Earnings Call Transcript
Zoom Communications, Inc. (ZM)
Earnings Call Transcript - ZM Q4 2021
Operator, Operator
Welcome, everyone, and thank you for joining today’s earnings call. Today is Zoom’s Fourth Quarter Fiscal Year 2021 Earnings Release. This call is being recorded. At this time, I would like to hand things over to Tom McCallum, Head of Investor Relations.
Tom McCallum, Head of Investor Relations
Thank you, Matt. Let me jump right into the presentation here. This is my favorite cool Zoom Meeting feature, slides as a virtual background. Let me just center myself here, so I don’t cover up the wording. Hello, everyone. Welcome to Zoom’s earnings video webinar for the fourth quarter of fiscal ‘21. Joining me today will be 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 can be downloaded from the Investor Relations page at investors.zoom.com. On this page, you will also 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 first quarter of fiscal year 2022 and full fiscal year 2022; estimated or projected costs, margins, expenditures and investments, our future results of operations and trends regarding the same; our growth strategy and business aspirations for our video-first unified communications platform; our product strategy; our market position and opportunity; and the continued impact of the COVID-19 pandemic on our business. These statements are only predictions that are based on what we believe today. The actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we disclosed in detail in our filings with the SEC, including our latest quarterly report on Form 10-Q as well as the current report on Form 8-K we filed with the SEC on January 13, 2021. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar. And with that, let me turn it over to Eric.
Eric Yuan, CEO
Thank you, Tom. First of all, I am not a cat. I’m live here. So, thank you all and welcome, everyone, joining us on today’s Zoom Video webinar. Fiscal year 2021 was truly a pivotal year for Zoom, characterized by achieving unprecedented success and overcoming tremendous challenges. My heartfelt appreciation goes out to our approximately 4,400 employees for their incredible energy, perseverance, and dedication. Their focus on delivering happiness and building trust enabled us to become a household name and one of the most popular apps of the year. We are so grateful to our customers, partners, investors, and the entire community for trusting us during these COVID times; and are humbled to see workers, students, and families log onto our platform and use it in increasingly innovative ways to connect, contribute, and collaborate. As the world emerges from the pandemic, our work has only begun. The future is here with the rise of remote and work-from-anywhere trends. We recognize this new reality and are helping to empower our own employees and those of our customers to work and thrive in a distributed manner. As companies begin their safe return to the office and reimagine their working models, Zoom is here to help, leading the transformation with an extensive and growing portfolio of offerings and product features. For example, Zoom Room enhancements connect seamlessly with Zoom Meetings, enabling features like Virtual Reception, Smart Gallery, and more, to provide a secure, inclusive, and empowering work-from-anywhere experience. Our evolution from a leading video communications app into a video communications platform will strengthen our position in the new normal by providing customers with a growing set of innovative and integrated collaboration and productivity tools. We are very energized to help lead the evolution to enable the future of work that allows greater flexibility for both in-person and virtual connections, a future that we believe will be better for the planet, productivity, and employee happiness. Next, as part of Zoom Phone’s second anniversary, I’d like to highlight some exciting deals where we harness the power of the channel to secure large enterprise rollouts of Zoom Phone. We are optimistic about the growth in our channel partners, including master agents who work as a liaison between customers and the telecommunications world. These channel partners are force multipliers and have proven to be strong advocates for us. Let me share a few happy customer stories. We are grateful to have the University of Southern California as a longstanding Zoom Meetings and a new Zoom Phone customer. Our commitment to USC and broad higher education was rewarded when the university and their master agent shortlisted us in an extensive vendor review to modernize their phone systems. After a six-month evaluation of UCaaS vendors, USC chose to deploy 21,000 Zoom Phone seats. We are so thankful that USC put their trust in Zoom to deliver an increasingly comprehensive and integrated set of communications services. Another highlight this quarter was the expansion with Equinix, the world’s digital infrastructure company, enabling digital leaders to harness a platform to bring it together and interconnect the foundational infrastructure that powers their success. Equinix has been a Zoom customer for several years and uses Zoom Meetings and Zoom Rooms for its global employees to communicate and collaborate. We recently expanded their partnership by adding Zoom Phones with over 10,000 seats. On top of being seamlessly integrated with Zoom Meetings and Rooms, they chose Zoom Phone for our global footprint, our ability to serve Equinix data centers with zero-touch provisioning, and our advanced features over other UCaaS offerings. Let me also welcome a direct sales win. We are very happy to announce that Universal Music Group, the world’s leading music company, is adopting Zoom Phone for its global workforce. UMG was looking to replace and consolidate legacy on-prem technologies with flexible, cloud PBX solutions. As an existing Zoom Meetings and Azure customer, UMG was drawn to the integrated nature of the Zoom Phone product. They will be using Zoom United, which will provide their global users with a one-touch experience of video, chat, and voice. Thank you, UMG. These stories are not exceptions. Enterprise customers choose to replace their legacy phone systems because of their positive experiences with our high-quality products that are very easy to use and are well integrated. With the value of our rapid innovation cycles and ability to scale for large and global deployments, they also look to us to partner with them to deliver a unified communication solution that will make their users happy and productive. Thank you, Equinix, USC, UMG, and our supportive channel partners. I love you all. With that, let me turn things over to Kelly.
Kelly Steckelberg, CFO
Thank you, Eric, and hello, everybody. As Eric mentioned, FY 2021 was a pivotal year for us. While the pandemic stress tested our operations, it also accelerated our growth opportunities. According to Okta’s 2021 Business Network Report, which relies upon data from Okta’s customers, Zoom was by far the preferred enterprise video conferencing app, ranked among the most popular workplace apps overall, and we’re the top app by number of customers and active unique users. In addition, analyst firm Frost & Sullivan recently recognized Zoom with its 2020 Company of the Year award, honoring Zoom’s dedication to providing customers with innovative solutions that drive growth and deliver new capabilities. Thank you to our amazing customers who made these accolades possible. Bolstering the growth of our product portfolio is Zoom Phone, which has grown incredibly and turned two last quarter. We believe the opportunity ahead is significant as the Total Addressable Market for telephony is forecasted to grow to $23 billion by 2024. We have seen wins from legacy on-prem providers as well as other cloud PBX vendors. Here are a few milestones to mark the anniversary. Illustrating the ability of Zoom Phone to meet the needs for large-scale enterprise rollouts, Zoom Phone finished FY ‘21 with 18 customers, each with over 10,000 paid seats. We closed FY ‘21 with approximately 10,700 Zoom Phone customers with more than 10 employees, up 269% year-over-year. We continued to drive broad adoption across industries and customer sizes. We are 60% within the mass market and 40% from the up market. With our base of approximately 467,000 customers with more than 10 employees and our growing channel presence, Zoom Phone is in a strong position as customers look to modernize their phone systems to an integrated communications platform. Now getting into the results, let me start with a few of the financial highlights and then for the full year. I will review our financial results for Q4 and finally, our outlook for Q1 and the full year of FY ‘22. Revenue grew 326% to $2.7 billion as we exited the fiscal year at an annualized run rate of $3.5 billion. We grew non-GAAP operating margin to 37.1%, up from 14.2% in FY ‘20. Free cash flow grew by over 12 times to $1.4 billion for the full year. In Q4, total revenue grew 369% year-over-year to $882 million. This top line result exceeded the high end of our guidance range of $811 million due to strong sales and marketing execution in online, direct, and channel businesses, as well as lower-than-expected churn. The demand was widespread across products, industry verticals, geographies, new logos, and customer cohorts. The year-over-year growth in revenue for the quarter was mainly driven by the sharp increase in new customers this year, which accounted for approximately 80% of the incremental revenue, up from 59% in Q4 of last year. We continue to add customers of all sizes and across industries that we anticipate will provide future up-sell opportunities. Let’s take a look at the key customer metrics for the quarter. We continue to see expansion in the up market as we ended the quarter with 1,644 customers generating more than $100,000 in trailing 12-month revenue, up 156% year-over-year and 28% quarter-over-quarter. This is an increase of 355 customers sequentially, the highest number of quarterly net adds for this segment. We made great progress in the up market and still see a lot of opportunity ahead. For example, we grew the number of Global 2000 customers generating at least $100,000 of ARR by more than 100% this year, but that still accounts for only 14% of the total population. We exited the quarter with approximately 467,000 customers with more than 10 employees, adding approximately 33,000 customers during the quarter and 385,000 customers during the year. In Q4, customers with more than 10 employees represented approximately 63% of revenue. We also continued to benefit from significant growth in our segment of customers with 10 or fewer employees. In Q4, customers with 10 or fewer employees represented approximately 37% of revenue, up from 20% in Q4 last year and down modestly from 38% in Q3. Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 11th consecutive quarter, as existing customers acquired more Zoom Meeting licenses, Rooms, webinars, and Zoom Phone products. We value their trust in us to build their unified communications on Zoom. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew over 292% year-over-year. Our combined APAC and EMEA revenue grew 687% year-over-year to be 33% of revenue, up from 20% a year ago. In FY ‘22, we intend to make additional investments in international resources to further capitalize on the global opportunity. Now turning to profitability, the increase in demand and strong execution drove net income profitability from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, and acquisition-related expenses. Non-GAAP gross margin in the fourth quarter was 71.3% compared to 84.2% in Q4 last year and 68.2% in Q3. The year-over-year decline in our gross margin is partially due to the dramatic increase in free usage related to the pandemic, including our ongoing commitment to support approximately 125,000 K-12 domains, as well as the higher utilization of public cloud services. The sequential improvement mainly relates to seasonal audio usage, which decreases during the holiday season. We would expect gross margins to remain around 70% as long as we continue to support free K-12 education. Research and development expense grew by 91% year-over-year to approximately $31 million. As a percentage of total revenue, R&D expense was approximately 3.5%, which is lower than in Q4 of FY ‘20, mainly due to the strong top line growth. Though we made strides in expanding our team, we remain committed to prioritizing R&D hiring and continuing to grow in order to drive further innovation, expansion, and security on our platform. Sales and marketing expense grew by 90% year-over-year to $159 million. This reflects an additional $75 million over last year, primarily due to investments in hiring to drive future growth. Sales and marketing expense was approximately 18.1% of total revenue, a decrease from Q4 of FY ‘20, mainly due to strong top line growth. We plan to continue to invest in adding sales capacity and product marketing programs over the next several quarters, focused on capturing market share. G&A expense in the quarter grew by 291% to $78 million as we continued to scale our G&A functions and invest heavily in security and compliance headcount and professional services. G&A expense was approximately 8.8% of total revenue, a decrease from Q4 of FY ‘20. The revenue upside in the quarter carried through to the bottom line, with non-GAAP operating income of $361 million exceeding our guidance. This translates to a 40.9% non-GAAP operating margin for the fourth quarter, a large improvement from 20.4% in Q4 last year and steady improvement from 37.4% in Q3. Non-GAAP earnings per share in Q4 was $1.22 on approximately 301 million non-GAAP weighted average shares outstanding, adjusting for undistributed earnings. This result is $0.43 above the high end of our guidance and $1.07 higher than Q4 of last year. Turning to the balance sheet, deferred revenue at the end of the period was $883 million, up 283% year-over-year from $231 million. Also, please note we have seen a shift in the mix of invoicing to approximately 50% of business being billed monthly, up from approximately 40% in the previous year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.8 billion, up 190% year-over-year from $604 million. The increase in RPO is consistent with the strong demand and execution in the quarter. We expect to recognize approximately 70% or $1.2 billion of the total RPO as revenue over the next 12 months, as compared to 62% or $375 million in Q4 of FY ‘20. We ended the quarter with approximately $4.2 billion in cash, cash equivalents, and marketable securities excluding restricted cash. This balance includes approximately $2 billion from our follow-on public offering in January. We had exceptional operating cash flow in the quarter of $399 million, up from $37 million in Q4 last year. Free cash flow was $378 million, up from $27 million in Q4 last year. The increase is primarily attributable to strong billings and collections. Looking into FY ‘22, we expect to increase our capital expenditures related to the build-out of our data center infrastructure to support our growth outlook and drive additional efficiencies. Now turning to guidance, we are pleased to announce our outlook for FY ‘22 for both revenue and non-GAAP profitability. Although we remain optimistic about Zoom’s outlook, please note the impact and extent of the COVID-19 pandemic and people returning to in-person contact still remains largely unknown. Our outlook is based on our current assessment of the business environment. For the first quarter of FY ‘22, we expect revenue to be in the range of $900 million to $905 million. We expect non-GAAP operating income to be in the range of $295 million to $300 million. Our outlook for non-GAAP earnings per share is $0.95 to $0.97 based on approximately 307 million shares outstanding. Both Q1 and full year share count include the additional shares issued in our follow-on public offering. For the full year of FY ‘22, we expect revenue to be in the range of $3.76 billion to $3.78 billion, which would represent approximately 42% to 43% year-over-year growth. We expect non-GAAP operating income to be in the range of $1.13 billion to $1.15 billion, which would represent approximately 14% to 16% year-over-year growth. Our outlook for the non-GAAP earnings per share is $3.59 to $3.65 based on approximately 311 million shares outstanding. Before concluding, I am happy to highlight that today we announced the first group of grant recipients from our EdInnovation Awards program. This is part of our Zoom Care’s philanthropic program under our ESG umbrella. We are excited to support their work, which includes promoting diversity from within the teaching profession, entrepreneurial and job training, assisting and inspiring youth in conflict-affected areas to join the digital economy, and providing access to science-based approaches to reading education. We are proud to sponsor these critical and innovative education efforts around the world and support the next generation of talent. As we look forward to FY ‘22, Zoom is grateful to be a driving force, enabling connection and collaboration worldwide with our high-quality, frictionless, and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors. If you have not yet enabled your video, please do so now for the interactive portion of our meeting. Matt, please queue up our first question.
Operator, Operator
Our first question is from Alex Kurtz with KeyBanc.
Alex Kurtz, Analyst
Yes. Thanks for the question, and I hope everyone at Zoom is doing well. So, could you frame how much Zoom Phone versus new customers versus the expansion opportunity is driving the fiscal 2022 growth outlook? And as part of that, what churn rates are you assuming as return to office ramps later in the year? Thank you.
Kelly Steckelberg, CFO
So, Alex, we are really excited about the opportunity of Zoom Phone ahead. As you have heard, they performed very well this year. The Zoom Phone was the fastest-growing product line quarter-over-quarter in Q4, and we expect to see strong growth as we look towards FY 2022. As you remember, our strategy is to sell into our existing install base. So based on the customers that we have today, we see tremendous opportunity for further up-sells with Zoom Phone. And then high level in terms of the churn rates, we have seen churn rates stabilize in the back half of FY 2021. And we do, though, they are certainly elevated from pre-pandemic levels, and we have assumed that to continue as we move through FY 2022 and the uncertainty around when people will be able to start to safely move around the world again.
Tom McCallum, Head of Investor Relations
Next question please, Matt.
Operator, Operator
Our next question is from Will Power with Baird.
Will Power, Analyst
Great. Thanks for taking the question. Yes, I wanted to touch on Zoom Phone as well. It’s terrific to see the strong results. I wonder if you could help us understand where you are in the evolution of rolling out channel partners. It sounds like that was a key contributor to some of the bigger customer additions. How much more is there to go? How much more of an acceleration could we expect there? And I guess tied to that, as you look at these bigger wins, the 10,000-seat paid customers, what’s really helping differentiate you versus the other cloud providers out there?
Eric Yuan, CEO
Yes. So, that’s a great question. First of all, if you look at why our customers choose Zoom over other cloud-based PBX solutions, first of all, you look at our existing customers, we have already got their trust. They really enjoyed our high-quality products, and because of that, they would like to test Zoom. After they have tested Zoom, they realize Zoom Phone is feature-rich, very reliable, very easy to use, and has a modern architecture, integrated very well with our meetings, Zoom Rooms, and other product lines. So as I said, from a current perspective, we have high confidence. From a distribution perspective, not only did they drive the other growth from our delivery team, and you see like the U.S. accounts, this growth was driven by Master Agents. I think we are doubling down on that channel partners, especially looking at the history of the Zoom cloud-based PBX growth, primarily driven by the channel partners. I think our strategy to focus on building greater partnerships with channel partners such as Master Agents is really paying off. I think we are working to double down on that.
Will Power, Analyst
Congratulations. Good luck.
Eric Yuan, CEO
Thank you.
Tom McCallum, Head of Investor Relations
Thank you, Will.
Operator, Operator
Our next question is from Matt Hedberg with RBC.
Matt Hedberg, Analyst
Okay, thanks for taking my questions, guys, and congrats on a stellar year. Momentum with the G2K customers over $100,000 in ARR was certainly impressive, but it still remains just vastly underpenetrated relative to your overall population. Can you talk about incremental steps you are looking at in fiscal 2022 to drive faster G2K or further G2K adoption? And then maybe just as a follow-up for Kelly, $4.2 billion in cash exiting the year, just thoughts on deploying that, just sort of – obviously, there are some CapEx expenditures, but just broader CapEx or cash expenditures?
Eric Yuan, CEO
Yes. Maybe, Matt, I can address the first part of your question. You are absolutely right, it’s only 14% of Global 2000 customers. So, the reason why you look at our history, the way for us to grow our revenue, our user base is from the bottom up from 1 user, 2 users; one department to multiple departments, and we talk to the CIO, right? And we are doing something similar. That’s why there is huge opportunity ahead of us. Because last year, I think that if you had talked with enterprise customers, if you do not have a very strong brand, normally they do not want to talk with you, right? Because of last year, I think Zoom has become a household brand, and we have more and more opportunities in the pipeline, and people like to talk with us now, not only from bottom-up, but also from the top down as well. Having said that, I think the rest of the Global 2000 customer is basically looking at international growth opportunities. I think the future is bright as long as we keep focusing on execution.
Kelly Steckelberg, CFO
In terms of what we are going to do with that $4.2 billion, so we, as you said, we are certainly investing in building out more data center infrastructure. And we are constantly looking for opportunities for other interesting companies, potentially M&A activity, that could add either to our talent or our technology. Eric has a very high bar for both, and so we just haven’t quite found the right match yet, but we keep looking. Colin leads our corporate development team, and his team is constantly looking to see what’s out there that looks interesting. So we will see. We are certainly open to it, it’s just finding the right match for us.
Matt Hedberg, Analyst
Thanks. Well done, guys.
Eric Yuan, CEO
By the way, Matt, if any of you have any great advice on how to do that, we would love all that advice. Thank you.
Matt Hedberg, Analyst
Thank you.
Operator, Operator
Next question is from Sterling Auty with JPMorgan.
Sterling Auty, Analyst
Yes, thanks. Hi, guys. Were you successful in rolling out all of the countries that you wanted to for Zoom Phone during calendar 2020? What’s the plan for 2021? And can you eliminate the need for the bring your own carrier program that you launched with?
Eric Yuan, CEO
Yes. So first of all, if you look at our international penetration, we are in 42 countries with Zoom Phone and the service. I think looking at our Phone, the growth, we see 40% coming from the upper market, and 60% from the SMB market. If you talk about the upper market, I think more and more opportunities will come from international customers. The reason why we started leading the focus in the North American market last calendar year is that we are starting to roll out to more and more international customers. I think the international penetration will be the catalyst for our future Zoom Phone growth.
Sterling Auty, Analyst
Got it. Thank you.
Operator, Operator
Our next question is from Meta Marshall with Morgan Stanley.
Meta Marshall, Analyst
Great, thanks. As you think about leveraging your platform, Digital Events is something you talked about at Zoomtopia with Zoom as another kind of natural adjacency. Any traction here to call out on Zoom or just how do you think about kind of finding other use cases or platforms for video usage?
Eric Yuan, CEO
Yes, Kelly, feel free to chime in. Actually, in terms of Zoom, we launched our digital events feature and announced that at last October at a Zoom annual user conference, and now it’s in the beta stage. Based on our talks with early adopters and the progress, we think Zoom is not only designed for the knowledge workers, but also for consumers, right, to learn classes online. Another aspect of Zoom is about our biggest customers, our enterprise customers, utilizing online virtual events. This year at Zoomtopia, we will hold the entire event on the Zoom platform. Essentially, Zoom has two parts: consumer-driven and allowing workers to make a living or sell classes, and we are beginning to expand our revenue platform to be our end-to-end corporate virtual event platform. That market also has a huge growth opportunity.
Meta Marshall, Analyst
Okay, thanks, guys.
Eric Yuan, CEO
Thank you.
Operator, Operator
Our next question is from Philip Winslow with Wells Fargo.
Philip Winslow, Analyst
Hey, guys. Thanks for taking my questions. I also just wanted to dig in on Zoom Phone. One of the things that jumped out at me was the 18 customers with more than 10,000 seats. I was wondering if there are any sort of cohorts, so to speak, what you are seeing here? Are these larger customers from a particular industry? Is their workforce more distributed than others? I mean anything that you can comment on sort of what the type of customer profile is for Zoom Phone, especially with those bigger transactions and how you think about that going forward?
Kelly Steckelberg, CFO
Hi. I think the great news, Phil, is that it’s actually spread across all industries. You saw those names that we talked about, right? We had a university, we had an entertainment organization, and a technology company. I think the success of Zoom Phone from the very beginning is that it has really appealed well to small and large enterprises alike and across all industries. The reason that we win, right, is based on the trust that they already have in us, as well as the usability and the total cost of ownership, which plays well across all industries.
Philip Winslow, Analyst
Got it. And then just to follow-up on that, theoretically, as companies are ramping up to return to the office, how do you think about the opportunity for Zoom Phone and also additional penetration for Zoom Rooms? As people are not in the office, it's easy to take away my phone at my desk, but if nobody is using any conference room, it’s maybe easier to upgrade it to Zoom Room. How do you think about sort of the first half there as people prep for potentially returning to the office?
Eric Yuan, CEO
Yes, Phil. Yes, first of all, we all want to go back to the office, right? We have been stuck at home for such a long time, so painful. But actually, even if we all go back to the office, I think video conferencing is well expected for growth, but most importantly, customers who would like to consolidate their phone and video systems. Why do they need to have another system? Why don’t they deploy the hardware back to the phone? Essentially, Zoom Phone already gives you everything. In the past, also Zoom Phone has been integrated with Zoom Meetings and Zoom Rooms. A lot of companies are talking about how to read into the office, especially focusing on the conference room system. Our recent innovations, like Virtual Reception and Smart Gallery combined with Zoom Phone, can really help us give customers a unified collaboration and communication experience, and that’s why we are very excited.
Philip Winslow, Analyst
Got it. Thanks very much. Appreciate it. Congrats and keep up the good work.
Eric Yuan, CEO
By the way, Phil, you have the best background.
Operator, Operator
Next question is from Tyler Radke with Citi.
Tyler Radke, Analyst
The regular room behind me. Can you hear me okay?
Eric Yuan, CEO
Yes.
Tyler Radke, Analyst
Alright. Thanks so much. Good to see everybody again. I am curious how you are thinking about investing and compensating in the direct sales force this year. Obviously, you are talking about increased channel leverage, particularly with Zoom Phone. I imagine renewals are going to be a pretty important topic as well for you in FY ‘22. So maybe just help me understand how fast you expect to grow your direct sales force and if you are changing kind of the way that you are compensating them in terms of the mix of new versus renewals? Thank you.
Kelly Steckelberg, CFO
So, the two areas of significant events that we are really focused on for FY ‘22 are exactly as you highlight. It’s quota-carrying representatives in our sales organization and it’s engineers. In both areas when we looked at the FY ‘22 plan, we considered the capacity of the organization to absorb that, as well as markets that are available. So you can expect continued significant growth in the account executives in the sales organization. In terms of compensation, we didn’t have significant change to our compensation plan, but you did pick on one of the key points, which is renewals and retention. Historically, we have not compensated for that, and so we did add a bonus component to the plan for this year to help align the reps’ interests with Zoom.
Tyler Radke, Analyst
Thanks so much.
Operator, Operator
The next question is from Rishi Jaluria with D.A. Davidson.
Rishi Jaluria, Analyst
Hey, Eric, Kelly, Tom. Thanks for taking my questions. It’s great to see continued strong momentum heading into next year. I wanted to ask about maybe potential areas for expansion. You have obviously had some really great success with Zoom Phone and I appreciate that in the disclosures here. As you think about becoming a broader enterprise collaboration and communication platform, where are some other adjacencies that you think you can get into? I know you have hinted at these in the past. And philosophically, how do you think about the build versus buy, especially just given the amount of capital you have available on the balance sheet? Thanks.
Eric Yuan, CEO
Yes, sure. Rishi, that’s a great question. When we started we were very focused on video conferencing, right? However, over the past several years, looking at the data, I think because of the popularity of video conferencing, a lot of people that used Zoom during the pandemic crisis are using Zoom for more than just business communication. That’s the case. Look at Zoom video conferencing, Zoom Phone, Zoom Rooms, built-in chat, and webinars, I think there is huge opportunity. Almost each area we see top-down opportunities. Another thing is about our ZoomX ecosystem. It’s actually not only about business communication, but also for consumer use. That’s the reason why we are transforming our business from a videoconferencing company to a platform company. I think a lot of opportunity exists for the UC platform, remote work platform, and the consumer-prosumer platform. We cannot forget about that. We have to be very careful about what we should build ourselves, what kind of new products we should partner with, or maybe go through acquisitions. Overall, I think we are opening up great opportunities for us. We are not only a videoconferencing company anymore.
Rishi Jaluria, Analyst
Great, thank you.
Eric Yuan, CEO
Thank you.
Operator, Operator
Next question is from Zane Chrane with Bernstein.
Zane Chrane, Analyst
Hi, congrats on another great quarter, team. I just want to dig in on the Zoom offering. It seems like a really great way to improve the conversion rate of kind of prosumers and knowledge workers at the lower end of the market. Can you give us a sense of how much that’s improving the paid conversion rate for free users to paid, maybe among consumers or independent contractors, freelancers, things like that? Is it a 10% increase? Is it double? And then secondly, on the gross margins for Zoom Phone, I know it’s still subscale, but how should we think about the non-GAAP gross margin for that relative to videoconferencing in a steady state long-term? I know it’s a lot less compute-intensive, so I’m curious if that could potentially have higher margins. Thank you.
Eric Yuan, CEO
Yes, then I can address the first part. Kelly will address the second part of your question. And I hope I have a good answer for you. Unfortunately, I don’t have a very solid answer yet because it’s too early to tell, as we are still in the beta, right? We’re trying to make sure the product experience is really solid before we announce the general availability. Currently, it’s in beta. You still can go on Zoom to register for classes. But again, I believe the future is very optimistic. We not only will generate a new revenue stream, but also we will gain customers and subscribers. Lastly, we have one more opportunity for those wanting to learn something or hold an event on Zoom. That’s our strategy. However, it is too early to tell, so I do not have a very solid answer yet.
Kelly Steckelberg, CFO
Yes, Zane, did you ask about the gross margins for Zoom Phone or on Zoom overall?
Zane Chrane, Analyst
Zoom Phone, it was a separate question. I’m curious, since it’s less compute-intensive if that could maybe have higher margins, especially since you don’t have a free offering for that, like the video conferencing?
Kelly Steckelberg, CFO
Yes. Pre-pandemic, when we looked at Zoom Phone, margins were actually slightly under the gross margin for Meetings due to the cost of carriers on either end. The goal is, as we continue to grow, to gain leverage to invest, and of course, to see efficiencies across the overall platform so that eventually those gross margins converge. That’s what we’re expecting to see right now, given that the gross margin is impacted on Meetings by the free usage, Zoom Phone's gross margin is probably even higher than Meetings right now.
Zane Chrane, Analyst
Great. Very helpful. Thank you. Congrats, team.
Eric Yuan, CEO
Thank you, Zane.
Operator, Operator
The next question is from Brad Zelnick with Credit Suisse.
Brad Zelnick, Analyst
Great, thank you so much. So nice to see everybody. Eric, Kelly, and Tom, wonderful, great Q4, great year, we’re all grateful. Kelly, my question is for you just around the seasonality of the business. Last year was so unusual. How are you thinking about modeling this year from a new business perspective, thinking about seasonality? I know you caveated your guidance relative to the uncertainty of COVID. But what’s the embedded assumption? Even though I totally appreciate that economies reopening doesn’t mean that people stop using Zoom.
Kelly Steckelberg, CFO
Yes. I think first of all, you have to think about our business in terms of online and direct, as both have become very significant businesses. There is a little bit of different behavior between the two. In the direct business, we expect to move back to a more normalized seasonality, if you will, as we grow through the year, especially with enterprise buyers, to be a little more back-end loaded in each of the quarters as well as back-end loaded in terms of the year, especially as we continue to add capacity in our sales organization and having those reps ramp throughout the year. From the online perspective, that is the one that is somewhat uncertain, dependent upon the timing of people potentially returning to work, as well as this integration with on Zoom. What we have modeled is we believe to be conservative in terms of an acceleration in churn rates. We’re doing everything we can though, of course, to retain those consumers and help them see the value in Zoom, so that we don’t see that as we move through the year.
Brad Zelnick, Analyst
Great. Thank you so much for taking the question.
Eric Yuan, CEO
Brad, thank you very much for wearing Zoom on top your head. I truly appreciate that.
Brad Zelnick, Analyst
Proudly, proudly. Thank you.
Operator, Operator
Next question is from Bhavan Suri with William Blair.
Bhavan Suri, Analyst
Hey, everyone. Thanks and let me echo my congrats, a really great job. I want to chat a little bit about one specific competitor. It’s our friends at Microsoft. I’d love to understand in a little more depth how that’s playing out. Not today, because obviously the results speak for themselves, but they are ostensibly giving away for free. We know E5 is not free. Upgrading to E5 costs. But they have a lot of power in the mid-market and the enterprise. How do you feel about what they are doing? Is that a sense that at some point, maybe when you go back to work, it’s good enough? How are you and the sales team working around this issue of Teams ostensibly giving away for free? That’s kind of what I’m getting at, specific to them, given their scale and power and their platform and how they bundle things, etc. Thank you.
Eric Yuan, CEO
Yes. So, I can start. Kelly, feel free to chime in. I think first of all, that’s a real question. However, I’d like to take a step back. We share I think the journey of Microsoft themselves. Because today, Microsoft is very different. Since Satya took over the CEO job several years ago, I think Microsoft has become open-minded. Satya is a great CEO in the world, really on the market, but quite often when we talk of integration, they would like to work together with us. They are willing to collaborate, right, that’s very important. 10 years ago, sometimes I think we would have been concerned. Today, that’s not the case from Microsoft’s perspective. I give the CEO of Microsoft, Satya, a lot of credit. When you look at an end-user perspective, consider today’s workforce, almost over one-third are millennials. They would like to use the best of breed service. If you give them something they do not like, they say no, I’d rather pay with my own credit card. The best of breed service will win, for sure. Also, if you look at it even from a CIO or IT perspective, they would like to bet on good vendors, right? If you're stuck with one vendor for everything, guess what, what if there is an outage? What if the innovation speed slows down? That’s why when we talk with enterprise customers, they like to deploy best of breed services. Zoom stands out in video and voice quality. That’s why our strategy works very well. Lastly, if you look at the Okta report, probably that’s the most important report for any IT professional, right. Zoom is the number one video conferencing app, right. In terms of position, based on a number of customers, Zoom ranks number five. However, there is one metric that’s very interesting. If you look at Okta’s Microsoft Office 365, the deployment of customers, those people use Zoom as well. That proves one thing: customers like to bet on good solutions because we can coexist very well. Again, this market size is much bigger than anyone can monopolize. That’s why I think a coexisting strategy works well. We look at everything from a customer perspective. That’s a long answer. I’m not sure it answered your question, Bhav, but that’s based on our observation.
Bhavan Suri, Analyst
Yes. That’s a great answer. I appreciate the color and the candor. Thank you all.
Operator, Operator
Next question is from Richard Valera with Needham.
Richard Valera, Analyst
Thank you. Let me add my congratulations to a really great year and fourth quarter. So, question on the education vertical, which has gotten a lot of attention. What are your thoughts on the trajectory of that business for you? You could maybe argue that there is a headwind if there’s decreased usage as folks go back to in-person school. But you guys have – I think it’s 125,000 K-12 customers that are free now, but presumably at some point will be paying. I wanted to check how you’re thinking about that revenue trajectory and the potential to monetize them? And if the July 31 date on your website is sort of the date that you’re going to turn off free or is that just a placeholder for now?
Kelly Steckelberg, CFO
In terms of the future and the opportunity ahead for education, as you noted, we have 125,000 K-12 domains using the product and becoming believers in Zoom. We expect that as students return to campuses in person, a hybrid approach in education continues. We joke, right, that students are going to hate us because there is no such thing as a snow day any longer. Imagine the benefit parents have received from attending PTA meetings from home, being able to do parent-teacher conferences. Many use cases extend beyond students simply being in the classroom. We foresee these domains wanting to continue to work with us. Regarding the date that’s on the website, we believe Zoom will do whatever the right thing is, continuing to assess how the pandemic progresses. The goal of that was to minimize the disruption in learning, and we remain committed to that.
Richard Valera, Analyst
Great, thanks very much, Kelly.
Operator, Operator
Our next question is from Ryan MacWilliams with Stephens.
Ryan MacWilliams, Analyst
Thanks for taking the questions. Can you talk about enterprise Zoom Meeting purchasing that you saw in the quarter? Did enterprise customers increasingly go wall to wall and consolidate pockets of Zoom usage and business silos? And then separately, with the improving Zoom Phone momentum that you’re seeing, do you see attach rates for contact center increase alongside that? Thank you.
Kelly Steckelberg, CFO
In terms of the significant growth in customers generating greater than $100,000 in trailing 12-month revenue, that’s an indicator of all those enterprise customers that continue to roll out and expand. In terms of wall to wall, we still see customers that are adding in terms of number of seats, as well as buying broader. So it’s a combination of both. And in terms of contact center within Zoom Phone, Eric, would you like to take that?
Eric Yuan, CEO
Yes. Sure, sure, yes. I think in terms of a contact center, our strategy is to work together with other contact center solutions like Five9, Genesys, InContact, Talkdesk, and others because customers talk about how to seamlessly integrate with others. Take Five9 as an example, we share the same vision and look to further improve the product experience. I love that. We strive to provide a much better, seamless integration to deliver happiness to our mutual customers.
Operator, Operator
Our next question is from James Fish with Piper Sandler.
James Fish, Analyst
Hey, guys. Congrats on an excellent year. I really appreciate what you have done. It was an impressive enterprise addition this quarter. I’m just trying to understand how much of these additions came from moving customers up from Phone or Phone within that commercial Meeting installed base. For new customer wins versus other items differentiate? Thanks.
Kelly Steckelberg, CFO
Yes. It’s really a combination of all of the above. We continue to see customers that bought earlier this year deploying and rolling out and adding to their services. You heard some of the great wins that we talked about specifically on the call, as well as continued up-sells in terms of just expansion in terms of Meetings, and making sure that their employees are being as efficient as possible. It’s not something specifically that we break out. I can just tell you that it’s a combination of all of the above.
James Fish, Analyst
Got it. Understood. Thank you.
Operator, Operator
The next question is from Matthew VanVliet with BTIG.
Matthew VanVliet, Analyst
Yes, hi. Thanks for taking my question. I guess I wanted to dig a little deeper not just on the contact center side. But as customer experience really becomes a greater focus for larger enterprises, what’s the opportunity to embed Zoom from a partnership perspective, either in other software platforms or just kind of in company websites, things of that nature, to help facilitate a more interactive approach with customers and sort of how you can better monetize that in the long run?
Eric Yuan, CEO
Yes, Matt, that’s a great question. That’s overall our platform play. Today, in addition to having APIs and SDKs to give third-party companies and partners vertical apps like online education and telemedicine apps via our platform SDK, we also introduced the Zoom Apps. I think that’s our future. The reason for building for business indications is to provide a people-centric interface. You and I can use Zoom with a window, right? You’re not only approving my expense report but also integrating with services like Salesforce and other applications. We have over 1,000 apps published in our marketplace. So, we are going to double down on our Zoom App ecosystem, which is the future for our platform play. Down the road, we will have new applications or existing integrations with many ways to monetize that. The goal is to offer a people-centric Zoom interface for other applications to be integrated into Zoom.
Matthew VanVliet, Analyst
Great. Thank you.
Operator, Operator
The next question is from Imtiaz Koujalgi with Guggenheim. It looks like he has audio only.
Imtiaz Koujalgi, Analyst
Hey, guys. Can you hear me?
Eric Yuan, CEO
Yes.
Kelly Steckelberg, CFO
Hi.
Imtiaz Koujalgi, Analyst
Hi, hi. Thanks for taking my question. I have a question for Eric or Kelly on Zoom Phone Attach versus Zoom Meetings. If a customer has both, I assume that any user who has a Zoom Phone license versus Zoom Meetings, only the host needs Zoom Meetings. Is there a rule of thumb or what you’re seeing in the customer base now in terms of what the vision of Zoom Meeting licenses compared to Zoom Phones is? And what that potentially can be going forward?
Kelly Steckelberg, CFO
Generally, what we see is that, to your point, not everybody needs a Zoom Meetings license because only the host needs one. Most organizations buy Zoom Meeting licenses for all of their employees as they want them to be as efficient as possible and then buy a corresponding number of Zoom Phone seats as well. So typically, when a company is doing a full deployment, it’s a 1:1 ratio of Zoom Meetings to Zoom Phone.
Imtiaz Koujalgi, Analyst
Are there cases where customers end up buying more or less? Is it different by different vertical or customer size, or is it typically 1 to 1?
Kelly Steckelberg, CFO
It depends on the stage of where our company is in terms of its rollout and its deployment as they often start with Meetings and then add Zoom Phone. It may take some time to roll it out depending on its market and geographic location. I do remember one case where more Zoom Phone licenses were bought than Zoom Meeting licenses. It was the case of a retailer that had Zoom Meetings and Zoom Phone in their corporate headquarters, but for example, they wanted to deploy Zoom Phone into their retail locations in the malls. There wasn’t a need for Zoom Meetings in the mall, but Zoom Phone was a great fit for them. So that’s the only case that I remember specifically where more Zoom Phone licenses were sold than Zoom Meeting licenses.
Imtiaz Koujalgi, Analyst
Got it. Very, very helpful color. Thank you very much, Kelly.
Tom McCallum, Head of Investor Relations
Thank you, Imtiaz.
Operator, Operator
We have time for one more question, and our last question will be from Tom Roderick with Stifel.
Tom Roderick, Analyst
Great. Hi, Eric. Hi, Kelly. Hi, Tom. Great to see you all. Congratulations on a fantastic finish to what was a crazy year, but a fantastic one for you all. As we’ve been going on almost a year now of sitting in our home offices, I’m curious for your thoughts on how you think about the way the world has changed and the way that you run Zoom, whether that’s more remote offices, R&D specialists in different parts of the world? Is the cost structure sort of permanently changed for your vision of the world, because it seems like for the rest of us, it is changing in that way. I would love to hear your thoughts on that.
Eric Yuan, CEO
Yes. Kelly, please.
Kelly Steckelberg, CFO
Sure. I think the amazing thing that’s happened during this pandemic is it has opened us up to be able to hire talent anywhere. We have taken advantage of the opportunity to hire competitive engineers from anywhere across the globe, and we are really focused on diversifying outside of San Jose, which has been a great win for us. In terms of the long-term growth impact, we have not modeled expenses associated with return to work for this year, at least for FY ‘22, as we continue to evaluate when it feels safe to support our employees and moving back into the office and coming back together in person. Once we have more clarity around that, of course, we will assess how that impacts our operating margins.
Operator, Operator
That’s great. I will turn it back to you. Thank you.
Kelly Steckelberg, CFO
Alright. Well, thank you so much for joining us today. We really appreciate it. Look forward to FY ‘22.
Tom McCallum, Head of Investor Relations
Thank you everybody.
Eric Yuan, CEO
Thank you all.