. Zoom Phone saw continued expansion up market. With the addition of the marquee financial services customer Eric just mentioned, we now have five customers with 100,000 or more Zoom Phone seats. Zoom AI Companion has grown significantly in just eight months with over 700,000 customer accounts enabled as of today. These customers range all the way from solopreneurs up to enterprises with over 100,000 users. Embedding AI across all aspects of Zoom Workplace and Business Services is a key priority as we continue to drive productivity and engagement for our customers. Now, let’s dive into the financial results. In Q1, total revenue came in at $1.141 billion, up 3% year-over-year. This result was approximately $16 million above the high end of our guidance. Our Enterprise revenue grew 5% year-over-year and represented 58% of total revenue, up from 57% a year ago. Online Average Monthly Churn came in at 3.2% as compared to 3.1% in Q1 of FY24. The slight uptick in churn was related to tightening up the grace period for unmade payments, which pulled some churn forward. Absent this change, Online Average Monthly Churn would have remained consistent with the last two quarters at 3.0%, the lowest we have ever reported. We saw 8% year-over-year growth in the up-market as we ended the quarter with 3,883 customers contributing more than $100,000 in trailing twelve months revenue. These customers represented 30% of revenue, up from 29% in Q1 of FY24. As a reminder, our classification of Enterprise versus Online is determined by how we engage the customer, with Enterprise referring to customers who are supported by our direct sales team, resellers, or strategic partners, and Online referring to customers who self-serve. During Q1, as part of an effort to improve the customer experience and drive greater efficiency in our operations, we transitioned 26,800 Enterprise customers with low ARR to Online. The number of Enterprise customers at the end of Q1, after accounting for the transition, was approximately 191,000. It is important to note that while the customer transition had a noticeable impact on our number of Enterprise customers in Q1, the associated revenue was de minimis, representing an approximately $4 million shift from Enterprise to Online. Additionally, our trailing twelve-month Net Dollar Expansion rate for Enterprise customers in Q1 came in at 99%, which was not affected by this transition. Our Americas revenue grew 4% year-over-year, while EMEA increased by 2% and APAC declined by 2%. The APAC performance was due to the FX headwinds in Japan and Australia. Moving now to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains on strategic investments, and all associated tax effects. Non-GAAP gross margin in Q1 was 79.3%, which was slightly lower than 80.5% in Q1 of last year, mainly due to our investments in AI innovation. In Q2, we will incur one-time investments to upgrade our data center backbone and expect gross margins to dip to 78% for the quarter. For the full year of FY’25, we continue to expect our gross margin to be approximately 79%. Non-GAAP income from operations grew by 8% year-over-year to $457 million, exceeding the high end of our guidance of $415 million. This translates to a 40% non-GAAP operating margin for Q1, an improvement from 38.2% in Q1 of last year. Non-GAAP diluted net income per share in Q1 was $1.35, on approximately 315 million non-GAAP diluted weighted average shares outstanding. This result was $0.15 above the high end of our guidance and $0.19 higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.35 billion, down approximately 1% from Q1 of last year. This was roughly three percentage points higher than the range we provided last quarter, partially due to tightening up our discounting practices last year. For Q2, we expect deferred revenue to be up approximately 1% year-over-year. Looking at both our billed and unbilled contracts, our RPO increased 5% year-over-year to approximately $3.67 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, consistent with Q1 of last year. Operating cash flow in the quarter grew 41% year-over-year to $588 million. Free cash flow grew 44% year-over-year to $570 million. Our operating cash flow and free cash flow margins expanded to 51.5% and 49.9%, respectively. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management and higher interest income. We ended the quarter with approximately $7.4 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Last quarter, we announced the authorization of a $1.5 billion share buy-back plan. As of the end of Q1, we had purchased $150 million of stock, representing 2.4 million shares. Now turning to guidance. For Q2, we expect revenue to be in the range of $1.145 to $1.15 billion, representing approximately 1% year-over-year growth. We expect non-GAAP operating income to be in the range of $415 million to $420 million. Our outlook for non-GAAP earnings per share is $1.20 to $1.21 based on approximately 316 million shares outstanding. We are pleased to raise our top-line and profitability outlook for the full year of FY’25. We now expect revenue to be in the range of $4.61 billion to $4.62 billion, which represents approximately 2% year-over-year growth. We still believe that Q2 will be the low point from a year-over-year growth perspective and will improve from there. We forecast our non-GAAP operating income to be in the range of $1.74 billion to $1.75 billion, representing an operating margin of 37.8% at the midpoint. Our outlook for non-GAAP earnings per share for FY’25 is $4.99 to $5.02, based on approximately 319 million shares outstanding. Moving on to free cash flow. Please remember that due to timing of US federal and state tax payments, we pay two quarters worth in Q2 and minimal amounts in Q1. Primarily due to this seasonality and AI-related CapEx, we expect free cash flow in Q2 to decrease by approximately 50% to 60% quarter-over-quarter, before normalizing in Q3 and Q4. With the strength in free cash flow in Q1 and increased outlook for operating income in FY’25, we now expect free cash flow to be toward the high end of our range of $1.44 to $1.48 billion for the full year. Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support.

Thank you so much, Kelly. As Kelly mentioned, we will now take your questions. Our first question will come from Meta Marshall with Morgan Stanley.

Thank you. I appreciate it, and congratulations on the quarter. I have a couple of questions. To start, could you share what you're observing in the SMB sector, considering the comments from others during the quarter? Additionally, regarding DBNE, you mentioned last quarter that you expected fiscal Q2 to be the year's low point. Does that still hold as you look ahead? Thank you.

Sure. Hi Meta. Looking at the outlook for the rest of the year, we still expect Q2 to be the low point in terms of year-over-year growth, and the net-dollar expansion rate is expected to reflect this trend. If you examine the end quarter net dollar expansion, you'll notice it remained consistent from one quarter to the next. This indicates that we are beginning to stabilize, which is a positive sign that the net dollar expansion rate over the trailing 12 months will likely follow a similar pattern. Regarding SMEs, we observed comparable performance across all segments of our enterprise business. We achieved some impressive customer wins in the upmarket, as well as in the SMB sector.

Thanks Meta. We'll now move on to Samad Samana with Jefferies.

Hi, good evening. Thank you for taking my question. Eric, I wanted to explore the CCaaS side since you mentioned the product is ready for prime time, and we showcased it to investors at Enterprise Connect a couple of months ago. Could you help us understand how you define prime time? Is the uptime improving, and are you starting to see larger customers? What should we expect regarding larger customers going forward?

It's a great question. Just over two years ago, we launched the Zoom Contact Center, and looking at our quarterly progress, we've added many customers who trust our Contact Center product. In the most recent quarter, for example, one Silicon Valley-based cloud software company switched to our platform after initially using a competitor's solution, one of the top three CCaaS providers. They preferred our feature set, seamless integration, greater uptime, and various AI features. Another instance involved competing against another leading CCaaS vendor for a significant deal in Q1, which we won. This deal involved more than 1,000 seats, showcasing our capability in larger agreements. Additionally, looking at our total installed base, we had around 90 new deals with an ARR of more than $100,000 at the end of Q1, representing almost 250% year-over-year growth compared to last year. Taking all of this into account, I can confidently say this is prime time. The key takeaway is that customers trust our brand, and we actively listen and innovate based on their feedback, which is why we are making significant progress with our contact center.

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

Yeah, thank you all for the questions. Eric, you touched on it briefly with the last question, but would love to hear about the competitive environment today, maybe to contrast it with 12 or 24 months ago. And specifically pricing. And how pricing is changing, whether or not more competitive, less competitive? And then I guess, related to that, if you're seeing more competition from Microsoft on the video side?

Yes, I apologize, but are you asking about pricing for the Contact Center or overall?

The entire platform is now facing changes in pricing trends as more competitors are likely bundling solutions.

Yes. Overall, I think the main competitor bundling their solutions is Microsoft. Over the past few years, there has certainly been some impact that you can observe in the numbers due to their bundling strategy. However, if you look at our installed base, we increased our online prices about a year ago, and we've received very positive feedback regarding the value of our service. Many customers really appreciate what we offer. The reason our customers' employees enjoy using Zoom is that they find it much better compared to other competitors' products. Even with bundled services that seem free, when customers examine the total cost of ownership, including support and AI costs, we believe we are in a much better position now. That’s why when we engage with customers, they don't always focus on price; they want to deploy the best video service. As a result, we haven't experienced significant price pressure recently, at least in the last quarter, and I think we are maintaining our pricing strategy effectively.

Okay. To your last comment, you didn't really experience price pressure last quarter. Should I interpret that to mean that pricing is stabilizing compared to where it was, and that pricing is improving?

I think so because you look at the overall online churn right, in kind of historical low, right as Kelly mentioned earlier, right? And also look at our enterprise customers as well because we have a lot of other services upsell entire the product suite. And I think it's a much better position now.

We will now hear from Rishi Jaluria with RBC Capital Markets.

Thank you, Eric and Kelly, for your responses. I wanted to follow up regarding the CCaaS segment. Eric, you mentioned that you have either displaced or surpassed the leading four CCaaS vendors as identified by Gartner. Could you elaborate on those victories? What aspects led you to win these deals? Was it primarily due to pricing, specific features, or capabilities? Any additional insights would be appreciated. Thank you.

Yes. Let me give you two examples, though I have many more. I don’t believe a single factor influences a customer's decision. They consider whether they trust the vendor, the product roadmap, the existing feature set, the integration, and our AI capabilities. Pricing is also a significant factor. Many customers who trusted Zoom years ago have a positive perception of our offerings. Interestingly, some of the customers we acquired in Q1 were not previous Zoom users but still trusted our brand because they recognize our innovation. In contrast, other CCaaS vendors have solutions that were developed a long time ago and often have outdated interfaces. This gives us strong confidence that we will continue winning more deals.

Our next question will come from Siti Panigrahi with Mizuho.

I saw the demo of your Zoom workstation and was very impressed with the AI features like Ask AI Companion that you added, Eric. I have a few questions. First, how do you envision the Zoom workplace? What is your strategy for branding and marketing this product? Do you anticipate gaining more traction in the small business segment or more on the enterprise side? If you integrate this workspace with AI, should we expect it to drive more conversion from free to paid users? If so, when should we start seeing that impact? Thank you.

It's a great question, and I'm glad to hear you like Zoom Workplace. This product is helping drive revenue growth and adoption among both SMBs and enterprise customers. When you look at our Zoom Workplace, it supports customer deployment meetings and allows clients to consolidate other tools, like Zoom Team Chat, which is a flexible and scalable chat solution included at no extra cost. We also have Whiteboard solutions, along with Zoom Meetings for scheduling functionality, all packed with features in the Zoom Workplace. A significant aspect is the Zoom meeting summary feature, an AI capability that has received overwhelmingly positive feedback from users—they’re impressed with its effectiveness and appreciate it being provided at no additional cost. Our AI vision has been trusted by clients. Meta is a great company, and their choice of Zoom Workvivo highlights their focus on selecting the best partner for deploying solutions that include AI. Workvivo is also part of our Workplace platform, encompassing Business Services, a Contact Center for support teams, Revenue Accelerator for sales, Event Sessions for marketing, and other new services that will greatly benefit us. There are many opportunities in the contact center space, particularly since many enterprise customers still rely on on-premise solutions. They're considering which cloud contact center solution they can trust and depend on for the next 5 to 10 years, and Zoom presents a superior platform. This momentum is really building, especially on the enterprise side.

Moving on to Catherine Trebnick with Rosenblatt Securities.

Hi thanks for taking my question. Can you update us on the partner program? What I'm really trying to dig into is how you are position yourself competitively against Ring and the traditional partners? Thanks.

Kelly?

Eric, you want me to take that. We are actively working with our partners and our direct sales team, and we are seeing success not only against other providers in the Phone Cloud but also in the Contact Center space. There are several factors contributing to this, including pricing, total cost of ownership, and the momentum driven by the ease of deploying and selling our product. We believe our partners recognize the value not just for the end users but also in their own deals. Regarding compensation for our partners, we are committed to maintaining competitive and appropriate partner programs. We consistently consider the impact on both our partners and our internal margins. As mentioned in previous discussions, we have secured additional partnerships, becoming the preferred partner for migration not only for Meta but also, as you may recall, for Twilio.

Yeah, thank you.

Yes, just quickly add on to what Kelly cited. Those are partnerships most of the time because the reason why I have all those good partners is because customers they ask for that, right? Because they say, yes, they really want to build more businesses with Zoom. And that's the reason why we have so many partners and recently like Avaya or Meta, right? This is a great example.

Thanks, Catherine. And Ryan MacWilliams with Barclays. Please go ahead with your question.

I appreciate it. Kelly and Eric, you got to it before I could. I wanted to ask about the partnership with Meta and Avaya. It's exciting to see them select Workvivo as their migration partner for their workplace solution. Do you have any idea about the timeline for when these customers might transition? How do you view the potential from this partnership? Additionally, regarding the Avaya partnership, I would like to understand the specifics of what this partnership aims to achieve and how it can lead to more customer relationships for you. Thank you.

Thank you for your questions. Regarding the Meta partnership, they are an impressive company working on AI Llama 3, which is excellent and open source. This is why they decided to discontinue their workplace for Meta products. They engaged with their customers and found that our Zoom Workvivo platform is a highly preferred solution. I also mentioned earlier that we recently secured a significant telco deal, which involves 100,000 seats. Our mature platform, with many innovations, is a key reason why Zoom is a preferred partner. We will collaborate to ensure that the transition for Meta's workplace customers is smooth. In the next 12 to 18 months, we plan to work closely with Meta and their customers to make this transition as seamless as possible. We have strong confidence in this partnership with Meta, and we are excited about the opportunities it brings. As for the Avaya deals, they have many large enterprise customers using both UCaaS and CCaaS solutions, but these customers are not fully prepared to transition everything to the cloud. Given the extensive integrations they have developed over the years, it's nearly impossible to make a complete cloud migration overnight. However, we aim to leverage various features and innovations, including AI, that these customers have shared with us from Avaya. While they are not ready to move to the cloud, they are still utilizing on-premise solutions. This hybrid architecture allows the Zoom workplace client to communicate with Avaya's on-premise future servers. The Zoom Workplace client offers a wide range of features, and it integrates seamlessly with Avaya's systems. This collaboration is beneficial for us, Avaya, and especially for the large, complex enterprise customers. I believe this hybrid architecture will significantly assist these customers.

Baird's William Power has the next question.

Okay, great. Hopefully, you can hear me calling from my mobile. Kelly, can you discuss the enterprise growth outlook from this point? Should we expect a low point in Q2 and then a rebound? Additionally, could you share your confidence in raising the full year guidance to account for the Q1 performance, considering we are still early in the year?

Yes. So Will, yes, we expect that enterprise growth will follow the similar trend that we've discussed for the entire company with Q2 being the low point from a year-over growth perspective and then seeing reacceleration in the back half from there. And in terms of our confidence for the year, we applied a similar approach that we always do to setting guidance, which is talking to our sales organization, of course, looking at the pipeline that we're seeing, also the trends that we're seeing with online and what's on deck in terms of initiatives, what's the performance we're seeing for churn? And then looking at all of that putting it together and coming up with our outlook.

We will move on to Tyler Radke with Citi.

Hi Kelly, hi Eric, thank you for taking my question. Kelly, to begin with, regarding enterprise customers, I appreciate your explanation about some of them transitioning to online. However, even with that consideration, it still appears to be a sequential decline. I would like to understand the factors contributing to the enterprise customer figure and your long-term growth perspective. Additionally, as we look at the billings outlook, I noticed it was slightly stronger for the second quarter, even though revenue was a bit below consensus. How should we interpret the factors influencing this divergence? Are there any changes in billings terms we should be aware of?

Yes. First of all, the enterprise number did not decline quarter-over-quarter, and I want to clarify that it should actually be up. We have previously discussed that our strategy, particularly regarding Zoom Phone and Contact Center, focuses on selling to our existing customer base. Since more of our revenue growth is coming from these emerging products and from engaging with our current customers, you can expect the addition of new customers to not grow at the same rate as in the past, but it did grow quarter-over-quarter, which is important to note. Additionally, as we have stated before, the most reliable indication of future performance is our revenue guidance. There are trends we are observing, including a continual shift from monthly to annual and multi-year billing, which is a positive sign, along with expansion in longer-term customer relationships online that typically correspond with longer billing terms. We've also seen some advantages from being more strategic about our discounting practices, including reducing the number of free periods in the enterprise segment. All of these factors are contributing to the growth reflected in our billings and deferred revenue.

We are moving right along, so we will now hear from Alex Zukin with Wolfe Research.

Hi guys. Thanks for taking my question. First, I just want to acknowledge, we saw something from you guys this quarter, we haven't seen in a long time, accelerating enterprise revenue growth, accelerating enterprise billings growth and declining OpEx, so just maybe stack rank for us, like if you look at all the things you called out, whether it's Contact Center, Phone, Workvivo, Even the Sales Product and the Quality Management product you referenced in the prepared remarks, Eric, stack rank where those kind of landed in terms of the driving factors or the driving-force behind that acceleration? And then I've got a quick follow-up.

You want to pick it?

Yes, sure. Let me talk about revenue and you can talk about sort of the business momentum in general. But Zoom Phone continues to be a very strong growth driver, very pleased with the growing momentum we are seeing from contact center and then Workvivo also gaining in its own right. In terms of relative overall dollars, Workvivo is still a smaller component of the business but is growing very, very quickly. So certainly contributing some really exciting customers that are coming to Zoom as a result of both Contact Center and Workvivo. And also, we had won a new customer coming from Revenue Accelerator as well this quarter. So that's really exciting to see these emerging products that are bringing new customers and new logos to the company. So I think in terms of momentum, we're excited across all of those thresholds, but kind of in that order. Eric, anything else you want to add?

That's a great observation. To echo what Kelly mentioned, our momentum is rooted in our product strategy, which consists of two key pillars. The first is the Zoom Workplace, and the second is Business Services. In terms of the Zoom Workplace, during customer deployment meetings, clients using the Zoom Workplace client are consolidating other solutions, with Zoom Team Chat being a notable, flexible, and scalable chat solution included at no extra cost. We also need to integrate other whiteboarding solutions; for example, Zoom offers Whiteboard and Meetings equipped with scheduling functionality. There are numerous features included in the Zoom Workplace. Importantly, features like the Zoom meeting summary, which leverages AI, receive very positive feedback. Customers are often amazed at how well it works and appreciate that there’s no extra charge. They also have confidence in our AI vision. This aligns with why companies like Meta, which I greatly admire, choose Zoom Workvivo—they focus on delivering the best solutions for their customers and seek trusted partners in that process. Furthermore, Workvivo is a part of our Workplace platform. Regarding Business Services, we have offerings like Contact Center for support teams, Revenue Accelerator for sales teams, and Event Sessions for marketing teams, all of which will significantly benefit us. Specifically, regarding the contact center, there are numerous opportunities, as many enterprise customers are still using on-premise solutions and evaluating reliable cloud contact center options for the next 5 to 10 years. Zoom provides a superior platform, which is why I believe the momentum is distinctly concentrated on the enterprise side.

Eric, you've been asked about pricing several times. It seems like you're indicating it's stable. You raised prices and didn't see a significant change in churn. I understand you prefer not to raise prices frequently. However, considering your strategy of continuously providing significant value, whether through consolidation or new functionalities like sales and quality management, what does the opportunity look like if we analyze the ACV uplift in those two accounts you mentioned for Expedia and MLB and consider that across your pipeline for adding similar features with some attach rate?

Yes, I can discuss the business aspect, and Kelly can share insights on the revenue side. Expedia serves as a great example of this. They implemented Revenue Accelerator, which is one of our business services. It’s a compelling service. While we don't shy away from comparisons with our competitors, we significantly lower our prices not because of a lack of value, but because the value we provide is substantial. AI is a key part of this offering, and it comes at no extra cost. However, AI plays a crucial role in all of our business services, most of which cater to enterprise customers. The reason we're focusing heavily on these business services now is that our pricing isn't like what we offered for meeting services many years ago. It's about improved pricing, products, and services. Competing with others has a different narrative; customers aren't just looking for low prices like they might for something like Zoom. The significant value of our business services sets us apart.

Yes. In terms of the revenue upside, Alex, it kind of varies by product because certain products have much higher ASPs, for example, like Zoom Contact Center than Meetings. But of course, the attach rate in terms of the number of seats isn't 1:1, right? There's a lesser ratio there. Zoom Phone, we saw an attach rate of generally 1:1 or do see an attach rate, I should say, of 1:1 for Meetings to Phone, sometimes even greater when we look at customers that we've talked about here before, that have a bigger attach rate because they have phones in retail locations, for example. So it just varies. The thing that I will say is generally a lot of these emerging products also had better gross margins which is helpful when you look at something like Contact Center because of the ASP, especially with the rollout of the pricing tiers, we saw the ASPs for those products almost doubled from quarter to quarter with the rollout of the new pricing tiers. And I think that will continue as the features and functionality, especially in those upper tiers continues to expand.

Matthew VanVliet with BTIG, has the next question.

Hi everyone, good afternoon. Thank you for taking my question. Regarding the last point, as you integrate more AI Companion, how do you see that affecting monetization? Are you finding that it potentially leads to more seats and larger opportunities with individual customers compared to just focusing on Phone or Meetings? How is Workspace, by bringing everything together, contributing to higher deal sizes?

I believe AI Companion enhances not just our Meetings and Phone but also our Team Chat across all Zoom workplace product lines and business services. Thanks to our federated AI approach, we are improving the entire collaboration platform, which benefits our customers. We’re able to add more value for them at no extra cost, which is a strong point for the Zoom AI initiative. In terms of monetization, as I mentioned earlier, AI serves as a key differentiator in our business services, allowing us to command a premium price because of the value it provides. Additionally, we plan to utilize AI Companion to develop new offerings like Ask AI, which will be launched later this year, along with other services in progress. Overall, AI provides existing collaboration customers with more value and offers opportunities for premium pricing and the development of new services, especially with the rise of edge AI creating many new prospects.

We will now hear from Ryan Koontz with Needham.

Thanks for the question. First, a quick housekeeping one. The reclassification of customers, is that expected to change any of your KPIs like NER like that, those in the right direction at all?

There was no significant change. Although the number appeared substantial, the revenue transition from enterprise to online was only $4 million. As we indicated, it did not affect the net dollar expansion calculation at all because the impact was minimal.

Got it. Helpful. And Eric, maybe a quick strategic question on events. Any update there in terms of how the ecosystem is building out? I know that's a complex market to penetrate, any update you have for us there. Thank you.

Yes, that's a great question. I haven't provided a few examples regarding that yet. However, I can say that Zoom Events is performing exceptionally well. When you look at each quarter, its contribution to our revenue growth is significant. We previously introduced a webinar feature, and now with Zoom Sessions and Events, we have built a reliable brand that offers the most flexible event services. This will increasingly benefit us because, among our competitors, no one else has something similar, particularly a large one whose product is comparable to our Webinar. With our Events and Sessions, we provide the best options for our customers. That's why virtually every enterprise customer sees us as the leading platform, especially for large events, as our competitors lack this capability. Additionally, I should mention that it's not just about the events themselves; many customers use Zoom to enhance their marketing efficiency and lead generation, and our workflow integrates seamlessly with our Events and Sessions.

We will now hear from James Fish with Piper Sandler.

Gi guys. Thanks for the question. Maybe just bridging the Phone and Contact center Opportunity, whether, it's kind of hard to probably parse this out in the entire installed base. But as we think about those greater than 90 Contact Center accounts over $100,000, maybe could you go over the overlap of adoption between following Contact Center, how that packaging of the two is going together? And if you guys are starting to see that pipeline or backlog increase for cloud conversions across those spaces relative to the last year? Thanks guys.

Yes, absolutely. Kelly, please feel free to add in. When we began, we expected that most of the Contact Center deals we secured would come from our existing customers, specifically those using our Meeting or Phone services. However, that turned out to be incorrect. Many of the customers we've engaged are neither Meeting nor Phone customers, yet they were among the first to implement the Zoom Contact Center. This indicates that there are significant opportunities within our current customer base. We plan to focus more on this area since the product is performing exceptionally well. Additionally, the customer profile is varied, which is why we've increased our investment in channel partnerships. As more of our existing customers learn about the success stories associated with our Contact Center, I believe we will witness a faster growth rate in that business segment. Thank you.

We have one additional question, which will come from Michael Turrin with Wells Fargo.

Okay. Thanks for squeezing me in. Kelly, you had a few comments on tightening discounts, tightening grace periods, just as things for us to be mindful in terms of the model, I'm wondering if that's somewhat standard operating procedure for Zoom or if that's coming from more confidence that the business is now stabilizing. And if you're just able to help us with visibility you have from here into Q2 marking the low point in terms of growth and any additional driver details on drivers there is useful. Thank you.

Yes, I believe that the approach to discounting we've been implementing more thoughtfully and consistently since last year is starting to show positive effects in our results this year. This is especially evident as customers near their renewal dates, particularly those on annual accounts. Additionally, as we refine our dunning period, it reflects our growth as an organization and our commitment to balancing the needs of our business with those of our customers. It feels like the right moment for these adjustments, and we continually review our financial and accounting policies to ensure they reflect what is best for both our business and our customers. This focus on maturity in our policies is more critical than any other changes happening within the business.

And again, that is all the time we have for questions today. That concludes our questions. So I'll turn it back to Eric for any closing comments you might have.

Yes. Thank you all for joining us today. I really appreciate, and we are working as hard as we can to truly deliver happiness to our customers and partners. And also I'd like to leverage this opportunity to thank every Zoomie for their hard work and really appreciate. Thank you all for your time. See you next quarter.

Thank you so much, Eric and Kelly, and again, everyone, this concludes today's earnings release. We thank you all for your participation. Enjoy your summer, and we will see you next quarter.